CRITICAL REVIEW ASSIGNMENT – REGIONAL ECONOMIC COURSE

TITLE : The Implementation of Oil Palm Based Regional Innovation System

(SIDA) In Supporting The Masterplan For The Acceleration and
Expansion of Indonesia’s Economic Development (MP3EI) of The
Economic Corridor of Sumatera - Indonesia

AUTHOR : Marlon Sihombing, Iskandar Muda, Erni Jumilawati. And Abikusno

Dharsuky
SOURCE : European Journal of Business and Innovation Research
PUBLISHED YEAR : 2015

DESCRIPTION OF THE MAIN ISSUE

This journal explained to the readers about Regional Innovation System (SIDa) in North
Sumatera. This region has very specific resource which is palm oil in Sei Mangkei. In the
bigger picture itself, Indonesia already has Masterplan for the Acceleration and Expansion of
Indonesia’s Economic Developmetn (MP3EI) in Economic Corridor of Sumatera. Right now,
Regional Innovation System in Palm Oil industry of North Sumatera is developed through
small and medium enterprise (SME). This approach is expected to increase the productivity,
the sector development on the farm, and also the development of distribution industries. The
current conditions in North Sumatra which support the distribution process of Oil Palm trees
are as the following:

 Oil Palm is the main commodity in MP3EI of North Sumatera’s Economic Corridor
 The area of Oil Palm plantations in North Sumatera is 1.2 Million Hectares
 There is a Special Economic Zone (KEK) of Sei Mangkei which processes the Oil Palm
 Oil Palm produces CPO but not fully distributed yet
Many distributed palm oil products are still in the laboratory scale which needs to be
developed into the industrial scale. Based on that basis, the SME based development of SIDA
for oil palm distribution in North Sumatra proposed four programs, they are; 1. the
improvement in the productivity of community plantations, 2. the development of SME based
distribution industries, 3. the utilization of biomass as energy alternative in oil palm plantations
and 4. the implementation of Oil Palm-Cow Energy Integration program (ISSE) as the
supporting capacity of food and energy security in North Sumatra. The program is based on
the potential of oil palm in North Sumatra that is not optimally developed. Although it is
supported by the condition of the suitable land and climate, the strategic position and the oil
palm market are still prospective.

Masterplan for the Acceleration and Expansion of Indonesia’s Economic Development

(MP3EI)
This SME approach is expected to support the government economic masterplan,
MP3EI. Master Plan is to enable Indonesia to become one of the 10 major world economies by
2025. It contemplates a high degree of cooperation between the central government, local
governments, state owned enterprises, and the private sector and a major change in mind set of
all of them. The Government will act as a regulator, a facilitator and a catalyst to support
economic growth. To do this, it will both amend and repeal regulations to remove bottlenecks
and prevent roadblocks to investment. To act as a catalyst to investment, the Indonesian
Government will provide fiscal and non-fiscal incentives and the private sector will be given a
major role in economic development, particularly in the area of infrastructure.

MP3EI has two-prongs: acceleration and expansion. The acceleration prong is designed
to achieve early completion of a number of existing key development programs. The expansion
prong is intended to spread the positive effects of economic development to every region and
among all components of the Indonesian community.

The Master Plan identifies six growth centres, or economic corridors, to boost economic
development: Sumatra, Java, Kalimantan, Sulawesi, Bali – Nusa Tenggara and Papua – Maluku
Islands. The main strategy of the Master Plan is to achieve economic development by focusing
on these six economic corridors, by strengtheningnational connectivity throughout the
archipelago, and by strengthening human resource capabilities, science and technology. The
Master Plan identifies eight primary programs and 22 primary activities as the focus of
development. The eight primary programs are: agriculture, mining, energy, industrial, marine,
tourism, telecommunications and the development of strategic areas.

The strategic initiative of the Master Plan is to encourage large-scale investment in 22

primary activities: shipping, textiles, food and beverages, steel, defense equipment, palm oil,
rubber, cocoa, animal husbandry, timber, oil and gas, nickel, copper, bauxite, fisheries, tourism,
food and agriculture, the Jabodetabek area, the Sunda Straits strategic area, transportation
equipment, and information and communication technology. The implementation of the Master
Plan is coordinated by the National Economic Committee (or KEN) and the National
Innovation Committee (or KIN).
The Master Plan knows that there are challenges for Indonesia to overcome such as; a
failure to achieve value added input in the agricultural and extractive industries; a
developmental gap between western and eastern Indonesia; the lack of infrastructure support;
a lack of connectivity between regions; inadequate quality of human resources and rapid
urbanisation.

