Index of /enm/images/dokumen
ENTREPRENEURSHIP DEVELOPMENT IN INDONESIA
Tulus Tambunan
Kadin Indonesia-Jetro, 2006
Abstract
Recently, entrepreneurship development has become a current important issue related to economic development in
Indonesia. This paper tries to present the current state of the art of entrepreneurship development in Indonesia by
examining the current developments of small and medium enterprises (SMEs) in the country. The paper comes with a
number of interesting facts. First, SMEs are of overwhelming importance in Indonesia, as they accounted for more
than 90% of all firms outside the agricultural sector, and thus the biggest source of employment. Second, the
representation of women entrepreneurs is low. Third, women entrepreneurs are less educated than their men
counterparts. Fourth, the main constraints faced by small entrepreneurs are lack of working capital and marketing
difficulties. Finally, the majority of existing studies suggests that the effectiveness of government programs to
support SME development programs is low. The paper concludes that in national efforts to develop high
competitive entrepreneurships, owners of small enterprises should be given the first priority as they have already
some experiences how to run a business or how to survive in competitive markets, and the emphasis should be to
promote modernization, capacity building and size upgrading.
Introduction
In the classical paradigm it is stated that development of economy depends on two main important factors (as explicitly
included in a general production function of Cobb Douglas), namely labor and capital (with advanced technology embodied).
Later, after looked at the miracle development in some Asian countries, the so-called the newly industrialized countries
(NICs), such as Chinese Taipei (Taiwan), Hong Kong -China and South Korea in the 1960s and 1970s and the widening gap
in development between developed/industrialized nations and less developed countries (LDCs), a new though emerged in the
1980s on the nature of economic development and factors determining it. In this new paradigm, it is stated that in addition to
the above two classical production factors, there is another also crucial factor, namely entrepreneurship. Nowadays,
development of entrepreneurship together with human skills improvement have become two crucial factors for a country to
become a world leader in all aspects of live, e.g. economy, trade, military, technology, etc. and for a sustainable economic
and social development.
Entrepreneurship development is also a current important issue related to economic development in Indonesia. It is
often said that the lack of entrepreneurship has been the main important cause of relatively low process of economic
development in the country as compared to other Asian countries such as Malaysia, Thailand, China, South Korea and
Singapore. Realizing this, training in entrepreneurship has become an important part of development government
supported programs for the development of small and medium enterprises (SMEs) in Indonesia.
The aim of this paper is to discuss the state of the art of entrepreneurship development in Indonesia by examining the
current developments of SMEs in the country. Developments of SMEs are used as an indicator of entrepreneurship
Kadin Indonesia-Jetro, 2006
1
www.kadin-indonesia.or.id
development since these enterprises provide an avenue for the testing and development of entrepreneurial ability.
Also, as stated by Timmons (1990),…… fundamentally, entrepreneurship is a human creative act. It involves finding
personal energy by initiating and building an enterprise or organization, rather than by just watching, analyzing, or
describing one. (page 5). This paper also discusses their main problems and the effectiveness of government programs to
support t-supported these enterprises.
Definitions of SMEs
In Indonesia, there are several definitions of SMEs, depending on which agency provides the definition. As this paper
uses data from the State Ministry of Cooperative and Small and Medium Enterprises (Menegkop & UKM), the
Department of Industry (MoI), and the Central Statistical Agency (BPS), so, only definitions of these three government
agencies are relevant for the paper. Menegkop & UKM promulgated the Law on Small Enterprises Number 9 of 1995,
which defines a small enterprise (SE) as a business unit with total initial assets of up to Rp 200 million (about US$ 20,000
at current exchange rate), not including land and buildings, or with an annual value of sales of a maximum of Rp 1 billion
(US$ 100,000), and a medium enterprise (ME) as a business unit with an annual value of sales of more than Rp 1 billion
but less than Rp 50 billion. Law does not define explicitly micro enterprises (MIEs). However, since MIEs are the
smallest size category of enterprises, Menegkop &n UKM data on SEs include MIEs. BPS, which regularly
conducted surveys of SMEs, uses the number of workers as the basis for determining the size of enterprise. In
its definition, MIEs, SEs and MEs are business units with, respectively, 1-4, 5-19, and 20-99 workers, and large
enterprises (LEs) are units with 100 or more workers. MoI defines enterprises by size in its sector also
according to number of workers as the BPS definition.
Indonesian Economic Development: A Brief Review
In the beginning of the New Order (NO) government in 1966 led by the former President Soeharto, the
average Indonesian earned only roughly US$50 a year; about 60% of adult Indonesian could not read or write;
and close to 65% of the country’s population lived in absolute poverty. Facing this condition, the NO
government launched five-year economic development plans, with the first plan started in 1969, and made
several crucial economic policies in the 1970s and 1980s, including liberalization in investment, capital
account, banking and external trade.
During that era, industry and agriculture were two most priority sectors. To support development of national
industry, the government adopted two subsequent strategies. Started first with an import-substitution strategy in
the 1970s up to early 1980s, focusing on labor-intensive industries such as textile and garments, footwear, wood
products, and food and beverages, followed latter by development of assembling industries of automotive. Then
the strategy gradually shifted to an export promotion strategy by reducing some import tariffs and export
restrictions, also focusing on labor-intensive industries. To support agriculture, the government adopted
Kadin Indonesia-Jetro, 2006
2
www.kadin-indonesia.or.id
modernization or intensification of agriculture, known as the ‘green revolution’, as the main strategy. The main
aim of this strategy was twofold: to boost agricultural productivity and thus to achieve the goal of rice selfsufficiency, and to increase real income per capita in rural areas, and thus to reduce rural poverty and hence
national poverty.
These strategies had generated a rapid and sustained economic growth in the 1980s up to 1997, just before
the Asian financial crisis occurred in 1997/98. The rapid and sustained growth has not only led the real income
per capita to increase, but also the poverty incidence (people living under current official poverty line as
percentage of total population) to fall substantially.
Before the crisis, because of its sustained high economic growth coupled with declining rates of poverty,
Indonesia was once one of the high performing East Asian economies that created the “East Asian economic
miracle.” Even among this group of economies including Hong Kong, Japan, Malaysia, the Republic of Korea,
Taiwan, Thailand and Singapore, the Indonesian economy was emerged as particularly impressive for its small
current account deficit and low amount of short-term debt. Indonesia was also different among oil-producing
countries for its strong development of agricultural and manufacturing sectors. During the 1980s and 1990s, the
country became a leading player in a wide variety of industries, from palm oil to apparel to electronics (USAID
& SENADA, 2006).
From mid 1997 up to 1998, the Indonesian economy came to an abrupt halt with the advent of the Asian
economic crisis (Figure 1). This crisis began with the collapse of the Thai baht and ultimately impacted several
other countries in the region including Indonesia, the Philippines and the Republic of Korea. From mid 1997
when the Indonesian currency, rupiah, started to depreciate, to mid 1998 the value of rupiah fell to more than
500%. Consequently, many companies, especially large-scale enterprises/conglomerates, which heavily
depended on imported materials and components and foreign loans stopped their production, and as a result, the
Indonesian economy grew at minus 13% in 1998.
In 1999 the country’s economy started to recover, and in recent years, Indonesia has reached a healthy
degree of macroeconomic stability; although in 2005 the growth rate was about 5.5%, which is lower than the
expected of 6.5%. The reduction in government fuel subsidies in October 2005 as a logical consequence of the
rapid increase of oil in the world market up to more than US$ 50 per barrel led to a fuel price increase of more
than 100%, sparking a huge spike in the inflation rate. Also because of this subsidy cut in fuel, it is expected
that the growth rate in 2006 will be less than 6%.
Since the first years of the NO era, Indonesian economy has been undergone a massive structural
transformation from an economy where the agricultural sector played a dominant role in the country’s GDP to
an economy where the sector’s contribution becomes much less important. In 1970, gross value added from
agriculture contributed about 45% to the formation of GDP, and during the 1990s its GDP contribution was
Kadin Indonesia-Jetro, 2006
3
www.kadin-indonesia.or.id
only around 16% to 20%, and declined to about 15.% in 2005. GDP contribution of industry, on the other hand,
increased from less than 20% in the 1970s to almost 30% in 2005. Industry also became among big sectors in
terms of output growth per year. In 2004, it grew at 6.4% or 4.6% in 2005 compared to 2.1% or 2.5% in
agriculture for the same periods, respectively (Table 1).
FIGURE 1. GDP PER CAPITA AND GDP GROWTH RATE IN INDONESIA: 1970-2002
Source: Statistical Year Book of Indonesia (SI), published annually by the Indonesian National Agency for Statistics (BPS)
Table 1. Growth rate of real GDP by sector in Indonesia, 2001-2006
Sector
Period
2001
2002
2003
2004
2005
1Q 2006
Agriculture, livestock, forestry & fisheries
Mining & quarrying
Manufacturing
Electricity, gas & water supply
Construction
Trade, hotel & restaurants
Transport & communication
Financial, rental & business services
Other services
3.1
0.3
3.3
7.9
4.6
4.4
8.1
6.6
3.2
3.2
1.0
5.3
8.9
5.5
3.9
8.4
6.4
3.8
4.3
-0.9
5.3
5.9
6.7
5.3
11.6
7.0
3.9
2.1
-4.9
6.4
4.2
6.9
5.8
14.0
7.9
5.4
2.5
1.6
4.6
6.5
7.3
8.6
13.0
7.1
5.2
3.9
7.0
2.0
5.2
7.2
4.2
11.0
5.1
4.6
Real GDP
3.8
4.4
4.9
4.9
5.6
4.6
Source: BPS
Also during the NO era the government gave a great attention on the development of SMEs, especially in
manufacturing industry. The government believed that SMEs can play an important role as the backbone of
Kadin Indonesia-Jetro, 2006
4
www.kadin-indonesia.or.id
development of national industry, especially as supporting industries for LEs through subcontracting or other
forms of production linkages. Within manufacturing industry, SMEs in food and beverages, footwear, textile
and garments, wood and its products, leather and its products, handicrafts, and metal products, and electronics
received enormous government’s supports, as it was believed that SMEs have specialization in these industries.
Development of SMEs in Indonesia
In Indonesia, SMEs have historically been the main player in domestic economic activities, especially as a large
provider of employment opportunities, and hence a generator of primary or secondary source of income for many
households. For low income or poor farm households in rural areas, SEs, i.e. units of less than 20 workers, in nonfarm activities are especially important. These enterprises have also been playing as an important engine for the
development of local economies and communities. However, as compared to many other APEC more developed
economies, Indonesian SMEs are not yet been proved to have contributed significantly their value added to the
country’s economy. Instead, they have been more important as the locus of most employment than of gross
domestic product (GDP) growth in Indonesia.
