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PROMOTING INVESTMENT IN SMALL AND MEDIUM SIZED ENTERPRISES IN BIMP-EAGA
SUB-REGION WITH AN ‘INDUSTRY CLUSTERING’ APPROACH
Tulus Tambunan
Kadin Indonesia & Pusat Studi Industri dan UKM, Universitas Trisakti
Problem Identification
It is generally agreed that a region’s success in increasing its attractiveness for investment depends in part
on the region’s capability to formulate policies related to investment and the business community and to
improving the quality of public services. Other important factors that also affect investment in a region are the
development of human resources and of infrastructure in the widest sense. Investment in a region is not only
from abroad (i.e. foreign direct investment), but also from inside the region within the local community. Even
the latter is more important than the first one in the ‘early’ stage of development, acting as an impulse to
encourage investment from outside, since outside investors will come to a region not only when the qualities of
infrastructure and public services are good but also when they see that there are economic activities in that
region. Because, local economic activities may help potential investors to identify sectors or kinds of economic
activities that tend to boom and so they would like to put their money in. For instance, clusters of furniture
industries in Jepara (Central Java) were started a long time ago with investment from local community, and later
many foreigners came and invest their money in those activities. Not the other way.
From the above thought, then, the development of local small and medium enterprises (SMEs) becomes an
important means to encourage local investment in the BIMP-EAGA region especially for at least three main
reasons. First, currently the majority of businesses in the sub-region are SMEs. Therefore, the promotion of
SMEs is increasingly recognized as an essential element of a strategy for broad-based growth within the region.
Second, although in general rural people are poor, many evidence shows that poor villagers are able to save a
small amount of capital and invest it; they are willing to take risks by doing so. In this respect, SMEs provide thus
a good starting point for the mobilization of rural saving/investment. Moreover, they are scattered widely
throughout the rural areas and therefore they may act as a means to investment distribution within a region. Third,
SMEs finance their operations overwhelmingly by personal savings of the owners, supplemented by gifts or loans
from relatives or from local informal moneylenders, traders, input suppliers, and payments in advance from
consumers. These enterprises can therefore play another important role, namely as a means to allocate rural
savings that otherwise would be used for unproductive purposes. 1
Despite this recognized importance of SMEs as a growth engine for regional investment and economy,
many studies have identified a range of problems that stand in the way of vigorous growth of SMEs. These
1
This issue is extensively discussed in, for example, Tambunan (1994), Liedholm and Mead (1999), and Berry et al. (2001).
1
include competition from foreign imports, rising costs of production, and inadequate framework of policy and
program support. Moreover, SMEs often lack access to finance for working capital and investment, appropriate
technology, networking especially to broaden markets and market information. 2
Principally, investment in SMEs can be derived from three sources: owners’ own money, credit from
financial institutions and from abroad through subcontracting linkages with local-based foreign companies.
However, neither of these sources in reality can bring investment in SMEs to an optimal level for three reasons.
First, money from owners is not enough to expand their investment due to the fact that the majority of
individuals undertaking SME activities are from low income population (e.g. farm households). Second, SMEs
often lack access to financial institutions especially because they lack of collaterals. Third, subcontracting
between local SMEs and foreign companies are still weak for two reasons; from the foreign companies-side,
they often difficult to identify potential subcontractors, and from the local SMEs-side, they often difficult in
meeting required quality.
Objective
A common industrial organization among SMEs is clustering, where SMEs producing similar products
concentrate in a certain area. Since the emerge of the "flexible specialization" thesis in the 1980s, initiated by the
Piore and Sabel's (1984) book on the second industrial divide, and the adoption of clustering approach by the
United Nation Industry and Development Organization (UNIDO) as its new SME development strategy in
developing countries in early 1990s, many articles, seminar papers and books have been written on SME clusters
development in developing countries. 3
Clustering is a common economic phenomenon. The UNIDO defines a cluster as a local agglomeration of
enterprises, producing and selling a range of related or complementary products within a particular industrial
sector or subsector (Richard, 1996). In its traditional form, clustering refers to the process in which
geographically proximate producers, suppliers, buyers, and other actors develop and intensify collaboration
with mutually beneficiary effects. However, in its most advanced form, according to a widely accepted
definition proposed by Porter (2000), a cluster is a geographically proximate group of interconnected
enterprises and associated institutions in a particular field, linked by commonality and complementarily. Under
this definition, a cluster may include suppliers of inputs, or extend downstream to regular buyers or exporters. It
also includes government institutions, banks or other financial institutions, business associations, chamber of
commerce, providers of business services and agencies that support clustered enterprises in such fields as
2
3
For a survey of literature discussing this matter, see Tambunan (2006a).
