00074910012331337813
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Linkage Formation by Small Firms: The Case of A
Rural Cluster in Indonesia
Yuri Sato
To cite this article: Yuri Sato (2000) Linkage Formation by Small Firms: The Case of A
Rural Cluster in Indonesia, Bulletin of Indonesian Economic Studies, 36:1, 137-166, DOI:
10.1080/00074910012331337813
To link to this article: http://dx.doi.org/10.1080/00074910012331337813
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Date: 19 January 2016, At: 22:04
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 137–66
LINKAGE FORMATION BY SMALL FIRMS:
THE CASE OF A RURAL CLUSTER IN
INDONESIA
Yuri Sato*
Institute of Developing Economies, Tokyo
This paper analyses forward linkages formed by small firms in Ceper, a
rural metal-casting cluster in Central Java, and examines the effects of
these linkages in promoting the firms’ development. Firms in the cluster
have developed subcontracting linkages with assemblers in the urban
modern sector, and putting-out linkages with wholesalers located in the
cities. The linkages provide benefits beyond product sales: some firms are
stimulated to improve technological capabilities through subcontracting
linkages with assemblers; others are supported by trade credits embedded
in linkages with wholesalers. In comparing these effects with external
assistance, the firms rate technological help from private institutions with
a business orientation more highly than that from assemblers, and support
from wholesalers more highly than any other source of financial assistance.
Government assistance receives a relatively low rating. There is little
evidence of effects of clustering, partly because firms consider linkages
with the outer economy more strategic.
INTRODUCTION
Inter-firm linkages in developing countries—between large and small
firms, downstream and upstream firms, and urban and rural firms—
have attracted wide research interest of at least two kinds. First there is a
policy-oriented interest. Economic development that effectively involves
small-scale rural firms is crucial to policy makers pursuing the dual goals
of growth and equity, especially in highly populated countries where a
large number of firms and much of the workforce are in the small-scale
rural industry sector. Japan’s experience provides a model of effective
subcontracting linkages with small firms, while Taiwan’s illustrates
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
138
Yuri Sato
flexible division of labour among small firms. The second type of research
interest is theoretical. Linkages are seen as an intermediate form between
market and organisation. In an imperfect market, transaction costs are
high, so firms move to form linkages with other firms in order to reduce
costs. A linkage here means a continuous transaction relationship between
firms by ex ante contract. If the two firms are integrated into one,
transaction costs no longer occur; instead, organising costs arise.
Organising costs increase as the organisation gets larger, until it chooses
linkages to reduce these costs.1 Thus, the theoretical interest is in the
conditions under which linkages are chosen and function as a costminimising device.
These two streams of interest were combined in a study by Lall (1980),
which stressed the effectiveness of linkage creation in imperfect markets
in developing countries. Stimulated by this study, Thee Kian Wie and his
colleagues pioneered Indonesia’s empirical study of subcontracting
linkages (Thee 1985; Hamid 1985; Sudjono 1985; Erfanie 1985). At that
time they concluded that subcontracting linkages in Indonesia had arisen
through policy enforcement and did not work effectively, mainly because
of the technological weakness of subcontractors. After a decade, however,
as some recent studies reveal, subcontracting linkages in Indonesia began
to develop, driven by market expansion (Harianto 1993; Thee 1997; Sato
1998).
While the above linkage studies have generally examined backward
subcontracting linkages from the perspective of the assembler, recent
studies look at forward and horizontal linkages from the viewpoint of
small-scale rural firms in developing countries. Studies of rural
industrialisation examine rural firms’ forward linkages to the market,
either through subcontracting systems, putting-out systems or direct sales
(Mizuno 1996; Ono 1998; Hayami et al. 1998). Other studies analyse the
dynamism of horizontal linkages or the division of labour among small
firms (Kawakami 1998). Another stream of studies focuses on clusters. A
cluster is defined here as a spatial concentration of small firms in the
same industry (Schmitz 1995; Becattini 1990), which has the potential to
evolve into an ‘industrial district’ (Marshall 1920) on the Italian model,
characterised by collective efficiency, flexible specialisation, joint action
by firms, self-help institutions and common value systems (Becattini
1990). There is increasing agreement that clustering helps small firms to
overcome growth constraints and to compete in distant markets (Shmitz
and Nadvi 1999).2 In the Indonesian context, while rural cottage industry
and small and medium enterprise (SME) issues have long attracted
research interest, the number of fieldwork-based studies focusing on
linkages formed by small rural firms or clusters is still limited.3
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
139
In light of the linkage studies reviewed above, this paper examines
the forward linkages small firms have formed, by focusing on a rural
cluster in Indonesia, and then analyses the effects of linkages in promoting
the development of small rural firms. The paper first provides an
overview of the rural cluster as a setting for the analysis. It then examines
the structure, the nature and the functions of transaction linkages formed
by firms in the cluster. The third section analyses the effectiveness of
assistance embedded in the linkages when compared with external
assistance, and assesses the extent to which collective efficiency is an
effect of clustering.
CEPER, A METAL-CASTING CLUSTER IN CENTRAL JAVA
Ceper is known as ‘a village of foundries’. It is a rural cluster of more
than 340 small and medium-scale home foundries, located about halfway
between Yogyakarta and Solo in Central Java, at the eastern edge of the
subdistrict of Ceper in Klaten district.
The metal-casting industry in Ceper began centuries ago with
traditional agricultural equipment making. A local legend tells that a
pioneer of the industry was a Bantenese (from the West Javanese north
coastal town of Banten) who settled in Ceper in the period of the Mataram
kingdom (1613–45) and introduced the making of iron ploughshares (mata
bajak) for cultivation by buffaloes (Mihira 1998). In the Dutch East Indies
period, the industry was stimulated by the development of sugarcane
plantations, especially after a sugar factory was established at Ceper in
1918. Some foundries began to produce not only agricultural equipment
for sugarcane farmers but also components of sugar factory machines,
trains and freight cars. After independence, the Ministry of Industry
launched a casting–machining pilot project in 1958. This was the first
time machine tools had been introduced into Ceper. Since then, Ceper’s
products have ranged from processed components to assembled
machinery such as weaving machines for textile factories in the district.
A further wave of change came when the younger generation
aggressively entered this industry in the 1980s. Major progress during
the period from the mid 1980s to 1997 included: an increase in the number
of melting furnaces in Ceper from 100 to over 350; a remarkable rise in
the number of machine tools, from 30 to 1,600 units; upgrading of furnace
facilities by some foundries from the popular tungkik (a simple short
furnace, slanted when molten metal is poured) to the cupola (a taller
furnace with a higher temperature, above 1,450oC) and further to electric
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Yuri Sato
140
TABLE 1 The Casting Industry in Ceper, 1997
Number of establishments (units)
Large (80–250)
Medium (20–79)
Small (1–19)
Total workforce (persons)
Total production (tons/year)
Total sales (Rp million)
Production facilities (units)
Melting furnaces
Tungkik furnaces
Cupola furnaces
Electric furnaces
Machine tools
Grind stone machines
Lathes
Drilling machines
340–50
10
± 120
± 210
± 4,100
35,500
77,800
364
350
10
4
± 1,600
± 600
± 350
± 350
Source: Author’s interviews at the Batur Jaya industrial cooperative, and author’s
estimation from field survey samples.
(high-frequency induction) furnaces in a few cases.4 Progress in this
period was strongly supported by favourable domestic market conditions.
Table 1 provides an overview of the casting industry in Ceper in 1997,
when production was at its peak, just before the economic crisis. Ceper
produces 35,500 tons of casting products, accounting for about 30% of
Indonesia’s total annual casting production. The 340 to 350 foundries
can be roughly divided into three layers. The first layer consists of about
10 large foundries with integrated machining and assembling processes,
sometimes contracting out certain production processes to lower-layer
foundries in the cluster. The second layer is composed of medium-sized
foundries with some machine tools, and absorbs 70% of the workforce
engaged in the Ceper casting industry. The third layer is small home
foundries specialising in casting, which account for 60% of the
establishments in the cluster. Thus, a correlation is observed between
firm size and the degree of integration of the production process.
Tables 2–4 summarise features of the sample firms under study (see
appendix for further details of individual firms).5 While the sample
includes only 5% of establishments, in terms of the workforce and
production volume it covers one-sixth of the total.6 The majority of the
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Linkage Formation by Small Firms: The Case of a Rural Cluster
141
TABLE 2 Size Distribution and Degree of Process Integration of
Sample Firms in Cepera
No. of Employees
C
C+M
C+M+A
Total
1–4
5–19
20–49
50–99
100–
Total
0
2
0
0
0
2
0
1
5
1
0
7
0
0
4
2
1
7
0
3
9
3
1
16
a
C: casting; M: machining; A: assembling
Source: Author’s field survey.
TABLE 3 Period of Commencement of Foundry Business by Size of Sample Firm
No. of
Employees
5–19
20–49
50–99
100–
Total
–1950s
1960s
1970s
1980s
1990s
Total
0
3
1
0
4
1
1
1
1
4
1
0
1
0
2
0
5
0
0
5
1
0
0
0
1
3
9
3
1
16
Source: As for table 2.
sample are medium-sized firms with a workforce of around 40; the large
end (a firm with 150 workers, the second largest in Ceper) and the small
end (a firm with around 10 workers) are also represented (table 2). The
correlation between size and degree of process integration is clearly
observed in table 2. However, there is also a preference for integration at
the medium level, in firms of less than 50 workers.
The majority of firms in the sample started business in the 1970s or
earlier (table 3). Most of the 10 successor–owners are in this category.
Since all firms with more than 50 workers set up their foundry businesses
before the 1980s, and all those that started their businesses after the 1980s
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Yuri Sato
142
TABLE 4 Background of Present Owners of Sample Firms
Professional Career
School Career and Specialty
Succession (child of owner)a
Related manufacturing
Wage worker
No answer
10
2
1
2
Totalb
15
Graduate school
Islamic
University/Academy
Islamic
Technology
Senior high school
General
Technology
Islamic (pesantren)
Junior high school
Elementary school
2
2
4
2
2
5
2
2
1
2
2
15
a
Includes three cases of succession by son-in-law.
