A Snapshot to Indonesian Entrepreneurship and MicroSME Development

Introduction

The Indonesian economy is basically characterized by grassroots SMEs that make up nearly 99.95 percent of the total number of enterprises . There are 41 million small economic units in the overall economy (including the agricultural sector), 60,000 medium-sized enterprises and more than 2,000 large enterprises. As of 2000, small enterprises accounted for 89 percent of total employment and medium-sized enterprises accounted for 10.55 percent. Conversely, small enterprises only accounted for 41 percent of GDP and medium enterprises 16 percent. Accordingly, the success in promoting SMEs is widely recognized as critical to long-term sustainable economic growth.

There is a need to increase the productivity of the SME sector. The productivity gap between the SME sector and large enterprises is so wide that the value added per worker in the SME sector is about 0.5 percent of that of the large enterprises on average. To make the SME-related projects more effective, the Indonesian government has chosen to dedicate itself to adopting a clustering approach with help from non-governmental organizations such as Business Development Services, members of which are spread throughout the nation.






Policy Initiatives

The Ministry of Cooperatives and Small and Medium Enterprises was established in 1993 solely to support the development of SMEs. The initial involvement of the government in promoting SMEs has been assigned formally to the Ministry since 1995 (Law No. 9 for Small Enterprises was enacted). The purpose of the law was two - fold:
First, to create a conductive business environment; and second, to strengthen the capacity and capability of the SMEs in order to promote them as economic actors.

To implement this objective, the government has formulated six main programs, so-called Action Plans, in promoting SMEs:

• Action plan for creating a business-conductive environment: The government takes part in formulating regulations required by SMEs.
• Action plan for market access: The government works to facilitate market access and opportunity.
• Action plan for financial access: The role of the government is divided into two areas. The government can provide a special scheme for SMEs, setting up procedures and standard requirement, and it can cooperate with financial institutions to provide financial resources for SMEs.
• Action plan for information access: This program is a part of marketing access plan, a current weak point in SME marketing. This action plan is about business networking through information technology.
• Action plan for technology and technology sharing: In this action plan, the government can assist SMEs in the field of increasing awareness to apply proper technology to the enhancement of competitiveness.
• Action plan for human resources development: Improvement of organization and management capacity is mainly focused on improving SME human resources development. According to the six action plans, the Ministry of Cooperatives and SMEs established seven deputy organizations.

The Ministry of Cooperatives and SMEs has been involved in clustering strategy for promotion of SMEs. It was found that supply-driven SME development programs led by strong government in the past few decades created dependency and in many cases the programs were hampered by frequent changes in the policy setting. Therefore, the Ministry set up the new basic principle of SME promotion through clustering: transferring SME support from being the responsibility of bureaucracy to the control of Business Development Services (BDS) over three years.

Furthermore the Government tried to update the Law of 1995 and in May 2011, President Yudhoyono announced the Master Plan for the Acceleration Expansion of Indonesian Economic Development 2011 –2025 (Public-Private Partnerships are expected to play an important part in infrastructure development of Indonesia ).

The Masterplan for Acceleration and Expansion of Indonesia's Economic Development (abbreviated MP3EI) is an ambitious plan by the Indonesian government to accelerate the realization of becoming a developed country of which the fruits and prosperity will be enjoyed equally among the people . By utilizing the MP3EI, Indonesia aims to earn its place as one of the world’s developed countries by 2025 with expected per capita income of USD $14,250-$15,500 and total gross domestic product of USD $4.0-$4.5 trillion. To achieve these objectives, real economic growth of 6.4 to 7.5 percent is expected for the period of 2011-2014. This economic growth is expected to coincide with a decrease in the rate of inflation from 6.5 percent in 2011-2014 to 3.0 percent in 2025.

This vision for 2025 will be achieved by focusing on three main goals:

1. Increase value-adding and expanding the value chain for industrial production processes, and increase the efficiency of the distribution network. In addition, to increase the capability of the industry to access and utilize both natural and human resources. These increases can be attained by the creation of economic activities within regions as well as among regional centers of economic growth.
2. Encourage efficiency in production and improve marketing efforts to further integrate domestic markets in order to push for competitiveness and strengthen the national economy.

3. Push for strengthening of the national innovation system in the areas of production process and marketing with a focus on the overall strengthening of sustainable global competitiveness towards an innovation-driven economy.



