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SME CAPACITY BUILDING IN INDONESIA
Tulus Tambunan
Kadin Indonesia –JETRO, May 2006
Recent Development
In Indonesia, small and medium enterprises (SMEs) have historically been main player in
domestic economic activities, especially as a large provider of employment opportunities, and
hence a generator of primary or secondary source of income for many households. For low
income or poor farm households in rural areas, SEs, i.e. units of less than 20 workers, in nonfarm activities are especially important. These enterprises have also been playing as an
important engine for the development of local economies and communities. However, as
compared to many other APEC more developed economies, Indonesian SMEs are not yet
been proved to have contributed significantly their value added to the country’s economy.
Instead, they have been more important as the locus of most employment than of gross
domestic product (GDP) growth in Indonesia.
In the last few years, the Indonesian government has recognized the importance of
having modern SMEs as an important element in creating a sophisticated economy,
especially through their role in developing inter-industry linkages, or as supporting
industries producing components and parts for large enterprises (LEs) either, via market
mechanisms or subcontracting systems or other forms of production linkages. In developed
countries, it is the role of SMEs to act as suppliers to industries producing final goods,
therefore creating a permanent, vibrant and inter-linked industrial base. Indonesia has
suffered from the lack of a sophisticated domestic supplier network, which would have
allowed intermediate inputs, components, and parts to being produced locally instead of
being imported (Banerjee, 2002). 1
Also recently, the SMEs as a group in the country has been recognized to have another
important role to play, namely as an important engine for development and growth of exports
of non-oil and gas, particularly in manufacture. This stems from evidence showing that the
most successful cases of SMEs development in East and Southeast Asian countries like South
Korea, Taiwan, Hong Kong, and Singapore, have directly related to trade and the adoption of
1
In the literature on the 1997 economic crisis in Southeast Asia, an extremely high level of the country’s import
dependency, in particular LEs, is often pointed as one important factor that has pushed Indonesia into the crisis. The high
level of import dependency in manufacturing industry has been the result of a combination of rapid development of
domestic downstream industries producing final consumption goods, mainly through assembling methods of production,
on one hand, and, on the other hand, underdevelopment of domestic supporting industries during the new order regime.
Therefore, since the crisis, the Indonesian has been trying through various programs to develop domestic supporting, in
which the SMEs can take an important part in it.
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export-oriented strategies. The experiences of these countries indicate that SMEs can compete
effectively in both domestic and international. 2
Last, but not least, SMEs could also play a powerful role in energizing agriculture
through the development of high competitive agricultural-based (agro) industry.
Agricultural-based production is a clear area where the country has enormous room for
development, simply because Indonesia is a large agrarian economy owning a huge variety
of agricultural commodities. Unfortunately, until know this country’s potential has not yet
been exploited very well, as compared to its regional and international counterparts. Even,
in the last few years Indonesia has become an important importing country for many
agricultural commodities including rice and a variety of vegetables and fruits. 3
The importance of SMEs for the Indonesian economy is observable reflected by their
relatively huge number of units. Indeed, a significant feature of the Indonesian economy is
the domination by this category of enterprises, in particular small enterprises (SEs).
Totally, in all sectors of the economy, the number of SMEs is huge and it keeps growing;
though there was a decline during the 1997 economic crisis. Their number of units is larger
than that of LEs. Especially SEs can be found in all over the country, in urban as well as rural
areas. Such entities contribute the bulk of units and employment in sectors such as
agriculture, trade, manufacturing industry and transportation.
SEs’ continuing role as the locus of most employment in Indonesia is reflected in the fact
that in 1997, SEs contributed more than 39.7 million units, or constituted about 99.8% of
all business units in that year, and there were an estimated more than 40 million units in
2001 (Table 1). In 1998, as the economic crisis has had a devastating impact on almost all
economic sectors in the country, many companies from all sizes went bankrupt. Based on
data from Menegkop & UKM, there was an estimated almost 3 million SEs were out of
business, and the number of MEs (medium enterprises) and LEs declined by respectively
14.2% and 12.7%. In 2000, there were about 38.99 million units of SEs with average annual
sales of less than Rp.1 billion per unit, or accounted for about 99.85% of total number of
enterprises in Indonesia. In the same year, there were 55,061 units of MEs, with annual sales
in the range of more than Rp. 1 billion and less than Rp. 50 billions, or accounted for 0.14%
of all firms. In 2001, the total number of SEs was predicted to increase to more than 40
2
Chapter VI presents recent data on export performance of Indonesian SMEs.
3
As shown in some tables in this chapter, SMEs, or SEs in particular concentrate in the agricultural sector, and in
manufacturing industry the majority of SMEs are industries processing agricultural commodities, such as food and
beverages and tobacco. Indeed, one important traditional characteristic of SMEs in Indonesia is that they are mainly
agricultural-based activities.
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million units, whereas MEs to about 57.7 thousand units.
Table 1. Total Enterprises by Size Category
Size Category
1997
1998
39,704,661
36,761,689
∑ SEs
60,449
51,889
∑ MEs
2,097
1,831
∑ LEs
Total
39,767,207
36,815,409
Source: Menegkop & UKM
1999
2000
37,804,536
51,798
1,832
37,858,166
2001
38,985,072
55,061
1,946
39,042,079
40,137,773
57,743
2,095
40,197,611
The importance of SMEs in Indonesia in terms of GDP contribution is always less than
their role as a source of employment. Official data from Menegkop & UKM show that in real
terms, GDP of SEs in 1997 was 38%. In 1998, when the crisis reached its worst level with the
economic growth of minus 13%, output contribution of SE to the formation of real GDP rose
slightly to a level of almost 41%; though in nominal value it declined. In 1999, the share
increased to about 41.3%, and after that in 2000, it declined again slightly to 40.4%. During
the crisis period (1997-1998), the growth rate of total SEs’ output was minus 19.3%, and after
the crisis (1998-2000), they performed much better, though the average growth rate per year
was still negative of about 2.5%. The largest GDP contribution of SEs was in agriculture, not
in manufacturing industry. Again, as shown before by other indicators, this is reflected in the
fact that these enterprises traditionally are strong in agricultural production; not yet in
industrial production as their counterparts in other APEC economies like Japan, South Korea,
and Taiwan.
Recent data from BPS on distribution of GDP by size group of enterprises for the period
2000-2003, indicate that SMEs performed relatively better than their larger counter-parts. As
illustrated in Figures 1 and 2, GDP share of SEs during that period increased from 39.7% in
2000 to about 41% in 2003. Whereas, the role of MEs in the formation of GDP was relative
stable in around 15%, and that of LEs fell from about 45.5% to 43%.
Figure 1 Distribution of GDP by Size Group of Enterprises: 2003 (%)
SE, 39.74
LE, 45.49
ME, 14.77
Figure 2 Distribution of GDP by Size Group of Enterprises: 2003 (%)
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SE, 41.11
LE, 43.28
ME, 15.61
Source: BPS.
The report also gives some information about GDP contributions of different size groups
of enterprises by sector, which shows that SEs still keep their advantages in local resourcebased and labor intensive sectors, such as agriculture and trade, hotels, and restaurants (Table
2). Their GDP contributions on average from these two sectors during that period under
review were more than 75%. The GDP contribution of MEs was concentrated in various
tertiary sector, with the biggest share found in finance, rent and service sector. Whereas, the
share of GDP contribution of LEs was found heavily in mining, manufacturing industry and
electricity, gas and clean water supply sectors.
