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Micro, Small and Medium Enterprises in Indonesia (Some Research Findings)

Author(s): Tulus T. H. Tambunan
1.1 The Importance of MSMEsFrom a worldwide perspective, it is generally recognized that micro, small and medium enterprises (MSMEs) play a vital role in economic development, as they have been the primary sources of job/employment creation and output growth, not only in developing countries but also in developed countries. In his various publications, based on reviews of many empirical studies, Tambunan (2006a, 2009a,b, 2015b) showed that, for example, 12 million or about 63.2 per cent of total labor force in the United States worked in 350,000 firms employing less than 500 employees, which considered as MSMEs. These enterprises made up more than 99 per cent of all business entities and employed more than 80 per cent of total workforce in the country. They, often called the foundation enterprises, are the core of the US industrial base. MSMEs are also important in many European countries. In the Netherlands, for example, these enterprises accounted for 95 per cent or more of total business establishments. In other industrialized/OECD countries such as Japan, Australia, Germany, French, and Canada, MSMEs, and particularly small and medium enterprises (SMEs), are also acted as an important engine of economic growth and technological progress.In developing countries, MSMEs have also a crucial role to play because of their potential contributions to the improvement of income distribution, employment creation, poverty reduction, industrial development, rural development, and export growth. For this reason, governments in these countries have been supporting their MSMEs extensively through various programs, with subsidized credit schemes as the most important component. International institutes such as the World Bank, the Asian Development Bank (ADB) and the United Nation Industry and Development Organisation (UNIDO) and many donor countries through bilateral co-operations have also played a crucial role in empowering MSMEs in developing countries. It is widely suggested in the literature that the importance of MSMEs in developing countries is because of their characteristics, which include the following ones:1. Their number is large, especially micro enterprise (MIEs) and small enterprises (SEs), and they are scattered widely throughout the rural areas and therefore they may have a special "local" significance for the rural economy;2. As being populated largely by firms that have considerable employment growth potential, their develop¬ment or growth can be included as an important element of policy to create employment and generate income. This awareness may also explain the growing emphasis on the role of these enterprises in the rural areas in developing countries. The agricultural sector has shown not to be able to absorb the increasing rural population. As a result, rural migration increased dramatically, causing high unemployment rates and its related socio-economic problems in the urban areas. Therefore, rural non-farm activities, especially rural industries being a potentially quite dynamic part of the rural economy have often been looked at their potential to create rural employment, and in this respect, MSMEs could play an important role;3. Not only that the majority of MSMEs, especially MIEs, in developing countries are found in the rural areas, they are also mainly agriculturally based activities. Therefore, government efforts to support MSMEs could also be considered as efforts, indirectly, to support the agricultural sector;4. MSMEs use technologies that are in a general sense more "appropria¬te" (as compared to modern technologies used by large enterprises (LEs)) to factor proportions and local conditions in developing countries, namely quite many raw materials being locally available and scarcity of capital, including human capital;5. Many MSMEs, especially SMEs, expanded significantly. Therefore, these enterprises are regarded enterprises having the “seedbed LEs” function;6. Although in general rural people are poor, available evidence showed that poor villagers were able to save a small amount of capital and invest it; they were willing to take risks by doing that. In this respect, MSMEs provide thus a good starting point for the mobilization of rural saving/investment; while, at the same time, these enterprises could function as an important sector providing an avenue for the testing and development of entrepreneurial ability of villagers. In fact, MSMEs financed their operations overwhelmingly by personal savings of the owners, supplemented by gifts or loans from relatives or from local informal moneylen-ders, traders, suppliers of raw materials and other inputs, and payments in advance from consumers. These enterprises could therefore play another important role, namely a means to allocate rural savings that otherwise would be used for unproductive purposes. In other words, if productive activities are not available locally (in the rural areas), rural/farm households having money surplus might keep or save their money without any interest revenue inside their home because in many rural areas there are no formal banks available. That is why, in many cases they used their wealth to buy lands, cars or houses and other unnecessary luxury consumption goods that often considered by the villagers as a matter of prestige;7. Although many goods produced by MSMEs are also for the middle and high-income groups of population, it is generally evident that the primary market for MSMEs' products is overwhelmingly simple consumer goods, such as clothing, furniture and other articles from wood, footwear, household items made from bamboo, rattan, and wood, and metal products. These goods catered to the needs of local low income consumers. MSMEs are also important for securing the basic need goods for poor/non-wealthy people/households. However, there are also many MSMEs engaged in the production of simple