See Tambunan (2006a) for a review of literature on this issue.
2
product development, production process improvement, technology, marketing information (for example, on
new market and designs), vocational training, and so on.
Thus, the above identified problems faced currently by local SMEs in carrying out their function as a means
to promote local investment and hence economic growth should be addressed by an ‘industry clustering’
approach. This approach should be adopted as the main vehicle for regional development particularly in the
promotion of local investment. From a government point of view, cluster approach promotes horizontal
collaboration and strategic partnership. The strategy brings coherence and coordination to various programs and
funding at various levels of government that otherwise exist in isolation and produce marginal result. For
government as well as private initiated supporting programs, this approach is much less costly than targeting
individual SMEs.
More specifically, the main objective of adopting industry clustering as a means to promote investment in
the region is twofold. First, it is to promote investment by local community. Clusters offer a focus to attract new
investments, encourage local expansion and stimulate start-up of new companies. Business sector has stronger
voice compared with individual firms in targeting public policy, legislation, programs/projects or funding.
Second, it is to promote cross-border partnership between SMEs, for instance between SME clusters in North
Sulawesi and SMEs in Davao Region in the Southern Mindanao. It is argued in the international literature that
cross-border partnership between SMEs can potentially offer mutual benefits to all partners and hence can
stimulate investment and economic growth in both regions. 4 . There exists a variety of forms of cross-border
partnership activities, such as subcontracting, joint ventures, franchise arrangements, both for long term and
short-term co-operation between enterprises.5 .
Description
To support development of SMEs clusters as well as cross-border partnerships among SMEs clusters from
different regions, there is a need for well-developed business and social networks and business supporting
institutes. Many empirical and case studies provide evidence that good networks promote trade among regions
by alleviating various problems of contract enforcement and providing needed information about trading and
investment opportunities. 6
Business supporting institutions that must be in place to support the networks are the followings 7 :
4
Some good examples and experiences of the benefits of cross-border activities of SMEs can be found from cases in European
countries, such as from Greece (Labrianidis, 2000) and Finland (Anko, 2001).
5
See Weaver (2000).
6
See e.g. Rauch (2001); Spencer and Qiu (2001); Saxenian (1999) and Weidenbaum and Hughes (1996).
7
See also, e.g. Kerem (2004).
3
1. Producers’ and other unions, associations, confederations etc., which are typical voluntary social networks
(for example, small business association, and local chamber of commerce).
2. Government initiated and financed institutions and foundations, for applying special target support (for
example, government-owned educational and research institutions).
3. Market-determined private institutions and business firms (for example, private educational
institutions/university and banks).
4. Government institutions (ministries, especially offices at regional/local level, local export promotion
institution).
5. Regional institutions (for example, in this case, ASEAN Secretary and Asian Development Bank).
The promotion of investment in SMEs with the industry clustering approach consists of two subsequent
stages:
1) diagnosis of existing clusters in the region to have a clear picture of the following thee aspects:
a. Characteristics: e.g. size range of firms, level of concentration, type of products, technical skills, the
availability of association and supporting institutions, level of investment, internal networks
among producers inside the clusters as well as external networks (including whether there
producers having subcontracting or other business linkages with companies outside the
clusters or region), etc.
b. Market:
local or exports or both.
c. Problems:
lack of knowledge on market opportunities, lack of technology, lack of finance, marketing
difficulties, quality control, lack of supply of raw materials, no access to information,
government policies that affect negatively, directly or indirectly, the clusters etc.
