Abstract

Manufacturing forms the largest sector of Indonesia's economy. According to Statistics Indonesia-BPS, its share is roughly 19 percent of the total Gross Domestic Product, providing jobs for approximately 19 million workers, ranking it third after the agriculture and trade sector. Due to its strategic role in the economy, a national initiative of Making Indonesia 4.0 was launched in 2018, focusing on industrial transformation in technology, research, innovation, and sustainability. From the business perspective, the increasing costs in materials, energy, and high expectations of customers or investors have brought the advanced adaptation in hi-tech and green business as critical aspects to increase efficiency and competitiveness. However, in light of mixed discourses about industrial revolution 4.0's (4IR) linkages, this study tries to unveil to what extent 4IR in Indonesia promotes growth in the manufacturing sector, particularly in large- and medium-scale industries. Focusing on the roles of innovation and research and development (R&D) in manufacturing growth, employment, and sustainable manufacturing, I analyze data from annual manufacturing surveys from Statistics Indonesia-BPS using panel regression analysis. I find that the Industry 4.0 index, mainly driven by innovation, had a significant positive association with value-added and productivity growth. However, my findings also indicate the need for more clarity between technology implementation and labour skills. In terms of employment, the significance of Industry 4.0 on employment is positive but does not out weight the other capital's influence. Furthermore, the rise in Industry 4.0 index also increases the likelihood of exporting manufacturing products. Regarding sustainability, industry 4.0 promotes the sustainable manufacturing index, which further leads to value-added growth. My findings imply that to pursue a global top-10 economy by 2030, combined with a demographic bonus issue, Indonesia should focus on supporting adequate digital skills by re- and upskilling workers for dealing with productivity and employment challenges in 4IR. Also, foreign investment, particularly ESG investment, is needed to transfer technology and knowledge to domestic workers. In addition, nudging policies, such as easing the bureaucracy and low cost for patent registration, can complement the existing super tax deduction program to encourage the company to run an R&D-based business to boost output and sustainable manufacturing.