Export-oriented small

and medium industry clusters

in Indonesia
Tulus Tambunan
Faculty of Economics, Center for Industry and SME Studies,
University of Trisakti, Jakarta, Indonesia
Abstract
Purpose The Indonesian government has been trying to support the development of small and
medium enterprises (SMEs) in the country, as these enterprises are expected to play a crucial role not
only for employment creation but also for GDP formation and export development. The paper aims to
address the following three questions. First, are networks important for the development of SME
clusters, especially for those involved in export activities? Second, in what type of clusters are
networks well developed? Third, what is the role of government; does it also play as an important
network for SME cluster development?
Design/methodology/approach This paper is based on an ongoing research on the importance
of networks in the development of export-oriented SME clusters in Indonesia. Although the paper also
discusses other important issues related to the development of SMEs in the country, i.e. constraints
facing the enterprises and women entrepreneurs, the paper focuses on the importance of networks.
Findings First, SMEs are of overwhelming importance to Indonesia because they account for more
than 90 percent of all rms outside of the agricultural sector. Second, the main constraints faced by
small entrepreneurs are, lack of nance and difculties in marketing. Third, the representation of
women entrepreneurs in Indonesia is still relatively low which can be attributed to various factors,
e.g. low level of education and lack of training opportunities that make Indonesian women severely
disadvantaged in both the economy and society. Finally, although in general Indonesia is not well
represented with small and medium industrial clusters that feed into global commodity chains, some
clusters have gradually become export-oriented. Among many factors, well developed networks
especially with traders, trading houses, and foreign tourists are indeed an important factor for their
increasingly export activities. Even these agents have played more important role than supports from
government for their successful export.
Originality/value The paper examines the importance of networks for the export-oriented SME
clusters in Indonesia.
Keywords Small to medium-sized enterprises, Networking, Women, Entrepreneurs, Exports, Indonesia
Paper type Research paper
Introduction
In the classical paradigm it is stated that the development of an economy depends on
two main factors (as explicitly included in a general Cobb Douglas production
function), namely labor and capital (with advanced technology embodied). Later, after
looking at the development miracle in the so-called the newly industrialized Asian
countries, such as Chinese Taipei (Taiwan), Hong Kong China and South Korea in
the 1960s and 1970s, and the widening gap in development between
developed/industrialized nations and less developed countries (LDCs), new thinking
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
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1750-6204.htm
Export-oriented
SME clusters
25
Journal of Enterprising Communities:
People and Places in the Global
Economy
Vol. 3 No. 1, 2009
pp. 25-58
qEmerald Group Publishing Limited
1750-6204
DOI 10.1108/17506200910943661
production factors, there is also another crucial factor, namely entrepreneurship.
Nowadays, the development of entrepreneurship together with human skills
improvement have become two crucial factors for sustainable economic and social
development and for world leadership in all aspects of the modern state.
Recently, entrepreneurship development has been generally recognized as an
important impulse factor for the sustainable economic development in Indonesia. It is
often said that the lack of entrepreneurship has been the main cause for Indonesias
slow economic development compared with other Asian countries such as Malaysia,
Thailand, China, South Korea, and Singapore. Realizing this, supporting small and
medium enterprises (SMEs) in Indonesia has been adopted as a strategy to develop
entrepreneurship in the country.
Entrepreneurship development has become more crucial to face the global business
environment which is changing dramatically. Traditionally, competition in
international markets was the realm of large enterprises (LEs), while SMEs
remained local or regional in scope. The removal of government-imposed barriers that
segregated domestic and international markets, technological advances in
manufacturing, transportation, and telecommunications allow SMEs to actively
involve in global business activities either through trade or business collaborations
with foreign companies. This changing global business environment also creates
opportunities as well as challenges to Indonesian SMEs.
The main aim of this paper is to examine the importance of networks for the
export-oriented SME clusters in Indonesia. Networking is a powerful tool for the
entrepreneur in all sizes (Dubini and Aldrich, 1991), and for international
entrepreneurs, networks, and cooperation are believed by some scholars to be
essential to successful global oriented operations (McDougall and Oviatt, 2003). Firms
use their networks to gain access to resources, to improve their strategic positions, to
control transaction costs, to, expand their market abroad, to learn new skills, to gain
legitimacy, and to cope positively with rapid technological changes[1]. For these
reasons, network analysis has been thus a powerful framework for international
entrepreneurship researchers (McDougall and Oviatt, 2003).
