Entrepreneurship Development Smes in Indonesia

April 25, 2007 14:57 WSPC WS-JDE SPI-J076 00057
Journal of Developmental Entrepreneurship

Vol. 12, No. 1 (2007) 95–118
© World Scientific Publishing Company
ENTREPRENEURSHIP DEVELOPMENT: SMES IN INDONESIA
TULUS TAMBUNAN
by NANYANG TECHNOLOGICAL UNIVERSITY on 04/26/15. For personal use only.
Center for Industry and SME Studies

J. Dev. Entrepreneurship 2007.12:95-118. Downloaded from www.worldscientific.com
Faculty of Economics, University of Trisakti, Indonesia

Jl. Kiyai Tapa No.1, Jakarta Barat, Indonesia
sjahrir@rad.net.id
Received February 2006

Revised December 2006
The Indonesian government has been trying to encourage entrepreneurship development by supporting
the development of small and medium enterprises in the country, since these enterprises provide an
avenue for the testing and development of entrepreneurial ability. This paper examines the current
developments of SMEs in the country. The paper comes with a number of interesting facts. First,
SMEs are of overwhelming importance in Indonesia, as they account for more than 90 percent of
all firms outside the agricultural sector, and thus are 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 suggest 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 some previous experience of running a business or of how to survive
in competitive markets, and the emphasis should be to promote modernization, capacity building and
size upgrading.
Keywords: Small and medium enterprises (SMEs); microenterprises (MIEs); small enterprises (SEs);
medium enterprises (MEs); women entrepreneurs; entrepreneurship.
1. 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, reviewing the miracle
development in some Asian countries, the so-called newly industrialized countries (NICs)
such as Taiwan, Hong Kong 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 thought 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 crucial factor, namely entrepreneurship. Today,
development of entrepreneurship, together with human skills improvement have become two
crucial factors for a country to be a world leader in all aspects of life, e.g., economy, trade,
military, technology, etc., and for a sustainable economic and social development.
95
96 T. Tambunan
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 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 study is to analyze the current developments of SMEs in the country.
Since these enterprises can function as an important sector, providing an avenue for the
testing and development of entrepreneurial ability of local people, current development of

SMEs in Indonesia may indirectly reflect current development of entrepreneurship in the

country. Therefore, the terms “entrepreneurship” and “SMEs” are used here interchangeably.
More specific, this study addresses five research questions. First, how important are SMEs
in the Indonesian economy? Second, what are the main problems facing entrepreneurs in
Indonesia? Third, how representative are women entrepreneurs in Indonesia? Fourth, what
are the main determinant factors of women entrepreneur development in the country? Fifth,
how effective are government-sponsored programs in supporting the development of SMEs
in Indonesia? All these questions will be addressed by analyzing secondary data, though
rather limited.
2. 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 and UKM), the Department of Industry (MoI) and
the Central Statistical Agency (BPS), only definitions of these three government agencies
are relevant for the study. Menegkop and 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 Rp200 million (about US$20,000 at the current exchange rate), not
including land and buildings, or with an annual value of sales of a maximum of Rp1 billion
(US$100,000), and a medium enterprise (ME) as a business unit with an annual value of
sales of more than Rp1 billion but less than Rp50 billion. Law does not define explicitly
microenterprises (MIEs). However, since MIEs are the smallest size category of enterprises,
Menegkop and UKM data on SEs include MIEs. BPS, which regularly conducts surveys
of SMEs, uses the number of workers as the basis for determining the size of enterprise.
In its definition, MIEs, SEs and MEs are business units with, respectively, 1–4, 5–19 and
20–99 workers, and large enterprises (LEs) are units with 100 or more workers. MoI defines
enterprises by size in its sector also according to number of workers as in the BPS definition.
3. 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 roughly US$50 a year; about 60 percent of adult
Indonesians could not read or write; and close to 65 percent of the country’s population
Entrepreneurship Development: SMEs in Indonesia 97
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 the two highest priority sectors. To support
development of national industry, the government adopted two subsequent strategies. It
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 later by development of automotive assembling industries. 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 modernization or intensification of agriculture, known as the “green
revolution,” as the main strategy. The goal of this strategy was twofold: to boost agricultural
productivity to achieve rice self- sufficiency, and to increase real income per capita in rural
areas to reduce rural poverty and thereby, national poverty as well.
These strategies had generated a rapid and sustained economic growth at 7 percent on
average per year, especially during the 1980s up to 1997, just before the Asian financial crisis
occurred in 1997–1998. 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. In 1970, the GDP per
capita in Indonesia was slightly less than US$300, and in mid-1997, just before the crisis,
it increased to slightly above US$1,000.
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 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 and SENADA, 2006).
From mid-1997 up to 1998, the Indonesian economy came to an abrupt halt with
the advent of the Asian economic crisis preceded with the depreciation of the rupiah by
more than 500 percent in mid-1998. Consequently, many companies, especially large-scale
enterprises/conglomerates which heavily depended on imported materials and components
and foreign loans, stopped their production. As a result, the Indonesian economy grew at
−13 percent in 1998, and the GDP per capita dropped to less than US$900. 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 percent,
which is lower than the expected 6.5 percent. In 2004, the GDP per capita reached a level
above US$1,000 and it continues to increase onwards. The reduction in government fuel
subsidies in October 2005 as a logical consequence of the rapid increase of oil in the world
market led to a fuel price increase of more than 100 percent, sparking a huge spike in the
98 T. Tambunan
inflation rate. Because of this cut in fuel subsidy, it is expected that the growth rate in 2006
will be less than 6 percent.
Since the first years of the NO era, the Indonesian economy has 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 percent to
the formation of GDP. During the 1990s, its GDP contribution was only around 20 percent,
and declined to about 15 percent in 2005. On the other hand, GDP contribution of industry
increased from less than 20 percent in the 1970s to almost 30 percent in 2005. Industry also
joined the big sector in terms of output growth per year. In 2004, it grew 6.4 percent or
4.6 percent in 2005 compared to 2.1 percent or 2.5 percent in agriculture for the same peri-
ods, respectively. In 2005, other sectors that had relatively high growth rates were transport
and communication (13 percent), trade (8.6 percent), construction (7.3 percent) and finance
(7.1 percent).
During the NO era, the government also paid much attention to the development of
SMEs, especially in the manufacturing industry. The government believed that SMEs could
play an important role as the backbone of national industry development, particularly as
supporting industries for LEs through subcontracting or other forms of production links.
Within the manufacturing industry, SMEs in food and beverages, footwear, textile and
garments, wood and its products, leather and its products, handicrafts, metal products and
electronics received enormous governmental support, as it was believed that SMEs have
specialization in these industries.
4. The Importance of SMEs in the Indonesian Economy