The selection of local SMEs clusters to be diagnosed should be based on the following two main criteria:
a) their products are among the region’s key commodities (thus attractive for investment);
b) they have export market potential, either as final goods or complementary goods for goods produced by
SMEs in other region, e.g. SMEs’ products in Sulawesi as inputs for SMEs’ products in Mindanao (thus
promoting cross-border partnership among SMEs from different regions)
2) By keeping in mind that the main objective (as mentioned before) is to promote local investment as well as
cross-border partnerships among SMEs in the BIMP-EAGA region, then the result of the above diagnosis will
determine what main policy actions will be required. Depending on the main current problems faced by the
diagnosed clusters, the actions may include the establishment of new or the empowerment of existing local
4
government supporting agency to open or to increase the connection of local SME clusters with
regional/international market, increasing partnership quality between government institutions and the SME
clusters as well as all other stakeholders of SME clusters development, soft as well as hard infrastructure
improvement, improvement of local information service by establishing information center that cover
information about market opportunities and all SME clusters (classified by products, location and market
orientation) in the BIMP-EAGA region, or establishment of regional investment and SME study center in a
local university.
So, the practical activities are subsequently as follows:
1. Identification of sub-regions to be included in the project.
2. Data collection and identification of “visible” clusters in the selected sub-regions.
3. Identification of local SMEs supporting agencies/programs in the selected sub-regions.
4. Assessment of local economic development and potentials and intra-trade among the selected subregions
5. Diagnosis of the selected clusters
6. Formulation of a cluster action plan based on results of the diagnosed clusters in close cooperation with
the clusters themselves. The action aims especially at the followings:
6a) developing SMEs’ knowledge of new and expanded markets, both export and domestic;
6b) building up SMEs’ production capabilities (e.g. quality, quality control, productivity);
6c) building up (when necessary) economically-viable supplies of required raw materials/inputs, again
tailored to the market requirement of SMEs;
6d) building up local capacity (especially government) to implement and further develop cluster action
plans;
6e) building up intra-trade among SMEs between sub-regions.
7. Implementation of the formulated action plan.
This project will generate a significant amount of data on SME's across the border. At least in the
Indonesian side, data on local SMEs can be obtained from local government body at district level, i.e.
BAPPEDA, or at subdistrict level, i.e. kelurahan, which has annual publication called: Desa dalam Angka
(Village in Number). Other, especially qualitative information should be collected through in-depth interviews
and focus group discussions (FGD).
The practical activities from number 1 to 6 are a short-term project, while the 7th activity is a long-term
project, which can be ranged from the establishment of a new local government or private supporting agency to
enhance intra-trade among SME clusters between sub-regions to actions in order to improve partnership
5
between SME clusters and local government and other local stakeholders such as banks, trading houses, training
institutions or universities. All these will depend on the results of the diagnoses.
Expected outputs/ outcomes
There are two regional cases showing positive impact of development of SME clusters on the local
economy. The first one is from Indonesia. A number of case studies shows that clustering of rattan furniture
producers in Tegal Wangi, West Java has absorbed the entire village and created numerous satellite small-scale
industrial activities in neighboring hamlets (Smyth, 1990, 1992); the growth of wood furniture industries in
Jepara, West Java had transformed the town into a thriving commercial center with a five-mile avenue of such
as furniture showrooms and factories, modern hotels, new commercial banks, supermarkets, telephone and fax
stalls, and European restaurants (Schiller and Martin-Schiller, 1997); the development of a roof tile cluster in a
small village in Bali has turned poverty in the village into prosperity (Soemardjan, 1992); and the metalworking
industry cluster in Tegal, Central Java has been helping to promote investment in the district by attracting many
large companies, including FDI-based companies such as PT. Komatsu Indonesia Tbk, PT. Daihatsu, and some
divisions of the Astra Group such as PT. Sanwa, PT Kubota, and PT. Katshusiro. In the district, there are around 2,811
metal workshops, or about 10% of the total number of local enterprises in non-farm sectors in the district.
