In their model of endogenous growth, Romer (1986) and Lucas (1988) argue that knowledge spillovers affect economic growth. As long as there is spillover of innovation and idea, firms will keep accelerating their growths as well as searching for new innovation. The process of increasing growth can still be happening even labor and capital absorption has achieved the maximum rate. Based on the phenomena, it can be said that knowledge spillovers explain a phenomenon in economy where growth is faster than an expected growth under the labor and capital absorption. The importance of knowledge spillover in explaining industrial growth has drawn much attention as can be seen on many empirical research works, such as, just to mention a few, the works by Glaeser et al (1992), Audretsch and Fledman (1996), Audretsch and Thurik (1999), Grilliches (1992) and Soete and Ter Weel (1989).
In Indonesia, manufacturing sector has engendered important contribution to the gross domestic product (GDP). In 1980, the contribution of manufacturing sector to GDP was only 13%. Mining sector was 29%o agriculture was 24% and services was 34%. By 1999, the contribution of manufacturing sector to GDP had increased up to 26.1%. While the average annual growth of all industrial sectors during 1980 to 1999 was around 6.1%, manufacturing sector itself was 12%. Agriculture sector was only 3.1%, and services was 6.8%. Manufacturing sector was clearly the engine of growth for Indonesia during 1980s and 1990s (Kuncoro, 2002; Hill, 1998). Important to ask, hence, is whether or not spillover of knowledge has played a significant role in accelerating the growth of manufacturing sector in Indonesia. |