Digital policy in Indonesia: the missing public sector link

There is no industry in Indonesia that has grown as fast as the digital economy. It is predicted that by 2025, the digital economy in Indonesia will have reached $124 billion, up from $44 billion in 2020. Even during the COVID-19 pandemic, the country’s digital sector is projected to grow by 10%, up from $40 billion in 2019 – far outpacing other sectors that are currently stagnating. Statistically, this is an unprecedented fourfold increase from 2015 to 2020 and a more than twofold increase between 2020 and 2025.

Unfortunately, this growth has been driven almost exclusively by the private sector. But without sufficient public support, the benefits stemming from the digital economy, especially to small and medium-sized enterprises (SMEs), cannot be properly developed. Soon, however, the digital economy will be too big for regulators to ignore.

A catalyst for economic recovery

Currently, the digital economy accounts for more than 4% of Indonesian GDP and more than 10% of Indonesia’s stock market capitalisation (JCI Index). Indonesia currently has six unicorns with a combined valuation of over $30 billion. With an IPO well within the short-run trajectory for some of these firms, it is imperative that regulatory authorities tailor themselves to prepare for the advent of this “new economy”. If these unicorns indeed go public within the next three years, they are well on track to becoming the sixth largest sector in the JCI index.

Given how significant the digital economy is in penetrating every segment of the economy, regulators must be cognisant of the ever-escalating role that is being assumed by this sector. Importantly, the digital economy is proven to be a catalyst for economic recovery. Initiatives started by governments, such as Bangga Buatan Indonesia (Proudly Made in Indonesia), whereby digital firms are encouraged to promote local SMEs to market their local products, is a sign that the government has realized the resilience of this sector in sheltering such businesses during the COVID-19 pandemic.

However, persuasion alone is not enough. There must be concrete regulation that supports the growth of these digital firms and ensures a healthy flow of capital for the benefit of the greater good.

The case for digital industry

The digital industry is often lumped together with the well-known technology industry. In Indonesia, both industries are often classified under the umbrella term TIK (Information, Communication and Technology). In setting policies, regulators caught in this murky lexicon often surreptitiously conflate the two under the umbrella categorisation of “tech firm”, thereby sacrificing the analytical rigour needed to streamline policy-setting.

The digital or internet economy is a more restrictive subset of the technology industry that utilises computing technology to enhance user experience. It is more focused on user-centricity: streamlining customers’ journey, leveraging business activities or shifting the way that daily activities are conducted are at the core of digital businesses. Digital firms are less of a producer of physical products than a progenitor of complementary prototypes that nurse users’ daily activities. E-commerce firms, which connect merchants and prospective buyers, or ride-hailing firms, which connect passengers with prospective drivers, are examples of such.

Bearing in mind that digital firms have their own business characteristics, regulators must then understand the nature of this industry to set a more targeted policy. Since the digital sector is often seen as just another part of the technology sector, the policy created is usually all-encompassing, which fails to take into account of the distinct characteristics of the digital sector. For example, current incentives in the technology sector in Indonesia rely mainly on tax deductions for R&D and worker training. Would such incentives be effective in attracting digital investment to Indonesia?

The entry point in understanding the nature of the digital industry is to investigate its spending structure. As its products are primarily digital, the fixed asset possession is generally much lower than other businesses. Yet investment regulation in Indonesia still strictly considers capital expenditure (capex) as the only item eligible for investment incentives. This does not bode well for digital firms, which generally spend very little in capex for their operations. Instead, digital firms are concerned with the need to establish a new ecosystem for their product to thrive in.

The spending to build a consumer base is often diminutively called “cash burning”. However, digital firms are ambitious: they are trying to introduce a new product, a so-called “disruption”, that will change the way users conduct their daily activities. For digital firms, the spending to build this ecosystem is an intangible asset by itself. In the digital world, where products are initially alien, testing the water before any capex commitment is made is crucial. Naturally, after the ecosystem is sufficiently built, the spending on infrastructure (such as a data centre) will come by itself. This business model is akin to a large digital firm like Amazon or Google, whose long-term profitability horizon rests on its success in building its unique network base.

Facing the digital future

It is not incorrect, to say the least, that the Indonesian technology sector has grown rapidly. To be more precise, however, it is necessary to attribute this growth almost exclusively to the digital economy sector. The digital economy can be thought of as the motor behind the entire technology sector in Indonesia.

In the end, the law and accounting standards have difficulty in coping with the pace of innovation. This is despite the significant contribution of this spending to the Indonesian economy, especially in facilitating financial inclusion or opening up massive employment opportunities. Instead of lurking within the framework of the law, regulation must adopt an agile and impact-focused mindset in facilitating digital transformation to best appropriate its benefits.

By implication, it is necessary for regulators to set an appropriate policy that is tailored for the digital sector. Whilst infrastructure plays a crucial role in expanding the digital reach of the population, the digital industry is directly related to the capability of human capital in utilising technology to assist their activities. Although government support in expanding hard infrastructure is appreciated, our low digital competitiveness remains a long-run concern. Supporting the digital industry implies leveraging our soft infrastructure in preparing for the new economy.