The development of SMEs and changes over time in their employment and output shares,
output composition, market orientation and location are usually thought to be related to many
factors, including the level of economic development, changes in real income per capita,
population growth and progress in technology. “Classical” literature on SME development
suggests that SMEs will become less important in the course of economic development as
income per capita increases.a
The World Bank (2002, 2004), however, gives three core arguments supporting the
view that SMEs can function as the engine of growth in developing countries. First, SMEs
enhance competition and entrepreneurship and therefore, have external benefits on economy-
wide efficiency, innovation and aggregate productivity growth. Second, SMEs are generally
more productive than LEs, but the financial market and other institutional failures and non-
conducive macroeconomic environmental aspects impede SME development. Third, the
expansion of SMEs boosts employment more than LEs’ growth because SMEs are more
labor-intensive. In other words, the World Bank believes that SMEs can boost economic
growth and development in these countries.
a See, for instance, Hoselitz (1959), Staley and Morse (1965) and Anderson (1982).
In Indonesia, SMEs have historically been the main player in domestic economic activ-
ities, 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 non-farm activities are
especially important. These enterprises have also been important for the development of
local economies and communities. However, compared to many other APEC more devel-
oped economies, Indonesian SMEs have not proven the significant value they contribute
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.
The SMEs have also been recognized to have another important role, namely as an
important engine for development and growth of exports, particularly in manufacture. This
stems from evidence showing that the most successful cases of SME development in East
and Southeast Asian countries such as South Korea, Taiwan, Hong Kong and Singapore,
have been directly related to trade and the adoption of export-oriented strategies. The expe-
riences of these countries indicate that SMEs can compete effectively in both domestic and
international markets.
Typically, SMEs in Indonesia account for more than 90 percent of all firms outside the
agricultural sector in the country, and thus are the biggest source of employment, providing
livelihood for over 90 percent of the country’s workforce, especially women and the young.
The majority of SMEs, 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 enter-
prises without hired/wage-paid workers. They are generally the most traditional enterprises
with low levels of productivity and 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 enterprise 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 and UKM), SEs in 1997 accounted for more than 39.7 million
units, or constituted about 99.8 percent of the total number of enterprises in the country
in that year, and increased to more than 40 million units in 2004 (see Table 1). Generally
speaking, this table may indicate that every year new entrepreneurs have been born in the
country. Unfortunately, there are no data that 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, even though the transformation process of firms by size may
show a better picture about long-term entrepreneurship development.
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 percent of
total non-farm SMEs in the region were in Indonesia and China (see Table 2). If agriculture
100 T. Tambunan
Table 1. Number of enterprises by size category, 1997–2004.
Size Category 1997 1998 1999 2000 2001 2003 2004

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 and UKM.
Table 2. Numbers of non-agricultural SMEs in selected Asia-Pacific economies.∗

Country/Economy SMEs in Non-agricultural Sector∗∗ SMEs as % of All Enterprises

in the 1990s∗∗
1990 1996 2002
Australia 757,100 895,500 1,111,900 97
Brunei Darussalam 3,856 4,085 5,000 98
Canada 855,840 879,335 925,000 98
Chile 423,021 445,299 500,000 16
China 8,608,200 7,253,406 8,000,000 99
Hong Kong, China 277,886 287,904 292,000 98
Indonesia 12,045,600 16,416,020 17000,000 98
Japan 6,484,264 6,433,557 6,139,735 99
South Korea 2,094,637 2,607,710 2,700,000 99
Malaysia 19,000 84
Mexico 1,302,757 2,179,631 2,854,266 99
New Zealand 159,564 218,044 19,2000 99
Peru 406,966 453,667 460,000
Philippines 77,807 99,767 817,976 99
Russian Federation 896,000 886,500 850,000 86
Singapore 31,468 47,001 54,000 91
Chinese Taipei 791,663 991,881 1,050,000 98
Thailand 632,300 350,000 96
USA 5,359,421 5,691,430 6,303,593 96
Vietnam 1,000 200,000
Total 40,640,280 45,790,737 49,824,470
∗ 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.
is included, certainly this portion will be much higher since these two countries are the
largest agrarian economies in the group.
Distribution by sector shows that SMEs are concentrated in agriculture (see Table 3).
They accounted for almost 60 percent of total SMEs. Trade, hotel and restaurant is the
second largest sector for SMEs with around 21 percent and slightly more than 22 percent
of their total units during the period 2003–2004. The third important sector is manufactur-
ing industry with around 6.4 percent of total SMEs. They are involved mainly in simple
traditional manufacturing activities such as wood products, including furniture; textile; gar-
ments; footwear; and food and beverages. Only a small portion of total SMEs is engaged
Table 3. Number of enterprises by size and sector, 2003 and 2004.
Sector SMEs LEs

2003 2004 2003 2004
Agriculture (1) 25,457,190 25,477,756 58 59
Mining (2) 203,711 144,834 72 51
Manufacture (3) 2,711,522 2,743,858 710 719
Electricity, gas & clean air supply (4) 4,423 4,111 39 36
Construction (5) 132,346 162,359 157 192
Trade, hotel & restaurant (6) 9,071,331 9,845,682 434 471
Transport & communication (7) 2,488,161 2,551,727 146 150
Finance, rent & service (8) 33,169 37,185 292 328