Among these are seven sentra, or groups of geographic agglomerations of metal enterprises producing the same
metal products. The majority of local workshops are small, employing less than 20 workers, mainly male. to do
subcontracting systems with local workshops (Tambunan, 2006, 2007).
The second case is from the southern Mindanao region, also known as Davao region, which has a number of
growing clusters, including food industry, wood industry and eco-tourism industry. Correspondingly, under the
Davao Regional Development Plan (DRDP), 2004-2010, the region is expected to grow by 5.7-6.7 percent on
the average on gross regional domestic product, and to generate 746,000 jobs. These are set to bring down the
region’s proportion of poor families from 31.5 percent to 20 percent or less by 2010. To achieve these
objectives, the Davao Region adopted the industry cluster approach as one of the major economic strategies
focusing on the development of priority industries, including the above mentioned ones, which have high
potentials and could serve as engines of economic growth in the region. It is anticipated that the development of
said industries will contribute 535,400 to the region’s total job generation targets, P186 billion in investments
and US$ 6.33 billion export receipts by 2010. 8
So far no data are available and not even studies have been made on SMEs clusters in the eastern part of
Indonesia. It can be easily assumed that in Indonesia, most developed SME clusters are located in Java, as
8
Taken from internet, Government Office, Davao.
6
markets, infrastructures and other marketing supporting facilities are more available in Java than in the eastern
part of the country.
Thus, in more specific, the outputs of the initiative are the following:
1) based on the collected data and information gathered from in-depth interviews and FGDs, ‘viable’ SMEs
clusters (according to the two criteria mentioned before) and their current problems in each part of the
region can be identified, and concrete action plans will be formulated to deal with these current
problems;
2) with the implementation of the formulated action plans, investment, production and export of the
identified viable SMEs clusters will increase, which can be measured in terms of differences in value or
volume between ‘before’ and ‘after’ the initiative; and
3) cross-border partnerships among SME clusters in sub-regions will be generated.
As the outcomes, these outputs will contribute to the increases in regional GDP, investment, employment and
SMEs intra-trade in the region.
References
Anko, A. (2001), “Finnish Experience in Promotion of Cross-Border Co-operation. Paper presented at the
OECD Conference on Cross Border Partnerships for Enterprise Development and Investment in the NW
Regions of the Russian Federation, St. Petersburg (mimeo).
Berry, Albert, Edgard Rodriguez and Henry Sandee (2001), “Small and Medium Enterprise Dynamics in
Indonesia”, Bulletin of Indonesian Economic Studies, 37(3).
Kerem, Kaie (2004), “Theory and Empirical Evidence of Business Support Networks”, TUTWPE No 129,
School of Economics and Business Administration, Tallinn University of Technology
Labrianidis, L. (2000), “Geographic Proximity Matters in the Orientation of FDI: the Case of Greek FDI in the
Balkans”, in: G. Petrakos and S. Totev (eds.), Economic Co-operation in the Balkans: A Regional Approach
to the European Integration, Ashgate.
Liedholm, Carl and Donald Mead (1999), Small Enterprises and Economic Development: The Dynamic Role
of Micro and Small Enterprises, Routledge, London.
Piore, Michael J. and Charles F. Sabel (1984), The second industrial divide, Basic Books, New York.
Porter Michael E. (2000), “Location, competition and economic development: Local clusters in a global
economy”, Economic Development Quarterly, 14(1).
7
Rauch, James E. (2001), “Business and Social Networks in International Trade”, Journal of Economic
Literature, 39(4).
Richard, Friedrich (1996), “Principal for Promoting Clusters and Networking of SMEs”, paper presented at the IX
International Conference on Small and Medium Enterprises, 17-19 April, WASME, New Delhi.
Saxenian, Anna Lee (1999), Silicon Valley’s New Immigrant Entrepreneurs. San Francisco: Public Policy
Institute of California.
Schiller, J. and B. Martin-Schiller (1997), “Market, Culture and State in the Emergence of Indonesian Export
Furniture Industry”, Journal of Asian Business, 13(1).