Table 2 Structure of GDP by size and sector: 2000-2003 (%)
Sector
1
2
3
4
5
6
7
8
9
GDP
GDP without oil & gas
Source: BPS.
SE
85.74
6.73
15.14
0.52
43.88
75.60
36.69
16.80
35.59
ME
9.09
2.96
12.98
6.80
22.57
20.81
26.64
46.47
7.16
LE
5.17
90.30
71.89
92.68
33.55
3.59
36.67
36.73
57.25
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
40.55
46.22
15.22
17.19
44.24
36.60
100.0
100.0
Some interesting evidence from this report is that the SMEs’ output contribution to the
annual growth rate of the country’s GDP was higher than that of their larger counterparts. As
shown in Figure 3, on average, the GDP growth share of SMEs was above 2%; whereas that
of LEs was under 2%. Within SMEs, SEs appeared as more important than MEs, as the GDP
growth share of the first group of enterprises was higher than that of the latter one. This was
despite the fact that annual output growth in SEs was lower than that in MEs. As plotted in
Figure 4, in 2000, the growth rate of output in SEs noted around 4%, lower some points in
comparison with about 5.1% and 4.4% in respectively MEs and LEs. In 2001, the growth
rates in all size groups of enterprises declined, and then went up again in 2002 onwards, with
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the lowest rates found in SEs.
Figure 3 Contribution to GDP Growth by Size Group of Enterprises, (%)
5
4
2.08
3
0.82
2
1
2.02
LE
1.73
1.46
1.55
0.58
0.62
0.69
1.42
1.52
1.68
2001
2002
2003
ME
SE
0
2000
Source: BPS.
Figure 4 Rates of Output Growth by Size Group of Enterprises, (%)
6
4
2
0
2000
2001
2002
2003
SE
4.13
3.45
4
4.29
ME
5.06
4.64
4.17
5.24
4.4
3.8
4.05
4.57
5.64
2.98
3.19
3.45
SME
LE
Source: BPS
Lack of Productivity
The greater GDP contribution of SMEs does not mean, however, that productivity, either
partial, for example, labor productivity (defined as value added per worker), or total of all
factors used (i.e. total factor productivity -TFP) in these enterprises is higher than that in
LEs. 4 It is mainly because their number of enterprises is huge, not because their greater
productivity as compared to LEs. Given the fact that SMEs lack of capital, technology and
skilled men power, it is hard for these enterprises to achieve increasing return to scale in their
production process. 5 The labor productivity gap between SMEs and LEs is one of the largest
4
Labor productivity rather than TFP is often used in analyzing productivity growth in SMEs, as the ratio is a useful
indicator of a sort of progress, since enterprises that cannot raise it will not be able to remain competitive as wages rise.
The difference between TFP and labor productivity is that the former measures the relative efficiency of SMEs and its
advance over time, whereas the latter does not. Unfortunately, the TFP measure is more difficult to operational due to
problems in the measurement of fixed and human capital.
5
In the literature on modern economic growth models, technology embodied in machines and skills of workers are two
most important determinant factors of productivity that often mentioned. In the literature on SMEs in developing
countries, lack of these two factors, plus others such as traditional way of organizing business; poor management; and
adopted inappropriate method of production are often argued as the main factors behind the low level of productivity in
these enterprises.
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observed in developing countries. 6
In Indonesia there is a number of studies which provide ample evidence that labor
productivity is much greater in LEs, which the result that, though SMEs had higher
percentage of employment than LEs had, they generated percentage of total value added less
than LEs did. For instance, based on data census on manufacturing sector for 1975-1996 from
BPS, estimates from Rice and Abdullah (2000) show that in 1975 value added per worker
(1990 Rp’000) in cottage and household industries (CHIs) was 132 and increased to 572 in
1996, and that of small-scale industries (SSIs) increased from 959 to 1,371. For the same
period, those from medium-scale industries (MSIs) and large-scale industries (LSIs) rose
respectively from 4,088 and 9,055 in 1975 to 9,055 and 12,495 in 1996.
By using the same data census, estimates from Berry et al. (2001) show that the labour
productivity gap between SMEs as a group and LEs has remained substantial. The ratio was
9.4 in 1975 and 9.1 in 1996. Over the entire period (1975-96), labor productivity appears to
have grown most for CHIs, with more modest (and quite similar) estimates for SSIs, MSIs
and LSIs. 7 However, their estimates suggest continued growth in labor productivity among
LSIs, while a possible slowdown for smaller sized of production units (Figure 5). 8
Data from the Ministry of Industry (MoI) may give some clue about the differences in
technological capability by size of firms at the national level. Table 3 shows (although it
varies by sub-sector) that on average, the value added-labor ratio increases by size of
enterprise, suggesting that in larger enterprises the level of technology is higher than that in
the smaller ones,. This finding as also confirmed by many other studies does not come,
however, as a surprise, given the fact that especially micro or cottage enterprises (CHIs) in
Indonesia (as in many other developing countries) are traditional enterprises adopting manual
modes of production (i.e. low degree of mechanization). They also lack of the necessary
inputs to increase productivity, such as skilled workers, capital to buy new machines and
modern tools, information on new machines or production tools, and know how to improve
their methods of production. 9
On the contrary, LSIs are usually very highly
mechanized/computerized, their production processes are much better managed and
6
See among others Liedholm and Mead (1999), and Berry and Mazumdar (1991).
7
As explained in Berry et al. (2001), labor productivity figures are difficult to interpret for the household
establishments that make the bulk of the CHIs group, because effective hours worked (rather than numbers of workers) in
these enterprises tend to be quite variable, and extremely hard to measure. According to them, it is probably that
productivity per hour worked increased less than the observed value added per worker, but nonetheless rose considerably.
8
See other studies on labor productivity gap between SMEs and LEs in Indonesia from, for example, Hill (1997,
2001), and Timmer (1999).
9
See e.g. Rice and Abdullah (2000), Sandee and van Hulsen (2000), Sandee et al. (2002), Sato (2000),
Smyth (1990), Tambunan (1994), and Tambunan and Keddie (1998).
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organized, and they generally employ highly skilled workers. For instance, in the food and
beverages industry, micro enterprises are very simple food and beverages processing units
mostly for local markets as compared to big companies such as Unilever and Indofood. This
is, however, not only the Indonesian, as the labor productivity gap between SMEs and LEs is
one of the largest observed in developing countries, simply because LEs have relatively large
endowments, including technology and know how. 10
Table 3. Differences in Labor Productivity in Indonesian Manufacturing
Industry by Size of
Enterprise and Sub-sector, 2000 (average of value added per
worker; in 000 rupiah).
ISIC
CHIs
SSIs
MSIs
LSIs
31
Food, beverages & tobacco
2,339 2,539
25,806
67,309
32
Textiles, garments, leather & footwear
1,746 4,855
24,271
27,237
33
Wood & wood products
2,103 6,743
12,403
30,236
34
Paper, printing & publications
3,981 5,723
18,953
103,938
35
Chemicals (incl. fertilizers) & rubber products
1,782 7,812
50,849
68,968
36
Cement & non-metallic mineral products
3,346 3,071
8,849
63,327
37
Basic iron & steel products
3,374 7,011
395,344
142,243
38
Transport means, machinery & its tools
5,492 5,402
45,127
130,589
39
Other manufacturing
4,973 6,097
12,701
22,946
Note: MoI defines SSIs as business establishments having assets (excluding land and building) maximum
Rp200 million and revenues per year Rp1 billion or less. The Ministry does not define explicitly micro
enterprises. In this table, the Ministry adopts the definition of Biro Pusat Statistik (BPS): micro (CHIs): 1-4
workers; SEs (or in manufacturing: SSIs): 5-19 workers; MEs (MSIs): 20-99 workers; and LEs (LSIs): 100 or
more workers.