One firm established by the government is not included.
b
Source: As for table 2.
have fewer than 50 workers, the natural law that ‘older is larger’ seems
to hold true, and this is consistent with the results of rural cluster studies
in other countries, including Japan (Itoh and Urata 1995). However, the
fact that some samples are ‘old but still small’ indicates that there are
some impediments to their expansion.
The data show that almost all owners have a professional background
in the metal-casting industry (table 4). What is peculiar in Ceper is the
Islamic orientation of their educational background. Of the six owners
with higher education, four chose Islam and two chose technology as
their educational specialty. Since one of the latter is an ‘immigrant’ from
Solo, there is only one Ceper native with a degree in engineering in the
sample of 15. Most respondents acknowledged their Islamic orientation;
some were educated in pesantren (Islamic junior and senior boarding high
schools), and some are engaged in the activities of Nahdlatul Ulama,
Indonesia’s largest Islamic organisation, suggesting that a common social
value system exists in this cluster.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
143
LINKAGES DEVELOPED BY CEPER’S FIRMS
The primary focus of this study is the linkages that Ceper’s firms have
developed.7 Most foundries in Ceper manufacture their products on the
basis of orders. Thus our first question is who provides the order: is the
order provider an assembler, a distributor, or an end user? Do foundries
supply semi-processed goods or final goods? Is the relationship with the
order provider continuous or just ‘on the spot’? Is the order repetitive
(‘routine’) or temporary (a ‘job order’)? Is the order provider located inside
or outside Ceper?
Four Types of Forward Linkage
First, let me present a simple typology of linkages. Linkages are here
defined to encompass not only the production process but also the
distribution process, until the goods reach the hands of end users
(consumers). In the context of this study, there are four types of forward
linkages viewed from the perspective of the foundries.
• Type A (Assembler). As a subcontractor, a foundry receives an order
from an assembler. The products supplied by the foundry are semiprocessed casting components, to be reprocessed and/or
assembled by the assembler.
• Type W (Wholesaler). A foundry receives an order from a
wholesaler. Usually, the products are final goods or components
for replacement (type W1). But wholesalers are sometimes
equipped with machine tools and add some simple machining or
assembling processes to the supplied products, particularly if the
foundry has no machine tools. In these cases, the products
supplied by the foundry are semi-processed goods (type W2).
• Type R (Retailer). A foundry receives an order from a retailer. The
products are final goods.
• Type U (User). A foundry receives an order directly from an end
user, generally a factory that needs new production equipment
or components for replacement. Direct orders from public works
projects are also included in this type.
Of the four types, type A and type W2 are transactions involving semiprocessed goods, as part of a vertical division of labour in the production
process of the metal and machine manufacturing industry. Type W1, type
R and type U are transactions involving final goods, and constitute
forward marketing linkages, either through traders or through direct sales
to consumers.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Yuri Sato
144
TABLE 5 Features of Linkages of Sample Firms
Sample
Firm
(in order
of size)
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Type of Linkagea
A
W
R
(number of customers)
1
–
1
–
–
10
–
–
–
1
1
1
4
–
1
5
–
3
–
6
–
–
–
–
–
2
2
1
–
2
2
–
–
–
5
•
–
•
–
•
10
1
•
•
•
•
•
•
U
–
–
–
–
12
–
3
1
•
3
–
2
–
1
–
–
Share of
Continuity Location
Largest
of
Inside/
Customer Relationshipb Outside
(%)
of
Cluster
100
60
15
40
40
30
40
70
20
50
40
30
35
90
40
45
▲
❍
❍
❍
❍
●
❍
n.a.
n.a.
❍
▲
●
❍
❍
▲
❍
in
out
out
out
out
out
out
out
out
out
out
out
out
out
out
out
a
A: with assembler; W: with wholesaler; R: with retailer, U: with end user.
: includes largest customer, •: unspecified plural, –: none.
b
Continuity of relationship: ❍: from the start of the business; ●: before the start of
the business; ▲: after the start of the business.
Source: As for table 2.
The Plural, Continuous and Interregional Nature
of the Transaction Linkages
Table 5 shows the types and characteristics of transactions of the sampled
firms. The major findings are as follows.
First, almost all the firms have linkages with plural order providers,
and many of them cover plural types of order providers. High dependence
on a single order provider is not common. The plurality of linkages is a
major reason why we cannot divide firms clearly into two types, i.e. semi-
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Linkage Formation by Small Firms: The Case of a Rural Cluster
145
processed goods makers linked to assemblers, and final goods makers
selling to wholesalers, retailers or end users. A firm may supply the same
kinds of components to assemblers for new assembly and to retailers for
replacement; or, more often, a firm may supply components to assemblers
and assembled products to end users. Plurality of linkages is the dominant
propensity of these firms, partly because of their efforts to diversify risk,
and partly because of the ‘small-lot’ and unstable nature of orders. If we
examine the linkage types of the largest order providers (customers) of
the respective firms (indicated by
in table 5), we find that all the four
types are prevalent, with neither a prominent preference for a specific
type, nor a correlation of linkage type with firm size (as indicated by the
order of firms in the left column of the table).
Second, the relationship with the largest order provider tends to be
long term, regardless of its type. More than half the firms have maintained
the linkages since the start of their business, sometimes in the owner’s
predecessor’s time. These continuous relationships can be regarded as a
means of lowering transaction costs, including the costs of knowing each
other, making a transaction contract (either oral or written), negotiating
and bargaining. While in urban areas like Jakarta and Surabaya ‘linkages
by spin-out’—where a former employee sets up a small firm to supply to
his former employer—increased rapidly after the 1980s, such cases are
rare in this rural cluster.
Third, the largest order provider of the firm is located outside Ceper
except in one case. There is a clear preference for transactions with
customers outside Ceper. As a result, intra-cluster inter-firm linkages—
vertical subcontracting and horizontal division of labour—seem to be
less developed in Ceper than in other reported clusters (Smyth 1992),
despite the divisibility of the production process in the machinery
industry.8
Type A: Subcontracting Linkages with Assemblers
Let us focus on type A linkages first. In the sample, we can observe three
patterns of subcontracting linkages. The first is an intra-cluster linkage
in which lower-layer firms receive subcontracted work from upper-layer
firms in Ceper. Firm A, the smallest firm in the sample, is a case of such
an intra-cluster subcontractor (the typical initial status of most of the
specialised home foundries in the cluster). Firm H also had this status,
but several years ago it succeeded in becoming ‘independent’ from an
intra-cluster assembler, and began to supply products directly to public
works projects by integrating the machining and assembling processes.
In a second pattern, medium-layer foundries in Ceper (e.g. firm F)
receive subcontracts from medium-scale assemblers of machinery making
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
146
Yuri Sato
local brands, located outside Ceper. The third pattern is that upper-layer
foundries (e.g. firms M and P) get subcontracts from large-scale
assemblers of machinery making popular brands, including foreign joint
ventures located in metropolitan Jabotabek (greater Jakarta) and other
large cities such as Surabaya. The last pattern demonstrates that
subcontracting linkages with modern manufacturing have already
reached the top layer of this cluster. We will look at the third pattern in
more detail.
Firm M and Firm P: Typical Type A Linkages. These two firms are among
the leading firms in Ceper, and are known as subcontractors to first-rank
brand machinery manufacturers. Their major products are such casting
components as pulleys for Yammer (Japan) handtractors, pumps for
Bukaka (Indonesia) and Rafkin (USA) oil boring facilities, and
components for UT (Indonesia) and Komatsu (Japan) forklifts. The
assemblers are located in Surabaya, Jakarta and Batam. Since the start of
their business, firm M has had transactions with Yammer and firm P
with Bukaka. Why do these firms give priority to subcontracting rather
than to other types of transactions?
The first reason is low business risk. The manager of firm M points
out that the continuity of transactions in terms of buyers and products
reduces total business risk in the long run, despite the low margin per
order. According to him, the average profit margin in subcontracting
orders is 10–17.5%, while it is 30–60% in the case of job orders because of
the risk premium. Even such high margins as the latter, however, are
often offset by costs in making moulds for only temporary use, and by
losses from unexpected discontinuation of the transaction. In terms of
risk management, the ideal pattern with the lowest risk, he says, is routine
subcontracting linkages with three to five assemblers.
The second advantage of subcontracting is technological progress.
The general manager of firm P says, ‘it is only through repetitive
transactions with specific assemblers that we can recognise our own
progress’. Through a continuous relationship, a firm can make a plan to
improve its technological capabilities. Firm P is a pioneer in Ceper in
adopting the ‘Kaizen’ system for enhancing quality control and efficiency,
including reduction in the number of processes, a three-step selection of
raw materials, a product inspection system, and a penalty system for
operators in case of rejects. Firm M is also intent on raising the accuracy
of casting by mechanising the moulding process. The attempts of these
firms at technological improvement are stimulated by transactions with
assemblers, especially through an apprenticeship at the assembly plant
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Linkage Formation by Small Firms: The Case of a Rural Cluster
147
(of a firm P employee), and a dispatch of engineers by the assemblers (to
firm M).
In the backgrounds of their founder–owners, the two firms have a
common feature. Neither owner is a native of Ceper: both are traders
from other towns in Central Java, each of whom has married the daughter
of a Ceper foundry owner and settled in Ceper. There may be some link
between their outsider status and their outstanding enterprising spirit in
relation to technological progress.
Type W: Putting-Out Linkages with Wholesalers
The firms that have plural types of linkages provide us with a comparative
view.
Firm O: Type A vs Type W. The case of firm O is helpful in allowing us
to compare type A and type W linkages, because this firm has a
subcontracting tie with a major local assembler of agricultural machinery
in Surabaya, and concurrently has a continuous relationship with several
wholesalers in Surabaya and Jakarta.
