The structure of this study is organised around six chapters. Chapter one contains the nuts and bolts of the introduction into the what, why and how aspects of the study. Chapter two will scrutinise the literature on development, industrialisation and technology development though strategic industry and technology indigenisation through offsets. Chapter three will undertake a broad sweep across the conceptual and empirical aspects of offset. The why, what, and how aspects of offset will be discussed, with a focus on the discrepancy between strategic objectives and the complexity of implementation. The thrust of this chapter is to evaluate how offset is implemented, emphasising the shortcomings of methodology, and the limited number of proper case studies of offset evaluation to provide justification for the ‘matrix’ of offset evaluation. Chapter four will explore the two opposite
mainstreams of the Indonesian economic schools of thought, which are Habibienomics and Wijojonomics that influence the development and technological planning in Indonesia. A major portion of this chapter will be dedicated to Habibienomics, which basically represents economic nationalism, a sentiment that has always been at the forefront of intellectual debate, due to insecurity fears brought about by foreign intervention. Habibie’s concept of catch-up industrialisation through ‘strategic industries’ and technology development through a ‘progressive manufacturing plan’ represent the encapsulation of Indonesia’s spirit of self-sufficiency in the globalised world. The chapter will also discuss the flexibility of Habibie’s strategy that became the pretext for defence offset. Chapter five will discuss the three different periods in which offset was implemented in Indonesia: the development of strategic industries (1988-1998), survival (1999-2009) and revitalisation of defence Industries (2010-2014). The imperative behind this stage approach is the ‘gap’ in offset implementation, created by the economic crisis of late 1990s. The crisis effectively halted the defence industrialisation process through termination of government subsidies and the introduction of a competitive procurement policy. Each of the periods will explore three subcase studies of offset programmes representing each defence industry - PT DI/IPTN, PT PAL, PT Pindad - and assess how offsets have been implemented. The contribution of offset will be evaluated through six variables: job creation; skill enhancement; transfer of technology; creation of supply chains; promotion of export; and R&D. Chapter six will offer conclusions, based on the key findings, and also recommendation for future policy and further research.
References and Notes:
1 Martin, S. (1996). ‘Countertrade and Offset: Overview of the theory and evidence’,in: Martin, S. (ed.)
The Economics of Offset: Defence Procurement and Countertrade. The Netherlands: Harwood Academic
Publishers, pp. 15-48.
2 Martin, S. (1996) Ibid.
3 Louscher, D., Schwartz, J. and Naylor, A. (1989). ‘Patterns of Third World Military Technology
Acquisition’, in: Baek, K., McLaurin R.D. and Moon, C. (1989). The Dilemma of Third World Defence
Industries: Supplier Control or Recipient Autonomy?. Boulder: Westview Press.
4 Nn. (2009). Impact of Offset in Defence Trade: An Annual Report to Congress. US Bureau of Industry and
Security. Available at
http://www.bis.doc.gov/defenseindustrialbaseprograms/osies/offset/default.htm. (Accessed 27 December 2010)
5 Ibid.
6 Ianakiev, G. and Mladenov, N. (2011). Offset Policies in Defence Procurement: Lesson for the
European Defence Equipment Market. p. 191. Available at http://aspheramedia.com/v2/wp- content/uploads/2011/02/Ianakiev1.pdf(Accessed 10 May 2011).
7 The estimation was made by Grant Logan, the boss of Blenheim Capital -an offset managing firm.
He said that the driver factor behind the figure is the tensions in the Arabian Gulf region which trigger Saudi Arabia, United Arab Emirates, Kuwait and Oman to procure integrated air defences, C41SR, and else. Other countries like Brazil, Canada, India, Taiwan and East Europe are also said to be contributing to the skyrocketing offset figure. See article by: Chuter, A. (2010) ‘Nations seek more offset from suppliers’. Available at http://www.defensenews.com/story.php?i=4588118 (Accessed 10 May 2011)
8 Matthews, R. (2005) ‘Defence Offset: Policy versus Pragmatism. In Arms Trade and Economic
Development: Theory, Policy, and Cases in Arms Trade Offset’, in: Brauer, J., Dunne, P. (eds.). Arms Trade and Economic Development: Theory, Policy, and Cases in Arms Trade Offset. New York: Routledge, pp. 92-104.