Source: MoI (database).
BPS data on SSIs and CHIs also come with the same evidence showing that labor
productivity increases by size. First, as shown in Table 4, the average value added-labor
ratio in the CHIs and SSIs together as one group is lower than that in MSIs and LSIs
combined. The labor productivity in CHIs and SSIs is so low that despite the fact that their
total number of establishments and total workers employed are much larger than those in
MSIs and LSIs, their share in total output (gross value added) is smaller than those of the
later two size groups of industries. Second, Table 5 shows that the average labor
productivity in CHIs is lower than that in SSIs. However, the gap in productivity varies
not only over time, but also across industries. During the period under review, differentials
between SSIs and CHIs tended to be larger in many industries, except in the paper, printing
and publications (34) industries which declined from Rp4.1 to Rp1.8 million, in cement
and non-metallic mineral products (36) from Rp1.5 to Rp1.1 million, and even in the
miscellaneous manufacturing industries the differential is reversed from Rp3.5 to –Rp3.4
million. In other words, only in these three industry groups CHIs have experienced higher
10
See among others Liedholm and Mead (1999), and Berry and Mazumdar (1991).
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rates of growth in labor productivity than that in SSIs. In manufacturing as a whole, the
overall rate of growth in labor productivity in the SSIs is also lower than that (in) of the
CHIs, i.e. about 153.7% and almost 170%, respectively.
Table 4. Productivity (P) and Output Share (Q) in Manufacturing by Size, 19992002
1990
2000
2001
P
Q
P
Q
P
Q
MSIs
+ 115.28 90.52
143.99 91.65
164.7
91.5
8.35
9.48
9.11
8.35
10.98
8.5
LSIs
CHIs
&
SSIs
Note: P in Rp million and Q in %.
Source: BPS (Profil Industri Kecil dan Kerajinan Rumah Tangga, 2002).
2002
P
166.31
12.36
Q
89.9
10.06
Table 5. Labor Productivity between Micro and Small Enterprises in Manufacturing
Industry by Subsector, 1996-2001 (Rp million per worker per year).
ISIC*
Size category
Period
1996
1998
1999
CHIs
3.3
7.2
6.8
SSIs
6.9
16.4
14.3
32
CHIs
2.3
5.98
5.4
SSIs
9.4
19.98
19.2
33
CHIs
2.1
4.4
5.1
SSIs
8.9
15.3
17.4
34
CHIs
5.3
9.8
8.1
SSIs
9.4
13.5
11.2
35
CHIs
3.2
7.8
3.1
SSIs
9.1
10.7
15.4
36
CHIs
2.3
4.5
5.2
SSIs
3.8
5.6
5.2
37
CHIs
5.0
12.7
6.9
SSIs
13.3
11.4
6.2
38
CHIs
4.9
9.2
12.8
SSIs
9.2
17.4
14.2
39
CHIs
4.4
9.2
7.8
SSIs
7.9
8.1
8.4
Total
CHIs
2.8
5.96
6.1
SSIs
7.4
14.3
13.9
Note: * = see Table 3.
Source: BPS (Indikator Industri Kecil & Kerajinan Rumah Tangga 1996-2001)
31
2000
6.99
17.0
5.7
19.1
4.95
17.1
13.7
15.1
6.1
20.8
5.9
10.0
12.3
26.2
14.9
16.9
11.98
15.4
6.4
15.97
2001
7.99
25.1
6.3
21.2
6.2
20.2
16.5
18.3
7.8
59.8
7.2
8.3
26.5
38.3
15.3
30.6
15.7
12.3
7.5
19.7
If labor productivity can be adopted as a good proxy of technology capability, then the
evidence shown above may suggest that in some industries, the smallest and the most
traditional units of production, namely the CHIs, are able to improve their technology
capability. This does not really come as a surprise, since many studies including from
Sandee (1994, 1995, 1996) and Sandee et al. (1994, 2000, 2002) show that even CHIs are
sometimes in a better position to adopt innovations in products as well as production
process. Even, based on his field study, Ismawan (2004) from the SMERU Research
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Institute concludes that CHIs need to be strategically developed for several reasons,
including that they are productive economic activities, and thus, what is needed is capacity
building and not the establishment of new enterprises, and if they are appropriately
empowered, they can easily grow into modern SSIs. In its report on SSIs and CHIs. BPS
states that the lack of capital, technology and human resource is the main cause of low
productivity in CHIs and SSIs.
Although, no data are available on the productivity of SMEs by rural and urban areas,
since the majority of these enterprises, especially from cottage and small categories, are
found in rural areas, while big companies, including most of MNCs are located in or near
big cities like Jakarta, Tangerang, Bekasi, Bogor, and Surabaya, it can be assumed that the
bulk of these enterprises, especially the CHIs and SSIs are unproductive.. This assumption
is simply based on the fact that in rural areas, especially in the provinces outside of Java,
the physical infrastructure is not yet well developed, transport facilities are bad, access to
information and capital market is very limited, and good facilities for education and highly
skilled workers are not available.
Development Constraints
In less developed countries (LDCs), SMEs are facing obstacles that are sometimes
similar to those experienced by LEs. However, SMEs, especially the smaller ones are much
more vulnerable in relation to these problems. The nature or complexity of many of these
problems is also related to the size of enterprises or activities. The smaller the size of
enterprises the more complex the problems they face. The problems may differ from region
to region and between one industry-group to another. Although the problems vary even
between individual enterprises in the same size category and within a branch of activity,
there are certain problems which are common to all SMEs which are linked to three groups
of issues: infrastructure, institution, and economic issues. The infrastructure issues include
poor and/or expensive infrastructure such as transport, storage facilities, water, electricity,
and telecommunication, lack of working premises, and poorly developed physical markets.
The second issues include no access to formal training and, as a result, lack of skills in
particular as regards basic economic skills and managerial expertise, lack of formal
schooling sometimes even resulting in illiteracy, limited access to property rights, limited
access to formal finance and banking institutions, excessive government regulations in
areas such as business startup, in particular as regards cumbersome, time demanding and
costly procedures for business registration, lack of information on prices, viability of
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products, etc., and ewer market opportunities due for instance to non-compliance to
international standards. The latter issues include excessive registration and transaction costs
of starting or operating businesses, limited access to technology, lack of opportunities for
bulk purchase of inputs, lack of working capital: credit has to be obtained from informal
sources such as friends or relatives or non-banking financial agencies with unfavourable
terms, and insufficient funds do not allow for further investments (UN, 2001).
These obstacles are more or less interlinked and create vicious circles of bad
performance or business stagnation or low competitiveness of SMEs in LDCs as compared
to their counterparts in developed/ industrialized countries. For instance, the main reasons
for the lack of funds or skills is that the SMEs, especially the micro ones cannot access
resource institutions such as banks and other financing institutions, training and education
institutions, marketing and consultancy firms, etc. In fact, all these various obstacles create
an overall context that in itself constitutes a barrier of further development or business
improvement to these enterprises (Tambunan, 2006).