Smyth, Ines A. (1990b), “Differentiation among petty commodity producers: The effects of a development project
on handicrafts production in a Sundanese village”, Working Paper Series, B-1, March, AKATIGA, Bandung.
Smyth, Ines A. (1990c), “Collective efficiency and selective benefits: the growth of the rattan industry of
Tegalwangi”, Working Paper Series, B.11, December, AKATIGA, Bandung.
Smyth, Ines A. (1992), “The Effects of a Development Project on Handicrafts Production in a Sundanese
Village”, PRISMA, No.52.
Soemardjan Soemardjan, S (1992), “Pejaten: Poverty Turned Into Prosperity”, Prisma The Indonesian Indicator,
No. 52.
Spencer, Barbara J. and Larry D. Qiu (2001), “Keiretsu and Relationship-Specific Investment: A Barrier to
Trade? International Economic Review, 42.
Tambunan, Tulus T.H. (1994), The Role of Small-Scale Industries in Rural Economic Development. A Case
Study in Ciomas Subdistrict, Bogor District, West Java, Indonesia, Amsterdam, Thesis Publishers.
Tambunan, Tulus (2006a), Development of Small and Medium Enterprises in Indonesia from the AsiaPacific Perspective, Jakarta: LPFE-Trisakti.
Tambunan, Tulus (2006b), “Sumber-sumber Peralihan Teknologi ke Usaha Kecil dan Menengah di Industri
Manufaktur di Indonesia. Kasus Industri Pengerjaan Logam Tegal” (Sources of Transfer of Technology to
Small and Medium Enterprises in Manufacturing Industry in Indonesia> The Case of Tegal Metal Working
Industry), November, Penelitian Dosen, FE-Trisakti, Jakarta.
Tambunan, Tulus (2007), “The Role of Government in Supporting Transfer of Technology to non-farm SMEs
in Indonesia”, working paper, The Indonesian Project, Australian National University (forthcoming).
Weaver, M. (2000), “Strategic Alliances as Vehicles for International Growth”, in: D. Sexton and Landstrom,
(eds), Handbook of Entrepreneurship, Oxford and Malden, MA: Blackwell.
Weidenbaum, Murray and Samuel Hughes (1996), The Bamboo Network, New York: Free Press.
8
9
SUB-REGION WITH AN ‘INDUSTRY CLUSTERING’ APPROACH
Tulus Tambunan
Kadin Indonesia & Pusat Studi Industri dan UKM, Universitas Trisakti
Problem Identification
It is generally agreed that a region’s success in increasing its attractiveness for investment depends in part
on the region’s capability to formulate policies related to investment and the business community and to
improving the quality of public services. Other important factors that also affect investment in a region are the
development of human resources and of infrastructure in the widest sense. Investment in a region is not only
from abroad (i.e. foreign direct investment), but also from inside the region within the local community. Even
the latter is more important than the first one in the ‘early’ stage of development, acting as an impulse to
encourage investment from outside, since outside investors will come to a region not only when the qualities of
infrastructure and public services are good but also when they see that there are economic activities in that
region. Because, local economic activities may help potential investors to identify sectors or kinds of economic
activities that tend to boom and so they would like to put their money in. For instance, clusters of furniture
industries in Jepara (Central Java) were started a long time ago with investment from local community, and later
many foreigners came and invest their money in those activities. Not the other way.
From the above thought, then, the development of local small and medium enterprises (SMEs) becomes an
important means to encourage local investment in the BIMP-EAGA region especially for at least three main
reasons. First, currently the majority of businesses in the sub-region are SMEs. Therefore, the promotion of
SMEs is increasingly recognized as an essential element of a strategy for broad-based growth within the region.