Tax Incentives

The Coordinating Minister for Economic Affairs has announced that tax incentives for infrastructure projects will be similar to those in manufacturing in the form of tax holidays and tax allowances .
The Income Tax Law provides various incentives to encourage companies to invest in certain qualifying business sectors and or regions.
The main concessions are:
• 30% investment allowance
• Accelerated depreciation of fixed assets (twice as fast as the normal rate)
• Longer tax loss carry forward period (extended from five years to ten years)
• A reduction of withholding tax on dividends paid to foreign shareholders from 20% to 10%
• Tax holidays-In August 2011, the government announced tax holidays should be provided to firms in Pioneer Industries which have a wide range of connections, provide additional value and high externalities, introduce new technologies and have strategic value for the national economy.
Eligible taxpayers may enjoy an income tax exemption for a period of five to ten years from the start of commercial production. At the end of the tax holiday period, the tax payers are given a 50% income tax reduction for a further period of two years
Despite the business oriented policy that the Government tried to establish, no single leading agency exists in Indonesia for Public-Private Partnership projects. However, a number of institutions closely collaborate for Public-Private Partnership development. One such unit is the Public-Private Partnership central unit which provides guidance for project preparation, procurement and project implementation.
To that extend the Ministry of Economic Affairs has published a Public-Private Partnership investor’s guide, which states that the government will assist with land acquisition and tariff reduction in certain circumstances. Noteworthy is the fact that within the guide the Ministry has included the so called “Negative Investment List ”.


Red Tape

A survey completed by the SEBAR team showed that 36.9 percent of MSMEs do not have any registration at all, while only 47.8 percent of those surveyed have already registered their company. Formally registered companies have access to a wider range of services and institutions including the courts, commercial banks, and business partners. As the benefits to registration are not significantly clear to a fledgling entrepreneur in comparison to the obligations and costs incurred, many entrepreneurs choose to avoid it, preferring to operate informally. Besides there is a bureaucratic Golgotha and legal hurdles, for entrepreneurs wishing to incorporate and register a new firm in Indonesia, specifically it will take 56 days and 10 bureaucratic steps to register.

Investment promotion and facilitation is the responsibility of the Indonesian Investment Co-ordination Board (BKPM) which registers both domestic and foreign investment projects as well as acting as the country’s investment promotion agency (IPA) . Motivated partly by its relatively poor performance in the World Bank’s Doing Business indicators, Indonesia has focused efforts to reduce red tape for business on implementing one-stop integrated services (PTSP) for investors at both central and local levels. This PTSP system aims to consolidate multiple licenses into one administrative step, introduce an electronic, automated platform, and hence cut the processing time and improve the predictability and transparency in investment registration significantly. BKPM is designated as the central level agency to provide PTSP while a respective regional body responsible for investment is to implement it at the local level.

Although a number of government regulations and notifications have been issued to support the PTSP system, the actual impact on the investment climate has so far been slight. While several Ministries have transferred their licensing authority or technical staff to BKPM, there remains an excessively large number of licenses which should be further streamlined. Local level implementation of PTSP has been uneven, reflecting the great diversity in capacity, political support, co-operation from other technical departments and pressure from local business. Strong government leadership and careful planning of implementing steps in consultation with stakeholders are necessary to achieve more efficient and predictable investment registration.

Natural Resources

Indonesia has an abundance of both renewable (agricultural products) and nonrenewable (mining and minerals) natural resources. It must be able to optimize the handling of its natural resources by increasing a processing industry that will provide high added value, while at the same time reducing exports of raw materials. Indonesia is one of the world’s major producer of a broad range of commodities. It is the largest producer and exporter of palm oil in the world. It is the world’s second largest producer of cocoa and tin. Regarding nickel and bauxite the country comes fourth and seventh respectively in the world’s reserves. Indonesia is also one of the largest producer for steel, copper, rubber and fisheries.
Indonesia contains huge reserves of coal, geothermal energy, and water which are used to support Indonesia’s prime industries such as, textiles, shipyards, transportation, as well as food and beverages.

Banking

The financial institutions see lending to small-medium businesses as an important part of their business plans , in fact ninety percent of the participant banks rated such lending as “very important.” Especially nowadays, Indonesian financial institutions, despite some commentary to the contrary, strongly focus services on loans and savings/demand accounts. Nineteen of the 20 lending institutions, in response to a direct question, said they would take actions to expand their share of the small-medium business market. At least four out of five who responded to a more detailed question said they were taking direct actions to do so:


1) Training bank staff
2) Adding branch networks
3) Opening special branches for SME banking
4) Upgrading on-line banking particularly for bill paying and other transactions.