The 2003 (recent) survey on SEs and micro enterprises (MIEs) from Central Bureau of
Statistics (BPS) in all sectors in Indonesia shows the typical problems of these enterprises in
Indonesia (Table 6). As can be seen, the main problems faced by the majority of the
respondents are lack of capital and marketing difficulties. In Indonesia, although there are
various government sponsored SME credit schemes, the majority of them, especially SEs
and MIEs located in rural/backward areas never received any credit from banks or other
financial institutions. They depend much on their own savings, money from relatives and
credit from informal lenders for financing their daily business operations. In marketing,
SMEs in general do not have the resources to explore their own markets. Instead, they
depend heavily on their trading partners for marketing of their products, either within the
framework of local production networks and subcontracting relationships or orders from
customers.
Table 6 suggests that lack of technology and skills is not a serious problem for SE and
MIE entrepreneurs in Indonesia, and thus it is not consistent with what is generally stated in
the literature about problems faced by these enterprises in LDCs. However, in fact, it is
among serious obstacles faced by many SMEs in Indonesia to improve their competitiveness.
As shown before, labour productivity in SMEs is much lower than that in LEs, or within
SMEs, it is much lower in MIEs and SEs than in MEs. This indicates strongly that SMEs,
especially SEs and MIEs faced a lack of technology and skilled workers. Most SEs and MIEs
in Indonesia use traditional or out of data technology with or without own modifications,
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characterized by manual operation and high labor intensity, but very low labor productivity.
Lack of funds and skilled workers and various other operational constraints largely account
for the technological backwardness of this size group of enterprises. There is a good reason
why they do not mention lack of technology and skill as problem. They may not aware of
that problem or they do not see it as a serious problem for their business as many SE and
MIE entrepreneurs usually modify or repair their own machines.
Table 6. Main Problems faced by SEs and MIEs in Manufacturing Industry, 2003
SEs
MIEs
Total SEs and MIEs
Have no problem
46,485 (19.48)*
627,650 (25.21)
674,135 (24.71)
Have problem
-Raw material
-Marketing
-Capital
-Transportation/Distribution
-Energy
-Labor cost
-Others
192,097 (80.52)
20,362 (10.60)
77,175 (40.18)
71,001 (39.96)
5,027 (2.62)
40,605 (2.4)
2,335 (1.22)
11,592 (6.04)
1,862,468 (74.79)
400,915 (21.53)
552,231 (29.65)
643,628 (34.56)
49,918 (2.68)
50,815 (2.73)
14,315 (0.77)
150,646 (8.09)
2,054,565 (75.29)
421,277 (20.50)
629,406 (30.63)
714,629 (34.78)
54,945 (2.67)
55,420 (2.7)
16,650 (0.81)
162,238 (7.90)
Total SEs & MIEs
Note: * = %
Source: BPS (SUSI 2003)
238,582 (100.00)
2,490,118 (100.00)
2,728,700 (100.00)
Also, lack of human resource is not mentioned in Table 6. However, no doubt that lack
of human resource is also responsible for the lack of productivity in SMEs in Indonesia.
Table 7 shows only a small portion of total entrepreneurs in MIEs and SEs who have
higher education diplomas. The table also shows that female entrepreneurs are less
educated than their male counterparts. With respect to higher education, less than 1% of
total female entrepreneurs who have university diplomas, as compared to their male
counterparts at 6.5%.
Table 7: Education of Entrepreneur in Non-Farm MIEs and SEs by Gender, 2003
(%)
Level of education
Not finished primary school
Finished primary school
Finished high school first degree (SMP)
Finished high school second degree (SMA)
Higher education
Source: BPS (SUSI 2003).
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Female
Male
27.88
40.82
18.62
11.77
0.91
14.27
39.49
25.87
18.37
6.5
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References
Banerjee, Shuvojit (2002), “Recovery and Growth in Indonesian Industry”, Working Paper No.02/08,
September, Jakarta: UNSFIR
Berry, Albert and Mazumdar, D. (1991), "Small-Scale Industry in the Asian-Pacific region", Asian-Pacific
Economic Literature, 5(2).
Berry, Albert, Edgard Rodriguez and Henry Sandee (2001), “Small and Medium Enterprise Dynamics in
Indonesia”, Bulletin of Indonesian Economic Studies, 37(3).
Hill, H. (1997), Indonesia’s Industrial Transformation, Institute of Southeast Asian Studies, Singapore, and
Allen and Unwin, Sydney.
Hill, H. (2001), “Small and Medium Enterprises in Indonesia: Old Policy Challenges for a New
Administration”, Asian Survey, 41(2).
Ismawan, Bambang (2004), “The People’s Economy and the Role of Microfinance”, SMERU NEWs, 10,
April-June, The Smeru Research Institute.
Liedholm, Carl and Donald Mead (1999), Small Enterprises and Economic Development: The Dynamic Role of
Micro and Small Enterprises, Routledge, London.
Rice, R. and I. Abdullah (2000), “A Comparison of Small and Medium/Large Indonesian Manufacturing
Enterprises from 1986 and 1996 by Sector”, mimeo, Partnership for Economic Growth Project, USAID,
Jakarta
Sandee, Henry (1994), “The Impact of Technological Change on Interfirm Linkages. A Case Study of
Clustered Rural Small-Scale Roof Tile Enterprises in Central Java”, in P.O. Pedersen, A. Sverrisson, and
M.P. van Dijk (eds.), Flexible Specialization. The Dynamics of Small-Scale Industries in the South,
Intermediate Technology Publications, London.
Sandee, Henry (1995), “Innovation Adoption in Rural Industry: Technological Change in Roof Tile Clusters
in Central Java, Indonesia”, unpublished PhD dissertation, Vrije Universiteit, Amsterdam.
Sandee, Henry (1996), “Small-Scale and Cottage Industry Clusters in Central Java: Characteristics, Research
Issues, and Policy Options”, paper presented at the International Seminar on Small Scale and Micro
Enterprises in Economic Development Anticipating Globalization and Free Trade, Satya Wacana
Christian University, November 4-5, Salatiga.
Sandee, Henry, P. Rietveld, Hendrawan Supratikno, and P. Yuwono (1994), “Promoting Small Scale and
Cottage Industries. An Impact Analysis for Central Java”, Bulletin of Indonesian
Economic
Studies,30 (3).
Sandee, Henry, Roos Kities Andadari and Sri Sulandjari (2000), “Small Firm Development during Good
Times and Bad: The Jepara Furniture Industry”, in C. Manning and P. van Dierman (eds.), Indonesia in
Transition: Social Aspects of Reformasi and Crisis, Indonesia Assessment Series, Research School of
Pacific and Asian Studies, Australian National University, Canberra, and Institute of Southeast Asian
Studies, Singapore.
Sandee, Henry, B. Isdijoso, and Sri Sulandjari (2002), SME clusters in Indonesia: An analysis of growth
dynamics and employment conditions, Jakarta: International Labor Office (ILO).
Tambunan, Tulus T.H. (1991), “The Role of Small-Scale Industries in the Indonesian Economy-An Analysis
of 1970s and 1980s Data”, in Henk Thomas, Francisco Uribe-Echevarria and Henny Romijn (eds.),
Small-scale Production. Strategies for Industrial Restructuring, Intermediate Technology Publication,
London.
Tambunan, Tulus T.H. (1992), “The Role of Small Firms in Indonesia”, Small Business Economics, 4(1).