The founder–owner of firm O is regarded as a reliable subcontractor
by the assembler, but he says: ‘For us, subcontracting is clearly important
as a routine matter. However, if we once become dependent on it, we
become blind.’ His point is that an entrepreneur should be close to the
market. That is why he attaches greater importance to linkages with
wholesalers. It is the wholesalers that provide him with live market
information and orders reflecting current market trends. They are also
familiar with firm O’s production capabilities. Further, the wholesalers
pay the owner two weeks after delivery, whereas it takes one to two
months for the assembler to pay him. The owner’s relationship with two
wholesalers has lasted since his independence from his father-in-law’s
foundry in 1982, while the relationship with the assembler dates from
1987.
In essence, given the low costs of production in this rural cluster, the
owner of firm O considers it more strategic for Ceper’s foundries to
manufacture products of lower quality but competitive price, making
use of linkages with wholesalers, rather than to try to make higher-quality
products under well known brand names through subcontracting
linkages with large assemblers.
Firm J: Type W vs Other Types. Firm J provides us with even wider
scope for comparison, since it covers all four types of transaction. The
firm has a business tie of type A with three medium-scale assemblers for
ship and electric line components (accounting for 10% of total sales), of
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
148
Yuri Sato
type W with two wholesalers for items such as manhole covers (35% of
sales), of type R with one retailer for diesel engine pulleys and water
pumps (50% of sales), and of type U with one pharmaceutical factory for
machinery spare parts (5% of sales as of 1998).
Of the four types of linkages, the founder–owner of firm J considers
type W the most advantageous. Why? First, wholesalers function as
matchmakers between demand trends in the market and the capabilities
of each supplier. The owner of firm J says: ‘The wholesalers are very
selective. But once they judge that the order fits me, it means I’ve got an
assured market with little risk of returns or rejects.’ With their capacity
for collecting and analysing market information, wholesalers not only
know the market well but also bear the risk of uncertainty in marketing
on behalf of firm J.
The second advantage of type W for firm J is that it lowers the firm’s
financial burden. Besides lowering financial costs because of shorter-term
sales payments, the wholesalers often provide working capital by means
of advance payments. Firm J provides a comparison of the payment terms
of the four types of linkage. In the case of the assemblers and the factory,
it is more than one month after delivery before the firm receives sales
payments, owing to the buyers’ bureaucratic procedures. In the case of
the retailer, payment also occurs one month on average after the products
are sold; if unsold, the products are returned to him after a month with
no payment. On the other hand, the wholesalers pay 40% of the order
value in advance so that firm J can procure raw materials with it. The
rest is paid to the firm just one week after delivery. This case illustrates
the advantages, in terms of financial costs and risks, of the trade credit
provided by wholesalers to supplier firms.
Firm J has paid little attention to improving product quality, unlike
firms M and P. This is not due to the owner’s lack of technological
awareness (he is one of the two engineering graduates in the sample),
but to cost calculations. According to him, it is costly to improve quality
by upgrading facilities and controlling material composition. He would
not do this unless order providers bore these costs. In the linkage with
wholesalers, he has never faced serious complaints about quality, because
the wholesalers lack the knowledge to pay precise attention to
technological matters.
Firm B and Firm D: Typical Type W. Firm B and firm D are examples of
firms that concentrate on transactions with wholesalers. Both are cases
of type W2, where the wholesalers undertake some manufacturing
processes.
Since the start of the foundry in 1986, firm D has had linkages with a
wholesaler-cum-repairshop located on the outskirts of Surabaya. The
wholesaler usually provides funds equivalent to three or four times the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
149
order value (Rp 20–25 million in total) for the firm to procure raw
materials. Firm D’s products become the collateral for the funds advanced
by the wholesaler, who deducts the advanced amount in instalments from
subsequent sales payments to firm D. When the wholesaler happens to
obtain steel scraps, he buys them and sends them as raw materials in
kind to firm D. It is owing to this system that the owner of firm D has
never felt the need for other external finance. When the owner moved
into machining from being a specialised home foundry in 1992, the
wholesaler helped him with initial guidance on how to select and use
machine tools and how to make jigs.
Firm B has linkages with three wholesalers-cum-repairshops-cumassemblers located in Solo. One of them has a wide marketing network
spreading outside Java. The owner of firm B became acquainted with
these wholesalers when he worked at a foundry firm as a salesman. Like
his father, he had been engaged in the foundry business as a wage worker
since his elementary school days (he did not graduate). Despite his long
working career, he had only a tiny landholding and no other savings or
inheritance when he wanted to become independent. It was one of the
wholesalers who lent him funds equivalent to twice the value of his order
(Rp 10 million in total), with which he could afford to buy a tungkik furnace
and raw materials. This case shows, first, that a career as a wage worker
does not produce a surplus for initial investment and, secondly, that
advances provided by wholesalers can cover set-up costs and investment
capital in some cases.
The Wholesaler as ‘Putter-Out’. We have briefly surveyed examples of
linkages with wholesalers. Usually called grosir, wholesalers collect and
allocate orders to foundries. Although they are sometimes equipped with
manufacturing facilities, by nature they are not manufacturers but
intermediaries and coordinators of orders. Most of the wholesalers in
the study are medium or small scale, and are located not only in big
cities but also in smaller cities like Yogyakarta and Solo.
One of the peculiarities of Ceper is that there are no such wholesalers
in the cluster to organise small foundries, supply them with raw materials,
collect their products and sell them to outside traders in consumer
markets. This type of wholesaler, called an ‘intra-cluster putter-out’
(sanchi-don’ya in Japanese), played a decisive role in the history of clusters
in the early stages of industrial development in Europe and Japan. In
contrast with this system, foundries in Ceper individually form linkages
with different wholesalers outside the cluster. Despite these differences,
the essential role of the wholesalers is similar, that is, to intermediate
orders by bearing market risk and financial costs. This is precisely the
role of a ‘putter-out’. Instead of supplying raw materials in kind,
wholesalers here adopt an ‘extended’ advance payment, with which they
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
150
Yuri Sato
finance the firms’ working capital and sometimes even their investment
capital, including set-up costs. In this respect, such linkages with
wholesalers can be considered a variation of the putting-out system.
The Coexistence of Two Systems—Dual Structure
or Evolutionary Process?
Type A is a subcontracting system and type W is a variation of the puttingout system. The study has revealed that both subcontracting linkages
and putting-out linkages permeate this rural cluster. Subcontracting
linkages with modern industry, with foreign joint venture assemblers of
leading brands of machinery at the apex, have already reached the top
layer of the cluster. Meanwhile, the foundries in every layer have formed
linkages with wholesalers outside the cluster who play the role of puttersout. In Japan’s historical experience, sophisticated subcontracting systems
in the modern machinery industry developed in the postwar period,
whereas the putting-out system prospered in the initial stages of
development of the industry in the 1930s. Here in Ceper, the two systems
coexist contemporaneously.
Should this coexistence be regarded as reflecting a dual structure or
an evolutionary process? Table 6 may offer insight into this question. In
the table, the sample firms are rearranged in order of firm age, measured
by the period from the start of the foundry business. It becomes obvious
that the firms whose largest customers are assemblers are relatively old
firms and those whose largest customers are wholesalers are younger
firms. This suggests that linkages with wholesalers have significance for
younger firms at the stage of initial accumulation. Are these firms evolving
towards linkages to assemblers? What is interesting is that none of the
firms sees evolution from type W to type A linkages as desirable (see the
middle column of table 6). Instead, some firms, even the old ones, show
an inclination towards independence from subcontracting linkages and
towards enhancing internal integration. Thus the evolutionary path the
sample firms are most inclined to follow seems to begin with intra-cluster
subcontracting (Ain) or sales to retailers (R), then to make use of linkages
with wholesalers (W2) and later to integrate processes in order to supply
assembled final products under the linkages with wholesalers (W1) or
end users (U) [Ain/R➔W2➔W1/U]. The path in which linkages are
established with assemblers of major brands is still a minor stream, though
it should be seen as a sign of change in the rural cluster. The coexistence
of the two systems is, for the present, seen as reflecting not an evolutionary
process but a dual structure in which the modern urban and the traditional
rural manufacturing systems coexist.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
151
TABLE 6 Types of Linkages, Firm’s Inclination to Evolve, and Firm Age
Type of Linkagea
Sample
Firm
(in order
of firm
age)
Inclination
Year of
to Evolveb
A
W
R
(number of customers)
U
Starting Establish- Starting
Foundry mentc RelationBusiness
ship
L
1
1
•
2
U➔n.a.
1940s
1982
●
F
10
–
•
–
A➔R
1950s
1978
●
G
–
–
–
3
U➔
1950s
1958
❍
N
–
2
•
1
U➔
1950s
1994
❍
C
1
–
5
–
R➔
1960s
1981
❍
I
–
–
10
•
R➔
1960s
1980
n.a.
M
4
–
•
–
A➔
1960s
1986
❍
P
5
–
•
–
A➔
1960s
1980
❍
A
1
–
–
–
Ain➔
1970s
1988
▲
O
1
2
•
–
W2➔W1
1970s
1979
▲
D
–
6
•
–
W➔
1980s
1986
❍
E
–
–
–
12
U➔
1980s
1985
❍
H
–
–
•
1
Ain➔U
1980s
1987
n.a.
J
1
2
1
3
R➔W
1980s
1986
❍
K
1
2
•
–
W➔
1980s
1991
▲
B
–
3
–
–
W➔
1990s
1990
❍
a
See table 5, note a; ‘Ain’ indicates a linkage with an assembler within the cluster.
An arrow shows a change of linkage type in the past or an inclination to change
in the future. An arrow with nothing to the right of it indicates no change and no
specific inclination.
c
‘Year of Establishment’ means the year in which a business entity was formed,
either as an unlimited or a limited company.
b
Source: As for table 2.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Yuri Sato
152
TABLE 7 Benefits of Linkages for Foundries
Benefit
Type
A
W
R
U
Type of
Order Provider
Assembler
Wholesaler
Retailer
User (factory)
No
Stock Risk
Provision
of Market
Information
Provision
of Working
Capital
Technological
Stimulus
✕
O
O
✕
✕
O
✕
✕
O
✕
✕
✕
O
O
✕
O
Source: As for table 2.