To do this, rst, the paper explains the importance of SMEs in the Indonesian
economy. Second, it deals with the main constraints and challenges facing SMEs in the
country. Third, it discusses types and current development of small industrial clusters
in the country. Finally, with some case studies of export-oriented clusters, it examines
the importance of networks for their increasingly export performance.
Denition of SMEs
In Indonesia, there are several denitions of SMEs, depending on which agency
provides the denition. As this paper uses data from the State Ministry of Cooperative
and SMEs (Menegkop & UKM), the Department of Industry (MoI), and the Central
Statistical Agency (BPS), only denitions of these three government agencies are
relevant for the paper. Menegkop & UKM promulgated the Law on Small Enterprises
Number 9 of 1995, which denes a small enterprise (SE) as a business unit with total
initial assets of up to Rp 200 million (about US$ 20,000 at current exchange rates), not
including land and buildings, or with an annual value of sales of a maximum of Rp
1 billion (US$ 100,000), and a medium enterprise (ME) as a business unit with an
annual value of sales of more than Rp 1 billion but less than Rp 50 billion. The Law
JEC
3,1
26
does not explicitly dene micro enterprises (MIEs). However, Menegkop & UKM data
on SEs include MIEs.
BPS, which regularly conducted surveys of SMEs, uses the number of workers as
the basis for determining the size of an enterprise. In its denition, MIEs, SEs, and MEs
are business units with, respectively, 1-4, 5-19, and 20-99 workers, and LEs are units
with 100 or more workers. MoI denes enterprises by size in its sector also according to
number of workers as the BPS denition.
The importance of SMEs in the Indonesian economy
In Indonesia, SMEs have historically been the main player in domestic economic
activities, especially as a large provider of employment opportunities, and hence a
generator of primary or secondary sources of income for many households. For low
income or poor farm households in rural areas, SE units of less than 20 workers in
non-farm activities are especially important. These enterprises have also been an
important engine for the development of local economies and communities. However,
compared with many other more developed Asia Pacic Economic Cooperation
(APEC) economies, Indonesian SMEs are not yet contributing signicant value added
to the national economy. Instead, they have been more important as the locus of most
employment (Tambunan, 2006).
SMEs have also been recognized having another important role in Indonesia as an
engine for development and the growth of exports of non-oil and gas, particularly in
manufacturing. This is in line with evidence in East and Southeast Asian in countries
like South Korea, Taiwan, Hong Kong, and Singapore, showing that the most
successful cases of SMEs development have directly contributed to trade and the
adoption of export-oriented strategies. The experiences of these countries indicate that
SMEs can compete effectively in both domestic and international.
Typically, SMEs in Indonesia account for more than 90 percent of all rms outside
the agricultural sector, and thus they are the biggest source of employment, providing
livelihood for over 90 percent of the countrys workforce, especially women and the
young. The majority of SMEs, especially SEs, are scattered widely throughout the
rural area and therefore they may play an important role as a starting point for
development of villagers talents as entrepreneurs, especially those of women. SEs are
dominated by self-employment enterprises without hired paid workers. They are the
most traditional enterprises, generally with low levels of productivity, poor quality
products, and serving small, localized markets. There is little or no technological
dynamism in this group. The majority of these enterprises eke out bare subsistence.
Some of them are economically viable over the long-term, but a large portion is not.
Many SEs face closure or very difcult upgrading especially with import liberalization,
changing technology, and the growing demand for higher quality modern products,.
However, the existence or growth of this type of enterprise can be seen as an early
phase of entrepreneurship development.
According to BPS data, SEs in 1997 accounted for more than 39.7 million units, or
about 99.8 percent of the total number of enterprises in the country in that year, and
increased to more than 48 million units in 2006 (Table I). So, generally speaking, this
table may indicate that every year new entrepreneurs have been born in the country.
Unfortunately, there is no data which can show whether the transformation process or
size upgrading has happened within SMEs, with SEs becoming MEs, and MEs being
Export-oriented
SME clusters
27
transformed into LEs. This transformation process of rms by size may show a better
picture about long-term entrepreneurship development.