Tambunan, Tulus T.H. (1994), The Role of Small-Scale Industries in Rural Economic Development. A Case
Study in Ciomas Subdistrict, Bogor District, West Java, Indonesia, Amsterdam, Thesis Publishers.
Tambunan, Tulus T.H. (1997), “Development of Small and Medium Industry Clusters in Indonesia”,
Background report for UNIDO, November, Jakarta.
Tambunan, Tulus T.H. (1998a), “Present Status and Prospect of Supporting Industries in Indonesia”, in
IDEA, “Present Status and Prospects of Supporting Industries in ASEAN (I), Philippines and
Indonesia”, March, Tokyo: Institute of Developing Economies, Japan External Trade Organization.
Tambunan, Tulus T.H. (1998b), “Cluster Diagnosis in Kuningan Fried Onion Cluster and Proposed Action
Plan”, Study report, October, UNIDO, Jakarta.
Tambunan, Tulus T.H. (1998c), “Cluster Diagnosis in Padang Rattan Industries and Proposed Action Plan”,
Study report, October, UNIDO, Jakarta.
Tambunan, Tulus T.H. (1998d), “Upaya Membantu SMEs Dalam Situasi Moneter Saat Ini” (effort to help
SMEs in this Monetary situation), paper presented at the IVth Discussion on SMEs, Forum Indonesia,
27 Januari, Jakarta.
Tambunan, Tulus T.H. (1998e), “The Role of Rural Small and Medium Industries in Poverty Alleviation in
Countries Affected by the Economic Crisis: Indonesia, Thailand and the Philippines”, Study Report,
December, Economic and Social Commission for Asia and The Pacific (ESCAP), Bangkok.
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Tambunan, Tulus T.H (1999a), “The Performance of Small Enterprises during the Economic Crisis:
Evidence from Indonesia”, mimeo, LP3E-Kadin Indonesia, Jakarta.
Tambunan, Tulus T.H. (1999b), “The Needs Assessment Study of Agroprocessing Small-and Medium-Scale
Industries with Special Focus on Women Entrepreneur, Environment and Gender Issues, and the Likely
Impact of the Crisis”, paper prepared for Economic and Social Commission for Asia and The
Pacific/United Nations Development Program (ESCAP/UNDP), January, LP3E-Kadin Indonesia &
UNDP, Jakarta.
Tambunan, Tulus T.H. (2000), Development of Small-Scale Industries During the New Order Government in
Indonesia, Aldershot, et.al.: Ashgate.
Tambunan, Tulus T.H. (2002). “Peluang, Potensi dan Kendala IK Logam Dalam Peta Hubungan Industrial
Antara IK dan IMB. Kasus IK Komponen dan Spare Part (Opportunity, Potential and Constraint of
Metal SI in the Map of Industrial Relation between SI and MLI. The Case of SI of Components and
Spare Parts), paper presented at the National Policy Dialog, October, USAID and ASEMHAKI, Jakarta.
Tambunan, Tulus T.H. (2006), Development of SMEs in Indonesia from the Asia-Pacific Perspective,
Jakarta: LPFE-University of Trisakti.
Tambunan, Tulus T.H. and James Keddie (1998), “Draft Cluster Diagnosis And Action Plan. Yogyakarta Area
Leather Goods Cluster”, Study report, February, UNIDO, Jakarta.
Timmer, Marcel P. (1999), “Indonesia’s Ascent on the Technology Ladder: Capital Stock and Total Factor
Productivity in Indonesia Manufacturing, 1975-95”, Bulletin of Indonesian Economic Studies, 35(1).
United Nations (2001), Growing Micro and Small Enterprises in LDCs, the Missing Middle, Geneva.
Kadin Indonesia-Jetro, 2006
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Tulus Tambunan
Kadin Indonesia –JETRO, May 2006
Recent Development
In Indonesia, small and medium enterprises (SMEs) have historically been main player in
domestic economic activities, especially as a large provider of employment opportunities, and
hence a generator of primary or secondary source of income for many households. For low
income or poor farm households in rural areas, SEs, i.e. units of less than 20 workers, in nonfarm activities are especially important. These enterprises have also been playing as an
important engine for the development of local economies and communities. However, as
compared to many other APEC more developed economies, Indonesian SMEs are not yet
been proved to have contributed significantly their value added to the country’s economy.
Instead, they have been more important as the locus of most employment than of gross
domestic product (GDP) growth in Indonesia.
In the last few years, the Indonesian government has recognized the importance of
having modern SMEs as an important element in creating a sophisticated economy,
especially through their role in developing inter-industry linkages, or as supporting
industries producing components and parts for large enterprises (LEs) either, via market
mechanisms or subcontracting systems or other forms of production linkages. In developed
countries, it is the role of SMEs to act as suppliers to industries producing final goods,
therefore creating a permanent, vibrant and inter-linked industrial base. Indonesia has
suffered from the lack of a sophisticated domestic supplier network, which would have
allowed intermediate inputs, components, and parts to being produced locally instead of
being imported (Banerjee, 2002). 1
Also recently, the SMEs as a group in the country has been recognized to have another
important role to play, namely as an important engine for development and growth of exports
of non-oil and gas, particularly in manufacture. This stems from evidence showing that the
most successful cases of SMEs development in East and Southeast Asian countries like South
Korea, Taiwan, Hong Kong, and Singapore, have directly related to trade and the adoption of
1
In the literature on the 1997 economic crisis in Southeast Asia, an extremely high level of the country’s import
dependency, in particular LEs, is often pointed as one important factor that has pushed Indonesia into the crisis. The high
level of import dependency in manufacturing industry has been the result of a combination of rapid development of
domestic downstream industries producing final consumption goods, mainly through assembling methods of production,
on one hand, and, on the other hand, underdevelopment of domestic supporting industries during the new order regime.
Therefore, since the crisis, the Indonesian has been trying through various programs to develop domestic supporting, in
which the SMEs can take an important part in it.
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export-oriented strategies. The experiences of these countries indicate that SMEs can compete
effectively in both domestic and international. 2
Last, but not least, SMEs could also play a powerful role in energizing agriculture
through the development of high competitive agricultural-based (agro) industry.
Agricultural-based production is a clear area where the country has enormous room for
development, simply because Indonesia is a large agrarian economy owning a huge variety
of agricultural commodities. Unfortunately, until know this country’s potential has not yet
been exploited very well, as compared to its regional and international counterparts. Even,
in the last few years Indonesia has become an important importing country for many
agricultural commodities including rice and a variety of vegetables and fruits. 3
The importance of SMEs for the Indonesian economy is observable reflected by their
relatively huge number of units. Indeed, a significant feature of the Indonesian economy is
the domination by this category of enterprises, in particular small enterprises (SEs).
Totally, in all sectors of the economy, the number of SMEs is huge and it keeps growing;
though there was a decline during the 1997 economic crisis. Their number of units is larger
than that of LEs. Especially SEs can be found in all over the country, in urban as well as rural
areas. Such entities contribute the bulk of units and employment in sectors such as
agriculture, trade, manufacturing industry and transportation.