THE EFFECTS OF LINKAGES IN PROMOTING THE
DEVELOPMENT OF SMALL FIRMS
Assistance Embedded in the Linkages
The second step of this study is to analyse the effects linkages have on
the promotion of small firms’ development. We will assess the relative
effectiveness of assistance embedded in the inter-firm transaction linkages
compared with that of external assistance, including government
programs. The question asked of each firm is: whose assistance has been
most effective for its business?
Table 7 presents simplified results of the analysis in the previous
section in light of the benefits firms receive from linkages with each type
of order provider. As the table shows, order providers other than retailers
bear stock risk by accepting ordered products regardless of ex post market
circumstances; wholesalers and retailers who are sensitive to market
trends offer live market information to the producers; wholesalers often
provide working capital by paying in advance; and assemblers tend to
stimulate technological progress in subcontractors. In terms of the effects
in question, types A and W offer more benefits than types R and U.
Details of assistance offered in type A and type W linkages are
compared in table 8.9 In provision of technological assistance, assemblers
have the advantage over wholesalers. The assistance they give ranges
from general technical guidance, instruction in the use of machinery and
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
153
TABLE 8 Assistance Embedded in Inter-Firm Transactions
Assembler (5)a
Wholesaler (5)a
Technological Assistance
Guidance
Instruction in machinery use/jig use
Providing machinery/tools
Quality control
Worker training/engineer dispatch
3
2
1
1
2
0
1
0
0
0
Financial Assistance
Capital participation
Investment loans
Advance payment
Machinery leasing
0
0
0
1
0
1
4
0
Other assistance
Providing raw materials
Information/guidance on market
1
0
1
2
a
Figures in parentheses indicate the number of sample firms covered in the table.
The numbers do not coincide with those in table 5, because table 8 includes cases
where an assembler or wholesaler is not the firm’s largest order provider.
Source: As for table 2.
jigs, and training of workers, to the dispatch of engineers to the firm.
There is, however, a wide variation among assemblers in the degree of
assistance provided. At one extreme is the case of the top-layer firm P,
which has received almost every kind of assistance from its large
assemblers in Jakarta; at the other is firm F, which has never received any
technological assistance from its assemblers, located mainly in small cities
like Solo and Malang. Even at the level of top-layer firms, the assistance
is not provided regularly, but only when a problem or a specific need
arises. Regular inspection tours and vendor control systems, which some
major foreign-brand automobile and electronic assemblers in Jakarta are
instituting, have not yet infiltrated into this rural cluster.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
154
Yuri Sato
As for financial assistance, capital participation is not usual in either
linkage type. The advance payment system adopted by wholesalers is a
significant exception, and no assembler in the sample adopts this system
regularly. As described earlier, some wholesalers pay in advance, say,
40% of the order value, to allow supplier firms to overcome a bottleneck
in working capital. Flexible application of this system enables some firms
even to invest in production facilities. Repayment can be made in
instalments or in the form of products. This system is crucial, especially
for lower-layer firms like firm D and for new entrants like firm B, which
have little access to other external sources of finance. A comparison with
other external financing is made below.
Access to market information is another benefit of linkages with
wholesalers. Some firms place a high value on the wholesalers’ capacity
to analyse product demand trends despite often having limited
technological knowledge of how to make the products. Assemblers, on
the other hand, are not rated highly as transmitters of market information.
This is related to the fact that, in contrast with Japan’s subcontracting
system, it is rare that assemblers and subcontractors jointly engage in
product development based on market analysis.
Comparison with External Assistance
The sample firms were asked to evaluate the effectiveness of assistance
they have so far received, by source and area of assistance, on a scale of 1
to 5. The sources of assistance are: (1) order providers; (2) the government,
e.g. the Ministry of Industry and Commerce, and state-owned
corporations; (3) private institutions, e.g. private companies (other than
order providers), industrial associations, and the Astra Dharma Bhakti
foundation, which has a branch office in Ceper to render business
assistance; (4) foreign institutions, e.g. United Nations and German and
Japanese government organisations, which carry out directly or through
the Ministry of Industry and Commerce such programs as dispatch of
foreign experts, seminars and training abroad; (5) universities and
research institutes; and (6) cooperatives, the industrial cooperative in
Ceper in particular.
The results are summarised in table 9. On the whole, they tell us that
a relatively high value (2.0 or above) was put on technological assistance,
especially from private institutions (private institutions > cooperatives >
universities > government > order providers), but that the evaluation of
financial and managerial assistance from all sources was by and large
low (2.0 or below).
The table also shows clear differences in the evaluations by firm size
and by type of linkage. The firms that place a high value on the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
155
TABLE 9 Evaluation on Effectiveness of Assistance by Sourcea
Area of
Assistance
Firm Sizeb
and
Type of
Order
Transaction Provider
Governmentc
Private
Institution
Foreign
Institution
1.9
2.0
3.1
1.5
2.1
2.3
1.7
1.4
3.0
1.0
2.6
1.5
2.3
3.2
3.5
1.0
1.7
1.5
1.7
2.6
1.5
1.7
2.8
1.5
Type A
2.6
Type W
1.4
Type U+R 1.7
1.8
1.8
2.3
4.2
3.8
1.7
1.0
1.4
2.0
2.2
1.8
2.3
2.6
2.2
2.0
Total
1.9
1.3
1.4
1.0
1.1
1.1
5–19
20–49
50–150
2.3
1.9
1.5
2.3
1.0
1.0
1.0
1.7
1.0
1.0
1.0
1.0
1.0
1.2
1.0
1.0
1.2
1.0
Type A
1.8
Type W
2.6
Type U+R 1.3
1.4
1.0
1.3
1.4
1.8
1.0
1.0
1.0
1.0
1.0
1.4
1.0
1.4
1.0
1.0
Total
1.0
1.1
2.0
1.1
1.1
1.4
5–19
20–49
50-150
1.0
1.0
1.0
1.7
1.0
1.0
1.0
1.9
3.0
1.0
1.0
1.5
1.0
1.2
1.0
1.0
1.4
1.5
Type A
1.0
Type W
1.0
Type U+R 1.0
1.0
1.0
1.3
3.0
1.8
1.3
1.4
1.0
1.0
1.0
1.4
1.0
1.8
1.4
1.0
Technological Total
assistance
5–19
20–49
50–150
Financial
assistance
Managerial
assistance
Source of Assistance
a
University/ CoResearch operaInstitute
tive
Effectiveness of assistance is measured on a scale of 1 to 5 ; 1 = not effective; 3 =
moderately effective; 5 = highly effective. Effectiveness was evaluated by each
firm and the responses converted to a value by the author.
b
The size of the firm is measured by the number of employees.
c
Includes state-owned corporations.
Source: As for table 2.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
156
Yuri Sato
technological assistance provided by private institutions are middle and
upper-layer firms and those with type A and type W linkages. Upperlayer firms and those with type A linkages also give relatively high points
to technological assistance by order providers. This same segment also
evaluates managerial assistance by private institutions as moderately
effective. These results indicate that the upper-layer firms, especially those
who have subcontracting linkages with assemblers, actively absorb
technological and managerial knowledge offered by private institutions,
the Astra Foundation in particular. Although daily transactions with
assemblers stimulate these firms to improve their technological
capabilities, the firms themselves regard the assistance of the Astra
Foundation as more effective than that of assemblers. This Foundation
has frequently given practical guidance on moulding, casting, drawing
and ferro specifications at its branch office in the centre of Ceper,10 and
has also accepted apprentices into the machinery companies under the
Astra group, with the intention of nurturing the firms to become qualified
subcontractors to the group in the future. The results show that businessoriented schemes of this kind by private institutions have infiltrated this
rural area, bringing positive reactions from some firms.
In the financial sphere, however, assistance by the Foundation is less
important. Relatively high points for financial assistance are given to order
providers by the lower-layer firms and firms with type W linkages. This
indicates that trade credits rendered by wholesalers are still much more
important than other forms of external financial assistance, particularly
for small and cottage-scale firms.
Low Evaluation of Government and Foreign Assistance
Government and foreign assistance received a low evaluation compared
with private institutions, order providers and cooperatives (table 9). In
respect of foreign assistance, this may be evidence that it is difficult for
assistance schemes of foreign institutions to reach these layers of firms in
rural clusters.
In contrast, most of the firms under study are aware of and have
experienced assistance rendered by the government since the 1980s.
However, a number of owners and managers made rather severe
comments on the effectiveness of guidance organised by the various
ministries. The first of these was that it is inappropriate to conditions in
their production sites. One of the owners described government guidance
as ‘a wind from heaven’ that only raises people’s expectations. ‘It makes
no sense unless it is applicable to our conditions’, i.e. simple facilities,
low-quality raw materials, and workers with limited skills. Another
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
157
criticism was directed at the bureaucratic character of assistance delivery.
A manager pointed out that there was a rush of guidance at the end of
year, as if the government’s aim was to achieve a certain target of program
execution. He claimed that neither firms’ needs nor their time schedules
were considered and coordinated by the relevent ministries. The ‘foster
father (bapak-angkat) system’, promoted by the government in the mid
1980s to foster linkages between large and small firms, was considered
by some firms as no more than government propaganda, because there
was no substantial effect in terms of linkage development in this cluster.
As these criticisms suggest, this rural cluster had been identified as one
of the target groups of the government’s small and medium enterprise
(SME) development policy, but the programs were less than responsive
to the recipients’ needs.
Given these observed weaknesses of government assistance, one firm
owner asserted that ‘there is no way for the government to assist us
directly’. The government, in his view, has only two roles: to provide
information needed by firms and to facilitate the establishment,
maintenance and expansion of firms’ businesses. It is worth listening
attentively to these living voices of rural cluster firm owners.
Financial Costs and Accessibility
Apart from studying the firms’ own views, we can assess the effectiveness
of financial facilities rendered to firms by looking at costs and accessibility.
