This study aims to examine the role of organizational capabilities embedded in the strategy-focused organization (SFO) in improving the integration of performance-based budgeting (PBB) within the Indonesian central government.
This research employs a mixed-method approach with primary data from surveys of 81 ministries/agencies and semi-structured interviews. Hypothesis is tested using partial least square structural equation modeling, supplemented by thematic analysis of qualitative data.
The results show that the implementation of SFO is positively related to PBB integration, especially through strategy translation, alignment and continuity. In practice, these mechanisms are often influenced by compliance to regulations and are reflected in the systematic alignment of budget allocations with performance metrics and government strategic plans. However, leadership practices and strategic awareness do not consistently support the substantial use of performance information in budget decisions.
The findings suggest that regulatory compliance alone is not sufficient to support effective PBB integration. Instead, government need to develop comprehensive strategic management systems, in which regulations is an integral component, accompanied by continuous investments in leadership capabilities, organizational learning and performance management routines. Such investments are essential to ensure that performance information becomes substantively relevant in budgeting processes.
This study provides new empirical evidence on how the development of SFO as a comprehensive strategic management system enhances PBB integration in the context of developing countries, going beyond its largely compliance-oriented implementation.