Services (9) 2,433,483 2,254,317 261 242
Total 42,535,336 43,221,829 2,169 2,248
Source: Menegkop and UKM.
in production of machineries, production tools and automotive components. The latter is

generally carried out through subcontracting systems with several multinational car compa-
nies such as Toyota and Honda. This structure of industry reflects the current technological
capability of Indonesian SMEs, as they are not as strong as their counterparts in other
countries such as South Korea, Japan and Taiwan in producing sophisticated technology-
embodied products.
In terms of GDP, on average, during the period 2000–2003, SMEs contributed more than
96 percent and almost 95 percent of total output in, respectively, trade, hotel and restaurant,
and agriculture. In total GDP, SMEs performed relatively better than their larger counterpart
as they accounted for more than 50 percent of total GDP during that period (see Table 4).
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 percent; whereas that
of LEs was under 2 percent. Within SMEs, SEs appeared to be more important than MEs
as their GDP growth share was higher than that of the latter ones (see Table 5).
Table 4. Structure of GDP by size and sector, 2000–2003 (%).
Sector SE ME LE Total
1 85.74 9.09 5.17 100.0
2 6.73 2.96 90.30 100.0
3 15.14 12.98 71.89 100.0
4 0.52 6.80 92.68 100.0
5 43.88 22.57 33.55 100.0
6 75.60 20.81 3.59 100.0
7 36.69 26.64 36.67 100.0
8 16.80 46.47 36.73 100.0
9 35.59 7.16 57.25 100.0
GDP 40.55 15.22 44.24 100.0
GDP without oil & gas 46.22 17.19 36.60 100.0
Source: National Agency for Statistics (BPS).

102 T. Tambunan
Table 5. Contribution to GDP growth by size

group of enterprises (%).
Size Category 2000 2001 2002 2003

SE 2.02 1.42 1.52 1.68
ME 0.82 0.58 0.62 0.69
LE 2.08 1.46 1.55 1.73
Source: BPS.
Table 6. Labor productivity (Q1; 000 rupiah) and output contribution (Q2; %) in manufacturing industry by size
of enterprises, 1999–2003.
Size Group 1999 2000 2001 2002 2003

Q1 Q2 Q1 Q2 Q1 Q2 Q1 Q2 Q1 Q2
MEs + LEs 115.28 90.52 143.99 91.65 167.70 91.50 166.31 89.94 196.26 90.68
MIEs + SEs 8.35 9.48 9.11 8.35 10.98 8.50 12.36 10.06 13.55 9.32
Source: BPS.
The greater GDP contribution of SMEs does not mean, however, that productivity, either
partial (i.e., 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.b It is mainly
because their number of enterprises is huge, not because their productivity is greater, as
compared to LEs. With a simple approach, using the average value added-labor ratio, the
analysis of BPS data on output and total workers employed in manufacturing industry by
size of enterprises, indicates that labor productivity increases with the size of a plant. As
shown in Table 6, the 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.
The above evidence is not only an Indonesian problem, as the labor productivity gap
between SMEs and LEs is one of the largest observed in developing countries.c It also does
not come as a surprise, given the fact that SMEs, especially SEs or MIEs, in developing
countries are traditional enterprises adopting manual mode of production (i.e., low degree of
mechanization). They also lack the necessary input to increase productivity such as skilled
workers, new machines and modern tools, as well as know-how to improve methods of
b 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 operate
due to problems in the measurement of fixed and human capital.
c See, e.g., Liedholm and Mead (1999) and Berry and Mazumdar (1991).
production. Without all of these inputs, it is hard for these enterprises to achieve increasing
return to scale in their production process.d
5. Development Constraints
SMEs in developing countries are facing obstacles that are sometimes similar to those expe-
rienced 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 that 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 work-
ing premises; and poorly developed physical markets. The second issues include no access
to formal training and, as a result, lack of skills in basic economics and managerial expertise;
lack of formal schooling, sometimes resulting in illiteracy; limited access to property rights;
limited access to formal finance and banking institutions; excessive government regulations
in areas such as business start-up, especially regarding cumbersome, time-demanding and
costly procedures for business registration; lack of information on prices, viability of prod-
ucts, etc.; and newer market opportunities due to non-compliance 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 non-banking financial agencies with unfavorable terms); and insufficient funds
which do not allow for further investments (United Nations, 2001).
These obstacles are more or less interlinked and create vicious circles of bad performance
or business stagnation or low competitiveness of SMEs in developing countries 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 constitutes a barrier of further development or business improvement to these
enterprises (Tambunan, 2006).
The 2003 (recent) survey on SEs and MIEs from BPS shows the typical problems of
these enterprises in Indonesia (see Table 7). As can be seen, the main problems faced by
d 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 are often mentioned. In
the literature on SMEs in developing countries, 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 (2000a, b), Smyth (1990a, b, c), Liedholm and Mead (1999)
and Berry and Mazumdar (1991).
104 T. Tambunan
Table 7. Main problems faced by SEs and MIEs in manufacturing industry in 2003 (number of enterprises).
SEs MIEs Total SEs and MIEs

Have no problem 46,485 (19.48)* 627,650 (25.21) 674,135 (24.71)
Have problem 192,097 (80.52) 1,862,468 (74.79) 2,054,565 (75.29)
Raw material 20,362 (10.60) 400,915 (21.53) 421,277 (20.50)
Marketing 77,175 (40.18) 552,231 (29.65) 629,406 (30.63)
Capital 71,001 (39.96) 643,628 (34.56) 714,629 (34.78)
Transportation/Distribution 5,027 (2.62) 49,918 (2.68) 54,945 (2.67)
Energy 40,605 (2.4) 50,815 (2.73) 55,420 (2.7)
Labor cost 2,335 (1.22) 14,315 (0.77) 16,650 (0.81)
Others 11,592 (6.04) 150,646 (8.09) 162,238 (7.90)
Total SEs & MIEs 238,582 (100.00) 2,490,118 (100.00) 2,728,700 (100.00)
∗ % of total enterprises surveyed.