Table 10 shows the financial sources the sample firms have actually
accessed. This pictur
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Linkage Formation by Small Firms: The Case of A
Rural Cluster in Indonesia
Yuri Sato
To cite this article: Yuri Sato (2000) Linkage Formation by Small Firms: The Case of A
Rural Cluster in Indonesia, Bulletin of Indonesian Economic Studies, 36:1, 137-166, DOI:
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 137–66
LINKAGE FORMATION BY SMALL FIRMS:
THE CASE OF A RURAL CLUSTER IN
INDONESIA
Yuri Sato*
Institute of Developing Economies, Tokyo
This paper analyses forward linkages formed by small firms in Ceper, a
rural metal-casting cluster in Central Java, and examines the effects of
these linkages in promoting the firms’ development. Firms in the cluster
have developed subcontracting linkages with assemblers in the urban
modern sector, and putting-out linkages with wholesalers located in the
cities. The linkages provide benefits beyond product sales: some firms are
stimulated to improve technological capabilities through subcontracting
linkages with assemblers; others are supported by trade credits embedded
in linkages with wholesalers. In comparing these effects with external
assistance, the firms rate technological help from private institutions with
a business orientation more highly than that from assemblers, and support
from wholesalers more highly than any other source of financial assistance.
Government assistance receives a relatively low rating. There is little
evidence of effects of clustering, partly because firms consider linkages
with the outer economy more strategic.
INTRODUCTION
Inter-firm linkages in developing countries—between large and small
firms, downstream and upstream firms, and urban and rural firms—
have attracted wide research interest of at least two kinds. First there is a
policy-oriented interest. Economic development that effectively involves
small-scale rural firms is crucial to policy makers pursuing the dual goals
of growth and equity, especially in highly populated countries where a
large number of firms and much of the workforce are in the small-scale
rural industry sector. Japan’s experience provides a model of effective
subcontracting linkages with small firms, while Taiwan’s illustrates
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
138
Yuri Sato
flexible division of labour among small firms. The second type of research
interest is theoretical. Linkages are seen as an intermediate form between
market and organisation. In an imperfect market, transaction costs are
high, so firms move to form linkages with other firms in order to reduce
costs. A linkage here means a continuous transaction relationship between
firms by ex ante contract. If the two firms are integrated into one,
transaction costs no longer occur; instead, organising costs arise.
Organising costs increase as the organisation gets larger, until it chooses
linkages to reduce these costs.1 Thus, the theoretical interest is in the
conditions under which linkages are chosen and function as a costminimising device.
These two streams of interest were combined in a study by Lall (1980),
which stressed the effectiveness of linkage creation in imperfect markets
in developing countries. Stimulated by this study, Thee Kian Wie and his
colleagues pioneered Indonesia’s empirical study of subcontracting
linkages (Thee 1985; Hamid 1985; Sudjono 1985; Erfanie 1985). At that
time they concluded that subcontracting linkages in Indonesia had arisen
through policy enforcement and did not work effectively, mainly because
of the technological weakness of subcontractors. After a decade, however,
as some recent studies reveal, subcontracting linkages in Indonesia began
to develop, driven by market expansion (Harianto 1993; Thee 1997; Sato
1998).
While the above linkage studies have generally examined backward
subcontracting linkages from the perspective of the assembler, recent
studies look at forward and horizontal linkages from the viewpoint of
small-scale rural firms in developing countries. Studies of rural
industrialisation examine rural firms’ forward linkages to the market,
either through subcontracting systems, putting-out systems or direct sales
(Mizuno 1996; Ono 1998; Hayami et al. 1998). Other studies analyse the
dynamism of horizontal linkages or the division of labour among small
firms (Kawakami 1998). Another stream of studies focuses on clusters. A
cluster is defined here as a spatial concentration of small firms in the
same industry (Schmitz 1995; Becattini 1990), which has the potential to
evolve into an ‘industrial district’ (Marshall 1920) on the Italian model,
characterised by collective efficiency, flexible specialisation, joint action
by firms, self-help institutions and common value systems (Becattini
1990). There is increasing agreement that clustering helps small firms to
overcome growth constraints and to compete in distant markets (Shmitz
and Nadvi 1999).2 In the Indonesian context, while rural cottage industry
and small and medium enterprise (SME) issues have long attracted
research interest, the number of fieldwork-based studies focusing on
linkages formed by small rural firms or clusters is still limited.3
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
139
In light of the linkage studies reviewed above, this paper examines
the forward linkages small firms have formed, by focusing on a rural
cluster in Indonesia, and then analyses the effects of linkages in promoting
the development of small rural firms. The paper first provides an
overview of the rural cluster as a setting for the analysis. It then examines
the structure, the nature and the functions of transaction linkages formed
by firms in the cluster. The third section analyses the effectiveness of
assistance embedded in the linkages when compared with external
assistance, and assesses the extent to which collective efficiency is an
effect of clustering.
CEPER, A METAL-CASTING CLUSTER IN CENTRAL JAVA
Ceper is known as ‘a village of foundries’. It is a rural cluster of more
than 340 small and medium-scale home foundries, located about halfway
between Yogyakarta and Solo in Central Java, at the eastern edge of the
subdistrict of Ceper in Klaten district.
The metal-casting industry in Ceper began centuries ago with
traditional agricultural equipment making. A local legend tells that a
pioneer of the industry was a Bantenese (from the West Javanese north
coastal town of Banten) who settled in Ceper in the period of the Mataram
kingdom (1613–45) and introduced the making of iron ploughshares (mata
bajak) for cultivation by buffaloes (Mihira 1998). In the Dutch East Indies
period, the industry was stimulated by the development of sugarcane
plantations, especially after a sugar factory was established at Ceper in
1918. Some foundries began to produce not only agricultural equipment
for sugarcane farmers but also components of sugar factory machines,
trains and freight cars. After independence, the Ministry of Industry
launched a casting–machining pilot project in 1958. This was the first
time machine tools had been introduced into Ceper. Since then, Ceper’s
products have ranged from processed components to assembled
machinery such as weaving machines for textile factories in the district.
A further wave of change came when the younger generation
aggressively entered this industry in the 1980s. Major progress during
the period from the mid 1980s to 1997 included: an increase in the number
of melting furnaces in Ceper from 100 to over 350; a remarkable rise in
the number of machine tools, from 30 to 1,600 units; upgrading of furnace
facilities by some foundries from the popular tungkik (a simple short
furnace, slanted when molten metal is poured) to the cupola (a taller
furnace with a higher temperature, above 1,450oC) and further to electric
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Yuri Sato
140
TABLE 1 The Casting Industry in Ceper, 1997
Number of establishments (units)
Large (80–250)
Medium (20–79)
Small (1–19)
Total workforce (persons)
Total production (tons/year)
Total sales (Rp million)
Production facilities (units)
Melting furnaces
Tungkik furnaces
Cupola furnaces
Electric furnaces
Machine tools
Grind stone machines
Lathes
Drilling machines
340–50
10
± 120
± 210
± 4,100
35,500
77,800
364
350
10
4
± 1,600
± 600
± 350
± 350
Source: Author’s interviews at the Batur Jaya industrial cooperative, and author’s
estimation from field survey samples.
(high-frequency induction) furnaces in a few cases.4 Progress in this
period was strongly supported by favourable domestic market conditions.
Table 1 provides an overview of the casting industry in Ceper in 1997,
when production was at its peak, just before the economic crisis. Ceper
produces 35,500 tons of casting products, accounting for about 30% of
Indonesia’s total annual casting production. The 340 to 350 foundries
can be roughly divided into three layers. The first layer consists of about
10 large foundries with integrated machining and assembling processes,
sometimes contracting out certain production processes to lower-layer
foundries in the cluster. The second layer is composed of medium-sized
foundries with some machine tools, and absorbs 70% of the workforce
engaged in the Ceper casting industry. The third layer is small home
foundries specialising in casting, which account for 60% of the
establishments in the cluster. Thus, a correlation is observed between
firm size and the degree of integration of the production process.
Tables 2–4 summarise features of the sample firms under study (see
appendix for further details of individual firms).5 While the sample
includes only 5% of establishments, in terms of the workforce and
production volume it covers one-sixth of the total.6 The majority of the
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Linkage Formation by Small Firms: The Case of a Rural Cluster
141
TABLE 2 Size Distribution and Degree of Process Integration of
Sample Firms in Cepera
No. of Employees
C
C+M
C+M+A
Total
1–4
5–19
20–49
50–99
100–
Total
0
2
0
0
0
2
0
1
5
1
0
7
0
0
4
2
1
7
0
3
9
3
1
16
a
C: casting; M: machining; A: assembling
Source: Author’s field survey.
TABLE 3 Period of Commencement of Foundry Business by Size of Sample Firm
No. of
Employees
5–19
20–49
50–99
100–
Total
–1950s
1960s
1970s
1980s
1990s
Total
0
3
1
0
4
1
1
1
1
4
1
0
1
0
2
0
5
0
0
5
1
0
0
0
1
3
9
3
1
16
Source: As for table 2.
sample are medium-sized firms with a workforce of around 40; the large
end (a firm with 150 workers, the second largest in Ceper) and the small
end (a firm with around 10 workers) are also represented (table 2). The
correlation between size and degree of process integration is clearly
observed in table 2. However, there is also a preference for integration at
the medium level, in firms of less than 50 workers.
The majority of firms in the sample started business in the 1970s or
earlier (table 3). Most of the 10 successor–owners are in this category.
Since all firms with more than 50 workers set up their foundry businesses
before the 1980s, and all those that started their businesses after the 1980s
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Yuri Sato
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TABLE 4 Background of Present Owners of Sample Firms
Professional Career
School Career and Specialty
Succession (child of owner)a
Related manufacturing
Wage worker
No answer
10
2
1
2
Totalb
15
Graduate school
Islamic
University/Academy
Islamic
Technology
Senior high school
General
Technology
Islamic (pesantren)
Junior high school
Elementary school
2
2
4
2
2
5
2
2
1
2
2
15
a
Includes three cases of succession by son-in-law.