The unit distribution by sector and size shows that Indonesian SMEs are
concentrated in agriculture, followed by trade, hotel, and restaurants as the second and
manufacturing industry as the third largest sector (Table II) In this latter sector, they
are involved mainly in simple traditional manufacturing activities such as wood
products, including furniture, textiles, garments, footwear, and food and beverages.
Only a small portion of total SMEs are engaged in production of machinery, production
tools, and automotive components. This is generally carried out through
subcontracting systems with several multinational car companies such as Toyota
and Honda. This structure of industry reects the current technological capability of
Indonesian SMEs, which are not yet as strong in producing sophisticated
technology-embodied products as their counterparts in other countries such as
South Korea, Japan, and Taiwan.
In terms of output, the performance of SMEs is relatively good as the growth in SEs
and MEs was, respectively, 3.96 and 4.59 percent in 2001 and increased to 5.38 and 5.44
percent in 2006. LEs experienced, on the other hand, a growth rate of 3.04 percent and
ended up at 5.60 percent during the same period (Figure 1).
In total GDP, SMEs performed relatively better than their larger counterparts as
they accounted for more than 50 percent of total GDP during that period (Table III).
SMEs output contribution to the annual growth rate of total GDP was also 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 (Table V). SMEs output
contribution to the annual growth rate of total GDP is also higher than that of LEs
(Figure 2).
Constraints facing SMEs
The development of viable and efcient SMEs, particularly non-farm enterprises, is
hampered by several constraints[2]. The constraints may differ from region to region,
between rural and urban, between sectors, or between individual enterprises within a
sector. However, there are a number of constraints common to all SMEs. These
common constraints faced by SMEs are the lack of capital, difculties in procuring raw
materials, lack of access to relevant business information, difculties in marketing and
distribution; low technological capabilities, high transportation costs; communication
problems; problems caused by cumbersome and costly bureaucratic procedures,
especially in getting the required licenses; and policies and regulations that generate
market distortions.
Size category 1997 1998 1999 2000 2001 2003 2004 2005 2006
P
SEs 39704.7 36761.7 37804.5 39705.2 39883.1 43372.9 44684.4 47006.9 48822.9
P
MEs 60.5 51.9 51.8 78.8 80.97 87.4 93.04 95.9 106.7
P
LEs 2.1 1.8 1.8 5.7 5.9 6.5 6.7 6.8 7.2
Total 39767.3 36815.4 37858.1 39789.7 39969.995 43466.8 44784.14 47109.6 48936.8
Source: BPS
Table I.
Total units of enterprises
by size category:
1997-2006 (000 units)
JEC
3,1
28
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Table II.
Unit distribution of SMEs
by sector in Indonesia,
2000, 2005, and 2006
(percent)
Export-oriented
SME clusters
29
Tybout (2000) nd that the manufacturing sectors of LDCs have traditionally been
relatively protected. They have also been subject to heavy regulation, much of which
has favored LEs. Accordingly, it is often argued that in these countries:
.
markets tolerate inefcient rms, so cross-rm productivity dispersion is high;
.
small groups of entrenched oligopolists exploit monopoly power in product
markets; and
.
many SMEs are unable or unwilling to grow, so important scale economies go
unexploited.
In 2003, BPS conducted a survey on enterprises with 0 (i.e. self-employment units) to 19
workers in the manufacturing industry. The enterprises are divided into two
sub-categories:
(1) very small or MIEs, i.e. with 0-4 workers; and
(2) SEs, i.e. with 5-19 workers.
The ndings as given in Table IV show that the main problems faced by the majority
of the respondents are lack of capital and marketing difculties. In Indonesia, although
there are various government sponsored SME credit schemes, the majority of them,
especially MIEs located in rural/backward areas never received any credit from banks
or other nancial institutions. They depend much on their own savings, money from
relatives and credit from informal lenders for nancing their daily business operations.
In marketing, these enterprises usually 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.
Others include cumbersome and onerous business regulations and restrictions.
