By M. Fakhryrozi
Indonesia is undergoing a surge in industrialization, driven primarily by its resource-based sectors—particularly through its mineral downstreaming strategy. This approach has proven effective in boosting exports, attracting investment, and accelerating growth in certain manufacturing sectors. However, behind these achievements lie structural challenges that must not be overlooked: limited participation of domestic players, the declining role of labor-intensive industries, and incentive and local content policies that have yet to fully drive national economic transformation.
Downstreaming, Incentives, and Structural Imbalances
Since the ban on raw mineral exports was enacted, Indonesia has successfully attracted major investments—especially from China—for the construction of nickel and copper smelters. According to the 2023 BKPM Performance Report, the basic metals sector accounted for over a quarter of total manufacturing investment, but absorbed only 6 percent of the industry’s workforce. This indicates that the downstreaming taking place is capital-intensive, rather than labor-intensive.
What’s also concerning is that much of this investment operates within closed supply chain structures. Local supplier participation is limited, and technology transfer is not a core requirement. Global studies by UNCTAD and the OECD warn that foreign direct investment not tied to local performance obligations—such as R&D partnerships, local sourcing, or workforce development—risks failing to deliver meaningful structural transformation for host countries.
On the other hand, the fiscal incentives offered—ranging from tax holidays to super deductions for R&D and training—have not been well-targeted. The majority of benefits have gone to large foreign firms, while local enterprises struggle to access them due to administrative and technical constraints. Rather than strengthening domestic industry, these incentives risk deepening dependency.
Indonesia’s Local Content Requirements (TKDN), intended to increase local participation in industrial value chains, have also underperformed. Many small-scale domestic firms are unable to meet required standards in quality and volume, and receive insufficient support to upgrade. As a result, TKDN often becomes more of a bureaucratic hurdle than a tool for capacity development.
The Marginalization of Labor-Intensive Industry
While mineral downstreaming takes center stage, labor-intensive sectors such as textiles, footwear, and light electronics have stagnated. Yet, these sectors have long been the backbone of employment and non-oil and gas exports.
The contribution of manufacturing to GDP has steadily declined—from 27.4 percent in 2000 to just 19 percent in 2024. Competitor nations like Vietnam and Bangladesh have successfully attracted industrial relocation from China, aided by more focused industrial policies, efficient logistics, and competitive labor markets. Meanwhile, Indonesia is falling behind due to the lack of consistent and adaptive policies to support labor-intensive industries.
Redirecting Industrialization Strategy
To ensure industrialization has a broad-based impact, Indonesia must adopt a more inclusive strategy rooted in national capabilities.
First, fiscal incentives must be reformed. The government should link incentives to measurable performance outcomes—such as partnerships with local players, technology transfer, or contributions to domestic research institutions.
Second, local content policy must be accompanied by technical training, financing access, and mentoring so that national industries can meet the demands of large-scale industrial operations, both in terms of quality and capacity.
Third, labor-intensive industries must be reprioritized. Industrial zones such as Batam, Kendal, and Cikarang could be repositioned as export bases for labor-intensive manufacturing, supported by flexible labor regulations and competitive logistics incentives.
True industrialization is not merely about building factories—it is about building national capabilities. Without local economic integration and the empowerment of domestic players, downstreaming risks widening structural disparities. It is time to restore balance: between capital and labor, between foreign and national actors, between growth and empowerment.
