Absorptive capacity and innovative performance frameworks for SMEs : case studies from manufacturers in Indonesia

Abstract

As the fourth most populous country globally, Indonesia is the world's 10th-largest manufacturing power, according to the United Nations (Schonhardt, 2016). The manufacturing sector employs 14.72% of the total Indonesian workforces (BPS, 2018). With the demographic bonus that will happen in 2045, around 208 million Indonesians will enter the workforces. Thus, Indonesia has the potential to become the hub of the manufacturing industry in Southeast Asia. This thesis aims to help industry practitioners in the manufacturing industry improve their competitive advantages and innovative performance by building the absorptive capacity. Absorptive capacity is a firm's ability to acquire, assimilate, and transform new knowledge and valuable information to upgrade its core capabilities in response to the changing economic environment. It indicates a firm's innovative activities and influences the sustainability of a firm's competitive advantages. This thesis answers the question that has not been explored previously: how should the absorptive capacity and innovative performance of Small Medium Enterprises (SMEs) in developing countries, where resources for research and development (R&D) are limited, be evaluated. All the factors that drive a firm's absorptive capacity and innovative performance were evaluated using a case study approach and direct field interviews with twelve manufacturers in Indonesia. The case studies provide vivid illustrations about Indonesia's SMEs and manufacturing industry conditions: the capabilities, challenges, and opportunities for further improvements. Finally, the case studies' findings were used to build conceptual frameworks that guide practitioners. Absorptive capacity is a multidimensional construct that can drive a firm's innovative performance. It is driven by a firm's capabilities and efforts to learn new knowledge and adapt to the environment. This thesis is seed research for multi-year research collaboration between MIT and Indonesia to build an integrated sustainable design and supply chain model to enhance Indonesia's manufacturing industry.