SEs’ continuing role as the locus of most employment in Indonesia is reflected in the fact
that in 1997, SEs contributed more than 39.7 million units, or constituted about 99.8% of
all business units in that year, and there were an estimated more than 40 million units in
2001 (Table 1). In 1998, as the economic crisis has had a devastating impact on almost all
economic sectors in the country, many companies from all sizes went bankrupt. Based on
data from Menegkop & UKM, there was an estimated almost 3 million SEs were out of
business, and the number of MEs (medium enterprises) and LEs declined by respectively
14.2% and 12.7%. In 2000, there were about 38.99 million units of SEs with average annual
sales of less than Rp.1 billion per unit, or accounted for about 99.85% of total number of
enterprises in Indonesia. In the same year, there were 55,061 units of MEs, with annual sales
in the range of more than Rp. 1 billion and less than Rp. 50 billions, or accounted for 0.14%
of all firms. In 2001, the total number of SEs was predicted to increase to more than 40
2
Chapter VI presents recent data on export performance of Indonesian SMEs.
3
As shown in some tables in this chapter, SMEs, or SEs in particular concentrate in the agricultural sector, and in
manufacturing industry the majority of SMEs are industries processing agricultural commodities, such as food and
beverages and tobacco. Indeed, one important traditional characteristic of SMEs in Indonesia is that they are mainly
agricultural-based activities.
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million units, whereas MEs to about 57.7 thousand units.
Table 1. Total Enterprises by Size Category
Size Category
1997
1998
39,704,661
36,761,689
∑ SEs
60,449
51,889
∑ MEs
2,097
1,831
∑ LEs
Total
39,767,207
36,815,409
Source: Menegkop & UKM
1999
2000
37,804,536
51,798
1,832
37,858,166
2001
38,985,072
55,061
1,946
39,042,079
40,137,773
57,743
2,095
40,197,611
The importance of SMEs in Indonesia in terms of GDP contribution is always less than
their role as a source of employment. Official data from Menegkop & UKM show that in real
terms, GDP of SEs in 1997 was 38%. In 1998, when the crisis reached its worst level with the
economic growth of minus 13%, output contribution of SE to the formation of real GDP rose
slightly to a level of almost 41%; though in nominal value it declined. In 1999, the share
increased to about 41.3%, and after that in 2000, it declined again slightly to 40.4%. During
the crisis period (1997-1998), the growth rate of total SEs’ output was minus 19.3%, and after
the crisis (1998-2000), they performed much better, though the average growth rate per year
was still negative of about 2.5%. The largest GDP contribution of SEs was in agriculture, not
in manufacturing industry. Again, as shown before by other indicators, this is reflected in the
fact that these enterprises traditionally are strong in agricultural production; not yet in
industrial production as their counterparts in other APEC economies like Japan, South Korea,
and Taiwan.
Recent data from BPS on distribution of GDP by size group of enterprises for the period
2000-2003, indicate that SMEs performed relatively better than their larger counter-parts. As
illustrated in Figures 1 and 2, GDP share of SEs during that period increased from 39.7% in
2000 to about 41% in 2003. Whereas, the role of MEs in the formation of GDP was relative
stable in around 15%, and that of LEs fell from about 45.5% to 43%.
Figure 1 Distribution of GDP by Size Group of Enterprises: 2003 (%)
SE, 39.74
LE, 45.49
ME, 14.77
Figure 2 Distribution of GDP by Size Group of Enterprises: 2003 (%)
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SE, 41.11
LE, 43.28
ME, 15.61
Source: BPS.
The report also gives some information about GDP contributions of different size groups
of enterprises by sector, which shows that SEs still keep their advantages in local resourcebased and labor intensive sectors, such as agriculture and trade, hotels, and restaurants (Table
2). Their GDP contributions on average from these two sectors during that period under
review were more than 75%. The GDP contribution of MEs was concentrated in various
tertiary sector, with the biggest share found in finance, rent and service sector. Whereas, the
share of GDP contribution of LEs was found heavily in mining, manufacturing industry and
electricity, gas and clean water supply sectors.
Table 2 Structure of GDP by size and sector: 2000-2003 (%)
Sector
1
2
3
4
5
6
7
8
9
GDP
GDP without oil & gas
Source: BPS.
SE
85.74
6.73
15.14
0.52
43.88
75.60
36.69
16.80
35.59
ME
9.09
2.96
12.98
6.80
22.57
20.81
26.64
46.47
7.16
LE
5.17
90.30
71.89
92.68
33.55
3.59
36.67
36.73
57.25
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
40.55
46.22
15.22
17.19
44.24
36.60
100.0
100.0
Some interesting evidence from this report is that the SMEs’ output contribution to the
annual growth rate of the country’s GDP was higher than that of their larger counterparts. As
shown in Figure 3, on average, the GDP growth share of SMEs was above 2%; whereas that
of LEs was under 2%. Within SMEs, SEs appeared as more important than MEs, as the GDP
growth share of the first group of enterprises was higher than that of the latter one. This was
despite the fact that annual output growth in SEs was lower than that in MEs. As plotted in
Figure 4, in 2000, the growth rate of output in SEs noted around 4%, lower some points in
comparison with about 5.1% and 4.4% in respectively MEs and LEs. In 2001, the growth
rates in all size groups of enterprises declined, and then went up again in 2002 onwards, with
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the lowest rates found in SEs.
Figure 3 Contribution to GDP Growth by Size Group of Enterprises, (%)
5
4
2.08
3
0.82
2
1
2.02
LE
1.73
1.46
1.55
0.58
0.62
0.69
1.42
1.52
1.68
2001
2002
2003
ME
SE
0
2000
Source: BPS.
Figure 4 Rates of Output Growth by Size Group of Enterprises, (%)
6
4
2
0
2000
2001
2002
2003
SE
4.13
3.45
4
4.29
ME
5.06
4.64
4.17
5.24
4.4
3.8
4.05
4.57
5.64
2.98
3.19
3.45
SME
LE
Source: BPS
Lack of Productivity
The greater GDP contribution of SMEs does not mean, however, that productivity, either
partial, for example, labor productivity (defined as value added per worker), or total of all
factors used (i.e. total factor productivity -TFP) in these enterprises is higher than that in
LEs. 4 It is mainly because their number of enterprises is huge, not because their greater
productivity as compared to LEs. Given the fact that SMEs lack of capital, technology and
skilled men power, it is hard for these enterprises to achieve increasing return to scale in their
production process. 5 The labor productivity gap between SMEs and LEs is one of the largest
4
Labor productivity rather than TFP is often used in analyzing productivity growth in SMEs, as the ratio is a useful
indicator of a sort of progress, since enterprises that cannot raise it will not be able to remain competitive as wages rise.
The difference between TFP and labor productivity is that the former measures the relative efficiency of SMEs and its
advance over time, whereas the latter does not. Unfortunately, the TFP measure is more difficult to operational due to
problems in the measurement of fixed and human capital.
5
In the literature on modern economic growth models, technology embodied in machines and skills of workers are two
most important determinant factors of productivity that often mentioned. In the literature on SMEs in developing
countries, lack of these two factors, plus others such as traditional way of organizing business; poor management; and
adopted inappropriate method of production are often argued as the main factors behind the low level of productivity in
these enterprises.
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observed in developing countries. 6
In Indonesia there is a number of studies which provide ample evidence that labor
productivity is much greater in LEs, which the result that, though SMEs had higher
percentage of employment than LEs had, they generated percentage of total value added less
than LEs did. For instance, based on data census on manufacturing sector for 1975-1996 from
BPS, estimates from Rice and Abdullah (2000) show that in 1975 value added per worker
(1990 Rp’000) in cottage and household industries (CHIs) was 132 and increased to 572 in
1996, and that of small-scale industries (SSIs) increased from 959 to 1,371. For the same
period, those from medium-scale industries (MSIs) and large-scale industries (LSIs) rose
respectively from 4,088 and 9,055 in 1975 to 9,055 and 12,495 in 1996.