Already since the NO era, the government recognized the importance of having well developed SMEs as an
important element in creating a sophisticated economy, especially through their role in developing interindustry linkages, or as supporting industries producing components and parts for LEs either, via market
mechanisms or subcontracting systems or other forms of production linkages. In developed countries, it is the
role of SMEs to act as suppliers to industries producing final goods, therefore creating a permanent, vibrant and
inter-linked industrial base. Indonesia has suffered from the lack of a sophisticated domestic supplier network,
which would have allowed intermediate inputs, components, and parts to being produced locally instead of
being imported (Banerjee, 2002). 1
The SMEs have also been recognized to have another important role to play, namely as an important engine
for development and growth of exports of non-oil and gas, particularly in manufacture. This stems from evidence
showing that the most successful cases of SMEs development in East and Southeast Asian countries like South
Korea, Taiwan, Hong Kong, and Singapore, have directly related to trade and the adoption of export-oriented
strategies. The experiences of these countries indicate that SMEs can compete effectively in both domestic and
international.
Last, but not least, SMEs could also play a powerful role in energizing agriculture through the development
of high competitive agricultural-based (agro) industry. Agricultural-based production is a clear area where the
1
In the literature on the 1997 economic crisis in Southeast Asia, an extremely high level of the country’s import dependency, in particular LEs, is
often pointed as one important factor that has pushed Indonesia into the crisis. The high level of import dependency in manufacturing industry has
been the result of a combination of rapid development of domestic downstream industries producing final consumption goods, mainly through
assembling methods of production, on one hand, and, on the other hand, underdevelopment of domestic supporting industries during the new order
regime. Therefore, since the crisis, the Indonesian has been trying through various programs to develop domestic supporting, in which the SMEs can
take an important part in it.
Kadin Indonesia-Jetro, 2006
5
www.kadin-indonesia.or.id
country has enormous room for development, simply because Indonesia is a large agrarian economy owning a
huge variety of agricultural commodities.
Typically, SMEs in Indonesia account for more than 90% of all firms outside the agricultural sector in the
country, and thus the biggest source of employment, providing livelihood for over 90% of the country’s workforce,
especially women and the young. The majority of SMEs, and especially MIEs are scattered widely throughout the
rural area and therefore they may play an important role as a starting point for development of villagers' talents,
especially women, as entrepreneurs. MIEs are dominated by self-employment enterprises without hired/wage-paid
workers. They are the most traditional enterprises generally with low levels of productivity, poor quality products,
serving small, localized markets. There is little or no technological dynamism in this group. The majority of these
enterprises eke out a bare survival. Some of them may be economically viable over the long-term, but a large portion is
not. Especially with import liberalization, changing technology and the growing demand for higher quality modern
products, many MIEs face closure or very difficult upgrading. However, the existence or growth of this type of
enterprises can be seen as an early phase of entrepreneurship development.
According to official data from the Ministry of Cooperative and Small and Medium Enterprises (Menegkop & UKM),
SEs in 1997 accounted for more than 39.7 million units, or constituted about 99.8% of the total number of enterprises in
the country in that year, and increased to more than 40 million units in 2004. During the same period, the total number of
MEs reached between slightly more than 60 thousand units in 1997 to about 63 thousand units in 2004. On the contrary,
the total number of LEs on average per year was around two thousand units for the whole period (Table 2). So, generally
speaking, this table may indicate that every year new entrepreneurs have been born in the country. Unfortunately, there
are no data which can show whether transformation process or size upgrading has happened within SMEs, i.e. MIEs
become SEs, SEs become MEs, and MEs transformed into LEs. While, the transformation process of firms by size may
show a better picture about long-term entrepreneurship development.
Table 2. Total Units of Enterprises by Size Category: 1997-2004
Size Category
1997
1998
39,704,661
36,761,689
∑ SEs
60,449
51,889
∑ MEs
2,097
1,831
∑ LEs
Total
39,767,207
36,815,409
Source: Menegkop & UKM
1999
37,804,536
51,798
1,832
37,858,166
2000
38,985,072
55,061
1,946
39,042,079
2001
40,137,773
57,743
2,095
40,197,611
2003
42,475,756
59,580
2,169
42,537,505
2004
43,158,468
63,361
2,248
43,224,077
In the Asia-Pacific region, Indonesia is the biggest economy with respect to total number of SMEs. A 2003
report from the Asia-Pacific Economic Cooperation (APEC) and some official estimated data from a number of
member economies show that about 50% of total non-farm SMEs in the region were in Indonesia and China
(Table 3). If agriculture is included, certainly this portion will be much higher since these two countries are the
largest agrarian economies in the group.
Kadin Indonesia-Jetro, 2006
6
www.kadin-indonesia.or.id
Table 3: Numbers of non-agricultural SMEs in Selected Asia-Pacific Economies*
Country/Economy
Australia
Brunei Darussalam
Canada
Chile
China
Hong Kong, China
Indonesia
Japan
South Korea
Malaysia
Mexico
New Zealand
Peru
Philippines
Russian Federation
Singapore
Chinese Taipei
Thailand
USA
Viet Nam
1990
757,100
3,856
855,840
423,021
8,608,200
277,886
12,045,600
6,484,264
2,094,637
1,302,757
159,564
406,966
77,807
896,000
31,468
791,663
632,300
5,359,421
1,000
SME in non-agricultural sector**
1996
2002
895,500
1,111,900
4,085
5,000
879,335
925,000
445,299
500,000
7,253,406
8,000,000
287,904
292,000
16,416,020
17000,000
6,433,557
6,139,735
2,607,710
2,700,000
19,000
2,179,631
2,854,266
218,044
19,2000
453,667
460,000
99,767
817,976
886,500
850,000
47,001
54,000
991,881
1,050,000
350,000
5,691,430
6,303,593
200,000
SMEs as % of all enterprises in
the 1990s**
97
98
98
16
99
98
98
99
99
84
99
99
99
86
91
98
96
96
Total
40,640,280
45,790,737
49,824,470
Notes: * figures in the columns 2 - 4 include state owned companies in some cases (notably China);
** blanks indicate data are not available.
Source: APEC (2003) and other official estimated data from some individual member economies
Distribution by sector shows that SMEs are concentrated in agriculture (Table 4). They accounted for almost
60% of total SMEs. Trade, hotel and restaurant is the second largest sector for SMEs with around 21% and
slightly more than 22% of their total units during the period 2003-2004. The third important sector is
manufacturing industry with around 6.4% of total SMEs. They are involved mainly in simple traditional
manufacturing activities such as wood products, including furniture, textile, garments, leather products
including footwear, and food and beverages. Only a small portion of total SMEs are engaged in production of
machineries, production tools and automotive components. The latter is generally carried out through
subcontracting systems with several multinational car companies such as Toyota and Honda. This structure of
industry reflects the current technological capability of Indonesian SMEs, as they are not so strong yet as their
counterparts in other countries such as South Korea, Japan, and Taiwan in producing sophisticated technology
embodied products.
Table 4. Total Units of Enterprises by Size and Sector, 2003 and 2004
Sector
SMEs
2004
2003
Agriculture (1)
Mining (2)
Manufacture (3)
Electricity, gas & clean air supply (4)
Construction (5)
Trade, hotel & restaurant (6)
Transport & communication (7)
Finance, rent & service (8)
Services (9)
Kadin Indonesia-Jetro, 2006
LEs
2003
25,457,190
203,711
25,477,756
144,834
2,711,522
4,423
132,346
9,071,331
2,488,161
33,169
2,433,483
2,743,858
4,111
162,359
9,845,682
2,551,727
37,185
2,254,317
7
2004
58
72
710
39
157
434
146
292
261
59
51
719
36
192
471
150
328
242
www.kadin-indonesia.or.id
42,535,336
Total
43,221,829
2,169
2,248
Source: Menegkop & UKM.
In terms of GDP, official data from the Central Bureau of Statistics (BPS) show that, on average, during the
period 2000-2003, SME contributed more than 96% and almost 95% of total output in, respectively, trade, hotel
and restaurant, and agriculture. In total GDP, SMEs performed relatively better than their larger counter part as they
accounted for more than 50% of total GDP during that period (Table 5). Also SMEs’ output contribution to the
annual growth rate of total GDP was higher than that of LEs. On average, the GDP growth share of SMEs was
above 2%; whereas that of LEs was under 2%. Within SMEs, SEs appeared to be more important than MEs as their
GDP growth share was higher than that of the latter ones (Figure 2).
Table 5. Structure of GDP by size and sector: 2000-2003 (%)
Sector
1
2
3
4
5
6
7
8
9
GDP
GDP without oil & gas
Source: BPS
SE
85.74
6.73
15.14
0.52
43.88
75.60
36.69
16.80
35.59
ME
9.09
2.96
12.98
6.80
22.57
20.81
26.64
46.47
7.16
LE
5.17
90.30
71.89
92.68
33.55
3.59
36.67
36.73
57.25
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
40.55
46.22
15.22
17.19
44.24
36.60
100.0
100.0
Figure 2: Contribution to GDP Growth by Size Group of Enterprises, (%)
5
4
2.08
3
0.82
2
1
2.02
1.73
1.46
1.55
0.58
0.62
0.69
1.42
1.52
1.68
2001
2002
2003
LE
ME
SE
0
2000
Source: BPS.
The greater GDP contribution of SMEs does not mean, however, that productivity, either partial, for example,
labor productivity (defined as value added per worker), or total of all factors used (total factor productivity/TFP) in
these enterprises is higher than that in LEs. 2 It is mainly because their number of enterprises is huge, not because
2
Labor productivity rather than TFP is often used in analyzing productivity growth in SMEs, as the ratio is a useful indicator of a sort of progress,
since enterprises that cannot raise it will not be able to remain competitive as wages rise. The difference between TFP and labor productivity is that
the former measures the relative efficiency of SMEs and its advance over time, whereas the latter does not. Unfortunately, the TFP measure is more
difficult to operational due to problems in the measurement of fixed and human capital.
Kadin Indonesia-Jetro, 2006
8
www.kadin-indonesia.or.id
their greater productivity, as compared to LEs. BPS data on output, number of enterprises and workers employed
in manufacturing industry indicate that labor productivity increases with the size of a plant. As presented in
Table 6, the average value added-labor ratio in the MIEs and SEs combined is lower than that in the MEs and
LEs combined. The labor productivity in MIEs and SEs is so low that although the total number of their
establishments and their workers are much larger than those in MEs and LEs, their share in manufacturing total
output (or gross value added) is much smaller than that of the MEs and LEs.
Table 6: Labour Productivity (Q1) and Output Contribution (Q2) in Manufacturing Industry by Size of
Enterprises, 1999-2003
Size group
MEs + LEs
MIEs + SEs
1999
Q1
Q2 (%)
115.28
90.52
8.35
9.48
Q1
143.99
9.11
2000
Q2 (%)
91.65
8.35
2001
Q1
Q2 (%)
167.70
91.50
10.98
8.50
2002
Q1
Q2 (%)
166.31
89.94
12.36
10.06
Q1
196.26
13.55
2003
Q2 (%)
90.68
9.32
Source: BPS
The above evidence is not only the Indonesia problem, as the labor productivity gap between SMEs and LEs is
one of the largest observed in LDCs. 3 It also does not come as a surprise, given the fact that SMEs, especially SEs
or MIE in LDCs are traditional enterprises adopting manual mode of production (i.e. low degree of mechanization).