Second, although in general rural people are poor, many evidence shows that poor villagers are able to save a
small amount of capital and invest it; they are willing to take risks by doing so. In this respect, SMEs provide thus
a good starting point for the mobilization of rural saving/investment. Moreover, they are scattered widely
throughout the rural areas and therefore they may act as a means to investment distribution within a region. Third,
SMEs finance their operations overwhelmingly by personal savings of the owners, supplemented by gifts or loans
from relatives or from local informal moneylenders, traders, input suppliers, and payments in advance from
consumers. These enterprises can therefore play another important role, namely as a means to allocate rural
savings that otherwise would be used for unproductive purposes. 1
Despite this recognized importance of SMEs as a growth engine for regional investment and economy,
many studies have identified a range of problems that stand in the way of vigorous growth of SMEs. These
1
This issue is extensively discussed in, for example, Tambunan (1994), Liedholm and Mead (1999), and Berry et al. (2001).
1
include competition from foreign imports, rising costs of production, and inadequate framework of policy and
program support. Moreover, SMEs often lack access to finance for working capital and investment, appropriate
technology, networking especially to broaden markets and market information. 2
Principally, investment in SMEs can be derived from three sources: owners’ own money, credit from
financial institutions and from abroad through subcontracting linkages with local-based foreign companies.
However, neither of these sources in reality can bring investment in SMEs to an optimal level for three reasons.
First, money from owners is not enough to expand their investment due to the fact that the majority of
individuals undertaking SME activities are from low income population (e.g. farm households). Second, SMEs
often lack access to financial institutions especially because they lack of collaterals. Third, subcontracting
between local SMEs and foreign companies are still weak for two reasons; from the foreign companies-side,
they often difficult to identify potential subcontractors, and from the local SMEs-side, they often difficult in
meeting required quality.
Objective
A common industrial organization among SMEs is clustering, where SMEs producing similar products
concentrate in a certain area. Since the emerge of the "flexible specialization" thesis in the 1980s, initiated by the
Piore and Sabel's (1984) book on the second industrial divide, and the adoption of clustering approach by the
United Nation Industry and Development Organization (UNIDO) as its new SME development strategy in
developing countries in early 1990s, many articles, seminar papers and books have been written on SME clusters
development in developing countries. 3
Clustering is a common economic phenomenon. The UNIDO defines a cluster as a local agglomeration of
enterprises, producing and selling a range of related or complementary products within a particular industrial
sector or subsector (Richard, 1996). In its traditional form, clustering refers to the process in which
geographically proximate producers, suppliers, buyers, and other actors develop and intensify collaboration
with mutually beneficiary effects. However, in its most advanced form, according to a widely accepted
definition proposed by Porter (2000), a cluster is a geographically proximate group of interconnected
enterprises and associated institutions in a particular field, linked by commonality and complementarily. Under
this definition, a cluster may include suppliers of inputs, or extend downstream to regular buyers or exporters. It
also includes government institutions, banks or other financial institutions, business associations, chamber of
commerce, providers of business services and agencies that support clustered enterprises in such fields as
2
3
For a survey of literature discussing this matter, see Tambunan (2006a).
See Tambunan (2006a) for a review of literature on this issue.
2
product development, production process improvement, technology, marketing information (for example, on
new market and designs), vocational training, and so on.
Thus, the above identified problems faced currently by local SMEs in carrying out their function as a means
to promote local investment and hence economic growth should be addressed by an ‘industry clustering’
approach. This approach should be adopted as the main vehicle for regional development particularly in the
promotion of local investment. From a government point of view, cluster approach promotes horizontal
collaboration and strategic partnership. The strategy brings coherence and coordination to various programs and
funding at various levels of government that otherwise exist in isolation and produce marginal result. For
government as well as private initiated supporting programs, this approach is much less costly than targeting
individual SMEs.
More specifically, the main objective of adopting industry clustering as a means to promote investment in
the region is twofold. First, it is to promote investment by local community. Clusters offer a focus to attract new
investments, encourage local expansion and stimulate start-up of new companies. Business sector has stronger
voice compared with individual firms in targeting public policy, legislation, programs/projects or funding.
Second, it is to promote cross-border partnership between SMEs, for instance between SME clusters in North
Sulawesi and SMEs in Davao Region in the Southern Mindanao. It is argued in the international literature that
cross-border partnership between SMEs can potentially offer mutual benefits to all partners and hence can
stimulate investment and economic growth in both regions. 4 . There exists a variety of forms of cross-border
partnership activities, such as subcontracting, joint ventures, franchise arrangements, both for long term and
short-term co-operation between enterprises.5 .