Source: BPS (2003).
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 receive any credit from
banks or other financial institutions. They depend 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-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 (see
Table 6) 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 that enjoy natural protection from competition
from similar goods produced by larger enterprises or from imports.
From personal experience in doing field studies, simple questions such as “is your current
machine the most sophisticated one?” or “are the skills of your workers enough to produce
goods with good quality?” are always answered by small producers with “yes.” However,
personal observations during a visit to their factories show that they use relatively out-of-
date machines or tools and, although their workers have traditional skills from learning by
doing, they do not understand the concept of quality control (Tambunan, 2006).
6. Women Entrepreneurs
Recently, there is an increasing interest in women entrepreneurship development among pol-
icy makers, academics and practitioners in Indonesia. This interest comes from the recogni-
tion that the creation of women entrepreneurship, especially in rural areas, will contribute to
the creation of many new rural enterprises that will increase local capabilities to bring rural
economic growth. It is generally believed that women entrepreneurs can play an important
role in promoting growth and development, thereby reducing poverty. In this respect, SMEs
provide a good starting point for the mobilization of women’s talent, especially in rural
areas, as entrepreneurs, providing an avenue for the testing and development of women
entrepreneurial ability.
At least two main characteristics of development of women entrepreneurship can be
obviously observed in developing countries. First, SMEs are more important than LEs for
women entrepreneurs. Second, within SMEs, the female:male entrepreneur ratio is generally
higher in MIEs than in larger-sized and more modern enterprises. This is due to the fact
that women in developing countries are more likely than men to be involved in informal
activities, which consists predominantly of MIEs, either as self-employed or employers or
paid/unpaid workers. Databases from the International Labor Organization (ILO) indicate
that almost 95 percent of MIEs in developing countries are performed by women as self-
employed, though the percentage varies between countries or regions.
BPS data from various years indicate that women entrepreneurs in Indonesia have also
been increasing since the 1980s during the NO era when the country achieved rapid economic
growth, leading to rapid increase in per capita income. According to a number of studies
(e.g., Manning, 1998; Oey, 1998), the reasons for the increasing number of women-owned
enterprises are partly due to the increase of women’s educational level and to the economic
pressure faced by women in their households. However, the only readily available official
statistics on women-led enterprises in Indonesia are in MIEs and SEs, as presented in Table 8.
Table 8. Women entrepreneurs in non-farm MIEs and SEs combined, 2003.
Sector Total Enterprises Entrepreneurs/Owners

Male Female
Mining, electricity (non-state-owned/PLN) 253 146 237 050 16 096
& construction (100.00)* (93.64) (6.36)
[2.21]** [0.32]
Industry manufacturing 2 641 909 1 636 185 1 005 724
(100.00) (61.93) (38.07)
[15.25] [19.91]
Trade, hotel & restaurant 9 228 487 5 649 138 3 579 349
(100.00) (61.21) (38.79)
[52.64] [70.86]
Transportation & communication 2 170 291 2 140 022 30 269
(100.00) (98.60) (1.40)
[19.94] [0.60]
Financial institutions, real estate, 1 490 226 1 070 001 420 225
renting & services (100.00) (71.80) (28.20)
[9.97] [8.32]
Total 15 784 059 10 732 396 5 051 663
(100.00) (68.00 ) (32.00 )
[100.00] [100.00]
∗ Distribution percentage by row (sector); ∗∗ distribution percentage by column (entrepreneur).

Source: BPS (2003).
106 T. Tambunan
Table 9. Women entrepreneurs as % of total non-farm entrepreneurs in APEC economies, 1990–2000.
Economies 1990 1996 1998 2000

Australia 32.4 32.7 32.2 32.2
Canada 34.1 33.2 34.4 34.0
Indonesia 27.2 29.5 31.0 32.0 (2003)
Japan 30.9 29.0 29.4 –
Korea 27.3 28.9 27.2 35.7
Mexico 13.7 25.9 27.6 32.0
New Zealand – 29.1 31.8 –
Philippines – – 34.0 34.0
USA 33.2 37.2 37.1 38.0
Note: These percentages include all types of non-farm business and all sizes of enterprises, i.e., women
who are self-employed, own-account workers as well as those who are employers.
Sources: APEC (1999, 2003), Kim (2005), BPS and online database from some economies.
From this table, there are three interesting facts. First, it reveals that only 32 percent of these
enterprises are run by women. If it is assumed that this percentage applied to MEs and LEs,
and if the total number of enterprises can be used as an indicator of the current state of women
entrepreneurship development, then the table suggests that becoming an entrepreneur in
Indonesia is still predominantly a male culture.e As a comparison, data from various sources
indicate that women comprise about 26 percent to 38 percent of total non-farm entrepreneurs
in the APEC region for which data are available, and there has been a slight increase in the
percentage of women entrepreneurs over the period 1990–2000 (see Table 9).
Second, in manufacturing industry, from a total of 1,005,724 women-owned firms, about
97.9 percent are in MIEs, employing 5 or less people (and in many cases are non-employing).
They choose MIEs simply because this economic activity is characterized by an easy entry
and exit, and low capital, skills, and simple technology requirements.
Evidence from other APEC economies also shows that women-owned firms are much
more likely to be MIEs. For instance, about 95.4 percent of women enterprises in Korea
are MIEs (Kim, 2005). In Mexico, 90 percent of women employers have fewer than 5
employees, compared to 78 percent of male employers. In Chinese Taipei, 82 percent of
women employers have fewer than 10 employees, compared to 76 percent of men-owned
firms. In the United States, there is not a significant difference in the employment size of
women- and men-owned firms (APEC, 1999).
Third, sectoral distribution is more or less similar for male and female entrepreneurs,
as they both are concentrated in trade, hotel and restaurant; although the percentage is
higher in the latter. In Indonesia, a female is more likely than a male to be involved in this
sector, mostly as own-account traders having small shops or as owners of small restaurants
or hotels. In other APEC economies, Mexico, for example, the highest concentration of
e Unfortunately, since no data are available on the proportion of women-led MEs and LEs in Indonesia, there is
no indication on whether the percentage of women owners relative to men decreases or increases as firm size
increases. Also, no data exist on the number of women starting enterprises each year, or on their growth rates into
the next firm-size category. But, it is probably safe to say that a very small proportion of women in MIEs grow
into SEs, and very few women-led SEs grow into MEs and LEs.
women-owned firms is found in the hotel and restaurant sector. In Australia, Canada and
the United States, the majority of women-owned firms are found in the services or retail
trade. In the Philippines, about 45 percent of women entrepreneurs are in manufacturing and
26 percent in retail trade (APEC, 1999). In the manufacturing industry, women entrepreneurs
tend to pursue areas where they have gender-based skills and know-how. In Indonesia and
the Philippines, for example, the majority of them are found in food, beverages, tobacco,
clothing and craft industries (APEC, 1999).
The relatively low representation of women entrepreneurs in Indonesia can be attributed
to at least four main factors. First, low level of education and lack of training opportunities
that make Indonesian women severely disadvantaged in both the economy and society
may play an important role. 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 in Indonesia is beginning to decline, it is still relatively
higher than in neighboring countries. As an illustration, gender inequality as reflected in the
difference in the human development index (HDI) and gender-related development index
(GDI) in Indonesia in 2002 is 0.007 (HDI 0.692 and GDI 0.685), while in Thailand and
Vietnam, for instance, in the same year the difference was only 0.002 (Suharyo, 2005).
Official data on working population by education in Indonesia indicate that, although
there has been some improvement in the last 20 years, the average level of education of
males is still higher than that of females. This national education structure by gender is con-
sistent with Table 10, showing that female entrepreneurs have very low levels of education.
Less than 1 percent of female entrepreneurs have university diplomas as compared to their
male counterparts at 6.5 percent. Evidence from other APEC economies also shows similar
education structures of women entrepreneurs. In Australia, for example, the highest level
of schooling for 54 percent of women employers is secondary school, while 65 percent of
men employers have gone on to higher levels of education (APEC, 1999).
In addition, a report on gender mainstreaming in the education system in Indonesia (Jalal,
2004; quoted from Suharyo, 2005) shows that the illiteracy rate for women is still higher than
men and the gap between men and women in rural areas is much higher than that in urban
areas. Many rural women speak only their native language and never read newspapers,
making them very restricted in their communication with the outside world. Particularly
among women living in rural areas, there are still many social, cultural and religious taboos
that prevent those women who can and should be accessing higher education from doing so.
Table 10. Education of entrepreneurs in non-farm MIEs and SEs by gender, 2003 (%).
Level of Education Female Male