Regional Innovation System (SIDa)

To support this approach, author of this journal decided to use Regional Innovation
System or SIDa. Regional Innovation System is considered to be an instrument for regional
development policy in Europe (Cooke et al, 2000). For example, the European Union adopted
a Socio-Economic Research Program entitled, “Regional Innovation Systems: Designing for
the Future (REGIS),” for the less developed regions in Europe. Highlights of the European
experience can be seen in Braczyk et al. (2002) and will also be discussed in this paper later.
One of the distinctive examples of RIS is industrial clustering or regional clustering. In some
parts of world, such as the U.S. and Japan, the term “cluster” is more popular than RIS.
Following the initiative of Porter (1998), policy makers in the U.S. use the concept of clustering
for all kinds of industries and for regional development (Council on Competitiveness 2001).

But in Indonesia Regional Innovation System or SIDa is rather new. In the case of
developing countries, like Indonesia, the level of innovation is not as broad as other nations.
Despite the globalizing economy today, new radical innovations in terms of products or
processes are yet scarce to be found. Radical innovation in new products or processes is
considered valuable, although the concepts of incremental changes in products, processes and
also management tools are imperative and apply to all regions. Regional innovation system
(SIDa) in Indonesia is one of the strategies in national innovation system which monitor
interaction process between innovation system components.
Basically, it is a national agenda according to Law no. 17 of 2007 on the National
Long Term Development Plan (RPJN) 2005-2025 and Law no. 18 of 2002 on National System
of Research, Development, and Application of Science and Technology. Each region should
make some important points about strengthening SIDa, which is the policy of making
coordination team and SIDA Roadmap, SIDa arrangement both institutional and SIDa
resources, developing SIDa through local potency, and coordinating and reporting up to central
government.
SIDa reinforcement includes several important actions (BPPT, 2011), which are:
a. Structuring the SIDA Pillars: The steps should be done is policy reform innovation by
removing every regulations that hamper or convoluted. Policies issued by the government the
region should also support the existence innovation area. Also necessary pay attention to
"umbrella program" which becomes the focus and connection between business actors and
sources funding. It is also needed basic infrastructure development,
financing regional innovation, as well as socio-cultural improvements, and potential of other
regions.
b. Development of Priority Focus: A comprehensive process with in-depth analysis and
reviewing the current legislation.
c. Implementation of the Innovation Framework: This activity is done within strengthening of
specific industry clusters according to the priority focus that has been set
The main commodities for SIDa in North Sumatera is Palm (Kelapa Sawit), because
of huge economic contribution of palm in north sumatera. Indonesia still hold 44% of world
Crude Palm Oil market Also there are already Kawasan Ekonomi Khusus and industrial cluster
pf palm oil in North Sumatera. Right now, there are few actions that government in North
Sumatera already did to implement SIDa by “hilirisasi” local economic development based on
palm, these are the following actions:
 Increase the productivity of palm land
 Integration of palm and cow to produce renewable energy
 Utilisation of palm shell through bio mass stove
 Developing root grass products of palm such as CBS, candle, soap, cosmetics
As the main commodity for MP3EI in North Sumatera Corridor, palm holds huge
impact on Indonesia and its own regional economy. Total area of palm land in North Sumatera
is increasing every year. But the lack of downstreaming of the current industry has negative
impact on the economy and mostly those downstream products are still laboratory scale and
needs to be developed. Current local government already have supporting regulations to
increase the palm industry, such as:
 RPJMD Sumatera Utara 2013-2018, with three main programs on research and
development
o Information technology dissemination program
o Regional innovation system (SIDa) program
o Enhance current science and technology
 Pergub No. 34 Tahun 2012 tentang Pedoman Kelitbangan dan Inovasi Daerah di
Lingkungan Pemerintah Provinsi Sumatera Utara
 Kepgub No. 188.44/64/KPTS/2013, about forming of Tim Koordinasi Sustem Inovasi
Daerah Sumatera Utara
 Kepgub No. 188.44/87/KPTS/2013, about Tim Pokja Sistem Inovasi Daerah (SIDa)
Sumatera Utara 2013
To understand how SIDa works in North Sumatera below is SIDa flowchart

