The defense industry plays a strategic role in strengthening national sovereignty, technological independence, and economic resilience. In developing countries, defense-related innovation projects often symbolize national prestige and technological ambition while simultaneously serving as instruments for technological catch-up and industrial upgrading (Anderson & Luiz, 2025). However, large investment in Research, Concept, and Development (RCD) does not automatically guarantee innovation success because technological capability depends on broader institutional and ecosystem support (Rao, 2019). One of the most ambitious aerospace innovation initiatives in Southeast Asia is Indonesia’s N-250 aircraft project. Developed by Industri Pesawat Terbang Nusantara (IPTN) using fly-by-wire (FBW) technology, the aircraft is designed as an advanced regional turboprop. The project ultimately failed to reach the commercial production and certification stages, even though it had successfully reached the prototype testing phase (Amir, 2007).

The failure of the N-250 project is often attributed to the Asian financial crisis and IMF intervention, as noted in previous studies. However, such explanations tend to oversimplify the innovation process by focusing only on external economic shocks. Systemic disconnection among research, production, market adaptation, and organizational learning processes, is often the cause of innovation failure in complex industries (Malerba, 2002). Contemporary scholarship on innovation systems argues that failure often emerges from cumulative mismatches among industrial learning, institutional coordination, market validation, and knowledge integration, rarely from a single external shock (Caliari et al., 2023). While previous studies frequently attribute the collapse of the N-250 program primarily to the 1997–1998 Asian financial crisis and IMF intervention, such interpretations may understate deeper structural weaknesses within the innovation ecosystem. Contemporary literature on innovation systems argues that failure often stems from cumulative mismatches between industrial learning, institutional coordination, market validation, and knowledge integration processes; conversely, large-scale technology projects rarely fail due to a single external shock. Therefore, a national innovation capability depends on the resilience of interconnected production and learning systems, not merely on technological ambition (Caliari et al., 2023).

This paper argues that the Chain-Linked Model (Kline & Rosenberg, 1986) provides a more comprehensive explanation of the N-250 failure because it emphasizes iterative feedback loops among innovation actors rather than linear technological progression. Existing studies on the N-250 program predominantly emphasize macroeconomic disruption and political intervention as the primary causes of project failure. However, attention to structural weaknesses within the innovation ecosystem itself remains limited. This creates an analytical gap because large-scale aerospace innovation failure often emerges from disconnected feedback mechanisms among market validation, production capability, research integration, and technological learning processes rather than external shocks alone (Rao, 2019).

Therefore, this study contributes analytically by repositioning the N-250 failure as a systemic innovation-chain disruption rather than merely an economic casualty of the Asian Financial Crisis. This study found that innovation failure refers to the inability of the innovation system to sustain certification, commercialization, mass production, and long-term ecosystem sustainability, rather than merely technological limitations

Innovation in High-Technology Defense Industry

Innovation refers to new products that create value for organizations and society, including the implementation of ideas, technologies, and processes. Innovation in the defense industry is characterized by long development cycles, high uncertainty, technological complexity, and high capital intensity. Unlike consumer industries, defense innovation requires continuous interaction among government institutions, research organizations, manufacturers, suppliers, and end users. Recent literature on innovation indicates that technological capabilities in the defense and aerospace sectors are increasingly dependent on participation in global innovation ecosystems, collaborative industry platforms, and cross-border knowledge networks. Consequently, firms operating in relative technological isolation face substantial disadvantages in certification capability, subsystem integration, and adaptive learning capacity (Jovanovic et al., 2021).

Chain-Linked Model of Innovation

Kline and Rosenberg (1986) developed a Chain-Linked model that views innovation not as a linear process, but as the result of a dynamic and ongoing interaction between the stages of research, design, manufacturing, and market response. The model does not view innovation as a linear path from invention to market, but rather emphasizes: (1) problem-solving mechanisms; (2) redesign processes; (3) knowledge integration; (4) iterative feedback loops; and (5) interaction between market needs and technological development. This model is particularly relevant to the defense and aerospace industries, where learning by doing, subsystem integration, and rapid prototyping are essential (Micaëlli et al., 2014). Figure 1 illustrates the chain-linked model proposed by Kline and Rosenberg.

Figure 1. Chain-linked Mode

Innovation Failure in Aerospace Industry

Aerospace innovation projects often fail due to market misalignment, excessive technological ambition, weak industrial ecosystems, and inadequate production scalability (Malerba, 2002). A robust iterative learning system, supported by international collaboration and operational feedback mechanisms, underpins the success of global aerospace companies such as Embraer and Airbus. On the other hand, even if a system’s technological capabilities are adequate, an innovation system that lacks an adaptive feedback structure remains vulnerable to failure (Jacobsson & Bergek, 2011). Theoretically, the chain-linked model conceptualizes innovation as an interactive, non-linear system driven by continuous feedback loops across market demand, design, manufacturing, and research. Far from a sequential progression, it advances through iterative problem-solving, meaning that any breakdown within these feedback channels can destabilize the entire innovation system (Kline & Rosenberg, 1986). This systemic view aligns with the sectoral innovation system perspective, which emphasizes that innovation performance depends on the co-evolution of firms, institutions, and knowledge networks within an industry (Malerba, 2002).