tools, equip¬ment, and machines for the demands of small farmers and small producers in the industrial, trade, construc¬tion, and transport sectors;8. As part of their dynamism, MSMEs, especially SMEs, often achieved rising productivity over time through both investment and technological change; although different countries may have different experiences with this, depending on various factors. The factors may include the level of economic development in general and that of related sectors in particular; accessibility to main important determinant factors of productivity, particularly capital, technology, and skilled manpower; and government policies that support the development of production linkages between MSMEs and LEs as well as with foreign direct investment (FDI);9. As often stated in the literature, one advantage of MSMEs was their flexibility, relative to their larger competitors. These enterprises are construed as being especially important in industries or economies facing rapidly changing market conditions, such as the sharp macroeconomic downturns that have bedeviled many countries in Southeast Asia, including Indonesia, over the past one decade.1.2 Definition and Concept of MSMEs What constitutes an MSME varies widely between countries. There is no common agreement on what distinguishes a MIE from a SE; a SE from a ME (medium enterprise); and a ME from a LE. MSMEs may range from a part time business with no hired workers or a non-employing unincorporated business, often called self-employed units, such as traditional business units making and selling handicrafts in rural Java in Indonesia, to a semiconductor manufacturer employing hundreds of people in Japan. They may range from fast growing firms, to private family firms that have not changed much for decades or stagnated. They range from enterprises, which are independent businesses, to those, which are inextricably part of a large company, such as those, which are part of an international subcontracting network. The only true common characteristic of MSMEs is that they are “not-large”; that is whether a firm is really an MSME or not is relative. In Indonesia there are several definitions of MSMEs, depending on which agency provides the definition. However, Indonesia has also a national law on MSMEs. The initial law was issued in 1995 by the State Ministry of Cooperative and SME, namely the Law on Small Enterprises Number 9 of 1995. It defines a SE as a business unit with total initial assets of up to 200 million Indonesian rupiah (IDR), not including land and buildings, or with annual sales of a maximum of IDR 1 billion, and a ME as a business unit with annual sales of more than IDR 1 billion but less than IDR 50 billion. Although the law does not explicitly define MIEs, data from the State Ministry on SEs also include MIEs. In 2008, the State Ministry issued the new Law on SMEs Number 20, replacing the 1995 Law. According to this new law, MSMEs are those annual sales/turnovers up to IDR 50 billion and fixed investment (excluding land and building) less than IDR 10 billion. In terms of the total number of workers, the National Agency of Statistics (BPS) defines MSMEs as units with 50 employees or less. MSMEs consist further of three sub-categories: MIEs, with up to five workers; SEs with six to 20 workers; and MEs with 21-50 workers.1.3 CharacteristicsIn reality, however, these subcategories of MSMEs in Indonesia as in other developing countries are not only different in total number of employees, annual revenues, or value of invested capital/assets as criteria to define them, but they can also be distinguished easily from one another by reference to their different characteristics. Such characteristics include formality or ways of doing business, market orientation, social-economic profiles of their owners/producers, nature of employment, organization and management system, degree of mechanization (nature of production process), sources of main raw materials and capital, location, external relationships, motivation, level of entrepreneurship, and degree of women’s involvement as entrepreneurs For instance, more women entrepreneurs are found in MSMEs than in LEs, and within the MSME group, MIEs have more women as business owners than in SEs and MEs for the following two key reasons: (1) for conducting activities in MIEs, advanced technologies and high formal skills are not as necessary because, in general, MIEs are very simple income-generating activities, such as food production, food stalls, shops selling basic goods, retails, and handicrafts; and (2) because of these simple and small scale activities, no special space is needed and, especially for married women, they can more easily divide their time between servicing their customers and doing their required domestic works.There are also differences between MIE, SE and ME in the background or motivation of entrepreneurs to do business. The difference in entrepreneurial motivation should actually be seen as the most important characteristic to differentiate between MSMEs and LEs, as well as between the sub-categories within the MSME group itself. Most micro-sized entrepreneurs in Indonesia have more economic rather than profit motivation, namely they do such activities not to seek profit but as a means to survive, i.e. to earn some money (for unemployed persons) or to increase their primary income (for e.g farmers whose income is not enough) to meet their daily needs. But there are also micro-sized entrepreneurs whose motivation is to continue their family business. Compared to small-sized, let alone medium-sized entrepreneurs, only a few micro-sized entrepreneurs have the motivation to seek profit. Apart from that, another reason to become a micro-sized entrepreneur is because there is no opportunity for a career in other fields.The motivations of small-sized entrepreneurs are more diverse than their micro counterparts. Although economic motivation is also the main reason, some others have a more realistic motivation by looking at future business