Description
To support development of SMEs clusters as well as cross-border partnerships among SMEs clusters from
different regions, there is a need for well-developed business and social networks and business supporting
institutes. Many empirical and case studies provide evidence that good networks promote trade among regions
by alleviating various problems of contract enforcement and providing needed information about trading and
investment opportunities. 6
Business supporting institutions that must be in place to support the networks are the followings 7 :
4
Some good examples and experiences of the benefits of cross-border activities of SMEs can be found from cases in European
countries, such as from Greece (Labrianidis, 2000) and Finland (Anko, 2001).
5
See Weaver (2000).
6
See e.g. Rauch (2001); Spencer and Qiu (2001); Saxenian (1999) and Weidenbaum and Hughes (1996).
7
See also, e.g. Kerem (2004).
3
1. Producers’ and other unions, associations, confederations etc., which are typical voluntary social networks
(for example, small business association, and local chamber of commerce).
2. Government initiated and financed institutions and foundations, for applying special target support (for
example, government-owned educational and research institutions).
3. Market-determined private institutions and business firms (for example, private educational
institutions/university and banks).
4. Government institutions (ministries, especially offices at regional/local level, local export promotion
institution).
5. Regional institutions (for example, in this case, ASEAN Secretary and Asian Development Bank).
The promotion of investment in SMEs with the industry clustering approach consists of two subsequent
stages:
1) diagnosis of existing clusters in the region to have a clear picture of the following thee aspects:
a. Characteristics: e.g. size range of firms, level of concentration, type of products, technical skills, the
availability of association and supporting institutions, level of investment, internal networks
among producers inside the clusters as well as external networks (including whether there
producers having subcontracting or other business linkages with companies outside the
clusters or region), etc.
b. Market:
local or exports or both.
c. Problems:
lack of knowledge on market opportunities, lack of technology, lack of finance, marketing
difficulties, quality control, lack of supply of raw materials, no access to information,
government policies that affect negatively, directly or indirectly, the clusters etc.
The selection of local SMEs clusters to be diagnosed should be based on the following two main criteria:
a) their products are among the region’s key commodities (thus attractive for investment);
b) they have export market potential, either as final goods or complementary goods for goods produced by
SMEs in other region, e.g. SMEs’ products in Sulawesi as inputs for SMEs’ products in Mindanao (thus
promoting cross-border partnership among SMEs from different regions)
2) By keeping in mind that the main objective (as mentioned before) is to promote local investment as well as
cross-border partnerships among SMEs in the BIMP-EAGA region, then the result of the above diagnosis will
determine what main policy actions will be required. Depending on the main current problems faced by the
diagnosed clusters, the actions may include the establishment of new or the empowerment of existing local
4
government supporting agency to open or to increase the connection of local SME clusters with
regional/international market, increasing partnership quality between government institutions and the SME
clusters as well as all other stakeholders of SME clusters development, soft as well as hard infrastructure
improvement, improvement of local information service by establishing information center that cover
information about market opportunities and all SME clusters (classified by products, location and market
orientation) in the BIMP-EAGA region, or establishment of regional investment and SME study center in a
local university.
So, the practical activities are subsequently as follows:
1. Identification of sub-regions to be included in the project.
2. Data collection and identification of “visible” clusters in the selected sub-regions.
3. Identification of local SMEs supporting agencies/programs in the selected sub-regions.
4. Assessment of local economic development and potentials and intra-trade among the selected subregions
5. Diagnosis of the selected clusters
6. Formulation of a cluster action plan based on results of the diagnosed clusters in close cooperation with
the clusters themselves. The action aims especially at the followings:
6a) developing SMEs’ knowledge of new and expanded markets, both export and domestic;
6b) building up SMEs’ production capabilities (e.g. quality, quality control, productivity);
6c) building up (when necessary) economically-viable supplies of required raw materials/inputs, again
tailored to the market requirement of SMEs;
6d) building up local capacity (especially government) to implement and further develop cluster action
plans;
6e) building up intra-trade among SMEs between sub-regions.