Basically, these problems which hamper business activities in Indonesia reect the
poor governance in Indonesia. One of the most egregious restrictive regulations which
hampered bona de business in Indonesia, including SMEs, was the policy-generated
barriers to domestic competition and trade. These policy-generated barriers included
the barriers to inter-regional and inter-island trade and proliferation of several state
and private monopolies which proliferated during the late New Order (NO) era. The
policy-generated barriers to domestic competition and trade included barriers to entry
in certain economic activities, ofcially sanctioned cartels and monopolies, price
Figure 1.
Output growth rates
of SEs, MEs, and LEs,
2001-2006 (percent)
0
1
2
3
4
5
6
7
8
2001 2002 2003 2004 2005 2006
SE
ME
LE
Total
Source: BPS
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e
:
B
P
S
Table III.
Structure of GDP by size
and sector, 2000-2006
(percent)
Export-oriented
SME clusters
31
controls, dominance of state-owned enterprises in certain sectors and preferential
treatment for selected favoured LEs.
These barriers created rent-seeking opportunities which beneted well-connected
businessmen, but hurt the business of the large majority of bona de businessmen,
including the numerous non-farmrms. Most of the policy-generated barriers to domestic
competition and trade, both at the national and regional levels, were abolished after the
Asian economic crisis as part of the structural reforms mandated by the governments
agreements with the IMF. Unfortunately, after the introduction of regional autonomy in
early 2001, several restrictive regulations on domestic competition and trade were
re-introduced by the regional governments. These onerous restrictive regulations have
worsened the business environment, including for the many SMEs. Although the SMEs
are considered to be mostly owned and run by the economically weak groups in society,
these enterprises, no less than LEs, are subjected to various illegal levies and so-called
contributions, both at the central government level and the regional government levels.
Interestingly, although it is well general known from the literature on SMEs in
LDCs that the lack of adequate skills in such as production and management are also
among their major constraints, Table IV indicates that these surveyed enterprises did
not consider the lack of skills as a serious problem. However, this may be due to the
fact that many of the respondents were not aware of this problem. Probably because
Figure 2.
GDP growth contribution
by size of rms, 2003-2006
(percent)
1.88 1.97
2.24 2.15
0.78
0.83
0.94
0.91
2.12
2.22
2.5
2.42
0
1
2
3
4
5
6
2003 2004 2005 2006
LE
ME
SE
Source: BPS
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 and MIEs 238,582 (100.00) 2,490,118 (100.00) 2,728,700 (100.00)
Note: Percentages in parentheses
Source: BPS
Table IV.
Main problems faced by
SEs and MIEs in
manufacturing industry,
2003
JEC
3,1
32
most of these enterprises produce simple items for low-income consumers in local
markets which enjoy natural protection from competition from similar goods produced
by larger enterprises or from import. The problem of unskilled entrepreneurs in MIEs
and SEs is evident in Table V.
Women entrepreneurs
Recently, there is an increasing interest in women entrepreneurship development
among policy makers, academics, and practitioners in Indonesia. This interest comes
from the recognition 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, and
hence reducing poverty. In this respect, SMEs provide thus a good starting point for
the mobilization of women talent, especially in rural areas, as entrepreneurs, while, at
the same time, SMEs can provide an avenue for the testing and development of women
entrepreneurial ability.
At least two main characteristics of development of women entrepreneurship can
obviously be observed in Indonesia as in LDCs in general:
(1) SMEs are more important than LEs for women entrepreneurs.
(2) Within SMEs, the female-male entrepreneur ratio is generally higher in SEs
than in larger sized and more modern enterprises.
This is due to the fact that women in LDCs are more likely than men to be involved in
informal activities which consists dominantly of SEs, either as self-employed or
employers or paid/unpaid workers. Database from the International Labour
Organization indicates that almost 95 percent of SEs in LDCs 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 (Manning, 1998; Oey, 1998), the reason for the increasing number of
women-owned enterprises are partly due to the increase of womens educational level,
and to the economic pressure the women faced in their households. However, the only
readily available ofcial statistics on women-led enterprises in Indonesia are only
in SEs, as presented in Table VI. From this table, there are three interesting facts.
Level of education Female (percent) Male (percent)
Not nished primary school 27.88 14.27
Finished primary school 40.82 39.49
Finished high school rst degree (SMP) 18.62 25.87
Finished high school second degree (SMA) 11.77 18.37
Higher education 0.91 6.5
Source: BPS
Table V.