They also lack of necessary inputs to increase productivity such as skilled workers, new machines and modern
tools, and know-how to improve method of production. Without all these inputs, it is hard for these enterprises to
achieve increasing return to scale in their production process. 4
Development Constraints
In LDCs, SMEs are facing obstacles that are sometimes similar to those experienced by LEs. However, SMEs,
especially MIEs are much more vulnerable in relation to these problems. The nature or complexity of many of
these problems is also related to the size of enterprises or activities. The smaller the size of enterprises the more
complex the problems they face. The problems may differ from region to region and between one industry-group
to another. Although the problems vary even between individual enterprises in the same size category and within a
branch of activity, there are certain problems which are common to all SMEs which are linked to three groups of
issues: infrastructure, institution, and economic issues. The infrastructure issues include poor and/or expensive
infrastructure such as transport, storage facilities, water, electricity, and telecommunication, lack of working
premises, and poorly developed physical markets. The second issues include no access to formal training and,
3
See e.g. Liedholm and Mead (1999) and Berry and Mazumdar (1991).
In the literature on modern economic growth models, advanced technology embodied in new/modern machines and skills of workers are
two most important determinant factors of productivity that often mentioned. In the literature on SMEs in LDCs, lack of these two factors,
plus others such as traditional way of organizing business; poor management; and adopted inappropriate method of production are often
argued as the main factors behind the low level of productivity in these enterprises. See e.g. Rice and Abdullah (2000), Sandee and van
Hulsen (2000), Sandee et al. (2002), Sato (2000), Smyth (1990), Liedholm and Mead (1999), and Berry and Mazumdar (1991).
4
Kadin Indonesia-Jetro, 2006
9
www.kadin-indonesia.or.id
as a result, lack of skills in particular as regards basic economic skills and managerial expertise, lack of formal
schooling sometimes even resulting in illiteracy, limited access to property rights, limited access to formal
finance and banking institutions, excessive government regulations in areas such as business startup, in
particular as regards cumbersome, time demanding and costly procedures for business registration, lack of
information on prices, viability of products, etc., and ewer market opportunities due for instance to noncompliance to international standards. The latter issues include excessive registration and transaction costs of
starting or operating businesses, limited access to technology, lack of opportunities for bulk purchase of inputs,
lack of working capital: credit has to be obtained from informal sources such as friends or relatives or nonbanking financial agencies with unfavourable terms, and insufficient funds do not allow for further investments
(UN, 2001).
These obstacles are more or less interlinked and create vicious circles of bad performance or business
stagnation or low competitiveness of SMEs in LDCs as compared to their counterparts in
developed/industrialized countries. For instance, the main reasons for the lack of funds or skills is that the
SMEs, especially MIEs cannot access resource institutions such as banks and other financing institutions,
training and education institutions, marketing and consultancy firms, etc. In fact, all these various obstacles
create an overall context that in itself constitutes a barrier of further development or business improvement to
these enterprises (Tambunan, 2006).
The 2003 (recent) survey on SEs and MIEs from Central Bureau of Statistics (BPS) in Indonesia shows the
typical problems of these enterprises in Indonesia (Table 7). As can be seen, the main problems faced by the
majority of the respondents are lack of capital and marketing difficulties. In Indonesia, although there are various
government sponsored SME credit schemes, the majority of them, especially SEs and MIEs located in
rural/backward areas never received any credit from banks or other financial institutions. They depend much on
their own savings, money from relatives and credit from informal lenders for financing their daily business
operations. In marketing, SMEs in general do not have the resources to explore their own markets. Instead, they
depend heavily on their trading partners for marketing of their products, either within the framework of local
production networks and subcontracting relationships or orders from customers.
Interestingly, although it is well general known that the lack of adequate skills and technological and
managerial capabilities are major constraints to SMEs in Indonesia (as in LDCs in general), Table 7 indicates that
these surveyed enterprises did not consider the lack of skills and technological capability as a serious problem.
However, this may be due to the fact that many owners of the SEs and MIEs were not aware that their productivity
is low and the quality of their products inferior compared to the products of the large enterprises or imported
products. Especially since many of these enterprises produce only for low-income consumers in local markets
Kadin Indonesia-Jetro, 2006
10
www.kadin-indonesia.or.id
which enjoy natural protection from competition from similar goods produced by larger enterprises or from
import.
Table 7. Main Problems faced by SEs and MIEs in Manufacturing Industry, 2003
SEs
MIEs
Total SEs and MIEs
Have no problem
46,485 (19.48)*
627,650 (25.21)
674,135 (24.71)
Have problem
-Raw material
-Marketing
-Capital
-Transportation/Distribution
-Energy
-Labor cost
-Others
192,097 (80.52)
20,362 (10.60)
77,175 (40.18)
71,001 (39.96)
5,027 (2.62)
40,605 (2.4)
2,335 (1.22)
11,592 (6.04)
1,862,468 (74.79)
400,915 (21.53)
552,231 (29.65)
643,628 (34.56)
49,918 (2.68)
50,815 (2.73)
14,315 (0.77)
150,646 (8.09)
2,054,565 (75.29)
421,277 (20.50)
629,406 (30.63)
714,629 (34.78)
54,945 (2.67)
55,420 (2.7)
16,650 (0.81)
162,238 (7.90)
Total SEs & MIEs
Note: * = %
Source: BPS (SUSI 2003)
238,582 (100.00)
2,490,118 (100.00)
2,728,700 (100.00)
Women Entrepreneurs
At least two main characteristics of development of women entrepreneurship can obviously observed in
LDCs. First, SMEs are more important than LEs for women as entrepreneurs. Second, within SMEs, the
female-male entrepreneur ratio is generally higher in MIEs than in larger sized and more modern enterprises.
Women in LDCs are more likely than men to be involved in the informal sector which consists dominantly of
MIEs and characterized by very simple ways of doing business (production processes). Database from the
International Labour Organization (ILO) indicate that almost 95% of MIEs in LDCs performed by women as
self-employed; though the percentage varies between countries.
Based on BPS data 2003, Table 8 shows entrepreneurs in non-farm MIEs and SEs by gender. From a total of
1,005,724 women entrepreneurs in these enterprises in manufacturing industry, almost 98% of them were in
MIEs There are two interesting facts. First, if total number of these enterprises can be used as an indicator of
current state of the art of entrepreneurship development in a country, the table suggests that becoming an
entrepreneur in Indonesia is still dominantly a man culture. Second, sectoral distribution is similar for male and
female entrepreneurs, as they both are concentrated in trade, restaurant and accommodation services; although
the percentage is higher in the latter. Indeed, in Indonesia female is more likely than male to be involved in this
sector, mostly as own-account traders having small shops or as owners of small restaurants..
The low representation of women entrepreneurs in LEs (or within SMEs, relatively low in MEs while very
high in SEs and MIEs) in LDCs has been attributed to many factors, of which the most important ones are the
following. First, low level of education and lack of opportunities for training. In Indonesia, in general, the index
of gender development, particularly the index developed by the UNDP to observe gender inequality in human
development, shows that although gender inequality is tending to decline, it is still relatively higher than in
Kadin Indonesia-Jetro, 2006
11
www.kadin-indonesia.or.id
neighboring countries. As an illustration, gender inequality reflected in the difference in the human
development index (HDI) and gender-related development index (GDI) in Indonesia in 2002 is 0.007 (HDI
0.692 and GDI 0.685), while in Thailand and Vietnam, for instance, in the same year the difference was only
0.002 (Suharyo, 2005).
Table 8: Number of Non-Farm MIEs and SEs by Gender Entrepreneur and Sector, 2003 (unit)
Sector
Entrepreneurs/owners
Male
Female
16 096
237 050
(6.36)
(93.64)
[0.32]
[2.21]**
1 005 724
1 636 185
(38.07)
(61.93)
[19.91]
[15.25]
3 579 349
5 649 138
(38.79)
(61.21)
[70.86]
[52.64]
30 269
2 140 022
(1.40)
(98.60)
[0.60]
[19.94]
420 225
1 070 001
(28.20)
(71.80)
[8.32]
[9.97]
Total units
Mining, electricity (non-Stated Own/PLN) & construction
253 146
(100.00)*
Manufacturing industry
2 641 909
(100.00)
Trade, restaurant & accommodation service
9 228 487
(100.00)
Transportation & communication
2 170 291
(100.00)
Financial institutions, real estate, renting, and services
1 490 226
(100.00)
10 732 396
(68.00 )
[100.00]
15 784 059
(100.00)
Total
5 051 663
(32.00 )
[100.00]
Notes: * = distribution percentage by row (sector).
** = distribution percentage by column (entrepreneur)
Source: BPS (SUSI 2003).
In addition, BPS data on working population by education indicate that, although there has been some
improvement in the last 20 years, the average level of education of male is higher than that of female, and a
report on gender mainstreaming in the education system (Jalal, 2004; quoted from Suharyo, 2005) shows that,
the illiteracy rate for women is still higher than men, especially in rural areas. This national education structure
by gender is consistent with Table 9, showing that in MIEs and SEs combined, female entrepreneurs are less
educated than their male counterparts. Less than 1% of total female entrepreneurs who have university
diplomas, as compared to their male counterparts at 6.5%.
Table 9: Education of Entrepreneur in Non-Farm MIEs and SEs by Gender, 2003 (%)
Level of education
Not finished primary school
Finished primary school
Finished high school first degree (SMP)
Finished high school second degree (SMA)
Higher education
Source: BPS (SUSI 2003).
Kadin Indonesia-Jetro, 2006
Female
Male
27.88
40.82
18.62
11.77
0.91
14.27
39.49
25.87
18.37
6.5
12
www.kadin-indonesia.or.id
Second, limited financial at the disposal of the women concerned. In this respect, ownership rights which
deprive women of property ownership and, consequently, of the ability to offer the type of collateral normally
required for access to bank loans is still an important issue related to gender mainstreaming in many LDCs. In
Indonesia, as men are still perceived as the head of the family, and thus, in general, men are still perceived as
the owner or inheritor of family land assets.
Third, culture or religious, especially in Islamic countries like Indonesia, that makes female behavior or
attitude less open than male to “doing modern business” culture. Especially in rural society, women are more
restricted than in urban areas to do activities outside of the home; they must comply with their primary duty as
their husband’s partner and housewife.
Next, Figure 3 shows that the participation rate of female as entrepreneurs varies by region. Interestingly,
although a larger part of MIE and SEs are located in Java, as also the majority of population, non-primary
economic activities, and educated people in the country are found in this island, Nusa Tenggara (NT) in the
eastern part of the country has the highest ratio. The ratio is above one (1) indicating that there are more female
than male entrepreneurs in NT. However, this does not reflect the higher spirit of entrepreneurship female spirit
of NT women than in the rest of the country. NT is a region with a very high unemployment rate. Formal
income generating activities especially mining, industry manufacturing, construction, agriculture and banking
are more or less stagnated in this island. Most matured or married men are working in local transportation,
services such as motorcycle repair workshops or in agriculture as marginal/subsistent farmers owning less than
0.5 ha of land, or as civil servants. So, as a family survival strategy, in the household, wife must also do
something outside home to earn some income. Therefore, the high participation rate of female as entrepreneurs
in NT is more a reflection of a family survival strategy rather than a spirit of entrepreneurship. In other words,
female entrepreneur development in NT is more a “push” rather than a “pull” phenomenon.
