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Manufacturing sector with comparative advantage, product diversification, and integration to global supply chain network will support sustainability of domestic economy. Manufacturing sector is the fourth largest in labor absorption as it constitutes 26.8% of total GDP (average 2005-2010). Nevertheless, its growth deteriorates, from 9.2% yoy (1991-1996) to 4.0% yoy (2005-2010). The decrease indicates some problems in labor productivity and competitiveness of domestic firms in manufacturing sector, which are lack of productivity and technological progress in manufacturing sector respectively. Both aspects are mainly determined by presence of high-skilled labor and R&D activity. Based on the background, this study is to reveal the innovation capacity and potential development in manufacturing sector based on Large and Medium Enterprise Statistic survey of Statistics Indonesia (BPS). To obtain weights of determinant factors of innovation capacity and potential, we used Analytic Network Process (ANP) method to gauge innovation level of each firm in manufacturing sector. This study found that most of Indonesian manufacturing firms have a low R&D activity. About 74% (16.851 firms) categorized as low innovation, whilst 5% (1.152 firms) considered as high innovation. These facts themselves reflect the capability of firms to compete in the global market through exports. Of low level firms, merely 15% (2.516 of 16.851 firms) is involved in export activity. On the contrary, 49% (561 of 1.152 firms) of high innovation level is involved in export activity, mainly in food, chemical, furniture, and textile sectors. By spatial, highly innovative firms which doing exports mainly located in Java. It is possibly due to a high quality of infrastructure and human capital support which is relatively better in Java than any other parts in Indonesia.

Innovation Capacity and Potential in Indonesian Manufacturing Sector