Education of
entrepreneur in non-farm
MIEs and SEs
by gender, 2003
Export-oriented
SME clusters
33
First, it reveals that only 32 percent of these enterprises are run by women. It is
generally assumed that this percentage is also more or less the same in the larger
enterprises, suggesting that becoming an entrepreneur in Indonesia is still dominantly
a man culture [3].
Second, in manufacturing industry, from a total of 1,005,724 women owned rms,
about 97.9 percent are in SEs, employing ve or less people (and in many cases are
non-employing). They choose SEs simply because this economic activity is
characterized by an easy entry and exit, and low capital, skills, and simple
technology requirements.
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 female is more likely than male to be
involved in this sector, mostly as own-account traders having small shops or as owners
of small restaurants or hotel. In manufacturing industry, women entrepreneurs tend to
pursue areas where they have gender-based skills and know-how such as in food,
beverages, tobacco, clothing, and crafts industries.
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 tending to decline, it is still relatively higher than in neighboring countries. As an
illustration, gender inequality reected 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).
Ofcial 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
Entrepreneurs/owners
Sector Total enterprises Male Female
Mining, electricity
(non-stated own/PLN)
and construction 253,146 (100.00)
a
237,050 (93.64) [2.21]
b
16,096 (6.36) [0.32]
Industry manufacturing 2,641,909 (100.00) 1,636,185 (61.93) [15.25] 1,005,724 (38.07) [19.91]
Trade, hotel, and
restaurant 9,228,487 (100.00) 5,649,138 (61.21) [52.64] 3,579,349 (38.79) [70.86]
Transportation and
communication 2,170,291 (100.00) 2,140,022 (98.60) [19.94] 30,269 (1.40) [0.60]
Financial institutions,
real estate, renting, and
services 1,490,226 (100.00) 1,070,001 (71.80) [9.97] 420,225 (28.20) [8.32]
Total 15,784,059 (100.00) 10,732,396 (68.00) [100.00] 5,051,663 (32.00) [100.00]
Notes:
a
Distribution percentage by row (sector);
b
distribution percentage by column (entrepreneur)
Source: BPS
Table VI.
Women entrepreneurs
in non-farm SEs, 2003
JEC
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34
education of male is still higher than that of female. This national education structure
by gender is consistent with Table V, 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.
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 and so they are very restricted to
communicate 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. 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, hence, 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
husbands. The better the economic condition of the family or the better the education of
the parents/husbands, the less inuence of the traditional thinking in their attitudes
towards women to have better education.
Second, heavy household chores. Especially, in rural areas, women have more
children, and they are more demanded to do their traditional role as being responsible
for housework and child care, 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 population are muslim and rather isolated from big cities like
Jakarta, Islamic-based norms have stronger inuence on women daily life. This makes
female behavior or attitude in rural areas less open than male (or than urban women) to
doing modern business culture. In such society, women must fully comply with their
primary duty as their husbands partner and housewife, they are not allowed to start
their own businesses or to do jobs that involve contact with or managing men, or
simply they are not allowed to leave the home alone. Even if women do have their own
business, 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. While, in rural areas relatively close to urban areas with
good transportation and communication links, changes in local society attitudes about
traditional role of women being responsible for housework and child care and men for
income in the last 30 years are observable.
Fourth, lack of access to formal credit and nancial institutions. This is indeed is 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
Export-oriented
SME clusters
35
perceived as the head of the family, and thus, in general, men are still perceived 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 made that women are being permitted to take up paid
employment outside the home or to run income earning activities beyond their
traditional role (Syahrir, 1986; Rusdillah, 1987).
Finally, the participation rate of female as entrepreneurs varies by region.
Interestingly, although a larger part of SEs are located in Java, as also the majority of
population, non-primary economic activities, and educated people in the country are
found in this island, Nusa Tenggara (NT) in the eastern part of the country has the
highest ratio, means that there are more female than male entrepreneurs in NT.
However, this does not necessary reect 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 in 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, in the household,
wife is pushed to do something outside home to earn some income. Therefore, the
high participation rate of female as entrepreneurs in NT is most likely to be a reection
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.