Figure 3: Ratio of Female-Male Entrepreneurs in Non-Farm MIEs and SEs by Province, 2003.
Kadin Indonesia-Jetro, 2006
13
www.kadin-indonesia.or.id
1.2
1
0.8
0.6
0.4
0.2
Iri
an
+
es
i
M
al
uk
u
Su
la
w
an
ta
n
Ka
l im
N
us
a
Te
ng
ga
ra
Ba
li
+
Ja
va
Su
m
at
er
a
0
Source: BPS (SUSI 2003).
SMEs Development Programs and Their Effectiveness in Indonesia
In Indonesia, almost all known types of government intervention to support SMEs development have been
tried at one time or another: various subsidized credit, human resource development trainings such as in
production technique, general management, management quality systems ISO-9000, and entrepreneurship,
provision of total quality control and technical assistances, internet facility, advisory extension workers,
subsidized inputs, marketing and promotion facilitation, setting up of Cooperatives of Small-Scale Industries
(KOPINKRA) in clusters, establishment of special small-scale industrial estates (LIK), partnership program,
Small Business Consultancy Clinics (KKB), establishment of the Export Support Board of Indonesia (DPE),
establishment of common service facilities (UPT) in clusters, and implementation an incubator system for
promoting the development of new entrepreneurs. Several government departments such as the Ministry of
Industry and Trade, and the Ministry of Cooperative and SME have taken the lead in SME development
policies. These, as do other ministries, have regional offices for delivery of services.
During the period 1997-2003, totally there were 64 institutions involved in SMEs development supporting
activities which can be categorized into six groups with a total of 594 programs (Table 10). Most of them were
provided by the government (65%). Other programs were conducted by NGOs (18%), donor agencies (8%),
banking institutions (5%), private companies (2%), and other institutions. The scale of each assistance program
varied greatly based on the amount of funds, timeframe and geographical scope, and thus one program cannot
be directly compared to another. 5
5
As the programs and activities of each program are huge, so, for more detailed information about each program from each institution,
including the name of the program, type of assistance, program executor, timeframe, fund used, area, beneficiaries, status, problems
and potential, see SMERU at www.smeru.or.id.
Kadin Indonesia-Jetro, 2006
14
www.kadin-indonesia.or.id
Table 10: The number of institutions and assistance programs to strengthen SMEs, 1997-2003
Institutions
Number of institutions
Number of assistance programs
Still continuing
Total
a) Government institutions
b) Banking institutions
c) Private companies
d) Donor agencies
e) NGOs
f) Others
13
7
10
8
20
6
388
31
12
46
109
8
Total
127
25
12
15
79
8
Total
Source: SMERU.
64
594
266
%
32.7
80.7
100.0
32.6
72.5
100.0
44.8
The type of supports provided by these institutions varies ranging from capital assistance, trainings,
facilitation e.g. for promotion activities and business meeting between producers and potential customers,
information about potential market/buyers and suppliers, facilities e.g. for quality control and workshops, to
guidelines about production process, management and standardization (Table 11). The number of activities
within each program also varied but generally ranged from between one and three. Thus, of the 594 assistance
programs there were 1,044 types of activities. In total, the most common types of activities were the provision
of training (22.9%), capital assistance/credit (17.3%), facilitation (16.1%), and the dissemination/introduction of
new technology (15.2%). Government institutions were (and are still) the most common institutions for the
introduction or dissemination of new technologies. Trainings, including entrepreneurship, were (and are still)
most commonly organized by NGOs, private companies, and government institutions, whereas other institutions
mostly provided capital assistance; although private companies and NGOs were also very active in the
provision of training. Facilitation was mainly provided by NGOs and government institutions (35.7%). For nongovernment institutions, capital assistance was the most important assistance.
Table 11: The proportion of assistance programs to strengthen SEs based upon the type of activities and
The executing institutions.
Capital assistance
Training
Facilitation
Provision of Information
Facilities
Promotion
Dissemination/introduction of new
technology
Guidelines
Others
Types of activities
Note: * = see Table 8
Source: see Table 8.
Kadin Indonesia-Jetro, 2006
a*
b
c
d
E
f
Total
5.3
21.1
11.3
1.9
16.2
3.0
27.9
52.9
13.7
9.8
7.8
2.0
3.9
0.0
25.0
22.2
19.4
2.8
5.6
13.9
0.0
21.0
19.0
7.6
3.8
8.6
6.7
6.7
29.6
29.0
28.7
1.6
1.0
1.0
1.3
28.6
21.4
0.0
21.4
0.0
7.1
0.0
17.3
22.9
16.1
2.6
9.7
3.3
15.2
4.3
9.0
0.0
9.8
0.0
11.1
0.0
26.7
0.7
7.2
0.0
21.4
2.4
10.5
531
51
36
105
307
14
1044
15
www.kadin-indonesia.or.id
The dominance of government in providing assistance to SMEs is consistent with BPS data which show that
out of total 481,714 units of non-farm MIEs and SEs ever received external supports in 2003, 203,563 units
received them from the government. The distribution by region shows that as the majority of these enterprises
are located in Java and Bali, most of those ever received government supports were also found in this region.
However, as a percentage of region’s total SEs and MIEs in non-agricultural sectors, NT has the highest score
(Figure 3). There are good explanations for the region variety in proportion of SEs and MIEs ever received
government supports. First, in many parts of the country, especially in the eastern part and in relatively isolated
and poor rural areas, local governments are not always able to organize training programs or to provide
assistance due to lack of staffs and in-house facilities, or they are not so aggressive in socializing the programs
to enlarge their coverage. Second, not every SE and MIE entrepreneurs are enthusiasm in attending such
training programs, especially in management, marketing and entrepreneurship areas because they do not see
direct benefits for their businesses; they like more to be supported with subsidized credits, cheap raw materials
and marketing assistance. Third, lack of infrastructure makes entrepreneurs in isolated areas difficult or it cost
too much in money and time to reach the training spot. The combination of these reasons made the majority of
non-farm SEs and MIEs never received assistance or attended training programs from government (see Figure
4).
Figure 4: Proportion of non-farm SEs and MIEs ever received government assistances as a percentage of
total non-farm SEs and MIEs by region, 2003
3.3
3.5
3
2.5
2.13
%
2
1.28
1.5
0.98
0.98
1
0.44
0.5
Pa
pu
a
&
es
i
M
al
uk
u
Su
la
w
an
ta
n
Ka
l im
Te
ng
ga
ra
Ba
li
us
a
&
N
Ja
va
Su
m
at
er
a
0
Source: BPS (SUSI 2003).
The most important government program has been the so-called the ‘Foster Father’ (FP) scheme. The
scheme was introduced as a nation-wide scheme in February 1992. In this scheme, all state-owned enterprises
and big private companies (LEs) are required to assist SMEs in capital, training and technical assistance,
Kadin Indonesia-Jetro, 2006
16
www.kadin-indonesia.or.id
marketing, procurement of raw material, and many others. For example, with respect to marketing, the parent
companies provide promotion facilities such as trade exhibitions and study tours for the supported enterprises or
act as trading house. As can be seen in Table 12, the portions of SE and MIE entrepreneurs in non-agricultural
sectors who had business linkages with LEs through this scheme though increased was very small. One
interesting fact from this table is that most of those who have involved in this FP program made a use of
facilities that give them direct benefits or dealing directly with their current problems, i.e. capital assistance for
their current working capital, procurement of (cheap) raw materials which guaranties the continuation of their
production, and marketing assistance which gives them a market guaranty. As said before, most SE and MIE
entrepreneurs are not so enthusiasm for training, especially when the training takes place for few days, far from
their homes, and too theoretical. Many of them also do not see the need for technical assistance as they thought
they are already master in their own production or if there is some problem they do not see an external technical
assistance is necessary (see again Table 7 and its explanation)
Table 12. Percentages of SEs & MIEs having/not having the FP scheme in manufacturing industry by
type of facilities, 2000 (a) and 2003 (b).
Description
Total SEs & MIEs
MIEs
SEs
Not having
(% of total)
Having
(% of total)
(a)
(a)
95.5
95.5
95.5
(b)
87.9
88.9
77.7
4.5
4.5
4.5
(b)
12.1
11.1
22.3
Type of facilities (% of total firms having the scheme)*
Capital/Loan
(a)
40.5
42.2
40.2
(b)
21.5
22.02
18.9
Procurement
of raw
material
Marketing
Technical
assistance
& training
Others
(a)
(b)
(a)
(b)
(a)
(b)
(a)
(b)
54.8
29.4
59.8
47.3
48.7
39.9
53.5
53.2
53.6
52.9
50.8
63.2
4.4
5.1
4.3
3.1
2.7
5.5
0.6
0.0
0.7
2.4
2.6
1.03
Note: * = one firm may got more types of facilities
Source: BPS (SUSI, 2000, 2003).
.
For government, success of a program is usually measured by the number of participants; while, the outcome
of the program has never been measured. A more realistic measure of success of a program would be of course
to measure the net benefit not only to the supported SMEs, but also to the society as a whole. While programs
may give significant benefits to SMEs, they also accrue cost. Program benefits must thus be measured against
the costs they incur. But, this paper is not going to estimate the net benefit of existing or previous SME
development programs due to lack of data. However, it is obvious from a range of studies that only few of the
above mentioned SME development programs have been successful. 6 For instance, the FP scheme discussed
above. Whether the scheme was successful or not, it should be examined not only from its input side, i.e. the
coverage, but also from its output side, i.e. the growth or development level of the involved SMEs. From the
input side, the scheme was unsuccessful. As shown before, the majority of MIEs and SEs were not involved in
6
For discussion explicitly or implicitly on the government programs to support SMEs in Indonesia, see for instance Sandee and
van Hulsen, 2000, Tambunan (1998a,b,c, 2000), Tambunan and Keddie (1998), Klapwijk (1997), Sandee (1994, 1995), Sandee et al
(1994, 2000, 2002), van Dierman (2004) and Sato (2000).
Kadin Indonesia-Jetro, 2006
17
www.kadin-indonesia.or.id
this scheme. This coverage problem, as a matter of fact, is not only the case of FP, but also for many other
government programs/facilities, including the setting up cooperatives (KOPINKRA) in SMEs clusters scattered
around the country. Services provided by KOPINKRA range from loan/financial support, procurement of raw
material, marketing assistance, technical guidance to skill training. However, based on BPS SUSI data, the
majority of sampled entrepreneurs were not members of KOPINKRA for reasons explained by Klapwijk
(1997), In view of the wide definition of small industry employed by the Ministry, much of the promotion efforts
may have bypassed the smallest enterprises that are most in need of assistance……. The extension officers
generally have little technical or business experience, and training or other technical facilities have been
largely provided according to the directions of central planners, rather than having been adapted to local
needs. (page 65).