9 Cheng, D. and Chinworth, M. W. (1996) ‘The Teeth of the Little Tigers: Offset, Defence Production
and Economic Development in South Korea and Taiwan’, in: Martin, S. (ed.). The Economics of Offset:
Defence Procurement and Countertrade. The Netherlands: Harwood Academic Publishers, pp. 245-298.
10 Robinson, R. (1988) ‘Authoritarian States, Capital-Owning Classes, and the Politics of Newly
Industrializing Countries: the Case of Indonesia’, World Politics, Vo.41 (1), pp. 52-74; and Goldstein, A. (2002) ‘The political economy of high-tech industries in developing countries: aerospace in Brazil, Indonesia and South Africa’, Cambridge Journal of Economics, 26, pp. 521-538.
11 Weiss, J. (1988). Industry in Developing Countries: theory, policy and evidence. New York: Routledge. 12 2015 Military Balance. International Institute for Strategic Studies.
13 ‘Military offset market looks to Middle East and Asia Pacific, finds Frost and Sullivan; Extensive re-
armament programme create growth potential in these regions, even as Europe falls by the wayside,’ M2 Presswire, 23 April 2013.
14 Bitzinger, R.A. (2005). ‘Offset and defense industrialization in Indonesia and Singapore’, in: Brauer,
J., Dunne, P. (eds.) Arms Trade and Economic Development: Theory, Policy, and Cases in Arms Trade Offset. New York: Routledge, pp. 249-263.
15 Benoit, E. (1973). Defence and Economic Growth in Developing Countries. Mass.: Lexington. 16 Evans, C. (1986). ‘Reappraising third world arms production’, Survival, 28(2), pp. 99-118. 17 Dumas, L.J. (2005). Op.Cit., p. 28.
18 Markusen, A. (2005). ‘Arms trade as illiberal trade’, in: Brauer, J., Dunne, P. (eds.) Arms Trade and
Economic Development: Theory, Policy, and Cases in Arms Trade Offset. New York:Routledge, pp. 69-91.
19 Ianakiev, G. and Mladenov, N. (2011)..Op.Cit.
20 Parsons, J.E. (1985) ‘A Theory of Countertrade Financing of International Business’, Working Paper,
Alfred P. Sloan School of Management MIT.
21 While transfer of technology refers to the inflow of ‘know-how’ to the Indonesian, local content does
not hold one common definition. It can be perceived as the contribution of domestic goods as part of the payment for an imported good (countertrade), or the participation of local company in the production line of imported goods.
22 Matthews, R. and Perdananti, A. (2007). ‘Indonesia’s Defence Industrial Challenge’, Asia Pacific
Defence Reporter.
23 The philosophy is similar to Keith Krausse’s ladder of production, which explains the linear steps
base. See Krausse, K. (1995) ‘Arms and the State: Pattern of Military Production and Trade’. Cambridge University Press, Cambridge Studies in International Relations. Habibie’s ‘ladder of production’ consists of four steps: (1) comprehension over the existing technology attached to a production cycle and design process of existing goods; (2) integrate existing technology into design and production process of new goods; (3) actively develop new technology from the existing one; (4) basic research to invent a new technology. See Savitri, C. M. (2007) Change in Indonesian Defence
Acquisition. Masters thesis. Institute Technology Bandung (ITB).
24 The length of government’s commitment toward these strategic industries was outstanding. For
example, throughout 1980s-1990s it invested more than US$2 billion in IPTN, an enormous amount for a developing country with a GNP per capita under US$ 1000. Amir, S. (2008) ‘The engineers versus the economist: Disunity of Technocracy in Indonesian Development’, Bulletin of Science,
Technology, and Society, 28(4), pp. 316-323.
25 Shiraisi, T. (1996). ‘Rewiring the Indonesian State’, in: McVey, R. and Lev, D. (eds.) Making Indonesia,
New York: SEAP Publication.
26 See Aswicahyono, H. and Hill, H. (2002).‘ ‘Perspiration’ versus ‘Inspiration’ in Asian
Industrialisation: Indonesia Before the Crisis’, The Journal of Development Studies, 38 (3), pp. 138-163.