By using the same data census, estimates from Berry et al. (2001) show that the labour
productivity gap between SMEs as a group and LEs has remained substantial. The ratio was
9.4 in 1975 and 9.1 in 1996. Over the entire period (1975-96), labor productivity appears to
have grown most for CHIs, with more modest (and quite similar) estimates for SSIs, MSIs
and LSIs. 7 However, their estimates suggest continued growth in labor productivity among
LSIs, while a possible slowdown for smaller sized of production units (Figure 5). 8
Data from the Ministry of Industry (MoI) may give some clue about the differences in
technological capability by size of firms at the national level. Table 3 shows (although it
varies by sub-sector) that on average, the value added-labor ratio increases by size of
enterprise, suggesting that in larger enterprises the level of technology is higher than that in
the smaller ones,. This finding as also confirmed by many other studies does not come,
however, as a surprise, given the fact that especially micro or cottage enterprises (CHIs) in
Indonesia (as in many other developing countries) are traditional enterprises adopting manual
modes of production (i.e. low degree of mechanization). They also lack of the necessary
inputs to increase productivity, such as skilled workers, capital to buy new machines and
modern tools, information on new machines or production tools, and know how to improve
their methods of production. 9
On the contrary, LSIs are usually very highly
mechanized/computerized, their production processes are much better managed and
6
See among others Liedholm and Mead (1999), and Berry and Mazumdar (1991).
7
As explained in Berry et al. (2001), labor productivity figures are difficult to interpret for the household
establishments that make the bulk of the CHIs group, because effective hours worked (rather than numbers of workers) in
these enterprises tend to be quite variable, and extremely hard to measure. According to them, it is probably that
productivity per hour worked increased less than the observed value added per worker, but nonetheless rose considerably.
8
See other studies on labor productivity gap between SMEs and LEs in Indonesia from, for example, Hill (1997,
2001), and Timmer (1999).
9
See e.g. Rice and Abdullah (2000), Sandee and van Hulsen (2000), Sandee et al. (2002), Sato (2000),
Smyth (1990), Tambunan (1994), and Tambunan and Keddie (1998).
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organized, and they generally employ highly skilled workers. For instance, in the food and
beverages industry, micro enterprises are very simple food and beverages processing units
mostly for local markets as compared to big companies such as Unilever and Indofood. This
is, however, not only the Indonesian, as the labor productivity gap between SMEs and LEs is
one of the largest observed in developing countries, simply because LEs have relatively large
endowments, including technology and know how. 10
Table 3. Differences in Labor Productivity in Indonesian Manufacturing
Industry by Size of
Enterprise and Sub-sector, 2000 (average of value added per
worker; in 000 rupiah).
ISIC
CHIs
SSIs
MSIs
LSIs
31
Food, beverages & tobacco
2,339 2,539
25,806
67,309
32
Textiles, garments, leather & footwear
1,746 4,855
24,271
27,237
33
Wood & wood products
2,103 6,743
12,403
30,236
34
Paper, printing & publications
3,981 5,723
18,953
103,938
35
Chemicals (incl. fertilizers) & rubber products
1,782 7,812
50,849
68,968
36
Cement & non-metallic mineral products
3,346 3,071
8,849
63,327
37
Basic iron & steel products
3,374 7,011
395,344
142,243
38
Transport means, machinery & its tools
5,492 5,402
45,127
130,589
39
Other manufacturing
4,973 6,097
12,701
22,946
Note: MoI defines SSIs as business establishments having assets (excluding land and building) maximum
Rp200 million and revenues per year Rp1 billion or less. The Ministry does not define explicitly micro
enterprises. In this table, the Ministry adopts the definition of Biro Pusat Statistik (BPS): micro (CHIs): 1-4
workers; SEs (or in manufacturing: SSIs): 5-19 workers; MEs (MSIs): 20-99 workers; and LEs (LSIs): 100 or
more workers.
Source: MoI (database).
BPS data on SSIs and CHIs also come with the same evidence showing that labor
productivity increases by size. First, as shown in Table 4, the average value added-labor
ratio in the CHIs and SSIs together as one group is lower than that in MSIs and LSIs
combined. The labor productivity in CHIs and SSIs is so low that despite the fact that their
total number of establishments and total workers employed are much larger than those in
MSIs and LSIs, their share in total output (gross value added) is smaller than those of the
later two size groups of industries. Second, Table 5 shows that the average labor
productivity in CHIs is lower than that in SSIs. However, the gap in productivity varies
not only over time, but also across industries. During the period under review, differentials
between SSIs and CHIs tended to be larger in many industries, except in the paper, printing
and publications (34) industries which declined from Rp4.1 to Rp1.8 million, in cement
and non-metallic mineral products (36) from Rp1.5 to Rp1.1 million, and even in the
miscellaneous manufacturing industries the differential is reversed from Rp3.5 to –Rp3.4
million. In other words, only in these three industry groups CHIs have experienced higher
10
See among others Liedholm and Mead (1999), and Berry and Mazumdar (1991).
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rates of growth in labor productivity than that in SSIs. In manufacturing as a whole, the
overall rate of growth in labor productivity in the SSIs is also lower than that (in) of the
CHIs, i.e. about 153.7% and almost 170%, respectively.
Table 4. Productivity (P) and Output Share (Q) in Manufacturing by Size, 19992002
1990
2000
2001
P
Q
P
Q
P
Q
MSIs
+ 115.28 90.52
143.99 91.65
164.7
91.5
8.35
9.48
9.11
8.35
10.98
8.5
LSIs
CHIs
&
SSIs
Note: P in Rp million and Q in %.
Source: BPS (Profil Industri Kecil dan Kerajinan Rumah Tangga, 2002).
2002
P
166.31
12.36
Q
89.9
10.06
Table 5. Labor Productivity between Micro and Small Enterprises in Manufacturing
Industry by Subsector, 1996-2001 (Rp million per worker per year).
ISIC*
Size category
Period
1996
1998
1999
CHIs
3.3
7.2
6.8
SSIs
6.9
16.4
14.3
32
CHIs
2.3
5.98
5.4
SSIs
9.4
19.98
19.2
33
CHIs
2.1
4.4
5.1
SSIs
8.9
15.3
17.4
34
CHIs
5.3
9.8
8.1
SSIs
9.4
13.5
11.2
35
CHIs
3.2
7.8
3.1
SSIs
9.1
10.7
15.4
36
CHIs
2.3
4.5
5.2
SSIs
3.8
5.6
5.2
37
CHIs
5.0
12.7
6.9
SSIs
13.3
11.4
6.2
38
CHIs
4.9
9.2
12.8
SSIs
9.2
17.4
14.2
39
CHIs
4.4
9.2
7.8
SSIs
7.9
8.1
8.4
Total
CHIs
2.8
5.96
6.1
SSIs
7.4
14.3
13.9
Note: * = see Table 3.
