On The Shoulders of Unicorns: Indonesia’s False Obsession with Startups
Though a very diverse and heterogeneous nation, Indonesians seem to have a handful of things in common. Other than our fondness for needless conflicts, nosing about celebrities’ household debacles, and mystical beings, Indonesians have a certain fetish for all things technological. A plethora of jargons have been blurted out regarding said topic, jargons such as “Industrial Revolution 4.0” and “AI”. However, there exists one thing that excites Indonesians more than tech, and that is money. More specifically, the ability to generate funds in their own terms, quickly. To amalgamate two of those seemingly flawless entities is to reach an equivalent of valhalla to some. Thus, our society’s obsession with startups was birthed.
Realizing Potential
Indonesia’s fascination towards startups does not only originate from the consumer’s fondness of it. Society’s fascination of purchasing anything the world has to offer only with a couple of taps and swipes has fueled an industry into newly found heights. Being the fourth most populous country in the world, it is no surprise that Indonesia was endowed with the potential of being a humongous market for the online economy market. Thus, it is no surprise that Indonesia’s internet economy has been striving with an average growth rate of 49% since 2015. Even during a global pandemic, Indonesia’s internet economy has been predicted to still record double digit growth rates with a projected 11% YoY growth rate in 2020. Only Indonesia and Vietnam have managed to accomplish such a feat. A simple market sizing analysis would tell you that such circumstances are accommodative towards startups and thus, as a testament of the said growth, Indonesia has capitalized and spawned a huge sum of startups. A huge enough sum to be touted as the country with the most startups in ASEAN and fifth globally or 2.238 to be exact.
Indonesia’s relationship with startups is not a new found one. It was first kindled during the “bubble dot com” phenomenon in 1998–2000 in which Indonesia, along with most other countries across the globe were struck with the possibility of owning personal websites, which were then utilized for running businesses. However, Indonesia’s history with startups truly started during the 2010s in which the term was popular in mass media. During the same year, Gojek became Indonesia’s first startup to become touted as a unicorn (a startup with a value of over $1 billion) . Gojek’s claim to fame then became the catalyst of the creation of five more of said mythical beasts, bringing up the tally of total Indonesian unicorns to six. Those six unicorns are Gojek, Traveloka, Tokopedia, OVO, Bukalapak, and J&T Express. It is logical to assume that the emergence of said unicorns contributed to the huge influx of newcomers in the industry.
As with most things, this phenomenal growth does not come from thin air as this particular spurt of growth required gargantuan amounts of investment and a slew of active policies by governments.
Source: CNBC Indonesia
The infographic above illustrates the sheer amount of investment shilled out to these unicorns in order to finance their next business moves. To make sense of such a large scale, it is imperative to compare it to more familiar numbers. In quarter one of 2017, Indonesian startups racked up a total of Rp40 trillion in investments. The aforementioned number is significantly bigger than investment in other major sectors such as food and beverages (Rp37 trillion) and electricity, gas, and water (Rp36 trillion).
Other than the enormous amounts of investment, several policies have been implemented by the government to further facilitate the exponential growth of this industry. One instance of the said active policy is the one recently brought up by Nadiem Makarim as the head of Kementerian Pendidikan, Kebudayaan, Riset dan Teknologi which stated that a “digital startup” subject will be taught in universities starting from 2022. Though initially planned to be a mandatory subject, the ministry quickly revised its decision and instead made it an optional subject. The aim of this policy is quite clear, to further entice students to start their own startups and to enhance their entrepreneurial skills. This will then ultimately continue to fuel the nation’s exponential startup growth. Such a highly accommodative policy is not a rare occurrence as Indonesia’s Finance Minister, Sri Mulyani, frequently mentions the country’s full blown support towards this industry and will continue to pursue active policies to alleviate some of its endowed issues such as lack of funding and excessive risks. With such overwhelming support, one must then ask, will this be worth it after all?
On Innovation
One of startups’ supposed greatest “strengths” is its ability to innovate. It is first imperative to see Indonesia’s aggregate measure of efficiency which also takes into account innovation, TFP, to get a rough visualization of startups’ impact on Indonesian innovative capabilities.
Source: fred.org
The visualization above depicts Indonesia’s Total Factor Productivity during the 2010–2019 period (which is the suspected period when startups gained huge traction). At first glance, it might seem that the TFP is growing steadily over the said period. However upon further inspection, the growth rates fluctuate rather heavily.
Source: own calculation
It can be seen that the TFP growth rate peaks in 2010 and then declines until the end of the period. Thus, using simple correlation analysis, it can be roughly inferred that TFP growth during the periods of high startup growth has not been the utopia dreamed about. However, it must be noted that innovation is only one part of the TFP calculation as there also lies the contributions of institutions and policies. Moreover, it must be noted that a plethora of other factors also affect this downfall of TFP (such as reduced productivity of the manufacturing sector). Thus, this conclusion must be taken very lightly.
Another assumption is that the startups industry contributes to the majority of total R&D spending, indicating that it carries out the most amount of R&D. However, that simply is not the case. The chart below of the top 1000 R&D spending companies from various industries illustrates this point very well.
Source: ideatovalue.com
As can be clearly seen from the chart above, the R&D contributions of traditional tech startup companies only account for around one third of total R&D spending (far left). There exist other highly technological industries requiring R&D, such as the pharmaceuticals industry, whose innovations have been taken for granted. However, it is true that firms in the tech industry do contribute to a hefty chunk of global R&D spending.