Not finished primary school 27.88 14.27
Finished primary school 40.82 39.49
Finished high school first degree (SMP) 18.62 25.87
Finished high school second degree (SMA) 11.77 18.37
Higher education 0.91 6.5
Source: BPS (2003).

108 T. Tambunan
Many parents living in rural areas still have the traditional thinking that (higher) education
belongs to men only, especially since after marriage women leave to join their husbands’
families and, therefore, are not regarded as being useful to their own families in the long-run.
However, although this traditional thinking still exists in rural society, it depends on
the economic condition of the family as well as education level of the parents or hus-
bands. The better the economic condition of the family or the better the education of the
parents/husbands, the less traditional their attitudes are toward women receiving better
education.
The second factor affecting women entrepreneurship is the fact that especially in rural
areas, women have more children and more household chores. They are expected to take on
their traditional role of being responsible for housework and childcare, and therefore they
have fewer hours of free time than men, both during the weekend and on weekdays.
Third, there may be legal, traditions, customs, cultural or religious constraints on the
extent to which women can open their own businesses. Especially in rural areas where the
majority of the population are Muslim and rather isolated from big cities such as Jakarta,
Islamic-based norms have stronger influence on women’s daily lives. This makes female
behavior or attitude in rural areas less open than male (or than urban women) to “mod-
ern business” culture. In such a society, a woman must fully comply with her primary
duty as her husband’s partner and housewife. Women are not allowed to leave the home
alone, much less to start their own businesses or do jobs that involve contact with or man-
aging men. Even if women do have their own businesses, in many cases, they defer to
husbands or other family members in key business decisions, and many turn over greater
power to these other family members as the business grows. All these constraints lead
to an exclusion of women from entrepreneurial activities. However, in rural areas rela-
tively close to urban areas with good transportation and communication links, over the last
30 years, changes are apparent in local societal attitudes regarding the traditional role of
women.
Fourth, lack of access to formal credit and financial institutions is indeed a key concern
of women business owners in Indonesia. This is found to be more problematic for women
in rural areas or outside of major metropolitan areas such as Jakarta and Surabaya. This
constraint is related to ownership rights, which deprives women of property ownership and,
consequently, of the ability to offer the type of collateral normally required for access to
bank loans. In Indonesia, men are still perceived as the head of the family, and thus, in
general, as the owner or inheritor of family assets such as land, company and house.
Probably because of the above reasons, especially cultural or religious constraints, it
is found that in Indonesia, particularly in rural areas, economic necessity or wanting to
improve family income is a more predominant factor for entrepreneurship among women.
Economic pressures have allowed women to be permitted to take up paid employment
outside the home or to run income-earning activities beyond their traditional role (Syahrir,
1986; Rusdillah, 1987). In more developed economies such as the United States, or even in
Korea, for instance, non-economic motives such as a desire for more fulfillment, to test a
winning idea, or as the first step toward independence, self-esteem and liberty of choices,
are more important for women entering into business ownership (APEC, 1999).
Finally, the participation rate of female entrepreneurs varies by region. Interestingly,

although the majority of the population and a larger number of MIEs and SEs are located
in Java, the island, Nusa Tenggara (NT) in the eastern part of the country has the highest
ratio of non-primary economic activities and educated people in the country, which means
that there are more female than male entrepreneurs in NT. However, this does not necessary
reflect the higher spirit of female entrepreneurship in NT than in the rest of the country.
NT is a region with a very high unemployment rate. Economic activities such as mining,
manufacturing industry, construction, agriculture and banking are more or less stagnated on
this island. Most matured or married men are working in low income-generating activities
such as transportation, 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,
the wife is “pushed” to do something outside the home to earn income. Therefore, the high
participation rate of female entrepreneurs in NT is most likely to be 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.
7. SME Development Programs and Their Effectiveness in Indonesia