One firm established by the government is not included.
b
Source: As for table 2.
have fewer than 50 workers, the natural law that ‘older is larger’ seems
to hold true, and this is consistent with the results of rural cluster studies
in other countries, including Japan (Itoh and Urata 1995). However, the
fact that some samples are ‘old but still small’ indicates that there are
some impediments to their expansion.
The data show that almost all owners have a professional background
in the metal-casting industry (table 4). What is peculiar in Ceper is the
Islamic orientation of their educational background. Of the six owners
with higher education, four chose Islam and two chose technology as
their educational specialty. Since one of the latter is an ‘immigrant’ from
Solo, there is only one Ceper native with a degree in engineering in the
sample of 15. Most respondents acknowledged their Islamic orientation;
some were educated in pesantren (Islamic junior and senior boarding high
schools), and some are engaged in the activities of Nahdlatul Ulama,
Indonesia’s largest Islamic organisation, suggesting that a common social
value system exists in this cluster.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
143
LINKAGES DEVELOPED BY CEPER’S FIRMS
The primary focus of this study is the linkages that Ceper’s firms have
developed.7 Most foundries in Ceper manufacture their products on the
basis of orders. Thus our first question is who provides the order: is the
order provider an assembler, a distributor, or an end user? Do foundries
supply semi-processed goods or final goods? Is the relationship with the
order provider continuous or just ‘on the spot’? Is the order repetitive
(‘routine’) or temporary (a ‘job order’)? Is the order provider located inside
or outside Ceper?
Four Types of Forward Linkage
First, let me present a simple typology of linkages. Linkages are here
defined to encompass not only the production process but also the
distribution process, until the goods reach the hands of end users
(consumers). In the context of this study, there are four types of forward
linkages viewed from the perspective of the foundries.
• Type A (Assembler). As a subcontractor, a foundry receives an order
from an assembler. The products supplied by the foundry are semiprocessed casting components, to be reprocessed and/or
assembled by the assembler.
• Type W (Wholesaler). A foundry receives an order from a
wholesaler. Usually, the products are final goods or components
for replacement (type W1). But wholesalers are sometimes
equipped with machine tools and add some simple machining or
assembling processes to the supplied products, particularly if the
foundry has no machine tools. In these cases, the products
supplied by the foundry are semi-processed goods (type W2).
• Type R (Retailer). A foundry receives an order from a retailer. The
products are final goods.
• Type U (User). A foundry receives an order directly from an end
user, generally a factory that needs new production equipment
or components for replacement. Direct orders from public works
projects are also included in this type.
Of the four types, type A and type W2 are transactions involving semiprocessed goods, as part of a vertical division of labour in the production
process of the metal and machine manufacturing industry. Type W1, type
R and type U are transactions involving final goods, and constitute
forward marketing linkages, either through traders or through direct sales
to consumers.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Yuri Sato
144
TABLE 5 Features of Linkages of Sample Firms
Sample
Firm
(in order
of size)
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Type of Linkagea
A
W
R
(number of customers)
1
–
1
–
–
10
–
–
–
1
1
1
4
–
1
5
–
3
–
6
–
–
–
–
–
2
2
1
–
2
2
–
–
–
5
•
–
•
–
•
10
1
•
•
•
•
•
•
U
–
–
–
–
12
–
3
1
•
3
–
2
–
1
–
–
Share of
Continuity Location
Largest
of
Inside/
Customer Relationshipb Outside
(%)
of
Cluster
100
60
15
40
40
30
40
70
20
50
40
30
35
90
40
45
▲
❍
❍
❍
❍
●
❍
n.a.
n.a.
❍
▲
●
❍
❍
▲
❍
in
out
out
out
out
out
out
out
out
out
out
out
out
out
out
out
a
A: with assembler; W: with wholesaler; R: with retailer, U: with end user.
: includes largest customer, •: unspecified plural, –: none.
b
Continuity of relationship: ❍: from the start of the business; ●: before the start of
the business; ▲: after the start of the business.
Source: As for table 2.
The Plural, Continuous and Interregional Nature
of the Transaction Linkages
Table 5 shows the types and characteristics of transactions of the sampled
firms. The major findings are as follows.
First, almost all the firms have linkages with plural order providers,
and many of them cover plural types of order providers. High dependence
on a single order provider is not common. The plurality of linkages is a
major reason why we cannot divide firms clearly into two types, i.e. semi-
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Linkage Formation by Small Firms: The Case of a Rural Cluster
145
processed goods makers linked to assemblers, and final goods makers
selling to wholesalers, retailers or end users. A firm may supply the same
kinds of components to assemblers for new assembly and to retailers for
replacement; or, more often, a firm may supply components to assemblers
and assembled products to end users. Plurality of linkages is the dominant
propensity of these firms, partly because of their efforts to diversify risk,
and partly because of the ‘small-lot’ and unstable nature of orders. If we
examine the linkage types of the largest order providers (customers) of
the respective firms (indicated by
in table 5), we find that all the four
types are prevalent, with neither a prominent preference for a specific
type, nor a correlation of linkage type with firm size (as indicated by the
order of firms in the left column of the table).
Second, the relationship with the largest order provider tends to be
long term, regardless of its type. More than half the firms have maintained
the linkages since the start of their business, sometimes in the owner’s
predecessor’s time. These continuous relationships can be regarded as a
means of lowering transaction costs, including the costs of knowing each
other, making a transaction contract (either oral or written), negotiating
and bargaining. While in urban areas like Jakarta and Surabaya ‘linkages
by spin-out’—where a former employee sets up a small firm to supply to
his former employer—increased rapidly after the 1980s, such cases are
rare in this rural cluster.
Third, the largest order provider of the firm is located outside Ceper
except in one case. There is a clear preference for transactions with
customers outside Ceper. As a result, intra-cluster inter-firm linkages—
vertical subcontracting and horizontal division of labour—seem to be
less developed in Ceper than in other reported clusters (Smyth 1992),
despite the divisibility of the production process in the machinery
industry.8
Type A: Subcontracting Linkages with Assemblers
Let us focus on type A linkages first. In the sample, we can observe three
patterns of subcontracting linkages. The first is an intra-cluster linkage
in which lower-layer firms receive subcontracted work from upper-layer
firms in Ceper. Firm A, the smallest firm in the sample, is a case of such
an intra-cluster subcontractor (the typical initial status of most of the
specialised home foundries in the cluster). Firm H also had this status,
but several years ago it succeeded in becoming ‘independent’ from an
intra-cluster assembler, and began to supply products directly to public
works projects by integrating the machining and assembling processes.
In a second pattern, medium-layer foundries in Ceper (e.g. firm F)
receive subcontracts from medium-scale assemblers of machinery making
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
146
Yuri Sato
local brands, located outside Ceper. The third pattern is that upper-layer
foundries (e.g. firms M and P) get subcontracts from large-scale
assemblers of machinery making popular brands, including foreign joint
ventures located in metropolitan Jabotabek (greater Jakarta) and other
large cities such as Surabaya. The last pattern demonstrates that
subcontracting linkages with modern manufacturing have already
reached the top layer of this cluster. We will look at the third pattern in
more detail.
Firm M and Firm P: Typical Type A Linkages. These two firms are among
the leading firms in Ceper, and are known as subcontractors to first-rank
brand machinery manufacturers. Their major products are such casting
components as pulleys for Yammer (Japan) handtractors, pumps for
Bukaka (Indonesia) and Rafkin (USA) oil boring facilities, and
components for UT (Indonesia) and Komatsu (Japan) forklifts. The
assemblers are located in Surabaya, Jakarta and Batam. Since the start of
their business, firm M has had transactions with Yammer and firm P
with Bukaka. Why do these firms give priority to subcontracting rather
than to other types of transactions?
The first reason is low business risk. The manager of firm M points
out that the continuity of transactions in terms of buyers and products
reduces total business risk in the long run, despite the low margin per
order. According to him, the average profit margin in subcontracting
orders is 10–17.5%, while it is 30–60% in the case of job orders because of
the risk premium. Even such high margins as the latter, however, are
often offset by costs in making moulds for only temporary use, and by
losses from unexpected discontinuation of the transaction. In terms of
risk management, the ideal pattern with the lowest risk, he says, is routine
subcontracting linkages with three to five assemblers.
The second advantage of subcontracting is technological progress.
The general manager of firm P says, ‘it is only through repetitive
transactions with specific assemblers that we can recognise our own
progress’. Through a continuous relationship, a firm can make a plan to
improve its technological capabilities. Firm P is a pioneer in Ceper in
adopting the ‘Kaizen’ system for enhancing quality control and efficiency,
including reduction in the number of processes, a three-step selection of
raw materials, a product inspection system, and a penalty system for
operators in case of rejects. Firm M is also intent on raising the accuracy
of casting by mechanising the moulding process. The attempts of these
firms at technological improvement are stimulated by transactions with
assemblers, especially through an apprenticeship at the assembly plant
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Linkage Formation by Small Firms: The Case of a Rural Cluster
147
(of a firm P employee), and a dispatch of engineers by the assemblers (to
firm M).
In the backgrounds of their founder–owners, the two firms have a
common feature. Neither owner is a native of Ceper: both are traders
from other towns in Central Java, each of whom has married the daughter
of a Ceper foundry owner and settled in Ceper. There may be some link
between their outsider status and their outstanding enterprising spirit in
relation to technological progress.
Type W: Putting-Out Linkages with Wholesalers
The firms that have plural types of linkages provide us with a comparative
view.
Firm O: Type A vs Type W. The case of firm O is helpful in allowing us
to compare type A and type W linkages, because this firm has a
subcontracting tie with a major local assembler of agricultural machinery
in Surabaya, and concurrently has a continuous relationship with several
wholesalers in Surabaya and Jakarta.