prospects with their limited capital. Most of the small-sized entrepreneurs in Indonesia have a reason to do business because of the existence of business opportunities and a secure large market share. There are also a number of small-sized entrepreneurs doing business with the main reason being heredity/inheritance, being equipped with skills and creating new jobs for local residents. Although there are still a number of entrepreneurs who argued that they do not have opportunities in other fields for various reasons, such as low formal education, or poor physical conditions. This shows that small-sized entrepreneurs have a better reason than micro-sized entrepreneurs.Meanwhile, the motivations of medium-sized entrepreneurs in Indonesia are largely the same as those of most small-sized entrepreneurs, namely seeing future business prospects, opportunities, and a secure and large market share. There are also some entrepreneurs from this particular group who do business because of heredity/inheritance, have expertise, or others. In general, it can be said that the motivation of small-sized and medium-sized entrepreneurs is more business oriented than micro-sized entrepreneurs.Apart from entrepreneur motivation, there are also differences between MSMEs and LEs as well as within the MSMEs group itself according to the status of a legal entity. Obviously, all companies in the LE group are legal entities. However, this is not the case with MSMEs, especially MIEs, and that is one of the reasons why it is difficult for these tiny and most traditional enterprises to obtain bank credit (meanwhile, ownership of a legal entity is important to facilitate a company access to funding from the formal financial sector) For example, in Indonesia, according to national data, about 95 per cent of the number of MSMEs are not legal entities. Within this group, there are more MIEs which are not legally incorporated, compared to SEs and MEs. Almost all SEs and MEs are legal entities. This fact gives impression that the larger the business scale, the more companies are incorporated.Another characteristic is the age structure of the entrepreneur/business owners. Based on national data, the age structure of MSME owners according to age groups in Indonesia indicates that more than one third of the total number of MSME owners were over 45 years old, and only a few were under 25 years old. On average, MSME owners were over 40 years old. The age structure of entrepreneurs/business owners indicates that MIE and SE owners tended to be younger than ME owners. One reason could be that ME is a business unit not only larger but also more complex and requires more capital compared to MIE and SE, and such business can only be carried out by persons who are more established, have enough money, long experience and insight, and all these are associated with age. Another suspicion is that many ME owners started many years before from MIE or SE, so that by the time their business grew and became ME, the owners would also be older.The difference between MSMEs and LEs can also be observed according to the status of the worker. In LEs and MEs there are no unpaid workers; all workers are recruited legally and paid monthly. In contrast to this, in MIEs and SEs there are many unpaid workers. Thus, the composition of unpaid labor tends to be inversely proportional to the scale of the business, which means that the larger the size of the business the smaller the composition of the unpaid workers. This also suggests that in most MIEs and SEs, the owners are directly involved in all activities in running their businesses (or commonly known as self-employment), and also many of them engaged their family members as workers, often called as ‘helper’.Regarding the gender of the worker, there is also a difference between LES and MSMEs. In LEs, the role of female workers is relatively smaller than in MSMEs, although there are variations by sector or subsector. Within the MSMEs group, MIEs and SMEs tend to have more female workers compared to MEs. This structure of the workforce according to sex is closely related to the differences in business types between the two subgroups of businesses. In the manufacturing industry, for instance, the nature of production activities in MIEs and SEs is generally simpler than that in most MEs, such as in textile and clothing, food processing, footwear, and handicrafts industries that do not require too much physical load and special skills making it easy for women to do so.The most notable difference between LEs and MSMEs is the gender difference of the entrepreneur or business owner. In Indonesia, although today the level of emancipation and development of women is much better than, say, 50 years ago, but until now formal work is still dominated by men. In MSMEs, especially MIEs, the majority of which are in the informal sector, the role of female entrepreneurs is much greater than in SMEs and LEs. While in LEs, the participation rate of women as entrepreneurs is relatively low. This structure indicates a positive correlation between women's participation rates as entrepreneurs and business size, which means that the larger the size of the business, the fewer female entrepreneurs.Finally, the difference between LEs and MSMEs can also be seen in the average level of formal education of entrepreneurs/owners. In MIES, the number of entrepreneurs who have only elementary school is more than those in LEs and MES. Meanwhile, for the category of entrepreneurs/owners who graduated from college, the percentage is higher in MES than in LEs and SEs. This entrepreneur structure according to the level of formal education shows a positive relationship between the average level of education of the entrepreneur and the size of the business: the larger the size of the business, which is usually positively related to the level of complexity of the business that requires higher skills and broader business insight, the more entrepreneurs with formal education.
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