In Indonesia, almost all known types of government intervention to support SME devel-
opment have been tried at one time or another: various subsidized credit; human resource
development training such as in production technique, general management, management
quality systems like ISO-9000 and entrepreneurship; provision of total quality control and
technical assistances; internet facility; advisory extension workers; subsidized inputs; mar-
keting and promotion facilitation; establishment of Cooperatives of Small-Scale Industries
(KOPINKRA) in clusters; establishment of special small-scale industrial estates (LIK); part-
nership 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 of an incubator system for promoting the development of new
entrepreneurs. Several government departments such as the Ministry of Industry and Trade,
and the Ministry of Cooperative and SME have taken the lead in SME development policies.
These, as do other ministries, have regional offices for delivery of services.
During the period 1997–2003, there were 64 institutions involved in SME development
supportive activities with a total of 594 programs, which can be categorized into six groups
(see Table 11). The government provided the majority of the programs (65 percent), NGOs
18 percent, donor agencies 8 percent, banking institutions 5 percent, private companies
2 percent, and other institutions conducted the remaining programs. 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.f
The type of supports provided by these institutions varies ranging from capital assistance;
training; facilitation, e.g., for promotion activities and business meetings between producers
f 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, funds
used, area, beneficiaries, status, problems and potential, see SMERU at http://www.smeru.or.id.
110 T. Tambunan
Table 11. Number of institutions and assistance programs to strengthen SMEs, 1997–2003.
Institutions Number of Institutions Number of Assistance Programs

Total Still Continuing
Total %
a) Government institutions 13 388 127 32.7
b) Banking institutions 7 31 25 80.7
c) Private companies 10 12 12 100.0
d) Donor agencies 8 46 15 32.6
e) NGOs 20 109 79 72.5
f) Others 6 8 8 100.0
Total 64 594 266 44.8
Source: SMERU.
Table 12. The proportion of assistance programs to strengthen SMEs based upon the type
of activities and the executing institutions (%).
a∗ b c d e f Total
Capital assistance 5.3 52.9 25.0 21.0 29.6 28.6 17.3
Training 21.1 13.7 22.2 19.0 29.0 21.4 22.9
Facilitation 11.3 9.8 19.4 7.6 28.7 0.0 16.1
Provision of information 1.9 7.8 2.8 3.8 1.6 21.4 2.6
Facilities 16.2 2.0 5.6 8.6 1.0 0.0 9.7
Promotion 3.0 3.9 13.9 6.7 1.0 7.1 3.3
Dissemination/introduction 27.9 0.0 0.0 6.7 1.3 0.0 15.2
of new technology
Guidelines 4.3 0.0 0.0 0.0 0.7 0.0 2.4
Others 9.0 9.8 11.1 26.7 7.2 21.4 10.5
Types of activities 531 51 36 105 307 14 1044
∗ See Table 11.

Source: See Table 11.
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 (see Table 12). 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 percent), capital assistance/credit (17.3 percent), facilitation
(16.1 percent) and the dissemination/introduction of new technology (15.2 percent). Gov-
ernment institutions were (and still are) the most common institutions for the introduction or
dissemination of new technologies. NGOs, private companies and government institutions
most commonly organized training, including entrepreneurship, whereas other institutions
mostly provided capital assistance. NGOs and government institutions were the main source
of facilitation (35.7 percent). For non-government institutions, capital assistance was the
most important assistance.
The dominance of government in providing assistance to SMEs is consistent with BPS
data, which show that out of the total 481,714 units of non-farm MIEs and SEs that ever
received external supports in 2003, 203,563 units received them from the government. The
distribution by region shows that the majority of these enterprises are located in Java and Bali,
which is the majority of those that received government supports. However, as a percentage
of a region’s total SEs and MIEs in non-agricultural sectors, NT has the highest score at
3.3 percent as compared to Sulawesi (2.13 percent) and Java and Bali (1.28 percent). There
are good explanations for the regional variety in proportion of SEs and MIEs to receive
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 staff and in-house facilities, or
they are not as aggressive in socializing the programs to enlarge their coverage. Second,
not all SE and MIE entrepreneurs are enthusiastic about attending such training programs,
especially in management, marketing and entrepreneurship areas, because they do not see
the direct benefits for their businesses; they prefer to be supported with subsidized credits,
cheap raw materials and marketing assistance. Third, the lack of infrastructure makes it
difficult or too expensive and time-consuming for entrepreneurs in isolated areas to reach
the training location. These reasons combined explained why the majority of non-farm
SEs and MIEs never received governmental assistance or attended government-sponsored
training programs.
The most important government program has been the so-called “Foster Father” (FP)
scheme introduced as a nation-wide program in February 1992. In this scheme, all state-
owned enterprises and large private companies (LEs) are required to assist SMEs in capital,
training and technical assistance, marketing, procurement of raw material and many other
areas. For example, with respect to marketing, the parent companies provide promotional
facilities such as trade exhibitions and study tours for the supported enterprises or act as a
trading house. As shown in Table 13, although the number of SE and MIE entrepreneurs in
non-agricultural sectors who had business links with LEs through this scheme was increased,
it was very small. One interesting fact outlined in this table is that most of those who have
been involved in this FP program made use of facilities that provided direct benefits or that
dealt directly with their current problems, i.e., capital assistance for their current working
capital, procurement of (cheap) raw materials which guarantees the continuation of their
production, and marketing assistance which gives them a market guarantee. As was said
before, most SE and MIE entrepreneurs are not enthusiastic about training, especially when
the training takes place over multiple days, far from their homes, and is too theoretical. In
addition, many of them do not recognize the need for technical assistance because they have
the impression that they are already masters in their own production or if there is a problem
they do not believe external assistance is necessary.
Government usually measures success of a program 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 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. 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 a few
112 T. Tambunan
April 25, 2007 14:57 WSPC
Table 13. Percentages of SEs and MIEs having/not having the FP scheme in manufacturing industry by type of facilities in 2000 and 2003.
2000 Figures Not Having (% of Total) Having (% of Total) Type of Facilities (% of Total Firms Having the Scheme)∗
Capital/Loan Procurement of raw material Marketing Technical assistance & training Others
Total SEs & MIEs 95.5 4.5 40.5 54.8 53.5 4.4 0.6
MIEs 95.5 4.5 42.2 29.4 53.2 5.1 0.0
WS-JDE SPI-J076
SEs 95.5 4.5 40.2 59.8 53.6 4.3 0.7

2003 Figures Not Having (% of Total) Having (% of Total) Type of Facilities (% of Total Firms Having the Scheme)∗
Capital/Loan Procurement of raw material Marketing Technical assistance & training Others
00057
Total SEs & MIEs 87.9 12.1 21.5 47.3 52.9 3.1 2.4
MIEs 88.9 11.1 22.02 48.7 50.8 2.7 2.6
SEs 77.7 22.3 18.9 39.9 63.2 5.5 1.03
∗ One firm may get more types of facilities.