The founder–owner of firm O is regarded as a reliable subcontractor
by the assembler, but he says: ‘For us, subcontracting is clearly important
as a routine matter. However, if we once become dependent on it, we
become blind.’ His point is that an entrepreneur should be close to the
market. That is why he attaches greater importance to linkages with
wholesalers. It is the wholesalers that provide him with live market
information and orders reflecting current market trends. They are also
familiar with firm O’s production capabilities. Further, the wholesalers
pay the owner two weeks after delivery, whereas it takes one to two
months for the assembler to pay him. The owner’s relationship with two
wholesalers has lasted since his independence from his father-in-law’s
foundry in 1982, while the relationship with the assembler dates from
1987.
In essence, given the low costs of production in this rural cluster, the
owner of firm O considers it more strategic for Ceper’s foundries to
manufacture products of lower quality but competitive price, making
use of linkages with wholesalers, rather than to try to make higher-quality
products under well known brand names through subcontracting
linkages with large assemblers.
Firm J: Type W vs Other Types. Firm J provides us with even wider
scope for comparison, since it covers all four types of transaction. The
firm has a business tie of type A with three medium-scale assemblers for
ship and electric line components (accounting for 10% of total sales), of
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Yuri Sato
type W with two wholesalers for items such as manhole covers (35% of
sales), of type R with one retailer for diesel engine pulleys and water
pumps (50% of sales), and of type U with one pharmaceutical factory for
machinery spare parts (5% of sales as of 1998).
Of the four types of linkages, the founder–owner of firm J considers
type W the most advantageous. Why? First, wholesalers function as
matchmakers between demand trends in the market and the capabilities
of each supplier. The owner of firm J says: ‘The wholesalers are very
selective. But once they judge that the order fits me, it means I’ve got an
assured market with little risk of returns or rejects.’ With their capacity
for collecting and analysing market information, wholesalers not only
know the market well but also bear the risk of uncertainty in marketing
on behalf of firm J.
The second advantage of type W for firm J is that it lowers the firm’s
financial burden. Besides lowering financial costs because of shorter-term
sales payments, the wholesalers often provide working capital by means
of advance payments. Firm J provides a comparison of the payment terms
of the four types of linkage. In the case of the assemblers and the factory,
it is more than one month after delivery before the firm receives sales
payments, owing to the buyers’ bureaucratic procedures. In the case of
the retailer, payment also occurs one month on average after the products
are sold; if unsold, the products are returned to him after a month with
no payment. On the other hand, the wholesalers pay 40% of the order
value in advance so that firm J can procure raw materials with it. The
rest is paid to the firm just one week after delivery. This case illustrates
the advantages, in terms of financial costs and risks, of the trade credit
provided by wholesalers to supplier firms.
Firm J has paid little attention to improving product quality, unlike
firms M and P. This is not due to the owner’s lack of technological
awareness (he is one of the two engineering graduates in the sample),
but to cost calculations. According to him, it is costly to improve quality
by upgrading facilities and controlling material composition. He would
not do this unless order providers bore these costs. In the linkage with
wholesalers, he has never faced serious complaints about quality, because
the wholesalers lack the knowledge to pay precise attention to
technological matters.
Firm B and Firm D: Typical Type W. Firm B and firm D are examples of
firms that concentrate on transactions with wholesalers. Both are cases
of type W2, where the wholesalers undertake some manufacturing
processes.
Since the start of the foundry in 1986, firm D has had linkages with a
wholesaler-cum-repairshop located on the outskirts of Surabaya. The
wholesaler usually provides funds equivalent to three or four times the
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Linkage Formation by Small Firms: The Case of a Rural Cluster
149
order value (Rp 20–25 million in total) for the firm to procure raw
materials. Firm D’s products become the collateral for the funds advanced
by the wholesaler, who deducts the advanced amount in instalments from
subsequent sales payments to firm D. When the wholesaler happens to
obtain steel scraps, he buys them and sends them as raw materials in
kind to firm D. It is owing to this system that the owner of firm D has
never felt the need for other external finance. When the owner moved
into machining from being a specialised home foundry in 1992, the
wholesaler helped him with initial guidance on how to select and use
machine tools and how to make jigs.
Firm B has linkages with three wholesalers-cum-repairshops-cumassemblers located in Solo. One of them has a wide marketing network
spreading outside Java. The owner of firm B became acquainted with
these wholesalers when he worked at a foundry firm as a salesman. Like
his father, he had been engaged in the foundry business as a wage worker
since his elementary school days (he did not graduate). Despite his long
working career, he had only a tiny landholding and no other savings or
inheritance when he wanted to become independent. It was one of the
wholesalers who lent him funds equivalent to twice the value of his order
(Rp 10 million in total), with which he could afford to buy a tungkik furnace
and raw materials. This case shows, first, that a career as a wage worker
does not produce a surplus for initial investment and, secondly, that
advances provided by wholesalers can cover set-up costs and investment
capital in some cases.
The Wholesaler as ‘Putter-Out’. We have briefly surveyed examples of
linkages with wholesalers. Usually called grosir, wholesalers collect and
allocate orders to foundries. Although they are sometimes equipped with
manufacturing facilities, by nature they are not manufacturers but
intermediaries and coordinators of orders. Most of the wholesalers in
the study are medium or small scale, and are located not only in big
cities but also in smaller cities like Yogyakarta and Solo.
One of the peculiarities of Ceper is that there are no such wholesalers
in the cluster to organise small foundries, supply them with raw materials,
collect their products and sell them to outside traders in consumer
markets. This type of wholesaler, called an ‘intra-cluster putter-out’
(sanchi-don’ya in Japanese), played a decisive role in the history of clusters
in the early stages of industrial development in Europe and Japan. In
contrast with this system, foundries in Ceper individually form linkages
with different wholesalers outside the cluster. Despite these differences,
the essential role of the wholesalers is similar, that is, to intermediate
orders by bearing market risk and financial costs. This is precisely the
role of a ‘putter-out’. Instead of supplying raw materials in kind,
wholesalers here adopt an ‘extended’ advance payment, with which they
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
150
Yuri Sato
finance the firms’ working capital and sometimes even their investment
capital, including set-up costs. In this respect, such linkages with
wholesalers can be considered a variation of the putting-out system.
The Coexistence of Two Systems—Dual Structure
or Evolutionary Process?
Type A is a subcontracting system and type W is a variation of the puttingout system. The study has revealed that both subcontracting linkages
and putting-out linkages permeate this rural cluster. Subcontracting
linkages with modern industry, with foreign joint venture assemblers of
leading brands of machinery at the apex, have already reached the top
layer of the cluster. Meanwhile, the foundries in every layer have formed
linkages with wholesalers outside the cluster who play the role of puttersout. In Japan’s historical experience, sophisticated subcontracting systems
in the modern machinery industry developed in the postwar period,
whereas the putting-out system prospered in the initial stages of
development of the industry in the 1930s. Here in Ceper, the two systems
coexist contemporaneously.
Should this coexistence be regarded as reflecting a dual structure or
an evolutionary process? Table 6 may offer insight into this question. In
the table, the sample firms are rearranged in order of firm age, measured
by the period from the start of the foundry business. It becomes obvious
that the firms whose largest customers are assemblers are relatively old
firms and those whose largest customers are wholesalers are younger
firms. This suggests that linkages with wholesalers have significance for
younger firms at the stage of initial accumulation. Are these firms evolving
towards linkages to assemblers? What is interesting is that none of the
firms sees evolution from type W to type A linkages as desirable (see the
middle column of table 6). Instead, some firms, even the old ones, show
an inclination towards independence from subcontracting linkages and
towards enhancing internal integration. Thus the evolutionary path the
sample firms are most inclined to follow seems to begin with intra-cluster
subcontracting (Ain) or sales to retailers (R), then to make use of linkages
with wholesalers (W2) and later to integrate processes in order to supply
assembled final products under the linkages with wholesalers (W1) or
end users (U) [Ain/R➔W2➔W1/U]. The path in which linkages are
established with assemblers of major brands is still a minor stream, though
it should be seen as a sign of change in the rural cluster. The coexistence
of the two systems is, for the present, seen as reflecting not an evolutionary
process but a dual structure in which the modern urban and the traditional
rural manufacturing systems coexist.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
151
TABLE 6 Types of Linkages, Firm’s Inclination to Evolve, and Firm Age
Type of Linkagea
Sample
Firm
(in order
of firm
age)
Inclination
Year of
to Evolveb
A
W
R
(number of customers)
U
Starting Establish- Starting
Foundry mentc RelationBusiness
ship
L
1
1
•
2
U➔n.a.
1940s
1982
●
F
10
–
•
–
A➔R
1950s
1978
●
G
–
–
–
3
U➔
1950s
1958
❍
N
–
2
•
1
U➔
1950s
1994
❍
C
1
–
5
–
R➔
1960s
1981
❍
I
–
–
10
•
R➔
1960s
1980
n.a.
M
4
–
•
–
A➔
1960s
1986
❍
P
5
–
•
–
A➔
1960s
1980
❍
A
1
–
–
–
Ain➔
1970s
1988
▲
O
1
2
•
–
W2➔W1
1970s
1979
▲
D
–
6
•
–
W➔
1980s
1986
❍
E
–
–
–
12
U➔
1980s
1985
❍
H
–
–
•
1
Ain➔U
1980s
1987
n.a.
J
1
2
1
3
R➔W
1980s
1986
❍
K
1
2
•
–
W➔
1980s
1991
▲
B
–
3
–
–
W➔
1990s
1990
❍
a
See table 5, note a; ‘Ain’ indicates a linkage with an assembler within the cluster.
An arrow shows a change of linkage type in the past or an inclination to change
in the future. An arrow with nothing to the right of it indicates no change and no
specific inclination.
c
‘Year of Establishment’ means the year in which a business entity was formed,
either as an unlimited or a limited company.
b
Source: As for table 2.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Yuri Sato
152
TABLE 7 Benefits of Linkages for Foundries
Benefit
Type
A
W
R
U
Type of
Order Provider
Assembler
Wholesaler
Retailer
User (factory)
No
Stock Risk
Provision
of Market
Information
Provision
of Working
Capital
Technological
Stimulus
✕
O
O
✕
✕
O
✕
✕
O
✕
✕
✕
O
O
✕
O
Source: As for table 2.