It is now imperative to gauge if said huge amount of R&D spending is necessarily representative of the empirical startup landscape and if it is acquainted with increased innovation. It must first be understood that not all startups are endowed with an abundance of capital to carry out innovative activities. Tech entrepreneurship is not merely a numbers game but rather a game of quality. A newcomer’s probability of directly conducting innovative endeavours and becoming highly productive is relatively miniscule when compared to the already established incumbents (Shane, 2009). Considering the notion that only “high growth potential entrepreneurs” (meaning entrepreneurs delving into the startups space not out of necessity but rather to usurp high-potential, innovative opportunities) are beneficial to economic growth and innovation (Wong et al., 2005 and Shane, 2008), only a handful of the nation’s startups will have beneficial contributions towards national technological advancements and economic growth. Thus, the large influx of newcomers in the startup industry may only lead to overrepresentation without any beneficial consequences. In fact, a cross country analysis done by Anokhin, S., & Wincent (2011) has uncovered that entrepreneurs tend to pursue entrepreneurial opportunities with little to no innovative advances in less-developed countries. Thus, an abundance of entrepreneurial newcomers in less-developed countries might actually lead to a slowing down in patenting activities,thus innovative advances. This is further backed by a study done by Daniel Garcia-Macia et al. (2016) of which states that most productivity growth originates from innovations made by incumbents, with most of the innovations being quality improvements rather than introducing brand new varieties.
It has been made apparent that startups do not necessarily acquaint themselves with overtly disruptive innovations and the abundance of newcomers in the industry does not necessarily acquaint them with accelerated growth. However, does this necessarily render startups useless and insignificant in the grand scheme of things?
Alternative Path
Historically speaking, as frequently mentioned in the theories of True Industrial Policy and Structural Transformation, the sustainable and “moonshot” approach to achieving growth is by focusing on export sophistication and hence the manufacturing sector. This can be seen by the meteoric rise in economic development in the East Asian Miracles countries such as South Korea and Taiwan. While this should still be the ultimate goal to strive for, there exists an alternative path that originates from an unlikely source, like Chile.
Chile became one of the only Latin American countries to reach a high income status (according to the UN in their 2020 World Economic Situation and Prospects report) . This historic moment was encapsulated by its decision to become a member of the OECD in 2010. This incredible achievement is certainly not attained without any significant policies. However, Chile’s road to greatness is deviant from the general trend.
Its reform started with several trade liberalization efforts by replacing its fixed exchange rate system with a floating exchange rate (with bands up to 1999). Other than unilateral efforts, it also started bilateral and multilateral trade agreements with several countries such as Canada, the EU, the United States, etc.
However, to complement such liberalization efforts, Chile prioritized scientific advancements in its national agenda as it conceived several institutions just for this purpose such as the National Fund for Science and Technology (FONDECYT) created in 1981 to facilitate basic scientific research and also the Fund for Scientific and Technological Development (FONDEF) created in 1991 to finance joint research projects between academia and the business sector. Chile’s fondness of its entrepreneurial spirit was solidified by its conjurement of several institutions to facilitate business innovation and development. One such institution was the National Technology Fund (FONTEC) which was conceived to accomplish just that through matching grants. It then further solidified said support through CORFO (Chilean Economic Development Agency) by financing the creation of business incubators to create innovative and high growth firms. This full blown support continues to be apparent even in the mid 2000s as Chile continues to foster innovation and business creation to better its position in the global economy.
Though not explicitly mentioned, it is clear that this alternative path is what is sought after by Indonesia, as can be seen by its current developments. However, a deeper dive will uncover a significant difference in the nature of Chilean startups with Indonesia’s. Before delving deeper into this topic, a distinction between two classifications of technology must be made. On the one hand, there is deep tech which is characterized by its utilization of high level engineering, innovation, and scientific advances usually to solve complex problems. Moreover, most deep tech companies utilize two or more technologies creating a technological convergence (96% of all deep tech companies utilize at least 2 technologies). Finally, most deep tech ventures develop physical products as opposed to software. On the other hand, there exists general tech which is solely created to disrupt current business models and its conjurance was done with prioritizing revenue. Thus, it is apparent that the former is more quintessential in stimulating growth. A quick gander at the top Chilean startups would entail that a majority of them dabble in the deep tech category. For example, “The Not Company” dabbles in the art of food technology and utilizes AI to create sustainable and accessible alternatives to animal-based cuisines. Comparing and contrasting with the main players of Indonesia’s startup industry, the difference is quite apparent as (with all due respect) most of said players dabble into general tech with the focus of disrupting current business practices (for example, Tokopedia with its modernized e-commerce platform essentially based off prior e-commerces). With all that being said, it can be concluded that the problem lies not only on the startups as entities, but also on the nature of Indonesian startups.
One must then finally ponder, which way? With two alternative paths towards economic development served beautifully on a platter for our policy makers to choose, a great degree of consideration must be undergone to select the “correct” one. To twist the perspective a little, we might not even have to choose. What if these two divergent paths are not so divergent after all? However, one thing is for sure. To levy the exceedingly heavy burden of a nation’s economic development on the shoulders of unicorns is not and will never be rational.
References without hyperlinks:
Anokhin, S., & Wincent, J. (2011). Start-up rates and innovation: A cross-country examination. Journal of International Business Studies, 43(1), 41–60. doi:10.1057/jibs.2011.47
Cherif, R., & Hasanov, F. (2019). The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy. IMF Working Papers, 19(74), 1. doi:10.5089/9781498305402.001
Garcia-Macia, D., Hsieh, C., & Klenow, P. (2016). How destructive is innovation? doi:10.3386/w22953
Moving forward in Chile: A Sharedvision for the future. (2018). Production Transformation Policy Review of Chile, 65–102. doi:10.1787/9789264288379–7-en