Source: BPS (2000, 2003).
of the above-mentioned SME development programs have been successful.g For instance,
the FP scheme discussed above 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 this scheme. This problem of coverage is not only the
case with FP, but also for many other government programs/facilities, including the setting
up of cooperatives (KOPINKRA) in SME 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, p. 65):
“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.”
From the output side, although the FP scheme has become unpopular since the political
and economic reforms in 1998 onward, many large companies are still active in assist-
ing 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 such as 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, the Indonesian Chamber of Commerce and Industry (Kadin
Indonesia) has also been involved in assisting SMEs through a newly established trading
company called PT UKM. However, there is no evidence at the national level that the pro-
gram was successful in fostering the growth of SMEs. General impression is that the FP
is a failure because it was essentially a non-market mechanism by pressuring a “forced
marriage” between the LEs and the SMEs. International evidence shows dense patterns of
links and partnerships are not formed through mandatory 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 Dierman (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
g 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 (2000a, b).
114 T. Tambunan
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 that 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 in 1997–1998, budget constraints have prevented
the replacement of the existing equipment. Today, much of the machines and equipments
are outdated; (iii) services have been delivered indiscriminately to clusters; (iv) the staff
of the UPT had not had the appropriate training to respond to entrepreneurs’ needs; and
(v) the structure of the UPT as part of the government meant that in most cases, there was
not enough flexibility in the system for responding to the changing needs of SMEs.
To assess the effectiveness of the assistance programs, SMERU (2004) conducted a

field study on 172 respondents in six Kabupaten/Kota (including Kabupaten Sukabumi,
Bantul and Kebumen, and Kota Padang, Surabaya and Makassar), consisting of MIEs and
SEs in trade, industry and services. These are informal, non-legal entities whose turnover
and employees fluctuate, and which operate without any or with only simple technology.
Considering that a large number of assistance programs recorded in the field were capital
assistance programs, the impact on respondents was generally economic. Other effects were
unknown, for example, whether there had been an increase in knowledge or technology
capability as a result of the training or technical assistance received. A large number of
MIEs (58.6 percent) and SEs (63 percent) stated that by obtaining assistance, their business
had improved in terms of increased revenues. Some MIE owners stated that they had been
able to develop their business further.
Based on his analysis of the effects of macro- and micro-policy environments on rural
industries in Indonesia, van Dierman (2004) comes to the following conclusions: (i) few of
the micro-policies (programs) implemented by the government have had a lasting impact
on improving rural SMEs; (ii) a significant number of macro- and micro-policies placed
additional costs and burdens on rural SMEs’ compliance and has led to most operating
outside of the formal economy; and (iii) macro-policies that created a favorable economic
environment, as reflected by consistently high growth rates in GDP, and not biased in favor
of LEs, provided the best stimulus for SME growth. Moreover, he states clearly that
“…if measured by the above criteria (i.e., market failure; targeting the
problem effectively; setting the right duration, scale and target group;
being administratively efficient for government; and not imposing exces-
sive compliance burdens on firms) most of the above programs would
score badly. There is no doubt that many SMEs have gained benefits
under the micro-policies…But the more relevant question is at what cost
were the benefits gained? The cost of programs should be measured in
terms of economy-wide loss in efficiency and the specific costs to other
sectors of the economy” (p. 53).
Based on their study on a furniture cluster in Jepara (Central Java), Sandee et al. (2000)
conclude that public intervention is likely to have contributed to the success story of this clus-
ter. A comprehensive development package, including technical upgrading via the provision
of a common service facility for wood drying, export training, support to trade fair partic-
ipation and investment in improvement of the regional infrastructure (container facilities,
roads, telephone), helped the cluster to gradually develop export markets. On the contrary,
Sato’s (2000b) field study of several clusters in the metalworking and machinery industry in
Java concludes that the successful development of these clusters has been achieved without
significant government support.
Her impression about effectiveness of government programs are also supported by
Tambunan’s (1998c) findings in rattan industries in Padang (West Sumatra) as well as
Tambunan and Keddie’ findings (1998) in leather industries in Yogyakarta, which conclude
that the government’s efforts to support the clusters have not yielded effective results. One
reason is that, although in many clusters many local government agencies such as regional
offices of the Menegkop and UKM, the MoI, state university, and workers skill training
centers (Balai Latihan Kerja) from the Department of Manpower have been found to pro-
vide some supports, there is no coordination between them. This often results in different
agencies providing similar programs.
Another reason is that training materials or information provided did not always match
the needs of the producers, as also concluded in Sandee (1994, p. 152) as follows:
“In practice, direct assistance frequently concerns brief training sessions

of one or two days for a selected group of producers. Such sessions are
characterized by a great deal of theory and little attention paid to how to
improve the actual running of the business of particular activities.”
8. Concluding Remarks, Implications and Some Policy Recommendations

