ENTREPRENEURSHIP DEVELOPMENT IN INDONESIA. Tulus Tambunan Kadin Indonesia-Jetro, 2006 Abstract

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1 ENTREPRENEURSHIP DEVELOPMENT IN INDONESIA Tulus Tambunan 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 1

2 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 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 2

3 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 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 3

4 only around 16% to 20%, and declined to about 15.% in GDP contribution of industry, on the other hand, increased from less than 20% in the 1970s to almost 30% in 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: Source: Statistical Year Book of Indonesia (SI), published annually by the Indonesian National Agency for Statistics (BPS) Sector Table 1. Growth rate of real GDP by sector in Indonesia, Period Q 2006 Agriculture, livestock, forestry & fisheries Mining & quarrying Manufacturing Electricity, gas & water supply Construction Trade, hotel & restaurants Transport & communication Financial, rental & business services Other services Real GDP 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 4

5 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. 5

6 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 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 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: Size Category SEs 39,704,661 36,761,689 37,804,536 38,985,072 40,137,773 42,475,756 43,158,468 MEs 60,449 51,889 51,798 55,061 57,743 59,580 63,361 LEs 2,097 1,831 1,832 1,946 2,095 2,169 2,248 Total 39,767,207 36,815,409 37,858,166 39,042,079 40,197,611 42,537,505 43,224,077 Source: Menegkop & UKM 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. 6

7 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 SME in non-agricultural sector** ,500 4, , ,299 7,253, ,904 16,416,020 6,433,557 2,607, ,100 3, , ,021 8,608, ,886 12,045,600 6,484,264 2,094,637 1,302, , ,966 77, ,000 31, , ,300 5,359,421 1,000 2,179, , ,667 99, ,500 47, ,881 5,691,430 1,111,900 5, , ,000 8,000, , ,000 6,139,735 2,700,000 19,000 2,854,266 19, , , ,000 54,000 1,050, ,000 6,303, ,000 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 SMEs as % of all enterprises in the 1990s** 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 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 LEs Agriculture (1) 25,457,190 25,477, Mining (2) 203, , Manufacture (3) 2,711,522 2,743, Electricity, gas & clean air supply (4) 4,423 4, Construction (5) 132, , Trade, hotel & restaurant (6) 9,071,331 9,845, Transport & communication (7) 2,488,161 2,551, Finance, rent & service (8) 33,169 37, Services (9) 2,433,483 2,254,

8 Total 42,535,336 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 , 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: (%) Sector SE ME LE Total GDP GDP without oil & gas Source: BPS Figure 2: Contribution to GDP Growth by Size Group of Enterprises, (%) LE ME SE 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. 8

9 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, Size group Q1 Q2 (%) Q1 Q2 (%) Q1 Q2 (%) Q1 Q2 (%) Q1 Q2 (%) MEs + LEs MIEs + SEs 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 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). 4 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). 9

10 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 10

11 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 (0) 2,490,118 (0) 2,728,700 (0) 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 11

12 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 (HDI and GDI 0.685), while in Thailand and Vietnam, for instance, in the same year the difference was only (Suharyo, 2005). Table 8: Number of Non-Farm MIEs and SEs by Gender Entrepreneur and Sector, 2003 (unit) Sector Total units Entrepreneurs/owners Male Female Mining, electricity (non-stated Own/PLN) & construction (0)* Manufacturing industry Trade, restaurant & accommodation service Transportation & communication Financial institutions, real estate, renting, and services (0) (0) (0) (0) (93.64) [2.21]** (61.93) [15.25] (61.21) [52.64] (98.60) [19.94] (71.80) [9.97] (6.36) [0.32] (38.07) [19.91] (38.79) [70.86] (1.40) [0.60] (28.20) [8.32] Total Notes: * = distribution percentage by row (sector). ** = distribution percentage by column (entrepreneur) Source: BPS (SUSI 2003) (0) (68.00 ) [0] (32.00 ) [0] 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 Female Male 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)

13 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,

14 Sumatera Java + Bali Nusa Tenggara Kalimantan Sulawesi Maluku + Irian 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 , 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 14

15 Table 10: The number of institutions and assistance programs to strengthen SMEs, Institutions Number of institutions Number of assistance programs a) Government institutions b) Banking institutions c) Private companies d) Donor agencies e) NGOs f) Others Total Still continuing Total % Total Source: SMERU 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. a* b c d E f Total 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

16 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, % Sumatera Java & Bali Nusa Tenggara Kalimantan Sulawesi Maluku & Papua 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 In this scheme, all state-owned enterprises and big private companies (LEs) are required to assist SMEs in capital, training and technical assistance, 16

17 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 Not having (% of total) Having (% of total) Type of facilities (% of total firms having the scheme)* Capital/Loan (a) (b) (a) (b) (a) (b) Procurement of raw material Marketing Technical assistance & training Others (a) (b) (a) (b) (a) (b) (a) (b) Total SEs & MIEs MIEs SEs 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). 17

18 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 political and economic reforms in 1998 onwards, it is still running. Many big companies are still active in assisting SMEs. For instance, according to some key persons in PT ASTRA International, the company continues to recruit new SMEs as its potential subcontractors especially in the motorcycle industries like Honda and Suzuki. Based on its annual public report, PT Freeport (the American gold company) in Papua is still consistent with its local community development, in which many MIEs and SEs in surrounding villages of its mining operation site are involved. Since 2004, Indonesian Chamber of Commerce and Industry (Kadin Indonesia) has also been involving in assisting SMEs through a new established trading company called PT UKM. However, there is no evidence showing that at the national level the scheme was successful in fostering the growth of SMEs. Even, the general impression is that the FP is a failure scheme as it was essentially a non-market mechanism by pressuring a forced marriage between the LEs and the SMEs. International evidence shows dense patterns of linkages and partnerships are not formed through mandatory linkage requirements, but because they offer commercial benefits to both parties. Another more comprehensive technical assistance program has been the development of technical service units (UPT)) located in SME clusters of similar industries across provinces. These units provide extension and technical services and training courses. Government technical officers who have received special training staff the units. Based on his survey, van Diermen (2004) concludes that the UPT extension service program has done poorly. It has failed to deliver efficient services, target appropriate recipients and address the important criteria of providing a net benefit to society and/or effectively addressing equity or fairness objectives. He states other problems with the implementation of the UPT include: (i) types of services are highly supply oriented rather than demand driven; (ii) originally, these units were supplied with modern technological machines and equipments. However, over the years, especially after the economic crisis 1997/1998, budget constraints have prevented the replacement of the existing equipment. Today, much of the machines and equipments are 18