THE EFFECTS OF LINKAGES IN PROMOTING THE
DEVELOPMENT OF SMALL FIRMS
Assistance Embedded in the Linkages
The second step of this study is to analyse the effects linkages have on
the promotion of small firms’ development. We will assess the relative
effectiveness of assistance embedded in the inter-firm transaction linkages
compared with that of external assistance, including government
programs. The question asked of each firm is: whose assistance has been
most effective for its business?
Table 7 presents simplified results of the analysis in the previous
section in light of the benefits firms receive from linkages with each type
of order provider. As the table shows, order providers other than retailers
bear stock risk by accepting ordered products regardless of ex post market
circumstances; wholesalers and retailers who are sensitive to market
trends offer live market information to the producers; wholesalers often
provide working capital by paying in advance; and assemblers tend to
stimulate technological progress in subcontractors. In terms of the effects
in question, types A and W offer more benefits than types R and U.
Details of assistance offered in type A and type W linkages are
compared in table 8.9 In provision of technological assistance, assemblers
have the advantage over wholesalers. The assistance they give ranges
from general technical guidance, instruction in the use of machinery and
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
153
TABLE 8 Assistance Embedded in Inter-Firm Transactions
Assembler (5)a
Wholesaler (5)a
Technological Assistance
Guidance
Instruction in machinery use/jig use
Providing machinery/tools
Quality control
Worker training/engineer dispatch
3
2
1
1
2
0
1
0
0
0
Financial Assistance
Capital participation
Investment loans
Advance payment
Machinery leasing
0
0
0
1
0
1
4
0
Other assistance
Providing raw materials
Information/guidance on market
1
0
1
2
a
Figures in parentheses indicate the number of sample firms covered in the table.
The numbers do not coincide with those in table 5, because table 8 includes cases
where an assembler or wholesaler is not the firm’s largest order provider.
Source: As for table 2.
jigs, and training of workers, to the dispatch of engineers to the firm.
There is, however, a wide variation among assemblers in the degree of
assistance provided. At one extreme is the case of the top-layer firm P,
which has received almost every kind of assistance from its large
assemblers in Jakarta; at the other is firm F, which has never received any
technological assistance from its assemblers, located mainly in small cities
like Solo and Malang. Even at the level of top-layer firms, the assistance
is not provided regularly, but only when a problem or a specific need
arises. Regular inspection tours and vendor control systems, which some
major foreign-brand automobile and electronic assemblers in Jakarta are
instituting, have not yet infiltrated into this rural cluster.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
154
Yuri Sato
As for financial assistance, capital participation is not usual in either
linkage type. The advance payment system adopted by wholesalers is a
significant exception, and no assembler in the sample adopts this system
regularly. As described earlier, some wholesalers pay in advance, say,
40% of the order value, to allow supplier firms to overcome a bottleneck
in working capital. Flexible application of this system enables some firms
even to invest in production facilities. Repayment can be made in
instalments or in the form of products. This system is crucial, especially
for lower-layer firms like firm D and for new entrants like firm B, which
have little access to other external sources of finance. A comparison with
other external financing is made below.
Access to market information is another benefit of linkages with
wholesalers. Some firms place a high value on the wholesalers’ capacity
to analyse product demand trends despite often having limited
technological knowledge of how to make the products. Assemblers, on
the other hand, are not rated highly as transmitters of market information.
This is related to the fact that, in contrast with Japan’s subcontracting
system, it is rare that assemblers and subcontractors jointly engage in
product development based on market analysis.
Comparison with External Assistance
The sample firms were asked to evaluate the effectiveness of assistance
they have so far received, by source and area of assistance, on a scale of 1
to 5. The sources of assistance are: (1) order providers; (2) the government,
e.g. the Ministry of Industry and Commerce, and state-owned
corporations; (3) private institutions, e.g. private companies (other than
order providers), industrial associations, and the Astra Dharma Bhakti
foundation, which has a branch office in Ceper to render business
assistance; (4) foreign institutions, e.g. United Nations and German and
Japanese government organisations, which carry out directly or through
the Ministry of Industry and Commerce such programs as dispatch of
foreign experts, seminars and training abroad; (5) universities and
research institutes; and (6) cooperatives, the industrial cooperative in
Ceper in particular.
The results are summarised in table 9. On the whole, they tell us that
a relatively high value (2.0 or above) was put on technological assistance,
especially from private institutions (private institutions > cooperatives >
universities > government > order providers), but that the evaluation of
financial and managerial assistance from all sources was by and large
low (2.0 or below).
The table also shows clear differences in the evaluations by firm size
and by type of linkage. The firms that place a high value on the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
155
TABLE 9 Evaluation on Effectiveness of Assistance by Sourcea
Area of
Assistance
Firm Sizeb
and
Type of
Order
Transaction Provider
Governmentc
Private
Institution
Foreign
Institution
1.9
2.0
3.1
1.5
2.1
2.3
1.7
1.4
3.0
1.0
2.6
1.5
2.3
3.2
3.5
1.0
1.7
1.5
1.7
2.6
1.5
1.7
2.8
1.5
Type A
2.6
Type W
1.4
Type U+R 1.7
1.8
1.8
2.3
4.2
3.8
1.7
1.0
1.4
2.0
2.2
1.8
2.3
2.6
2.2
2.0
Total
1.9
1.3
1.4
1.0
1.1
1.1
5–19
20–49
50–150
2.3
1.9
1.5
2.3
1.0
1.0
1.0
1.7
1.0
1.0
1.0
1.0
1.0
1.2
1.0
1.0
1.2
1.0
Type A
1.8
Type W
2.6
Type U+R 1.3
1.4
1.0
1.3
1.4
1.8
1.0
1.0
1.0
1.0
1.0
1.4
1.0
1.4
1.0
1.0
Total
1.0
1.1
2.0
1.1
1.1
1.4
5–19
20–49
50-150
1.0
1.0
1.0
1.7
1.0
1.0
1.0
1.9
3.0
1.0
1.0
1.5
1.0
1.2
1.0
1.0
1.4
1.5
Type A
1.0
Type W
1.0
Type U+R 1.0
1.0
1.0
1.3
3.0
1.8
1.3
1.4
1.0
1.0
1.0
1.4
1.0
1.8
1.4
1.0
Technological Total
assistance
5–19
20–49
50–150
Financial
assistance
Managerial
assistance
Source of Assistance
a
University/ CoResearch operaInstitute
tive
Effectiveness of assistance is measured on a scale of 1 to 5 ; 1 = not effective; 3 =
moderately effective; 5 = highly effective. Effectiveness was evaluated by each
firm and the responses converted to a value by the author.
b
The size of the firm is measured by the number of employees.
c
Includes state-owned corporations.
Source: As for table 2.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
156
Yuri Sato
technological assistance provided by private institutions are middle and
upper-layer firms and those with type A and type W linkages. Upperlayer firms and those with type A linkages also give relatively high points
to technological assistance by order providers. This same segment also
evaluates managerial assistance by private institutions as moderately
effective. These results indicate that the upper-layer firms, especially those
who have subcontracting linkages with assemblers, actively absorb
technological and managerial knowledge offered by private institutions,
the Astra Foundation in particular. Although daily transactions with
assemblers stimulate these firms to improve their technological
capabilities, the firms themselves regard the assistance of the Astra
Foundation as more effective than that of assemblers. This Foundation
has frequently given practical guidance on moulding, casting, drawing
and ferro specifications at its branch office in the centre of Ceper,10 and
has also accepted apprentices into the machinery companies under the
Astra group, with the intention of nurturing the firms to become qualified
subcontractors to the group in the future. The results show that businessoriented schemes of this kind by private institutions have infiltrated this
rural area, bringing positive reactions from some firms.
In the financial sphere, however, assistance by the Foundation is less
important. Relatively high points for financial assistance are given to order
providers by the lower-layer firms and firms with type W linkages. This
indicates that trade credits rendered by wholesalers are still much more
important than other forms of external financial assistance, particularly
for small and cottage-scale firms.
Low Evaluation of Government and Foreign Assistance
Government and foreign assistance received a low evaluation compared
with private institutions, order providers and cooperatives (table 9). In
respect of foreign assistance, this may be evidence that it is difficult for
assistance schemes of foreign institutions to reach these layers of firms in
rural clusters.
In contrast, most of the firms under study are aware of and have
experienced assistance rendered by the government since the 1980s.
However, a number of owners and managers made rather severe
comments on the effectiveness of guidance organised by the various
ministries. The first of these was that it is inappropriate to conditions in
their production sites. One of the owners described government guidance
as ‘a wind from heaven’ that only raises people’s expectations. ‘It makes
no sense unless it is applicable to our conditions’, i.e. simple facilities,
low-quality raw materials, and workers with limited skills. Another
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Linkage Formation by Small Firms: The Case of a Rural Cluster
157
criticism was directed at the bureaucratic character of assistance delivery.
A manager pointed out that there was a rush of guidance at the end of
year, as if the government’s aim was to achieve a certain target of program
execution. He claimed that neither firms’ needs nor their time schedules
were considered and coordinated by the relevent ministries. The ‘foster
father (bapak-angkat) system’, promoted by the government in the mid
1980s to foster linkages between large and small firms, was considered
by some firms as no more than government propaganda, because there
was no substantial effect in terms of linkage development in this cluster.
As these criticisms suggest, this rural cluster had been identified as one
of the target groups of the government’s small and medium enterprise
(SME) development policy, but the programs were less than responsive
to the recipients’ needs.
Given these observed weaknesses of government assistance, one firm
owner asserted that ‘there is no way for the government to assist us
directly’. The government, in his view, has only two roles: to provide
information needed by firms and to facilitate the establishment,
maintenance and expansion of firms’ businesses. It is worth listening
attentively to these living voices of rural cluster firm owners.
Financial Costs and Accessibility
Apart from studying the firms’ own views, we can assess the effectiveness
of financial facilities rendered to firms by looking at costs and accessibility.
Table 10 shows the financial sources the sample firms have actually
accessed. This pictur