From the output side, although the FP scheme has become unpopular since the politica
Tulus Tambunan
Kadin Indonesia-Jetro, 2006
Abstract
Recently, entrepreneurship development has become a current important issue related to economic development in
Indonesia. This paper tries to present the current state of the art of entrepreneurship development in Indonesia by
examining the current developments of small and medium enterprises (SMEs) in the country. The paper comes with a
number of interesting facts. First, SMEs are of overwhelming importance in Indonesia, as they accounted for more
than 90% of all firms outside the agricultural sector, and thus the biggest source of employment. Second, the
representation of women entrepreneurs is low. Third, women entrepreneurs are less educated than their men
counterparts. Fourth, the main constraints faced by small entrepreneurs are lack of working capital and marketing
difficulties. Finally, the majority of existing studies suggests that the effectiveness of government programs to
support SME development programs is low. The paper concludes that in national efforts to develop high
competitive entrepreneurships, owners of small enterprises should be given the first priority as they have already
some experiences how to run a business or how to survive in competitive markets, and the emphasis should be to
promote modernization, capacity building and size upgrading.
Introduction
In the classical paradigm it is stated that development of economy depends on two main important factors (as explicitly
included in a general production function of Cobb Douglas), namely labor and capital (with advanced technology embodied).
Later, after looked at the miracle development in some Asian countries, the so-called the newly industrialized countries
(NICs), such as Chinese Taipei (Taiwan), Hong Kong -China and South Korea in the 1960s and 1970s and the widening gap
in development between developed/industrialized nations and less developed countries (LDCs), a new though emerged in the
1980s on the nature of economic development and factors determining it. In this new paradigm, it is stated that in addition to
the above two classical production factors, there is another also crucial factor, namely entrepreneurship. Nowadays,
development of entrepreneurship together with human skills improvement have become two crucial factors for a country to
become a world leader in all aspects of live, e.g. economy, trade, military, technology, etc. and for a sustainable economic
and social development.
Entrepreneurship development is also a current important issue related to economic development in Indonesia. It is
often said that the lack of entrepreneurship has been the main important cause of relatively low process of economic
development in the country as compared to other Asian countries such as Malaysia, Thailand, China, South Korea and
Singapore. Realizing this, training in entrepreneurship has become an important part of development government
supported programs for the development of small and medium enterprises (SMEs) in Indonesia.
The aim of this paper is to discuss the state of the art of entrepreneurship development in Indonesia by examining the
current developments of SMEs in the country. Developments of SMEs are used as an indicator of entrepreneurship
Kadin Indonesia-Jetro, 2006
1
www.kadin-indonesia.or.id
development since these enterprises provide an avenue for the testing and development of entrepreneurial ability.
Also, as stated by Timmons (1990),…… fundamentally, entrepreneurship is a human creative act. It involves finding
personal energy by initiating and building an enterprise or organization, rather than by just watching, analyzing, or
describing one. (page 5). This paper also discusses their main problems and the effectiveness of government programs to
support t-supported these enterprises.
Definitions of SMEs
In Indonesia, there are several definitions of SMEs, depending on which agency provides the definition. As this paper
uses data from the State Ministry of Cooperative and Small and Medium Enterprises (Menegkop & UKM), the
Department of Industry (MoI), and the Central Statistical Agency (BPS), so, only definitions of these three government
agencies are relevant for the paper. Menegkop & UKM promulgated the Law on Small Enterprises Number 9 of 1995,
which defines a small enterprise (SE) as a business unit with total initial assets of up to Rp 200 million (about US$ 20,000
at current exchange rate), not including land and buildings, or with an annual value of sales of a maximum of Rp 1 billion
(US$ 100,000), and a medium enterprise (ME) as a business unit with an annual value of sales of more than Rp 1 billion
but less than Rp 50 billion. Law does not define explicitly micro enterprises (MIEs). However, since MIEs are the
smallest size category of enterprises, Menegkop &n UKM data on SEs include MIEs. BPS, which regularly
conducted surveys of SMEs, uses the number of workers as the basis for determining the size of enterprise. In
its definition, MIEs, SEs and MEs are business units with, respectively, 1-4, 5-19, and 20-99 workers, and large
enterprises (LEs) are units with 100 or more workers. MoI defines enterprises by size in its sector also
according to number of workers as the BPS definition.
Indonesian Economic Development: A Brief Review
In the beginning of the New Order (NO) government in 1966 led by the former President Soeharto, the
average Indonesian earned only roughly US$50 a year; about 60% of adult Indonesian could not read or write;
and close to 65% of the country’s population lived in absolute poverty. Facing this condition, the NO
government launched five-year economic development plans, with the first plan started in 1969, and made
several crucial economic policies in the 1970s and 1980s, including liberalization in investment, capital
account, banking and external trade.
During that era, industry and agriculture were two most priority sectors. To support development of national
industry, the government adopted two subsequent strategies. Started first with an import-substitution strategy in
the 1970s up to early 1980s, focusing on labor-intensive industries such as textile and garments, footwear, wood
products, and food and beverages, followed latter by development of assembling industries of automotive. Then
the strategy gradually shifted to an export promotion strategy by reducing some import tariffs and export
restrictions, also focusing on labor-intensive industries. To support agriculture, the government adopted
Kadin Indonesia-Jetro, 2006
2
www.kadin-indonesia.or.id
modernization or intensification of agriculture, known as the ‘green revolution’, as the main strategy. The main
aim of this strategy was twofold: to boost agricultural productivity and thus to achieve the goal of rice selfsufficiency, and to increase real income per capita in rural areas, and thus to reduce rural poverty and hence
national poverty.
These strategies had generated a rapid and sustained economic growth in the 1980s up to 1997, just before
the Asian financial crisis occurred in 1997/98. The rapid and sustained growth has not only led the real income
per capita to increase, but also the poverty incidence (people living under current official poverty line as
percentage of total population) to fall substantially.
Before the crisis, because of its sustained high economic growth coupled with declining rates of poverty,
Indonesia was once one of the high performing East Asian economies that created the “East Asian economic
miracle.” Even among this group of economies including Hong Kong, Japan, Malaysia, the Republic of Korea,
Taiwan, Thailand and Singapore, the Indonesian economy was emerged as particularly impressive for its small
current account deficit and low amount of short-term debt. Indonesia was also different among oil-producing
countries for its strong development of agricultural and manufacturing sectors. During the 1980s and 1990s, the
country became a leading player in a wide variety of industries, from palm oil to apparel to electronics (USAID
& SENADA, 2006).
From mid 1997 up to 1998, the Indonesian economy came to an abrupt halt with the advent of the Asian
economic crisis (Figure 1). This crisis began with the collapse of the Thai baht and ultimately impacted several
other countries in the region including Indonesia, the Philippines and the Republic of Korea. From mid 1997
when the Indonesian currency, rupiah, started to depreciate, to mid 1998 the value of rupiah fell to more than
500%. Consequently, many companies, especially large-scale enterprises/conglomerates, which heavily
depended on imported materials and components and foreign loans stopped their production, and as a result, the
Indonesian economy grew at minus 13% in 1998.
In 1999 the country’s economy started to recover, and in recent years, Indonesia has reached a healthy
degree of macroeconomic stability; although in 2005 the growth rate was about 5.5%, which is lower than the
expected of 6.5%. The reduction in government fuel subsidies in October 2005 as a logical consequence of the
rapid increase of oil in the world market up to more than US$ 50 per barrel led to a fuel price increase of more
than 100%, sparking a huge spike in the inflation rate. Also because of this subsidy cut in fuel, it is expected
that the growth rate in 2006 will be less than 6%.
Since the first years of the NO era, Indonesian economy has been undergone a massive structural
transformation from an economy where the agricultural sector played a dominant role in the country’s GDP to
an economy where the sector’s contribution becomes much less important. In 1970, gross value added from
agriculture contributed about 45% to the formation of GDP, and during the 1990s its GDP contribution was
Kadin Indonesia-Jetro, 2006
3
www.kadin-indonesia.or.id
only around 16% to 20%, and declined to about 15.% in 2005. GDP contribution of industry, on the other hand,
increased from less than 20% in the 1970s to almost 30% in 2005. Industry also became among big sectors in
terms of output growth per year. In 2004, it grew at 6.4% or 4.6% in 2005 compared to 2.1% or 2.5% in
agriculture for the same periods, respectively (Table 1).
FIGURE 1. GDP PER CAPITA AND GDP GROWTH RATE IN INDONESIA: 1970-2002
Source: Statistical Year Book of Indonesia (SI), published annually by the Indonesian National Agency for Statistics (BPS)
Table 1. Growth rate of real GDP by sector in Indonesia, 2001-2006
Sector
Period
2001
2002
2003
2004
2005
1Q 2006
Agriculture, livestock, forestry & fisheries
Mining & quarrying
Manufacturing
Electricity, gas & water supply
Construction
Trade, hotel & restaurants
Transport & communication
Financial, rental & business services
Other services
3.1
0.3
3.3
7.9
4.6
4.4
8.1
6.6
3.2
3.2
1.0
5.3
8.9
5.5
3.9
8.4
6.4
3.8
4.3
-0.9
5.3
5.9
6.7
5.3
11.6
7.0
3.9
2.1
-4.9
6.4
4.2
6.9
5.8
14.0
7.9
5.4
2.5
1.6
4.6
6.5
7.3
8.6
13.0
7.1
5.2
3.9
7.0
2.0
5.2
7.2
4.2
11.0
5.1
4.6
Real GDP
3.8
4.4
4.9
4.9
5.6
4.6
Source: BPS
Also during the NO era the government gave a great attention on the development of SMEs, especially in
manufacturing industry. The government believed that SMEs can play an important role as the backbone of
Kadin Indonesia-Jetro, 2006
4
www.kadin-indonesia.or.id
development of national industry, especially as supporting industries for LEs through subcontracting or other
forms of production linkages. Within manufacturing industry, SMEs in food and beverages, footwear, textile
and garments, wood and its products, leather and its products, handicrafts, and metal products, and electronics
received enormous government’s supports, as it was believed that SMEs have specialization in these industries.
Development of SMEs in Indonesia
In Indonesia, SMEs have historically been the main player in domestic economic activities, especially as a large
provider of employment opportunities, and hence a generator of primary or secondary source of income for many
households. For low income or poor farm households in rural areas, SEs, i.e. units of less than 20 workers, in nonfarm activities are especially important. These enterprises have also been playing as an important engine for the
development of local economies and communities. However, as compared to many other APEC more developed
economies, Indonesian SMEs are not yet been proved to have contributed significantly their value added to the
country’s economy. Instead, they have been more important as the locus of most employment than of gross
domestic product (GDP) growth in Indonesia.