On the other hand, despite what the Banks state, Small and Medium firms in Indonesia consistently report problems in obtaining access to credit, and there are some indicators of bank reluctance to move strongly into this market. At the moment, the SME segment contributes only about 20 percent to the portfolio , according to Standard Chartered’s SME banking group head, Christopher Dalo. “The growth rate has been consistent at between 10 and 12 percent each year for the past few years. Now, we are seeing rising wealth in Indonesia, and some of it is coming from SME owners,” he said.

Thus current pressures are pushing commercial banks in the direction of this market. The central bank (BI) obliges all existing banks to channel at least 20 percent of its total lending to the segment of the SME by 2018. To help meet BI’s requirement, the bank now partners with local banks to channel the loans to areas beyond their own offices’ reach. According to BI’s data, loans for micro, small and medium businesses reached Rp 583.78 billion (US$52.47 million) in June 2013, while the total loans recorded by commercial banks amounted to a staggering Rp 4,395 trillion.

What’s more, is the fact that Banks are lacking of experienced and/or educated personnel. Many of the SME’s response was that the Banks’ staff was not aware of the Bank’s products nor any funding mechanism that could be used by the entrepreneurs. In that sense, it is unthinkable to suggest that Banks could be used as a mechanism tool by the Government to support the SMEs, when in fact the majority of the products that Banks have towards that segment is mostly accounts and now are issuing credit cards.

Furthermore, the interest rates are still sky high at 12 to 14% annually on commercial loans, whereas in order to even consider for a loan in first place it requires such as 2 years operations and reported cash flows and collateral requirements. With that in mind, it is no wonder why 90% of the commercial loan applications are rejected, 48% of which with no justification on why they are been rejected. Overall, today, banks are loaning more to MSMEs than previously. However, the proportion of MSMEs who actually get loans from commercial banks is still small. According to Bank Indonesia’s statistics, only around 439,850 MSMEs from 53.823 million MSMEs have received credit loans.


KADIN Indonesian Chamber of Commerce and Industry

KADIN is focused on all matters relating to trade, industry and services, and is highly committed to tapping potentials and synergies of the national economy, offering a strategic forum for Indonesian entrepreneurs. It is privately financed, hence an independent spokesperson of private sector interests . It is also the only nation-wide business organization mandated by Law No. 1/1987 to speak on behalf of private business, maintaining a privileged liaison to Government Officials and covering all relevant sectors. 33 regional Chambers (KADIN Daerah) and 440 district branches ensure national coverage. Because of this huge network, KADIN Indonesia is the preferred partner for foreign companies initiating their engagement in Indonesia.





SME

Small Medium Enterprises (SMEs) in Indonesia are growing fast . In the period of 2011-2012, SMEs in Indonesia grew as much as 2.41% from total of 55.206.444 units (which composed by: Micro Businesses as much as 54.559.969, Small Businesses as much as 602.195 and Middle Businesses as much as 44.280) to total of 56.534.592 units (which composed by: 55.856.176 Micro Businesses, 629.418 Small Businesses, and 48.997 Middle Businesses). By these numbers, SMEs in Indonesia give big contribution to create job employment. In 2011, for example, SMEs created jobs to about 97.24% (equal to 101.722.548 persons); and in 2012, SMEs had successfully created jobs to about 9.16% (equal to 107.657.509 persons). SMEs’ contribution to the National GDP is also significant. In 2011, SMEs’ contribution to National GDP was about 57.94% (or equal to IDR 4.303.571,5 Trillion) and it increased to 59.08% (or equal to IDR 4.869.568,1 Trillion) in 2012. These contributions have made SMEs become one of the key sectors to enhance Indonesian economy.

Moreover, related to export performance, SMEs in Indonesia give significant contributions to national export performance. In 2010, SMEs’ contribution to national export performance is about IDR 175.894,9 Billion (or equal to 15.81%) and IDR 187.441,82 Billion (equal to 16.44%) in 2011. The flagship export products for SMEs include: 30% of handicraft, 29% of fashion and accessories, 27% of furniture, 10% of food and beverage, and 4% of health and beauty products. The main policy challenge will be to speed up the development of technology based SMEs, preferably in the kind of technology that conforms to the current global discourse on sustainable development that embeds with three key domains:

i) Environmental Sustainability
ii) Social Sustainability
iii) Economic Sustainability.