27 The Archipelago economy: Unleashing Indonesia’s potential. McKinsey Global Institute. September 2012. 28 Savitri, C.M. (2007). Change in Indonesian Defence Acquisition, Masters thesis, Institute Technology
Bandung.
29 SIPRI Yearbook 2006. Stockholm International Peace Research Institute. Indonesia was among major
third world exporting countries, with value of total exports of major weapon US$28mn, or two rank below Singapore with total export value of USD79mn.
30 Jojo, J. (2006). International Technology Spillover and Manufacturing Performance in Indonesia.
Eindhoven: Technische Universiteit Eindhoven.
31 ‘IPTN Looks for international backing for delayed N-250-100’, Flight international, 24 June 1998.
Available at: http://www.flightglobal.com/articles/1998/06/24/38574/iptn-looks-for- international-backing-for-delayed-n250-100.html (Accessed 10 May 2011)
32 Goldstein, A. (2002). Op.Cit.
33 PT DI won the bid to supply maritime patrol aircraft to South Korea, beating competitors from more
advanced countries like Israel and US.
34 ‘Indonesian navy chief says no naval vessels combat ready’, BBC Monitoring Asia Pacific, 2 July 2002.
What Adm Sondakh referred to as “non combat ready” was the vessels only capable of sailing, but not to perform their basic functions. From 113 vessels, only nine were under 10 years old; 39 were over 30 years old, 42 were between 21 and 30 years old, and 24 were between 11 and 20 years old.
35 Punch, K. F. (2006) Developing Effective Research Proposal. Sage Publication.
36 As far as the author concerned, there has not been any cross country analysis on offset that involve
more than three countries. This includes Cheng, D. and Chinworth, M. W. (1996). ‘The Teeth of the Little Tigers: Offset, Defence Production and Economic Development in South Korea and Taiwan’, in: Martin, S. (ed.). The Economics of Offset: Defence Procurement and Countertrade. The Netherlands: Harwood Academic Publishers, pp. 245-298; Mawdsley, J. and Brzoska, M. (2005). ‘Comparing British and German offsets stretagies’, in Brauer, J. and Dunne, J.P. (eds.). Arms Trade and Economi Development: Theory, policy, and cases in arms trade offsets. New York: Routledge, pp. 106-117; Hartley, K. (2005). ‘Offsets and the Joint Strike Fighter in the UK and the Netherlands’, in: Brauer, J. and Dunne, J. P. (eds.) Op.Cit. ; Skons, E. (2005). ‘Evaluating defense offsets: the experience in Finland and Sweden’ in: Brauer, J. and Dunne, J. P. (ed.). Loc.Cit.Chinworth, M. (2005). ‘Offset policies in Japan, South Korea, Taiwan’ in Brauer, J. and Dunne, J. P. (ed.). Loc.Cit.; Bitinger, R.A. (2005) ‘Offset and defense industrialization in Indonesia and Singapore’ in Brauer, J. and Dunne, J. P. (ed.). Loc.Cit.
37 Shiraishi, T. (1996). Op.Cit.; Amir, S. (2007). ‘Nationalist Rhetoric and Technological Development:
293; Amir, S. (2007). ‘Symbolic Power in Technocratic Regime: the Reign of B.J. Habibie in the New Order Indonesia’, Sojourn: Journal of Social Issues in Southeast Asia, 22(1), pp. 83-106.
38 The leading figures for the debate are Kwik Kian Gie and Dawam Rahardjo. Both published
newspaper articles in Kompas, one of the biggest newspaper in Indonesia, debating what they coined as ‘Widjojonomics’ against ‘Habibienomics’. Kwik took stance to defend Widjojonomics, whereas Rahardjo took the opposite. See, Amir, S. (2007). Op.Cit.
39 Perdananti, A. (2007). In Search of Competitive Advantage. Masters Thesis, Institut Teknologi Bandung;
Yuniorita, S. (2009.) Offset in Indonesian Aerospace. Masters Thesis, Institut Teknologi Bandung.
40 Ibid.
41 ‘Korvet Sigma III dan IV Dibuat di Belanda’. Antara, 27 November 2007. 42 Ibid.
43 Private conversation with one of Indonesian Ministry of Defence staffs who was in charge with
defence industry revitalisation programme, Jakarta, 30 November 2010.