SMEs development programs
While it is impossible to itemize all government programs, the SMERU Research
Institute has been able to map most important existing assistance programs to
strengthen SMEs provided by government and non-government institutions during
the period 1997-2003. Table VII shows there were 64 institutions whose assistance
programs to strengthen SMEs were successfully mapped and they were categorized
into six groups. A total of 594 programs were identied and most of them were
provided by the government (65 percent). Other programs were conducted by NGOs
Number of assistance programs
Still continuing
Institutions Number of institutions Total Total Percent
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 (2004)
Table VII.
Number of institutions
and assistance programs
to strengthen SMEs,
1997-2003
JEC
3,1
36
(18 percent), donor agencies (8 percent), banking institutions (5 percent), private
companies (2 percent), and other institutions. The scale of each assistance program
varied greatly based on the amount of funds, time frame and geographical scope.
Hence, one program cannot be directly compared with another[4].
Table VIII shows that the type of assistance activities varied. The number of
activities within each program also varied, but generally ranged from between one and
three. Hence, 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).
The data in Table VIII show that government agencies are the most common
institutions which introduced new technology (27.9 percent) and provided training
(21.1 percent), whereas other institutions mostly provided capital assistance. Of all the
institutions, government agencies played the most prominent role (50.9 percent),
followed by NGOs (29.4 percent) and donor agencies (10.1 percent). Based on the type
of activity, training was mostly undertaken by government institutions (46.9 percent)
and NGOs (37.2 percent). Capital assistance was mostly provided by local and
international NGOs (50.3 percent), followed by government institutions (15.5 percent)
and banking institutions (14.9 percent). Facilitation was mainly provided by NGOs
(52.4 percent) and government institutions (35.7 percent).
In Indonesia numerous government supporting programs for SMEs have been
implemented the nation-wide over the years including:
.
Small Enterprise Development, generally known as the KIK/KMKP subsidized
credit program for SMEs;
.
the Small Enterprise Credit (KUK) scheme; the credit program for village units
(KUPEDES);
.
the establishment of small rural development banks (BKD);
.
human resource development training programs, such as in production
techniques, general management (MS/MUK), management quality systems
(ISO-9000), quality control methods, entrepreneurship (CEFE, AMT), and
extension services;
A
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
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 of new technology 27.9 0.0 0.0 6.7 1.3 0.0 15.2
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
Note:
a
See Table VII
Source: SMERU, 2004
Table VIII.
The proportion of
assistance programs to
strengthen SMEs based
upon the type of activities
and the implementing
institutions
Export-oriented
SME clusters
37
.
the establishment of Cooperatives of Small-Scale Industries (KOPINKRA) in
clusters;
.
the establishment of small-scale industrial estates (LIK), the Foster Father
scheme;
.
the establishment of Small Business Consultancy Clinics (KKB);
.
the establishment of the Export Support Board of Indonesia (DPE), the
establishment of common service facilities (UPT) in clusters; and
.
the introduction of an incubator system for promoting the development of new
entrepreneurs.
Government departments, specically the Directorate-General of Small-Scale Industry,
Department of Industry and the Ofce for the State Minister for Cooperatives and
SMEs have taken the lead in the implementation of the SME development programs.
These departments, like other departments, have regional ofces for the delivery of
these various services in their respective regions.
The data from the Integrated Business Survey 2003 from BPS shows that the
government played a signicant role in supporting the development of SMEs. The
survey indicated that, out of a total 481,714 non-farm SMEs receiving government
support in 2003, 203,563 rms (or 43 percent of the total) received support through one
or more of the various government programs. The remainder (52 percent of the total)
received support from NGOs, foreign foundations and a number of large private
companies. The distribution by region shows that the majority of those receiving
support from the government are located in Java and Bali (Figure 3). However, as a
percentage of the total number of SMEs receiving government support in a region, the
region of NT (both Barat and Timur) scored the highest, while Java and Bali ranked
third (Figure 4).
To assess the effectiveness of SMEs assistance programs, SMERU (2004) conducted
a eld study on 172 respondents in six districts/towns (Kabupaten/Kota), including
Kabupaten Sukabumi, Bantul and Kebumen, and Kota Padang, Surabaya and
Makassar) consisting of SMEs in trade, industry, and services. These were informal,
Figure 3.
