Determinants of Firm Innovation in Indonesia: The Role of Institutions and Access to Finance

Abstract

This paper investigates the determinants of firm innovation in Indonesia. Using quality of local regulations index constructed by the Indonesia’s Regional Autonomy Watch (KPPOD) as measure of institutions, We found that better institutional quality at the local level was associated with more innovation and that firms experiencing major obstacle in access to finance were less likely to innovate. Access to finance is more critical for small and medium enterprises (SMEs) whereas institutional quality is more important for large firms. The positive impact of better institutions on innovation is asymmetrically distributed. Better local institutional quality disproportionately benefited non-constrained firms.AbstrakMakalah ini menyelidiki faktor-faktor penentu terjadinya inovasi pada perusahaan di Indonesia. Sebagai proksi kelembagaan digunakan variabel Peraturan Daerah yang dibuat oleh Komite Pemantuan Pelaksanaan Otonomi Daerah (KPPOD). Penelitian ini menemukan bahwa kualitas kelembagaan yang baik pada tingkat daerah erat kaitannya dengan tingkat inovasi yang lebih tinggi dan perusahaan-perusahaan yang mengalami kendala akses keuangan cenderung tidak melakukan inovasi. Faktor akses keuangan lebih menentukan bagi perkembangan inovasi perusahaan perusahaan kecil dan menengah sedangkan kualitas kelembagaan lebih menentukan bagi perusahaan besar. Dampak positif dari kelembagaan yang baik terhadap tingkat inovasi terdistribusikan secara asimetris dan faktor kelembagaan yang baik lebih berdampak positif terhadap perusahaan yang tidak mengalami kendala keuangan.Kata kunci: Akses Keuangan; Inovasi Perusahaan; Faktor Penentu Inovasi; Kesenjangan Inovasi; KelembagaanJEL classifications: O38; O53; G38

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“…In this regards, Kirkpatrick et al (2006) concluded that the quality of regulatory framework and foreign investment is highly related. They also observed that due to weak government regulations foreign investors may reluctant to investment in the large investment projects like R&D. Similarly, Mahendra et al (2015) found evidence that good regulatory quality and access to finance have positive impact on innovation. Although, Blind et al (2017) stated that the relation between regulations and innovation may differ due to market environments, they found that regulations have positive influence on innovation in low uncertain markets while opposite effects in high uncertain markets.…”

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