Recently, entrepreneurship development has become a current important issue related to
economic development in Indonesia. This study has tried to present the current reality
of entrepreneurship development in Indonesia by examining the current developments of
SMEs in the country. The paper has shown a number of interesting facts. First, SMEs are
of overwhelming importance in Indonesia, as they account for more than 90 percent of all
firms outside the agricultural sector, and thus are the biggest source of employment. Second,
although the representation of women entrepreneurs is low, the growth of MIEs and SEs
is very important as a starting point for development of women’s talent as entrepreneurs.
Third, women entrepreneurs are less educated than their men counterparts, and this, together
with other factors, may have been the reason that women entrepreneurs in Indonesia are
still scarce and are concentrated in smaller-sized/informal enterprises. Fourth, the main
constraints faced by MIE and SE entrepreneurs in Indonesia are lack of working capital
and marketing difficulties. Finally, from existing studies, only very few come with evi-
dence of successful government-supported SME development programs in Indonesia. The
main problems of such programs lie in coverage, no coordination among executing insti-
tutions within government as well as between government and non-government executing
agencies, and the implementation of such programs is not always supported by micro- and
macroeconomic policies.
116 T. Tambunan
At least three generalizations can be extracted from this study. First, SMEs are of
overwhelming importance not only in less developed and developing countries, but also
in developed economies. Second, in developing countries, the representation of women
entrepreneurs is low, which can be attributed to at least four main factors: low level of
education; heavy household chores; legal, traditional, cultural or religious constraints; and
lack of access to formal credit and financial institutions. Third, within SMEs, MIEs are
of overwhelming importance for women entrepreneurs, simply because these enterprises
are characterized by easy entry and exit, and low capital, skills and simple technological
requirements.
However, this study has some limitations. With the data used, this study is not able to
examine the “transformation” process within SMEs or from SMEs into LEs. Such a process
can be used as evidence for successful development of entrepreneurship. Since no time
series data are available, this study is also unable to examine the dynamic growth of women
entrepreneurs by size of enterprises, which may indicate in which category of enterprises
they grow the most quickly.
With respect to policy, many policy actions or programs have been suggested in the
literature to support development of entrepreneurship. Among these, business practices
supported by learning materials in business schools is the best way to produce entrepreneurs.
So, in national efforts to develop high competitive entrepreneurships, owners of MIEs and
SEs should be given the first priority as they have previous experiences running a business
or knowledge regarding how to survive in competitive markets. Moreover, most of these
enterprises were established without any external support, by using money of the owners.
However, the aim of development programs should not be solely to help them survive or to
create as many new enterprises as possible to generate new employment (as is often the case
in LDCs, including in Indonesia), but the emphasis should be to promote modernization,
capacity building and size upgrading.
With respect to development of women entrepreneurship, especially in developing areas
such as Indonesia, the following are some policy recommendations:
(1) More information is needed about women entrepreneurs and their enterprises such
as their numbers, not only by sector but also by subsector and region; their level of
economic contributions (e.g., GDP and export); growth trends; and the problems and
challenges they are facing. Such information should come from government as well as
non-government sources such as universities and associations. Without comprehensive
information on women entrepreneurship development, programs to support them would
not be effective.
(2) Education should be a key emphasis in women entrepreneurship development. Gov-
ernment, women business associations and other relevant associations, universities and
private schools are all important players in providing education and training to women.
(3) Since the problem of education for women in Indonesia (as in many other LDCs) is
often a cultural, social or even religious issue, socialization about the importance of
education for women and the crucial role that educated women can play in economic
and societal development becomes essential.
(4) Microcredit programs targeted especially toward women business owners should be a
key emphasis for improving access of women entrepreneurs to formal credit institutions.
This should fill the gap in capital required by women entrepreneurs due to collateral
problems related to the current system of ownership rights, which deprives women of
property ownership.
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April 25, 2007 14:57 WSPC WS-JDE SPI-J076 00057

Journal of Developmental Entrepreneurship

ENTREPRENEURSHIP DEVELOPMENT: SMES IN INDONESIA

Center for Industry and SME Studies

Faculty of Economics, University of Trisakti, Indonesia

Received February 2006

Entrepreneurship development is also a current important issue related to economic

testing and development of entrepreneurial ability of local people, current development of

SMEs in Indonesia may indirectly reflect current development of entrepreneurship in the

3. Indonesian Economic Development: A Brief Review

Entrepreneurship Development: SMEs in Indonesia 97

and export restrictions, also focusing on labor-intensive industries. To support agriculture,

4. The Importance of SMEs in the Indonesian Economy

Entrepreneurship Development: SMEs in Indonesia 99

Table 1. Number of enterprises by size category, 1997–2004.

Size Category 1997 1998 1999 2000 2001 2003 2004

Source: Menegkop and UKM.

Table 2. Numbers of non-agricultural SMEs in selected Asia-Pacific economies.∗

Country/Economy SMEs in Non-agricultural Sector∗∗ SMEs as % of All Enterprises

Total 40,640,280 45,790,737 49,824,470

Entrepreneurship Development: SMEs in Indonesia 101

Table 3. Number of enterprises by size and sector, 2003 and 2004.

Sector SMEs LEs

Finance, rent & service (8) 33,169 37,185 292 328

Source: Menegkop and UKM.

in production of machineries, production tools and automotive components. The latter is

Table 4. Structure of GDP by size and sector, 2000–2003 (%).

Source: National Agency for Statistics (BPS).

Table 5. Contribution to GDP growth by size

Size Category 2000 2001 2002 2003

Size Group 1999 2000 2001 2002 2003

Entrepreneurship Development: SMEs in Indonesia 103

SEs MIEs Total SEs and MIEs

∗ % of total enterprises surveyed.

Entrepreneurship Development: SMEs in Indonesia 105

Table 8. Women entrepreneurs in non-farm MIEs and SEs combined, 2003.

Sector Total Enterprises Entrepreneurs/Owners

∗ Distribution percentage by row (sector); ∗∗ distribution percentage by column (entrepreneur).

Table 9. Women entrepreneurs as % of total non-farm entrepreneurs in APEC economies, 1990–2000.

Economies 1990 1996 1998 2000

Entrepreneurship Development: SMEs in Indonesia 107

Level of Education Female Male

Source: BPS (2003).

Entrepreneurship Development: SMEs in Indonesia 109

Finally, the participation rate of female entrepreneurs varies by region. Interestingly,

such as transportation, motorcycle repair workshops or in agriculture as marginal/subsistent

7. SME Development Programs and Their Effectiveness in Indonesia

Institutions Number of Institutions Number of Assistance Programs

Total 64 594 266 44.8

∗ See Table 11.

Entrepreneurship Development: SMEs in Indonesia 111

SEs 95.5 4.5 40.2 59.8 53.6 4.3 0.7

∗ One firm may get more types of facilities.

Entrepreneurship Development: SMEs in Indonesia 113

explained by Klapwijk (1997, p. 65):

To assess the effectiveness of the assistance programs, SMERU (2004) conducted a

Entrepreneurship Development: SMEs in Indonesia 115

“In practice, direct assistance frequently concerns brief training sessions

8. Concluding Remarks, Implications and Some Policy Recommendations

Entrepreneurship Development: SMEs in Indonesia 117

Development, 10(11), 913–948.

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