Already since the NO era, the government recognized the importance of having well developed SMEs as an
important element in creating a sophisticated economy, especially through their role in developing interindustry linkages, or as supporting industries producing components and parts for LEs either, via market
mechanisms or subcontracting systems or other forms of production linkages. In developed countries, it is the
role of SMEs to act as suppliers to industries producing final goods, therefore creating a permanent, vibrant and
inter-linked industrial base. Indonesia has suffered from the lack of a sophisticated domestic supplier network,
which would have allowed intermediate inputs, components, and parts to being produced locally instead of
being imported (Banerjee, 2002). 1
The SMEs have also been recognized to have another important role to play, namely as an important engine
for development and growth of exports of non-oil and gas, particularly in manufacture. This stems from evidence
showing that the most successful cases of SMEs development in East and Southeast Asian countries like South
Korea, Taiwan, Hong Kong, and Singapore, have directly related to trade and the adoption of export-oriented
strategies. The experiences of these countries indicate that SMEs can compete effectively in both domestic and
international.
Last, but not least, SMEs could also play a powerful role in energizing agriculture through the development
of high competitive agricultural-based (agro) industry. Agricultural-based production is a clear area where the
1
In the literature on the 1997 economic crisis in Southeast Asia, an extremely high level of the country’s import dependency, in particular LEs, is
often pointed as one important factor that has pushed Indonesia into the crisis. The high level of import dependency in manufacturing industry has
been the result of a combination of rapid development of domestic downstream industries producing final consumption goods, mainly through
assembling methods of production, on one hand, and, on the other hand, underdevelopment of domestic supporting industries during the new order
regime. Therefore, since the crisis, the Indonesian has been trying through various programs to develop domestic supporting, in which the SMEs can
take an important part in it.
Kadin Indonesia-Jetro, 2006
5
www.kadin-indonesia.or.id
country has enormous room for development, simply because Indonesia is a large agrarian economy owning a
huge variety of agricultural commodities.
Typically, SMEs in Indonesia account for more than 90% of all firms outside the agricultural sector in the
country, and thus the biggest source of employment, providing livelihood for over 90% of the country’s workforce,
especially women and the young. The majority of SMEs, and especially MIEs are scattered widely throughout the
rural area and therefore they may play an important role as a starting point for development of villagers' talents,
especially women, as entrepreneurs. MIEs are dominated by self-employment enterprises without hired/wage-paid
workers. They are the most traditional enterprises generally with low levels of productivity, poor quality products,
serving small, localized markets. There is little or no technological dynamism in this group. The majority of these
enterprises eke out a bare survival. Some of them may be economically viable over the long-term, but a large portion is
not. Especially with import liberalization, changing technology and the growing demand for higher quality modern
products, many MIEs face closure or very difficult upgrading. However, the existence or growth of this type of
enterprises can be seen as an early phase of entrepreneurship development.
According to official data from the Ministry of Cooperative and Small and Medium Enterprises (Menegkop & UKM),
SEs in 1997 accounted for more than 39.7 million units, or constituted about 99.8% of the total number of enterprises in
the country in that year, and increased to more than 40 million units in 2004. During the same period, the total number of
MEs reached between slightly more than 60 thousand units in 1997 to about 63 thousand units in 2004. On the contrary,
the total number of LEs on average per year was around two thousand units for the whole period (Table 2). So, generally
speaking, this table may indicate that every year new entrepreneurs have been born in the country. Unfortunately, there
are no data which can show whether transformation process or size upgrading has happened within SMEs, i.e. MIEs
become SEs, SEs become MEs, and MEs transformed into LEs. While, the transformation process of firms by size may
show a better picture about long-term entrepreneurship development.
Table 2. Total Units of Enterprises by Size Category: 1997-2004
Size Category
1997
1998
39,704,661
36,761,689
∑ SEs
60,449
51,889
∑ MEs
2,097
1,831
∑ LEs
Total
39,767,207
36,815,409
Source: Menegkop & UKM
1999
37,804,536
51,798
1,832
37,858,166
2000
38,985,072
55,061
1,946
39,042,079
2001
40,137,773
57,743
2,095
40,197,611
2003
42,475,756
59,580
2,169
42,537,505
2004
43,158,468
63,361
2,248
43,224,077
In the Asia-Pacific region, Indonesia is the biggest economy with respect to total number of SMEs. A 2003
report from the Asia-Pacific Economic Cooperation (APEC) and some official estimated data from a number of
member economies show that about 50% of total non-farm SMEs in the region were in Indonesia and China
(Table 3). If agriculture is included, certainly this portion will be much higher since these two countries are the
largest agrarian economies in the group.
Kadin Indonesia-Jetro, 2006
6
www.kadin-indonesia.or.id
Table 3: Numbers of non-agricultural SMEs in Selected Asia-Pacific Economies*
Country/Economy
Australia
Brunei Darussalam
Canada
Chile
China
Hong Kong, China
Indonesia
Japan
South Korea
Malaysia
Mexico
New Zealand
Peru
Philippines
Russian Federation
Singapore
Chinese Taipei
Thailand
USA
Viet Nam
1990
757,100
3,856
855,840
423,021
8,608,200
277,886
12,045,600
6,484,264
2,094,637
1,302,757
159,564
406,966
77,807
896,000
31,468
791,663
632,300
5,359,421
1,000
SME in non-agricultural sector**
1996
2002
895,500
1,111,900
4,085
5,000
879,335
925,000
445,299
500,000
7,253,406
8,000,000
287,904
292,000
16,416,020
17000,000
6,433,557
6,139,735
2,607,710
2,700,000
19,000
2,179,631
2,854,266
218,044
19,2000
453,667
460,000
99,767
817,976
886,500
850,000
47,001
54,000
991,881
1,050,000
350,000
5,691,430
6,303,593
200,000
SMEs as % of all enterprises in
the 1990s**
97
98
98
16
99
98
98
99
99
84
99
99
99
86
91
98
96
96
Total
40,640,280
45,790,737
49,824,470
Notes: * figures in the columns 2 - 4 include state owned companies in some cases (notably China);
** blanks indicate data are not available.
Source: APEC (2003) and other official estimated data from some individual member economies
Distribution by sector shows that SMEs are concentrated in agriculture (Table 4). They accounted for almost
60% of total SMEs. Trade, hotel and restaurant is the second largest sector for SMEs with around 21% and
slightly more than 22% of their total units during the period 2003-2004. The third important sector is
manufacturing industry with around 6.4% of total SMEs. They are involved mainly in simple traditional
manufacturing activities such as wood products, including furniture, textile, garments, leather products
including footwear, and food and beverages. Only a small portion of total SMEs are engaged in production of
machineries, production tools and automotive components. The latter is generally carried out through
subcontracting systems with several multinational car companies such as Toyota and Honda. This structure of
industry reflects the current technological capability of Indonesian SMEs, as they are not so strong yet as their
counterparts in other countries such as South Korea, Japan, and Taiwan in producing sophisticated technology
embodied products.
Table 4. Total Units of Enterprises by Size and Sector, 2003 and 2004
Sector
SMEs
2004
2003
Agriculture (1)
Mining (2)
Manufacture (3)
Electricity, gas & clean air supply (4)
Construction (5)
Trade, hotel & restaurant (6)
Transport & communication (7)
Finance, rent & service (8)
Services (9)
Kadin Indonesia-Jetro, 2006
LEs
2003
25,457,190
203,711
25,477,756
144,834
2,711,522
4,423
132,346
9,071,331
2,488,161
33,169
2,433,483
2,743,858
4,111
162,359
9,845,682
2,551,727
37,185
2,254,317
7
2004
58
72
710
39
157
434
146
292
261
59
51
719
36
192
471
150
328
242
www.kadin-indonesia.or.id
42,535,336
Total
43,221,829
2,169
2,248
Source: Menegkop & UKM.
In terms of GDP, official data from the Central Bureau of Statistics (BPS) show that, on average, during the
period 2000-2003, SME contributed more than 96% and almost 95% of total output in, respectively, trade, hotel
and restaurant, and agriculture. In total GDP, SMEs performed relatively better than their larger counter part as they
accounted for more than 50% of total GDP during that period (Table 5). Also SMEs’ output contribution to the
annual growth rate of total GDP was higher than that of LEs. On average, the GDP growth share of SMEs was
above 2%; whereas that of LEs was under 2%. Within SMEs, SEs appeared to be more important than MEs as their
GDP growth share was higher than that of the latter ones (Figure 2).
Table 5. Structure of GDP by size and sector: 2000-2003 (%)
Sector
1
2
3
4
5
6
7
8
9
GDP
GDP without oil & gas
Source: BPS
SE
85.74
6.73
15.14
0.52
43.88
75.60
36.69
16.80
35.59
ME
9.09
2.96
12.98
6.80
22.57
20.81
26.64
46.47
7.16
LE
5.17
90.30
71.89
92.68
33.55
3.59
36.67
36.73
57.25
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
40.55
46.22
15.22
17.19
44.24
36.60
100.0
100.0
Figure 2: Contribution to GDP Growth by Size Group of Enterprises, (%)
5
4
2.08
3
0.82
2
1
2.02
1.73
1.46
1.55
0.58
0.62
0.69
1.42
1.52
1.68
2001
2002
2003
LE
ME
SE
0
2000
Source: BPS.
The greater GDP contribution of SMEs does not mean, however, that productivity, either partial, for example,
labor productivity (defined as value added per worker), or total of all factors used (total factor productivity/TFP) in
these enterprises is higher than that in LEs. 2 It is mainly because their number of enterprises is huge, not because
2
Labor productivity rather than TFP is often used in analyzing productivity growth in SMEs, as the ratio is a useful indicator of a sort of progress,
since enterprises that cannot raise it will not be able to remain competitive as wages rise. The difference between TFP and labor productivity is that
the former measures the relative efficiency of SMEs and its advance over time, whereas the latter does not. Unfortunately, the TFP measure is more
difficult to operational due to problems in the measurement of fixed and human capital.
Kadin Indonesia-Jetro, 2006
8
www.kadin-indonesia.or.id
their greater productivity, as compared to LEs. BPS data on output, number of enterprises and workers employed
in manufacturing industry indicate that labor productivity increases with the size of a plant. As presented in
Table 6, the average value added-labor ratio in the MIEs and SEs combined is lower than that in the MEs and
LEs combined. The labor productivity in MIEs and SEs is so low that although the total number of their
establishments and their workers are much larger than those in MEs and LEs, their share in manufacturing total
output (or gross value added) is much smaller than that of the MEs and LEs.
Table 6: Labour Productivity (Q1) and Output Contribution (Q2) in Manufacturing Industry by Size of
Enterprises, 1999-2003
Size group
MEs + LEs
MIEs + SEs
1999
Q1
Q2 (%)
115.28
90.52
8.35
9.48
Q1
143.99
9.11
2000
Q2 (%)
91.65
8.35
2001
Q1
Q2 (%)
167.70
91.50
10.98
8.50
2002
Q1
Q2 (%)
166.31
89.94
12.36
10.06
Q1
196.26
13.55
2003
Q2 (%)
90.68
9.32
Source: BPS
The above evidence is not only the Indonesia problem, as the labor productivity gap between SMEs and LEs is
one of the largest observed in LDCs. 3 It also does not come as a surprise, given the fact that SMEs, especially SEs
or MIE in LDCs are traditional enterprises adopting manual mode of production (i.e. low degree of mechanization).
