Indonesia had put huge interest on the development of special administrative area for improving national economy. Thus, the Batam Free Trade Zone (FTZ) was opened in the 1970s. However, rapid development on the island only started in the 1990s after a boost from Singapore-Johor-Riau triangle plan, led by the former. Following the high investment period, institutional changes affected by 1998 crisis and reform has brought down investment climate in Batam. Not only did Batam temporarily lost its unique status as promoter of export oriented economy, but also it suffered from the existence of the newly autonomous local government in the municipal level. The former event affected the fiscal structure of the zone, while the latter created long-lasted friction between the Free Trade Zone Authority (BP Batam) and the city government of Batam. These so called institutional problems are the highlight of this study. Classical studies suggest that development of a duty free zone could promote development through investment flows and export growth. However zone’s competitiveness depends on several key variables. According to Global Competitiveness Report, institutions, along with other basic variables need to be maintained before stepping into the next stages which focused on innovation. To answer the problems, a survey was conducted involving 17 participants from different areas of the zone. Relationships between variables were established using Fischer’s Exact Test. Result indicates that there are significant relationship between institutions and innovation, judging by R&D related activity, under 0.05 alpha level. However there was not enough evidence to support the relation between institutions and other aspects of innovation (business sophistication). The author interpreted that weak vision towards FTZ policy and zero-sum approach by key actors contributed the most to the failure of the zone in promoting innovation.

Keyword: Batam, free trade zone, competitiveness, institution, innovation

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About the Author:

Bangkit is a public policy researcher at the Center for Policy Formulation and the Application of Technology, the Ministry of Public Works of Indonesia. He obtained his graduate degree from Nagoya University this year, after previously finishing his study at the University of Indonesia in 2007.