Figure 2. Innovation success in aerospace industries

This study employs a qualitative analytical case-study approach to investigate systemic innovation failure within high-technology aerospace development. The qualitative case-study approach was selected because the N- 250 program represents a historically bounded and institutionally complex innovation process involving interactions among government policy, industrial capability, technological learning, and international collaboration. When systemic innovation failures involve nonlinear cause-and-effect relationships that are embedded in organizational and institutional contexts, the case study methodology serves as a tool for investigating such failures. The geographical and institutional scope of this study focuses on Indonesia’s aerospace sector, with a particular emphasis on the state-led industrial ecosystem, namely Industri Pesawat Terbang Nusantara (IPTN). As the epicenter of national aerospace ambitions in Southeast Asia during the 1990s, this context provides a relevant empirical framework for examining institutional interactions among domestic state-owned enterprises, research networks, and global technology providers.

This study focuses on the N-250 aircraft program initiated by IPTN in the 1990s. Using the purposive document selection method, this study specifically examines sources that discuss innovation systems, the dynamics of the aerospace industry, certification procedures, and the direction of defense industry policy in Indonesia. Documents were selected based on three criteria: (1) relevance to innovation failure mechanisms; (2) empirical discussion of aerospace industry capability; and (3) direct relation to IPTN/N-250 development. Data were collected from: (1) academic journal articles; (2) historical policy documents; (3) aerospace industry reports; (4) innovation management literature; and (5) previous studies on Indonesian aerospace development. A comprehensive review of the literature, mapping of historical developments, and systematic organization of these secondary data sources were carried out in a structured manner over a designated six-month period, from November 2025 to May 2026.

The analytical framework is based on the Chain-Linked Model of innovation proposed by Kline and Rosenberg (1986). This model is used to identify systemic weaknesses in several areas, including production cycles, market design integration, research connectivity, knowledge accessibility, and operational feedback mechanisms. To minimize interpretive bias, a data triangulation process was applied by comparing academic literature, historical records, and relevant policy documents (Creswell & Poth, 2018). The Chain-Linked Model was chosen as the primary analytical framework because it conceptualizes innovation as an iterative and interactive system rather than a linear sequence from research to commercialization. As previous studies have shown, this model is particularly well-suited for analyzing high-tech industries characterized by subsystem integration, intensive feedback loops, and learning-by-doing processes (Figueiredo, 2022). In addition, the study applies interpretive comparative analysis by contrasting the N-250 experience with the CN-235 and Embraer programs in order to identify differences in innovation governance, industrial learning patterns, and international collaboration structures.

Weak Market Validation

The lack of robust market validation before large-scale development began was one of the main weaknesses of the N-250 program. The N-250 program was largely driven by state-led technological ambition instead of demand-oriented market dynamics. In this study, weak market validation refers to limited evidence of export confidence, limited ongoing customer commitment, and insufficient recognition of international certifications prior to reaching the stage of large-scale production. The Chain-Linked Model emphasizes that market needs should continuously influence design and production decisions. However, IPTN lacked strong launching customers and failed to establish sufficient international market confidence. Evidence of this market weakness is clearly illustrated by the CN-235 precedent: (1) Customer Rejection: many potential customers preferred to purchase aircraft from CASA (Spain) rather than IPTN, even for an identical product; (2) The 'Backward' Image: this preference was explicitly linked to the perceived 'backward image of developing countries' associated with IPTN, which hampered its ability to compete on equal footing despite having a technically comparable product (Amir, 2007). Unlike Airbus, which conducted extensive iterative testing and pilot feedback integration during FBW development, IPTN had limited market interaction mechanisms (Edquist & Zabala Iturriagagoitia, 2012).

Limited Design-Production Iteration

Although IPTN successfully developed prototypes, the organization lacked opportunities for large-scale serial production. If only IPTN had a sustainable manufacturing cycle, they could produce: (1) operational learning; (2) cost optimization; (3) reliability improvement; and (4) production efficiency refinement. As a result, technological maturity remained incomplete, and the iterative redesign loop (a key element of the Chain-Linked Model) was never fully activated. Comparative evidence from Embraer demonstrates that firms achieving global aerospace competitiveness do so through continuous iterative production, not prototype-stage development alone (Figueiredo, 2022).

Fragmented Research-Innovation Connectivity

The innovation chain between research institutions and industrial production was insufficiently developed. Technical problems encountered during aircraft development were not supported by a mature national aerospace research infrastructure capable of rapid iterative problem-solving. The program’s capacity for iterative technological problem-solving has been diminished due to the limited responsiveness of the domestic research network, a critical deficiency from the Chain-Linked Model perspective, which posits research connectivity as a prerequisite for innovation resilience (Jacobsson & Bergek, 2011).