44 This is the researcher’s impression upon joining the work on the formulation of offset policy with
the Ministry of Defence throughout 2010-2013.
45 A preliminary interview with PT PAL, for example, informed that the industry and government
have different opinion regarding what is best for defence industry and the result is the offset negotiator demanded a form of offset that the local industry regarded to be pointless. See also Savitri, Curie M. (2007) Change in Indonesian Defence Acquisition. Masters Thesis, Institute Technology Bandung.
46 Merriam-Webster free dictionary. Available at: http://www.merriam-
webster.com/dictionary/methodology(Accessed 20 December 2010)
47 Silbergh, D.M. (2001). Doing a Dissertation in Politics: A Student Guide. 48 Silbergh, D.M (2001) Op.Cit.
49 Brannen, J. (2003). ‘Mixing Methods: Qualitative and Quantitative Research’. Ashgate.
50 Hammersley distinguished three forms of linking qualitative and quantitative research:
triangulation, facilitation and combination. A richer choice is offered by Bryman, who outlined eleven ways of integrating quantitative and qualitative research, among others are triangulation, supportive function, combination, quantitative structure with qualitative process, adding quantitative finding to solve the problem of generality in qualitative approach. See Flick, U. (2007).
Designing Qualitative Research. SAGE Publications; Brannen, J. (2003). Op.Cit.
51 Flick, U. (2007) Ibid.
52 Saunders, M., Lewis, P., and Thornhill, A. (2003). Research methods for Business Students. Pearson
Education Limited, p.83.
53 Silbergh, D.M (2001). Op.Cit.,p.17. 54 Silbergh, D.M (2001). Loc.Cit., p.110.
55 Perecman, H. and Cuman, S. R. (2006). A Handbook for Social Science Field Research: Essays and
Bibliographic Sources on Research and Methods. SAGE Publications.
56 Yin, R.K. (2003). Case Study Research Design and Methods. SAGE Publications, pp. 13-14.
57 George, A.L. and Bennett, A. (2005) Case Studies and Theory Development in the Social Sciences. MIT
Press.
58 Atkinson, P., Coffey, A. and Delamont, S. (2003). Key Themes in Qualitative Research. Altamira Press. 59 Saunders, M., Lewis, P., and Thornhill, A. (2003). Op.Cit. pp.389-390
60 Freire’s book ‘Pedagogy of the Oppressed’ was attributed as one of the inspirations that led to the
creation of the participatory action research as part of critical approach on research.
61 Saunders, M., Lewis, P., and Thornhill, A. (2003). Loc.Cit., pp.95. 62 Flick, U. (2007). Op.Cit. p.45
63 Flick, U. (2007). Loc.Cit.
64 Bloor, M. and Wood, F. (2006). Keywords in Qualitative Methods: a vocabulary of Research Concept.
London: Sage.
65 Flick, U. (2007). Op.Cit., pp.36-7. 66 Flick, U. (2007). Loc.Cit.
67 Olsen, W. (n.d.) Triangulation in Social Research: Qualitative and Quantitative Methods Can Really Be
Mixed. Available at: http://www.ccsr.ac.uk/staff/Triangulation.pdf (Accessed 26th August 2011) 68 The researcher has introduced her self from the beginning of her works and informed about the
research she is working at, that is offset. For utilisation of data from Bappenas study, the researcher has been granted permission to treat the result of study as secondary source. A written permit in form of email correspondence have also been obtained from officer in charge with offset policy formulation at KEMHAN in 2011.
69 During the first field research in 2011, two out of three firms did not understand the concept of offset
and believed they have never experienced such. One of the firm claimed that participation of domestic industry in the procurement of arms form abroad is based on business-to-business commercial consideration, not government intervention. Another firm chose to abort export of arms when facing offset demand from the buyer country, fearing of losing what they claimed to be “only slight margin of profit”. Discussion with defence industries, Bandung, May 2013.
70 The stopgap here was created by the researcher’s involvement in the formulation of offset policy,
especially throughout 2013. Under this programme the researcher was also tasked with socialisation of offset concept with defence industries. As consequence of this socialisation, the researcher found better understanding of offset had been shared among defence firms.
71 The gatekeeper in PT DI is the vice president of restructuring; gatekeeper in PT Pal is director of
technology; and gatekeeper in PT Pindad is the head of public relations.