In that spirit, the main feature of the development policies for SMEs consists of:

a) Improvement of access to technology,
b) Improvement of access to finance,
c) Improvement of access to market,
d) Technology diffusion and commercialization scenarios through business incubation,and
e) Provision and creation of conducive environment to support new business ventures, etc.

Although the SME informatization of Indonesia is led by the government, government bodies are not equipped to cover vast regions and various types of SMEs scattered throughout the economy without support from other organizations interested in SME promotion. Of the many organizations helping promote SMEs are Business Development Services providers (BDS ) in Indonesia.

The BDS providers basically operate in most of the big cities and universities. There are at least three sources of funding for non-government BDS providers, namely universities, including technology and incubation centers, NGOs and international organizations, and privately funded BDS providers that have developed in many fields of business service centers. However, in less developed regions at the district level and on the outer island of Java, the absence of BDS providers is still a common phenomenon.

In those areas, the government has introduced a large number of project models to support SMEs, such as business incubators in different sectors, business consulting clinics and technology centers. However, the program sponsoring the promotion of business advisory units was not always successful in being a productive regulator and facilitator of market and product development for BDS providers. In the new cluster program that the government is planning to activate shortly, each BDS forms a contractual partnership arrangement with the government to serve the cluster for three years; in exchange, government provides start-up capital to the BDS providers. The seed money is paid back in the form of servicing other clusters nearby or in other areas as agreed upon by both parties within the three-year period.

The Center for Development of SMEs (CD SMEs) is another non-government organization located all over Indonesia, though heavily concentrated in the urban areas. CD SMEs are members of an international organization that specialize in the promotion of financial SMEs, with SME financial institutions as its members




Summary

My conclusions and suggestions are drawn from a theoretical level and based on what data I found for Indonesia, without having seen the situation at first hand.
In order for Indonesia to accelerate its green and sustainable development, it will need to embrace a new way of thinking, a new way of working, and a new way of conducting business. Despite the efforts of the GOI to promote Indonesia and to make out the country on the centre of the map by organizing International Exhibitions on Innovations, Entrepreneurship and SMEs , Policies at the central and regional level need to be streamlined to ease the doing of business.
A new way of thinking should be based on the spirit of “Not Business as Usual”. The implementation of the new way of thinking regarding economic development needs collaborative efforts among government, local governments, state-owned enterprises, private enterprises and the people. Since the government has very limited funds to finance development through its State Budget (APBN), thus, in order to foster the economic growth in Indonesia, it will depend largely on private sector participation which includes state-owned enterprises, and private domestic and foreign investors.
Government policy must be streamlined to allow for a bigger participation from the private sector. Regulations must be clear and without any possibility for misinterpretation in order to encourage trust and maximize participation from investors to build much needed industries and infrastructure. In order to achieve the above objectives, all existing regulatory frameworks must be evaluated and strategic steps must be taken to revise and change regulations.
The role of the government in the implementation of MP3EI is to provide a set of rules and regulations that give incentives for investors to build sectorial industries and infrastructure. Incentives can consist of conducive policy on tariff, taxes, import duties, labor regulations, licensing and permits, land procurements, etc. The central and local governments must build a reliable link within and beyond the centers of economic growth.
Micro, small and medium-sized firms (MSMEs) are a key source of employment and economic growth in Indonesia . They contributed to the country’s economic resilience during the 2008-09 financial crisis. But many suffer from low productivity, curbing their role in boosting living standards. There are several ways to spur MSME productivity growth over the medium term.
The first route would be to encourage the formalization- registration of small firms. Lessening red tape through simplification of the licensing process and lower tax compliance costs would help. Avoiding excessive rises in the minimum wage in provinces where it is already at a reasonable level would also be important. Looking forward, it would be useful to remove rigidities in the formal labor markets, while moving to some form of unemployment benefit system to insure workers against job-loss risks.
The second route would be to boost investment. At the same time, the development of financing alternatives such as venture capital, leasing or micro-finance would enhance credit supply. The poor state of infrastructure, in particular in the transportation and electricity sectors, is also perceived as an important impediment to investment and could be remedied by increasing public infrastructure spending on cost-effective projects.
The third route would be to enhance the quality of human resources. The country suffers from a lack of skilled workers, and policies should aim both at increasing the pool of workers and making education and training institutions more responsive to evolving labor-market demand. But responsibilities between the different levels of government and within the central government need to be clarified to minimize overlap and inefficiencies.