7. Implementation of the formulated action plan.
This project will generate a significant amount of data on SME's across the border. At least in the
Indonesian side, data on local SMEs can be obtained from local government body at district level, i.e.
BAPPEDA, or at subdistrict level, i.e. kelurahan, which has annual publication called: Desa dalam Angka
(Village in Number). Other, especially qualitative information should be collected through in-depth interviews
and focus group discussions (FGD).
The practical activities from number 1 to 6 are a short-term project, while the 7th activity is a long-term
project, which can be ranged from the establishment of a new local government or private supporting agency to
enhance intra-trade among SME clusters between sub-regions to actions in order to improve partnership
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between SME clusters and local government and other local stakeholders such as banks, trading houses, training
institutions or universities. All these will depend on the results of the diagnoses.
Expected outputs/ outcomes
There are two regional cases showing positive impact of development of SME clusters on the local
economy. The first one is from Indonesia. A number of case studies shows that clustering of rattan furniture
producers in Tegal Wangi, West Java has absorbed the entire village and created numerous satellite small-scale
industrial activities in neighboring hamlets (Smyth, 1990, 1992); the growth of wood furniture industries in
Jepara, West Java had transformed the town into a thriving commercial center with a five-mile avenue of such
as furniture showrooms and factories, modern hotels, new commercial banks, supermarkets, telephone and fax
stalls, and European restaurants (Schiller and Martin-Schiller, 1997); the development of a roof tile cluster in a
small village in Bali has turned poverty in the village into prosperity (Soemardjan, 1992); and the metalworking
industry cluster in Tegal, Central Java has been helping to promote investment in the district by attracting many
large companies, including FDI-based companies such as PT. Komatsu Indonesia Tbk, PT. Daihatsu, and some
divisions of the Astra Group such as PT. Sanwa, PT Kubota, and PT. Katshusiro. In the district, there are around 2,811
metal workshops, or about 10% of the total number of local enterprises in non-farm sectors in the district.
Among these are seven sentra, or groups of geographic agglomerations of metal enterprises producing the same
metal products. The majority of local workshops are small, employing less than 20 workers, mainly male. to do
subcontracting systems with local workshops (Tambunan, 2006, 2007).
The second case is from the southern Mindanao region, also known as Davao region, which has a number of
growing clusters, including food industry, wood industry and eco-tourism industry. Correspondingly, under the
Davao Regional Development Plan (DRDP), 2004-2010, the region is expected to grow by 5.7-6.7 percent on
the average on gross regional domestic product, and to generate 746,000 jobs. These are set to bring down the
region’s proportion of poor families from 31.5 percent to 20 percent or less by 2010. To achieve these
objectives, the Davao Region adopted the industry cluster approach as one of the major economic strategies
focusing on the development of priority industries, including the above mentioned ones, which have high
potentials and could serve as engines of economic growth in the region. It is anticipated that the development of
said industries will contribute 535,400 to the region’s total job generation targets, P186 billion in investments
and US$ 6.33 billion export receipts by 2010. 8
So far no data are available and not even studies have been made on SMEs clusters in the eastern part of
Indonesia. It can be easily assumed that in Indonesia, most developed SME clusters are located in Java, as
8
Taken from internet, Government Office, Davao.
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markets, infrastructures and other marketing supporting facilities are more available in Java than in the eastern
part of the country.
Thus, in more specific, the outputs of the initiative are the following:
1) based on the collected data and information gathered from in-depth interviews and FGDs, ‘viable’ SMEs
clusters (according to the two criteria mentioned before) and their current problems in each part of the
region can be identified, and concrete action plans will be formulated to deal with these current
problems;
2) with the implementation of the formulated action plans, investment, production and export of the
identified viable SMEs clusters will increase, which can be measured in terms of differences in value or
volume between ‘before’ and ‘after’ the initiative; and
3) cross-border partnerships among SME clusters in sub-regions will be generated.
As the outcomes, these outputs will contribute to the increases in regional GDP, investment, employment and
SMEs intra-trade in the region.
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