Textiles/garments and electronics are illustrative of the fact that Indonesia's manufacturing is still in a nascent stage of development as regards its ability to compete in overseas markets. The experience of manufacturing firms considered in this chapter shows the first efforts that are being made to go beyond the mere exploitation of cost advantages in an attempt to give attention to other factors such as technology acquisition. An important influence in this process has been exercised by the incentive system. The creation of an improved foreign investment climate and the introduction of export promotion measures by the government in the mid-1980s coincided with locational considerations in the strategies of domestic and foreign investors, inducing them to set up export-oriented plants. However, Indo­ nesia enjoys a continental-size economy which makes it difficult for many established firms to look beyond serving a lucrative home market whose attractiveness is ensured by prolonged government reliance on import sub­ stitution policies designed to shelter that market from foreign competition, at the same time that it implements measures aimed at promoting exports. Although firms in both industries face competitive challenges, their situa­ tions differ. In the more traditional textiles and garment industry, the acquisition of technological capabilities aimed at raising productivity is essential to the maintenance of export competitiveness in the face of emer­ ging producers in countries such as China and Viet Nam. Electronics is a sector in which Indonesian firms have only just entered the fray. Techno­ logy accumulation by these firms reflects the imperative of investing in learning and in maintaining foreign technology linkages in order to keep up with the rapid pace of product and process innovations taking place internationally.