Figure 1 SIDa Flowchart

Special Economic Zone (KEK)

To attract investment in certain areas in Indonesia, the Government has established a new
location based concession called a Special Economic Zone (Kawasan Ekonomi Khusus/KEK),
which is governed by Law No.39/2009. On 28 December 2015, the Government issued
Regulation (GR) No.96/2015 (GR-96) that provides comprehensive facilities available to
investors in a KEK. Tax facilities under this regime are the most complete to date as they cover
Income Tax, Value Added Tax (VAT), Luxury-goods Sales Tax (LST), import duty, and excise
facilities. GR-96 will be effective 60 days after enactment (from 25 January 2016). Currently,
there are eight areas designated as KEKs, being:
1. Sei Mangkei
2. Tanjung Api-Api
3. Tanjung Lesung
4. Mandalika
5. Maloy Batuta Trans Kalimantan
6. Palu
7. Bitung
8. Morotai

As the locations are spread across Indonesia each KEK has different resources to be
developed, ranging from plantations, logistics, to tourism activities. The main targeted business
activities in each KEK that will be entitled to the Corporate Income Tax (CIT) Reduction
facility will be stipulated in a separate regulation. While the implementing regulations are being
prepared taxpayers may refer to the official website of KEK National Council for preliminary
information on each KEK.
Writers of this journal use following conceptual framework in this research

Figure 2 Conceptual Framework

This reserach also has 150 families as respondent for which they all lived in Desa
Mangkei Lama and Desa Mangkei Baru. This research also uses variables as the following:
RESULT
From the data description in the journal we can see that:

 40% respondents agree that the Oil Palm Nursery Efforts in the village are increased
rapidly and 7% the respondents disagree
 43.3% respondents, agree that the Oil Palm Nursery Efforts in the village supply the
needs of oil palm and 10% respondents state that they are neutral
 50% respondents disagree to the Cooperative of Oil Palm Midribs based Cattle Feeds
Business and 3.3% respondents absolutely agree
 36.7% respondents disagree that the Cooperative of Cattle Feeds Business as the supplier
of Cattle Feeds and other 10% respondents agree
 50% respondents agree that the Cattle Business produces Beef, Excellent Calves and Bio
Gas and 2 other groups of 10% respondents disagree and absolutely disagree.
 46.7% respondents agree that the Cattle Business produces Beef, Excellent Calves and
Bio Gas and 2 other groups of 10% respondents disagree and absolutely disagree
 46.7% respondents agree to The plantation community empowerment through the
Biomass stove using the Shells and Briquets and 10% respondents absolutely disagree
 63.3% respondents agree to The Oil Palm Plantations Produce CPO but it is not
distributed yet and other 2 groups of 0% respondents absolutely disagree and absolutely
agree
 43.3% respondents state neutral to The Distributed Oil Palm Products need to be
developed into the industry scale and other 2 groups of 0% respondents absolutely
disagree and absolutely agree
 50% respondents agree to the diversification of CPO product of foods and consmetics
(Chocolate, Butter, Soap, Cosmetics, etc) and other 2 groups of 0% respondents
absolutely disagree and absolutely agree
 60% respondents agree to the developed SME based Oil Palm industry is expected to
give wider multiplier effect to the welfare of the society and 0% respondents absolutely
disagree
 60% respondents agree to to the derrivative products of Oil Palm to obtain the bank
financing and 0% respondents absolutely disagree
 76.7% respondents agree that the efforts had been conducted in the form of Laboratory
to produce excellent seeds, and also processed Oil Palm products in the form of Cooca
Butter Subtitutes (CBS), paraffin, Soap, and Butter and 6.7% respondents disagree

From this research we can understand that the implementation of Oil Palm based
Regional Innovation System (SIDA) of Sei Mangkei is potential to become the growth center
region as it becomes a Special Economic Zone (KEK) of Sei Mangkei which will stimulate
growth and development of surrounding areas by creating innovative products from oil palm.
The existence of KEK of Sei Mangkei will improve people's lives around which are realized
in the form of the increase in people's income, also in terms of the availability of facilities and
social and economic infrastructures for the society.
 The development of Oil Palm Distribution will be beneficial to the progress of society,
especially in terms of improving the socioeconomic status of the society. The development of
KEK of Sei Mangkei with the primary expectations that KEK of Sei Mangkei will absorb a lot
of labors so that the unemployment problem can be solved. The SME policy in Indonesia is
more social-oriented, not market and competitiveness-oriented. It only encourages the SME
policy to promote employment chances growth or poverty, and more geared to increase export
and domestic market share, so that SME in Indonesia remains weak (Tambunan, 2010).
Therefore, the policy of SME in Indonesia is more focused on the provision of credit not
providing the facilities in order to innovate. Therefore, generally, the SME in Indonesia is more
utilized for the capital not for financing the innovation.