Source: BPS (Indikator Industri Kecil & Kerajinan Rumah Tangga 1996-2001)
31
2000
6.99
17.0
5.7
19.1
4.95
17.1
13.7
15.1
6.1
20.8
5.9
10.0
12.3
26.2
14.9
16.9
11.98
15.4
6.4
15.97
2001
7.99
25.1
6.3
21.2
6.2
20.2
16.5
18.3
7.8
59.8
7.2
8.3
26.5
38.3
15.3
30.6
15.7
12.3
7.5
19.7
If labor productivity can be adopted as a good proxy of technology capability, then the
evidence shown above may suggest that in some industries, the smallest and the most
traditional units of production, namely the CHIs, are able to improve their technology
capability. This does not really come as a surprise, since many studies including from
Sandee (1994, 1995, 1996) and Sandee et al. (1994, 2000, 2002) show that even CHIs are
sometimes in a better position to adopt innovations in products as well as production
process. Even, based on his field study, Ismawan (2004) from the SMERU Research
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Institute concludes that CHIs need to be strategically developed for several reasons,
including that they are productive economic activities, and thus, what is needed is capacity
building and not the establishment of new enterprises, and if they are appropriately
empowered, they can easily grow into modern SSIs. In its report on SSIs and CHIs. BPS
states that the lack of capital, technology and human resource is the main cause of low
productivity in CHIs and SSIs.
Although, no data are available on the productivity of SMEs by rural and urban areas,
since the majority of these enterprises, especially from cottage and small categories, are
found in rural areas, while big companies, including most of MNCs are located in or near
big cities like Jakarta, Tangerang, Bekasi, Bogor, and Surabaya, it can be assumed that the
bulk of these enterprises, especially the CHIs and SSIs are unproductive.. This assumption
is simply based on the fact that in rural areas, especially in the provinces outside of Java,
the physical infrastructure is not yet well developed, transport facilities are bad, access to
information and capital market is very limited, and good facilities for education and highly
skilled workers are not available.
Development Constraints
In less developed countries (LDCs), SMEs are facing obstacles that are sometimes
similar to those experienced by LEs. However, SMEs, especially the smaller ones are much
more vulnerable in relation to these problems. The nature or complexity of many of these
problems is also related to the size of enterprises or activities. The smaller the size of
enterprises the more complex the problems they face. The problems may differ from region
to region and between one industry-group to another. Although the problems vary even
between individual enterprises in the same size category and within a branch of activity,
there are certain problems which are common to all SMEs which are linked to three groups
of issues: infrastructure, institution, and economic issues. The infrastructure issues include
poor and/or expensive infrastructure such as transport, storage facilities, water, electricity,
and telecommunication, lack of working premises, and poorly developed physical markets.
The second issues include no access to formal training and, as a result, lack of skills in
particular as regards basic economic skills and managerial expertise, lack of formal
schooling sometimes even resulting in illiteracy, limited access to property rights, limited
access to formal finance and banking institutions, excessive government regulations in
areas such as business startup, in particular as regards cumbersome, time demanding and
costly procedures for business registration, lack of information on prices, viability of
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products, etc., and ewer market opportunities due for instance to non-compliance to
international standards. The latter issues include excessive registration and transaction costs
of starting or operating businesses, limited access to technology, lack of opportunities for
bulk purchase of inputs, lack of working capital: credit has to be obtained from informal
sources such as friends or relatives or non-banking financial agencies with unfavourable
terms, and insufficient funds do not allow for further investments (UN, 2001).
These obstacles are more or less interlinked and create vicious circles of bad
performance or business stagnation or low competitiveness of SMEs in LDCs as compared
to their counterparts in developed/ industrialized countries. For instance, the main reasons
for the lack of funds or skills is that the SMEs, especially the micro ones cannot access
resource institutions such as banks and other financing institutions, training and education
institutions, marketing and consultancy firms, etc. In fact, all these various obstacles create
an overall context that in itself constitutes a barrier of further development or business
improvement to these enterprises (Tambunan, 2006).
The 2003 (recent) survey on SEs and micro enterprises (MIEs) from Central Bureau of
Statistics (BPS) in all sectors in Indonesia shows the typical problems of these enterprises in
Indonesia (Table 6). As can be seen, the main problems faced by the majority of the
respondents are lack of capital and marketing difficulties. In Indonesia, although there are
various government sponsored SME credit schemes, the majority of them, especially SEs
and MIEs located in rural/backward areas never received any credit from banks or other
financial institutions. They depend much on their own savings, money from relatives and
credit from informal lenders for financing their daily business operations. In marketing,
SMEs in general do not have the resources to explore their own markets. Instead, they
depend heavily on their trading partners for marketing of their products, either within the
framework of local production networks and subcontracting relationships or orders from
customers.
Table 6 suggests that lack of technology and skills is not a serious problem for SE and
MIE entrepreneurs in Indonesia, and thus it is not consistent with what is generally stated in
the literature about problems faced by these enterprises in LDCs. However, in fact, it is
among serious obstacles faced by many SMEs in Indonesia to improve their competitiveness.
As shown before, labour productivity in SMEs is much lower than that in LEs, or within
SMEs, it is much lower in MIEs and SEs than in MEs. This indicates strongly that SMEs,
especially SEs and MIEs faced a lack of technology and skilled workers. Most SEs and MIEs
in Indonesia use traditional or out of data technology with or without own modifications,
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characterized by manual operation and high labor intensity, but very low labor productivity.
Lack of funds and skilled workers and various other operational constraints largely account
for the technological backwardness of this size group of enterprises. There is a good reason
why they do not mention lack of technology and skill as problem. They may not aware of
that problem or they do not see it as a serious problem for their business as many SE and
MIE entrepreneurs usually modify or repair their own machines.
Table 6. Main Problems faced by SEs and MIEs in Manufacturing Industry, 2003
SEs
MIEs
Total SEs and MIEs
Have no problem
46,485 (19.48)*
627,650 (25.21)
674,135 (24.71)
Have problem
-Raw material
-Marketing
-Capital
-Transportation/Distribution
-Energy
-Labor cost
-Others
192,097 (80.52)
20,362 (10.60)
77,175 (40.18)
71,001 (39.96)
5,027 (2.62)
40,605 (2.4)
2,335 (1.22)
11,592 (6.04)
1,862,468 (74.79)
400,915 (21.53)
552,231 (29.65)
643,628 (34.56)
49,918 (2.68)
50,815 (2.73)
14,315 (0.77)
150,646 (8.09)
2,054,565 (75.29)
421,277 (20.50)
629,406 (30.63)
714,629 (34.78)
54,945 (2.67)
55,420 (2.7)
16,650 (0.81)
162,238 (7.90)
Total SEs & MIEs
Note: * = %
Source: BPS (SUSI 2003)
238,582 (100.00)
2,490,118 (100.00)
2,728,700 (100.00)
Also, lack of human resource is not mentioned in Table 6. However, no doubt that lack
of human resource is also responsible for the lack of productivity in SMEs in Indonesia.
Table 7 shows only a small portion of total entrepreneurs in MIEs and SEs who have
higher education diplomas. The table also shows that female entrepreneurs are less
educated than their male counterparts. With respect to higher education, less than 1% of
total female entrepreneurs who have university diplomas, as compared to their male
counterparts at 6.5%.
Table 7: Education of Entrepreneur in Non-Farm MIEs and SEs by Gender, 2003
(%)
Level of education
Not finished primary school
Finished primary school
Finished high school first degree (SMP)
Finished high school second degree (SMA)
Higher education
Source: BPS (SUSI 2003).
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Female
Male
27.88
40.82
18.62
11.77
0.91
14.27
39.49
25.87
18.37
6.5
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