Analysis and Interpretation of Findings

The findings presented in the Results section demonstrate that the N-250 program's failure cannot be attributed to a single external shock. Instead, the evidence reveals a pattern of pre-existing systemic weaknesses across all five dimensions of the Chain-Linked Model: market validation, design-production iteration, knowledge network access, research connectivity, and feedback loop continuity. The simultaneous fragmentation of these interconnected chains created a brittle innovation ecosystem that was unable to withstand the pressure of the 1997–1998 financial crisis. An alternative interpretation suggests that the program might have succeeded if the Asian financial crisis had not interrupted financial support. The technological achievements demonstrated during prototype testing indicate that IPTN possessed substantial engineering capability. However, the present study argues that the financial crisis acted primarily as an accelerative shock rather than the sole origin of failure. Innovation-system scholars emphasize that resilient technological ecosystems maintain adaptive continuity even under severe macroeconomic pressure through diversified partnerships, iterative production learning, and institutional flexibility (Caliari et al., 2023). The N-250 ecosystem lacked these resilience mechanisms before the crisis occurred.

Research Implications

The findings contribute theoretically to the understanding of systemic innovation failure by extending the Chain-Linked Model into the context of defense aerospace development in emerging economies. The study repositions the N-250 failure as an innovation-chain disruption rather than merely an economic casualty of the Asian Financial Crisis. This theoretical repositioning has implications for how scholars conceptualize technology project failure in late- industrializing states. Practically, the findings suggest that technological sovereignty policies should prioritize ecosystem resilience, industrial learning continuity, and international knowledge integration alongside national technological ambition. Governments and industrial policymakers in developing economies designing high-technology aerospace programs should ensure that certification infrastructure, bilateral agreements, iterative production systems, and research connectivity are established before committing to advanced technological leapfrogging strategies (Priyono et al., 2023).

Research Limitations and Directions for Future Research

The limitations of this study lie in its reliance on historical secondary data and policy documents, which limits the depth of its institutional analysis. Furthermore, the absence of primary data from direct participants (including former IPTN engineers, policymakers, and program managers) prevents a comprehensive exploration of the organization’s internal dynamics and decision- making processes. Future studies could include interviews with policymakers, aerospace engineers, and former IPTN executives to provide deeper institutional insights into the mechanisms of innovation failure. In addition, future studies should conduct a comparative analysis of failures in aerospace innovation in several developing countries, including Brazil, South Korea, and Turkey. This step is essential for developing a more comprehensive framework for evaluating the resilience of innovation ecosystems in the defense industry. Such comparative studies would strengthen the generalizability of the Chain-Linked Model's application to defense aerospace contexts and provide a more comprehensive understanding of how institutional ecosystems influence technological catch-up trajectories (Figueiredo, 2022).

The failure of the N-250 program demonstrates that high RCD investment alone is insufficient to ensure innovation success in high-technology defense industries. Using the Chain-Linked Model, this study identifies that systemic innovation failure emerged from: (1) weak market integration; (2) limited production iteration; (3) fragmented research connectivity; (4) restricted knowledge access; and (5) absence of operational feedback mechanisms. This study also contributes theoretically by extending the application of the Chain-Linked Model into the context of defense aerospace innovation failure within developing economies. The findings suggest that technological sovereignty policies should prioritize ecosystem resilience, industrial learning continuity, and international knowledge integration alongside national technological ambition.

The innovation ecosystem, which had been fragile from the start, collapsed even more rapidly due to the Asian financial crisis. The findings challenge the assumption that large RCD expenditure automatically produces innovation success. Sustained innovation in the complex aerospace industry is, in fact, driven not so much by technological ambition alone, but rather by institutional capacity. It is this capacity that sustains a comprehensive adaptive learning cycle, encompassing market uptake, production processes, and even research systems at the earliest stages. This study is limited by its reliance on secondary historical and policy data. For future research, a deeper institutional understanding of the mechanisms underlying innovation failures can be gained through interviews with policymakers, aerospace engineers, and former IPTN executives. In addition, future studies should conduct a comparative analysis of cases of aerospace innovation failures in several developing countries. This comparative approach aims to formulate a broader framework for evaluating the resilience of the innovation ecosystem in the defense industry sector.

The limitations of this study lie in its reliance on historical secondary data and policy documents, which limits the depth of its institutional analysis. Furthermore, the absence of primary data from direct participants (including former IPTN engineers, policymakers, and program managers) prevents a comprehensive exploration of the organization’s internal dynamics and decision- making processes. Future studies should include interviews with policymakers, aerospace engineers, and former IPTN executives to provide deeper institutional insights into the mechanisms of innovation failure. In addition, future studies must conduct a comparative analysis of failures in aerospace innovation in several developing countries. This step is essential for developing a more comprehensive framework for evaluating the resilience of innovation ecosystems in the defense industry.