They also lack of necessary inputs to increase productivity such as skilled workers, new machines and modern
tools, and know-how to improve method of production. Without all these inputs, it is hard for these enterprises to
achieve increasing return to scale in their production process. 4
Development Constraints
In LDCs, SMEs are facing obstacles that are sometimes similar to those experienced by LEs. However, SMEs,
especially MIEs are much more vulnerable in relation to these problems. The nature or complexity of many of
these problems is also related to the size of enterprises or activities. The smaller the size of enterprises the more
complex the problems they face. The problems may differ from region to region and between one industry-group
to another. Although the problems vary even between individual enterprises in the same size category and within a
branch of activity, there are certain problems which are common to all SMEs which are linked to three groups of
issues: infrastructure, institution, and economic issues. The infrastructure issues include poor and/or expensive
infrastructure such as transport, storage facilities, water, electricity, and telecommunication, lack of working
premises, and poorly developed physical markets. The second issues include no access to formal training and,
3
See e.g. Liedholm and Mead (1999) and Berry and Mazumdar (1991).
In the literature on modern economic growth models, advanced technology embodied in new/modern machines and skills of workers are
two most important determinant factors of productivity that often mentioned. In the literature on SMEs in LDCs, lack of these two factors,
plus others such as traditional way of organizing business; poor management; and adopted inappropriate method of production are often
argued as the main factors behind the low level of productivity in these enterprises. See e.g. Rice and Abdullah (2000), Sandee and van
Hulsen (2000), Sandee et al. (2002), Sato (2000), Smyth (1990), Liedholm and Mead (1999), and Berry and Mazumdar (1991).
4
Kadin Indonesia-Jetro, 2006
9
www.kadin-indonesia.or.id
as a result, lack of skills in particular as regards basic economic skills and managerial expertise, lack of formal
schooling sometimes even resulting in illiteracy, limited access to property rights, limited access to formal
finance and banking institutions, excessive government regulations in areas such as business startup, in
particular as regards cumbersome, time demanding and costly procedures for business registration, lack of
information on prices, viability of products, etc., and ewer market opportunities due for instance to noncompliance to international standards. The latter issues include excessive registration and transaction costs of
starting or operating businesses, limited access to technology, lack of opportunities for bulk purchase of inputs,
lack of working capital: credit has to be obtained from informal sources such as friends or relatives or nonbanking financial agencies with unfavourable terms, and insufficient funds do not allow for further investments
(UN, 2001).
These obstacles are more or less interlinked and create vicious circles of bad performance or business
stagnation or low competitiveness of SMEs in LDCs as compared to their counterparts in
developed/industrialized countries. For instance, the main reasons for the lack of funds or skills is that the
SMEs, especially MIEs cannot access resource institutions such as banks and other financing institutions,
training and education institutions, marketing and consultancy firms, etc. In fact, all these various obstacles
create an overall context that in itself constitutes a barrier of further development or business improvement to
these enterprises (Tambunan, 2006).
The 2003 (recent) survey on SEs and MIEs from Central Bureau of Statistics (BPS) in Indonesia shows the
typical problems of these enterprises in Indonesia (Table 7). As can be seen, the main problems faced by the
majority of the respondents are lack of capital and marketing difficulties. In Indonesia, although there are various
government sponsored SME credit schemes, the majority of them, especially SEs and MIEs located in
rural/backward areas never received any credit from banks or other financial institutions. They depend much on
their own savings, money from relatives and credit from informal lenders for financing their daily business
operations. In marketing, SMEs in general do not have the resources to explore their own markets. Instead, they
depend heavily on their trading partners for marketing of their products, either within the framework of local
production networks and subcontracting relationships or orders from customers.
Interestingly, although it is well general known that the lack of adequate skills and technological and
managerial capabilities are major constraints to SMEs in Indonesia (as in LDCs in general), Table 7 indicates that
these surveyed enterprises did not consider the lack of skills and technological capability as a serious problem.
However, this may be due to the fact that many owners of the SEs and MIEs were not aware that their productivity
is low and the quality of their products inferior compared to the products of the large enterprises or imported
products. Especially since many of these enterprises produce only for low-income consumers in local markets
Kadin Indonesia-Jetro, 2006
10
www.kadin-indonesia.or.id
which enjoy natural protection from competition from similar goods produced by larger enterprises or from
import.
Table 7. Main Problems faced by SEs and MIEs in Manufacturing Industry, 2003
SEs
MIEs
Total SEs and MIEs
Have no problem
46,485 (19.48)*
627,650 (25.21)
674,135 (24.71)
Have problem
-Raw material
-Marketing
-Capital
-Transportation/Distribution
-Energy
-Labor cost
-Others
192,097 (80.52)
20,362 (10.60)
77,175 (40.18)
71,001 (39.96)
5,027 (2.62)
40,605 (2.4)
2,335 (1.22)
11,592 (6.04)
1,862,468 (74.79)
400,915 (21.53)
552,231 (29.65)
643,628 (34.56)
49,918 (2.68)
50,815 (2.73)
14,315 (0.77)
150,646 (8.09)
2,054,565 (75.29)
421,277 (20.50)
629,406 (30.63)
714,629 (34.78)
54,945 (2.67)
55,420 (2.7)
16,650 (0.81)
162,238 (7.90)
Total SEs & MIEs
Note: * = %
Source: BPS (SUSI 2003)
238,582 (100.00)
2,490,118 (100.00)
2,728,700 (100.00)
Women Entrepreneurs
At least two main characteristics of development of women entrepreneurship can obviously observed in
LDCs. First, SMEs are more important than LEs for women as entrepreneurs. Second, within SMEs, the
female-male entrepreneur ratio is generally higher in MIEs than in larger sized and more modern enterprises.
Women in LDCs are more likely than men to be involved in the informal sector which consists dominantly of
MIEs and characterized by very simple ways of doing business (production processes). Database from the
International Labour Organization (ILO) indicate that almost 95% of MIEs in LDCs performed by women as
self-employed; though the percentage varies between countries.
Based on BPS data 2003, Table 8 shows entrepreneurs in non-farm MIEs and SEs by gender. From a total of
1,005,724 women entrepreneurs in these enterprises in manufacturing industry, almost 98% of them were in
MIEs There are two interesting facts. First, if total number of these enterprises can be used as an indicator of
current state of the art of entrepreneurship development in a country, the table suggests that becoming an
entrepreneur in Indonesia is still dominantly a man culture. Second, sectoral distribution is similar for male and
female entrepreneurs, as they both are concentrated in trade, restaurant and accommodation services; although
the percentage is higher in the latter. Indeed, in Indonesia female is more likely than male to be involved in this
sector, mostly as own-account traders having small shops or as owners of small restaurants..
The low representation of women entrepreneurs in LEs (or within SMEs, relatively low in MEs while very
high in SEs and MIEs) in LDCs has been attributed to many factors, of which the most important ones are the
following. First, low level of education and lack of opportunities for training. In Indonesia, in general, the index
of gender development, particularly the index developed by the UNDP to observe gender inequality in human
development, shows that although gender inequality is tending to decline, it is still relatively higher than in
Kadin Indonesia-Jetro, 2006
11
www.kadin-indonesia.or.id
neighboring countries. As an illustration, gender inequality reflected in the difference in the human
development index (HDI) and gender-related development index (GDI) in Indonesia in 2002 is 0.007 (HDI
0.692 and GDI 0.685), while in Thailand and Vietnam, for instance, in the same year the difference was only
0.002 (Suharyo, 2005).
Table 8: Number of Non-Farm MIEs and SEs by Gender Entrepreneur and Sector, 2003 (unit)
Sector
Entrepreneurs/owners
Male
Female
16 096
237 050
(6.36)
(93.64)
[0.32]
[2.21]**
1 005 724
1 636 185
(38.07)
(61.93)
[19.91]
[15.25]
3 579 349
5 649 138
(38.79)
(61.21)
[70.86]
[52.64]
30 269
2 140 022
(1.40)
(98.60)
[0.60]
[19.94]
420 225
1 070 001
(28.20)
(71.80)
[8.32]
[9.97]
Total units
Mining, electricity (non-Stated Own/PLN) & construction
253 146
(100.00)*
Manufacturing industry
2 641 909
(100.00)
Trade, restaurant & accommodation service
9 228 487
(100.00)
Transportation & communication
2 170 291
(100.00)
Financial institutions, real estate, renting, and services
1 490 226
(100.00)
10 732 396
(68.00 )
[100.00]
15 784 059
(100.00)
Total
5 051 663
(32.00 )
[100.00]
Notes: * = distribution percentage by row (sector).
** = distribution percentage by column (entrepreneur)
Source: BPS (SUSI 2003).
In addition, BPS data on working population by education indicate that, although there has been some
improvement in the last 20 years, the average level of education of male is higher than that of female, and a
report on gender mainstreaming in the education system (Jalal, 2004; quoted from Suharyo, 2005) shows that,
the illiteracy rate for women is still higher than men, especially in rural areas. This national education structure
by gender is consistent with Table 9, showing that in MIEs and SEs combined, female entrepreneurs are less
educated than their male counterparts. Less than 1% of total female entrepreneurs who have university
diplomas, as compared to their male counterparts at 6.5%.
Table 9: Education of Entrepreneur in Non-Farm MIEs and SEs by Gender, 2003 (%)
Level of education
Not finished primary school
Finished primary school
Finished high school first degree (SMP)
Finished high school second degree (SMA)
Higher education
Source: BPS (SUSI 2003).
Kadin Indonesia-Jetro, 2006
Female
Male
27.88
40.82
18.62
11.77
0.91
14.27
39.49
25.87
18.37
6.5
12
www.kadin-indonesia.or.id
Second, limited financial at the disposal of the women concerned. In this respect, ownership rights which
deprive women of property ownership and, consequently, of the ability to offer the type of collateral normally
required for access to bank loans is still an important issue related to gender mainstreaming in many LDCs. In
Indonesia, as men are still perceived as the head of the family, and thus, in general, men are still perceived as
the owner or inheritor of family land assets.
Third, culture or religious, especially in Islamic countries like Indonesia, that makes female behavior or
attitude less open than male to “doing modern business” culture. Especially in rural society, women are more
restricted than in urban areas to do activities outside of the home; they must comply with their primary duty as
their husband’s partner and housewife.
Next, Figure 3 shows that the participation rate of female as entrepreneurs varies by region. Interestingly,
although a larger part of MIE and SEs are located in Java, as also the majority of population, non-primary
economic activities, and educated people in the country are found in this island, Nusa Tenggara (NT) in the
eastern part of the country has the highest ratio. The ratio is above one (1) indicating that there are more female
than male entrepreneurs in NT. However, this does not reflect the higher spirit of entrepreneurship female spirit
of NT women than in the rest of the country. NT is a region with a very high unemployment rate. Formal
income generating activities especially mining, industry manufacturing, construction, agriculture and banking
are more or less stagnated in this island. Most matured or married men are working in local transportation,
services such as motorcycle repair workshops or in agriculture as marginal/subsistent farmers owning less than
0.5 ha of land, or as civil servants. So, as a family survival strategy, in the household, wife must also do
something outside home to earn some income. Therefore, the high participation rate of female as entrepreneurs
in NT is more a reflection of a family survival strategy rather than a spirit of entrepreneurship. In other words,
female entrepreneur development in NT is more a “push” rather than a “pull” phenomenon.