CRITICAL REVIEW OF THE ISSUE

Small and medium-sized enterprises (SMEs) are critical for emerging economies like
Indonesia but simultaneously challenging for policymakers looking to support their growth.
Including micro firms (companies with fewer than five employees), SMEs are responsible for
more than 97 percent of total employment in Indonesia and represent 99 percent of all firms
(Mourougane 2012). Small firms tend to be labour intensive and relatively unproductive,
typically using outdated or less sophisticated technologies to produce goods. As a consequence,
SMEs produce only 57 percent of Indonesia’s total value-added output (Mourougane 2012). A
central challenge for the Indonesian government is how to encourage SMEs to grow so that
they and the industries they operate in can benefit from the dynamics of economies of scale,
contribute to national economic growth and provide more employment opportunities for
Indonesians.

This limitation on SME growth despite its potential is rooting on 2 key points according
to Rand Corporation in 2015, which are:

 Credit constraint: Inadequate access to finance prevented firms from expanding and
making investments in new technologies that would lead to growth. Many firms felt that
the credit offered to them by banks was too expensive, with exorbitant interest rates and
stringent collateral requirements. This was why firms relied more heavily on informal
financial sources, such as family or social networks. Existing credit programmes, such
as People’s Business Credit, are a step in the right direction but they could be improved
and need to be re-evaluated.
 Access to information: Inadequate access to information of many different forms was
also a pervasive problem for SMEs. Information problems prevented firms from learning
about support programmes sponsored by government and nongovernmental
organisations, including trade fairs that might help them access markets and worker-
training programmes that might help them become more productive. Not only do SMEs
lack information about government programmes but the various levels of government,
the banks and non-governmental organisations lack information about SMEs. A better
national registry of SMEs would enable policymakers to more effectively design and
target SME support programmes.
 Continuting from the conclusion of the paper, we can see that there indeed contraints
that SME, in this case the downstream industries of palm oil in Sei Mengkei, faced that limits
their growth. This limitation not only hinder their ability to succeed but also can be seen as
failure in small economic policies in Indonesia. According to the journal, it is because of the
lack of policy that promotes growth and competitiveness. To increase the competitiveness
itself, SMEs should be able to access financial assistance that will support the needs of the
business. By enhancing the quality oh human resource and the business itself, the SMEs could
grow. Access to information will surely increase their chance to enhance the competitiveness.

According to the data provided within the journal, direction for future SMEs in Sei
Mengkei is possible. The downstream small industry which focuses on biomass and palm
nursery could thrive. But to make that happened there are few propositions that needs to be
done:

 Policies to assist SMEs that promotes economic growth, improving productivity and
creating an enabling business environment.
 Detailed and frequently updated national registry of SMEs at all levels of government
that would enable policymakers to design and targets support programs for SMEs more
effectively
 Improving access to information about SME support programs especially for growth
oriented SMEs that has registered their business. This could be done by publicly
advertised any government support programs
 Government should review again the current credit extension programs for SMEs and
reconsider the effectivenes of those programs.
 Government should also support the SMEs through enabling market access especially
export market. Provide enough information related to certification and export procedures

To increase the productivity and effectivity of Sei Mangkei as the economic corridor of
North Sumatera, we need to acknowledge the need of infrastructure there. The current
condition has shown the lack of adequate infrastructure that can support the development of
Sei Mangkei Economiz Zone. There are also issues in governance, related to coordination and
responsiveness. Although the Indonesian government has tried their best to eliminate this long
bureaucratic procedure, confusion and uncertainty still exists. In this case, the institutional
structures should be established with clear authority, responsibilities and roles identified for
the organizations involved. A successful KEK requires a very capable government and a well-
functioning market system. To have a successful KEK, the government could employ the
cluster approach which is a more bottom up than top down approach. In this sense, increasing
competitiveness itself is not enough. We have to assess the market signals and have a perfect
understanding of the domestic comparative advantages and market situations (both domestic
and international).A proper supply chain and related supporting industries should be developed
to strengthen the market positioning of the cluster.