Figure 3: Ratio of Female-Male Entrepreneurs in Non-Farm MIEs and SEs by Province, 2003.
Kadin Indonesia-Jetro, 2006
13
www.kadin-indonesia.or.id
1.2
1
0.8
0.6
0.4
0.2
Iri
an
+
es
i
M
al
uk
u
Su
la
w
an
ta
n
Ka
l im
N
us
a
Te
ng
ga
ra
Ba
li
+
Ja
va
Su
m
at
er
a
0
Source: BPS (SUSI 2003).
SMEs Development Programs and Their Effectiveness in Indonesia
In Indonesia, almost all known types of government intervention to support SMEs development have been
tried at one time or another: various subsidized credit, human resource development trainings such as in
production technique, general management, management quality systems ISO-9000, and entrepreneurship,
provision of total quality control and technical assistances, internet facility, advisory extension workers,
subsidized inputs, marketing and promotion facilitation, setting up of Cooperatives of Small-Scale Industries
(KOPINKRA) in clusters, establishment of special small-scale industrial estates (LIK), partnership program,
Small Business Consultancy Clinics (KKB), establishment of the Export Support Board of Indonesia (DPE),
establishment of common service facilities (UPT) in clusters, and implementation an incubator system for
promoting the development of new entrepreneurs. Several government departments such as the Ministry of
Industry and Trade, and the Ministry of Cooperative and SME have taken the lead in SME development
policies. These, as do other ministries, have regional offices for delivery of services.
During the period 1997-2003, totally there were 64 institutions involved in SMEs development supporting
activities which can be categorized into six groups with a total of 594 programs (Table 10). Most of them were
provided by the government (65%). Other programs were conducted by NGOs (18%), donor agencies (8%),
banking institutions (5%), private companies (2%), and other institutions. The scale of each assistance program
varied greatly based on the amount of funds, timeframe and geographical scope, and thus one program cannot
be directly compared to another. 5
5
As the programs and activities of each program are huge, so, for more detailed information about each program from each institution,
including the name of the program, type of assistance, program executor, timeframe, fund used, area, beneficiaries, status, problems
and potential, see SMERU at www.smeru.or.id.
Kadin Indonesia-Jetro, 2006
14
www.kadin-indonesia.or.id
Table 10: The number of institutions and assistance programs to strengthen SMEs, 1997-2003
Institutions
Number of institutions
Number of assistance programs
Still continuing
Total
a) Government institutions
b) Banking institutions
c) Private companies
d) Donor agencies
e) NGOs
f) Others
13
7
10
8
20
6
388
31
12
46
109
8
Total
127
25
12
15
79
8
Total
Source: SMERU.
64
594
266
%
32.7
80.7
100.0
32.6
72.5
100.0
44.8
The type of supports provided by these institutions varies ranging from capital assistance, trainings,
facilitation e.g. for promotion activities and business meeting between producers and potential customers,
information about potential market/buyers and suppliers, facilities e.g. for quality control and workshops, to
guidelines about production process, management and standardization (Table 11). The number of activities
within each program also varied but generally ranged from between one and three. Thus, of the 594 assistance
programs there were 1,044 types of activities. In total, the most common types of activities were the provision
of training (22.9%), capital assistance/credit (17.3%), facilitation (16.1%), and the dissemination/introduction of
new technology (15.2%). Government institutions were (and are still) the most common institutions for the
introduction or dissemination of new technologies. Trainings, including entrepreneurship, were (and are still)
most commonly organized by NGOs, private companies, and government institutions, whereas other institutions
mostly provided capital assistance; although private companies and NGOs were also very active in the
provision of training. Facilitation was mainly provided by NGOs and government institutions (35.7%). For nongovernment institutions, capital assistance was the most important assistance.
Table 11: The proportion of assistance programs to strengthen SEs based upon the type of activities and
The executing institutions.
Capital assistance
Training
Facilitation
Provision of Information
Facilities
Promotion
Dissemination/introduction of new
technology
Guidelines
Others
Types of activities
Note: * = see Table 8
Source: see Table 8.
Kadin Indonesia-Jetro, 2006
a*
b
c
d
E
f
Total
5.3
21.1
11.3
1.9
16.2
3.0
27.9
52.9
13.7
9.8
7.8
2.0
3.9
0.0
25.0
22.2
19.4
2.8
5.6
13.9
0.0
21.0
19.0
7.6
3.8
8.6
6.7
6.7
29.6
29.0
28.7
1.6
1.0
1.0
1.3
28.6
21.4
0.0
21.4
0.0
7.1
0.0
17.3
22.9
16.1
2.6
9.7
3.3
15.2
4.3
9.0
0.0
9.8
0.0
11.1
0.0
26.7
0.7
7.2
0.0
21.4
2.4
10.5
531
51
36
105
307
14
1044
15
www.kadin-indonesia.or.id
The dominance of government in providing assistance to SMEs is consistent with BPS data which show that
out of total 481,714 units of non-farm MIEs and SEs ever received external supports in 2003, 203,563 units
received them from the government. The distribution by region shows that as the majority of these enterprises
are located in Java and Bali, most of those ever received government supports were also found in this region.
However, as a percentage of region’s total SEs and MIEs in non-agricultural sectors, NT has the highest score
(Figure 3). There are good explanations for the region variety in proportion of SEs and MIEs ever received
government supports. First, in many parts of the country, especially in the eastern part and in relatively isolated
and poor rural areas, local governments are not always able to organize training programs or to provide
assistance due to lack of staffs and in-house facilities, or they are not so aggressive in socializing the programs
to enlarge their coverage. Second, not every SE and MIE entrepreneurs are enthusiasm in attending such
training programs, especially in management, marketing and entrepreneurship areas because they do not see
direct benefits for their businesses; they like more to be supported with subsidized credits, cheap raw materials
and marketing assistance. Third, lack of infrastructure makes entrepreneurs in isolated areas difficult or it cost
too much in money and time to reach the training spot. The combination of these reasons made the majority of
non-farm SEs and MIEs never received assistance or attended training programs from government (see Figure
4).
Figure 4: Proportion of non-farm SEs and MIEs ever received government assistances as a percentage of
total non-farm SEs and MIEs by region, 2003
3.3
3.5
3
2.5
2.13
%
2
1.28
1.5
0.98
0.98
1
0.44
0.5
Pa
pu
a
&
es
i
M
al
uk
u
Su
la
w
an
ta
n
Ka
l im
Te
ng
ga
ra
Ba
li
us
a
&
N
Ja
va
Su
m
at
er
a
0
Source: BPS (SUSI 2003).
The most important government program has been the so-called the ‘Foster Father’ (FP) scheme. The
scheme was introduced as a nation-wide scheme in February 1992. In this scheme, all state-owned enterprises
and big private companies (LEs) are required to assist SMEs in capital, training and technical assistance,
Kadin Indonesia-Jetro, 2006
16
www.kadin-indonesia.or.id
marketing, procurement of raw material, and many others. For example, with respect to marketing, the parent
companies provide promotion facilities such as trade exhibitions and study tours for the supported enterprises or
act as trading house. As can be seen in Table 12, the portions of SE and MIE entrepreneurs in non-agricultural
sectors who had business linkages with LEs through this scheme though increased was very small. One
interesting fact from this table is that most of those who have involved in this FP program made a use of
facilities that give them direct benefits or dealing directly with their current problems, i.e. capital assistance for
their current working capital, procurement of (cheap) raw materials which guaranties the continuation of their
production, and marketing assistance which gives them a market guaranty. As said before, most SE and MIE
entrepreneurs are not so enthusiasm for training, especially when the training takes place for few days, far from
their homes, and too theoretical. Many of them also do not see the need for technical assistance as they thought
they are already master in their own production or if there is some problem they do not see an external technical
assistance is necessary (see again Table 7 and its explanation)
Table 12. Percentages of SEs & MIEs having/not having the FP scheme in manufacturing industry by
type of facilities, 2000 (a) and 2003 (b).
Description
Total SEs & MIEs
MIEs
SEs
Not having
(% of total)
Having
(% of total)
(a)
(a)
95.5
95.5
95.5
(b)
87.9
88.9
77.7
4.5
4.5
4.5
(b)
12.1
11.1
22.3
Type of facilities (% of total firms having the scheme)*
Capital/Loan
(a)
40.5
42.2
40.2
(b)
21.5
22.02
18.9
Procurement
of raw
material
Marketing
Technical
assistance
& training
Others
(a)
(b)
(a)
(b)
(a)
(b)
(a)
(b)
54.8
29.4
59.8
47.3
48.7
39.9
53.5
53.2
53.6
52.9
50.8
63.2
4.4
5.1
4.3
3.1
2.7
5.5
0.6
0.0
0.7
2.4
2.6
1.03
Note: * = one firm may got more types of facilities
Source: BPS (SUSI, 2000, 2003).
.
For government, success of a program is usually measured by the number of participants; while, the outcome
of the program has never been measured. A more realistic measure of success of a program would be of course
to measure the net benefit not only to the supported SMEs, but also to the society as a whole. While programs
may give significant benefits to SMEs, they also accrue cost. Program benefits must thus be measured against
the costs they incur. But, this paper is not going to estimate the net benefit of existing or previous SME
development programs due to lack of data. However, it is obvious from a range of studies that only few of the
above mentioned SME development programs have been successful. 6 For instance, the FP scheme discussed
above. Whether the scheme was successful or not, it should be examined not only from its input side, i.e. the
coverage, but also from its output side, i.e. the growth or development level of the involved SMEs. From the
input side, the scheme was unsuccessful. As shown before, the majority of MIEs and SEs were not involved in
6
For discussion explicitly or implicitly on the government programs to support SMEs in Indonesia, see for instance Sandee and
van Hulsen, 2000, Tambunan (1998a,b,c, 2000), Tambunan and Keddie (1998), Klapwijk (1997), Sandee (1994, 1995), Sandee et al
(1994, 2000, 2002), van Dierman (2004) and Sato (2000).
Kadin Indonesia-Jetro, 2006
17
www.kadin-indonesia.or.id
this scheme. This coverage problem, as a matter of fact, is not only the case of FP, but also for many other
government programs/facilities, including the setting up cooperatives (KOPINKRA) in SMEs clusters scattered
around the country. Services provided by KOPINKRA range from loan/financial support, procurement of raw
material, marketing assistance, technical guidance to skill training. However, based on BPS SUSI data, the
majority of sampled entrepreneurs were not members of KOPINKRA for reasons explained by Klapwijk
(1997), In view of the wide definition of small industry employed by the Ministry, much of the promotion efforts
may have bypassed the smallest enterprises that are most in need of assistance……. The extension officers
generally have little technical or business experience, and training or other technical facilities have been
largely provided according to the directions of central planners, rather than having been adapted to local
needs. (page 65).
From the output side, although the FP scheme has become unpopular since the politica