Second, enough attention should also be given to the zone location, surrounding
infrastructure, quality of governance toward and within the zone, and the blend of incentive
packages offered by the central and regional governments. A cluster approach should be
properly developed by inviting credible investors that can develop a trickle-down economic
effect to regions. In addition, the government should give a special power to the KEKs to create
an efficient regulatory system and a conducive business environment, which make the KEKs
attractive to investors.

Third, he human factor plays An important role. Therefore investments in education,

training and skill development will determine the capacity of the nation to change with the
changing times. Fourth, the attractiveness of investment policy packages to create a beneficial
investment environment. To improve its investment climate, Indonesia needs to have a
coherent strategy which should be complimented by good governance.
MP3EI as one of the regional economics policy in Indonesia still needs improvement
to increase its effectiveness. Sei Mangkei Special Economic Zones as one of the strategies in
MP3EI shows some promising result in increasing overall regional economic. But, its current
condition also shows lacking in adequate infrastructure to develop international level economic
zone. To increase the effectiveness of MP3EI we should also seek the grassroot strategies
which in this case is SMEs or the downstream palm oil industry. This could increase the local
economy that has huge economic potential.

LESSON LEARNED
This research helps us inderstand the implementation of SIDA in Oil Palm based
industry to increase the productivity of Sei Mangkei Special Economic Zone (KEK) which will
stimulate growth and development of surrounding areas by creating innovative products from
oil palm. The existence of KEK of Sei Mangkei will improve people's lives around which are
realized in the form of the increase in people's income, also in terms of the availability of
facilities and social and economic infrastructures for the society through the downstream
industry and SMEs. The development of Oil Palm Distribution will be beneficial to the progress
of society, especially in terms of improving the socioeconomic status of the society. The
development of KEK of Sei Mangkei with the primary expectations that KEK of Sei Mangkei
will absorb a lot of labors so that the unemployment problem can be solved. The SME policy
in Indonesia is more social-oriented, not market and competitiveness-oriented. It only
encourages the SME policy to promote employment chances growth or poverty, and more
geared to increase export and domestic market share, so that SME in Indonesia remains weak.
Therefore, the policy of SME in Indonesia is more focused on the provision of credit not
providing the facilities in order to innovate. Therefore, generally, the SME in Indonesia is more
utilized for the capital not for financing the innovation.
There are few key points that we can learned from this journal, which are:
 As the main commodity for MP3EI in North Sumatera Corridor, palm holds huge impact
on Indonesia and its own regional economy, therefore the implementation of MP3EI and
in this case North Sumatera Corridor needs to be effectively done to increase prosperity
of local, regional, and national economics.
 Sei Mangkei Special Economic Zone has palm oil as the main commodity but
infortunately that resources hasn’t been evenly distributed. This condition decrease the
 effectivity of palm oil industry in Sei Mangkei. The downstream industry of palm oil
hasn’t been developed so this economic zone hasn’t fully reached its optimum potentials
 Regional Innovation System (SIDa) should be implemented as ways to increase Sei
Mangkei productivity by; 1) increase the productivity of palm land, 2) integration of palm
and cow to produce renewable energy, 3) utilisation of palm shell through bio mass stove,
4) Developing grass root products of palm such as CBS, candle, soap, cosmetics
 To implement SIDa, government also needs to acknowledge the role of SME since are
critical for emerging economies like Indonesia. The current condition of SME still needs
more support and policy reform. Removing credit constraint barriers and increasing the
access to information could increase its productivity. Policymakers should consider the
impact and target of optimal SME and formalizing SME to make effetcive policies for
SME
 To increase the productivity and effectivity of Sei Mangkei as the economic corridor of
North Sumatera, we need to acknowledge the need of infrastructure there. The current
condition has shown the lack of adequate infrastructure that can support the development
of Sei Mangkei Economiz Zone. There are also issues in governance, related to
coordination and responsiveness. Enough attention should also be given to the zone
location, surrounding infrastructure, quality of governance toward and within the zone,
and the blend of incentive packages offered by the central and regional governments.

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