Distribution of non-farm
SMEs that received
supports from the
government by region,
2003
Source: BPS
11%
71%
8%
2%
7%
1%
Sumatera
Java & Bali
Nusa Tenggara
Kalimantan
Sulawesi
Maluku & Papua
JEC
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38
non-legal entities whose turnover and number employees uctuated, and which
operated with only simple technology. Because a large number of assistance programs
recorded in the eld were capital assistance programs, the impact on respondents was
generally economic. The nding shows that a majority of the sampled SMEs did claim
that their business had improved because of the assistance programs.
Small and medium industrial clusters
Types and development
In Indonesia, the agglomeration of manufacturing SME (say, small and medium
industrial clusters) is observed in both rural and urban areas (mostly surrounding big
cities). According to Weijland (1994, 1999), rural clusters in Indonesia have a seedbed
function for the development of rural industries, demonstrating that clustering can
improve for rural producers to outside markets, through dense networks of traders.
Klapwijk (1997) argue that clusters are important for the development of rural
industries because productivity in clusters appears to be higher than in dispersed
enterprises. One of the main reasons is that clustering stimulates active involvement of
traders and LEs in agglomeration of SMEs. A more interesting nding is from Sandee
(1994, 1995, 1996), which shows that enterprises in clusters are in a better position to
adopt innovations in products as well as production process than dispersed
enterprises[5].
Most clusters in Indonesia were established naturally as traditional activities of
local communities whose production of specic products have long been proceeding.
Based on comparative advantages of products they made, at least with respect to the
abundance of local raw materials and workers who have special skills in making such
products, many of these clusters have a large potential to grow. Take for example the
clusters of batik producers that have long been existence in various districts in Java
(e.g. Yogyakarta, Pekalongan, Cirebon, Surakarta, and Tasikmalaya).
Figure 4.
Proportion of SMEs
received assistances from
government by region,
2003 (percentage of total
SMEs in the region)
0.98
1.28
3.3
0.44
2.13
0.98
0
0.5
1
1.5
2
2.5
3
3.5
S
u
m
a
t
e
r
a
J
a
v
a

&

B
a
l
i
N
u
s
a

T
e
n
g
g
a
r
a
K
a
l
i
m
a
n
t
a
n
S
u
l
a
w
e
s
i
M
a
l
u
k
u

&

P
a
p
u
a
%
Source: BPS
Export-oriented
SME clusters
39
Various studies show the importance of clustering not only for the development of
SMEs in the clusters, but also for the development of villages/towns in Indonesia.
Based on evidence from their eld studies on SMEs in rural Java. Smyth (1990, 1992)
described how clustering of rattan furniture producers has absorbed an entire village
in Tegal Wangi, West Java, and created numerous satellite small-scale industrial
activities in neighboring hamlets. Schiller and Martin-Schiller (1997) also provide the
same evidence from wood furniture producers in Jepara in Central Java. The growth of
this cluster in the 1980s had transformed the town into a thriving commercial center
with a ve-mile avenue of such as furniture showrooms and factories, modern hotels,
new commercial banks, supermarkets, telephone and fax stalls, and European
restaurants. Soemardjan (1992) also presented an interesting story on how the
development of a roof tile cluster in a small village in Bali has turned poverty in the
village into prosperity.
However, there is also evidence that clusters are of limited importance for SME
development. Based on her study on SEs in a rural metal-casting cluster in Ceper of
Central Java, Sato (2000) found little evidence of positive effects of clustering, as no
inter-rm specialization of work processes and no joint actions (which are important
ingredient for a cluster to grow) among the rms inside the cluster studied. Based on a
research of eight clusters in rural Central Java, Supratikno (2002b) also comes with the
same story, as he found inter-rm specialization and cooperation among producers
inside the clusters were very limited, and they were fully dependent on outside
merchant capital. It is also hard to nd SMEs in clusters in Indonesia that have
production linkages through subcontracting systems with LEs. BPS data 2001 show
that more than 90 percent of these enterprises do not have such linkages with LEs.
Now the question is whether cluster diversity as evident in Indonesia is an
evolutionary process or a dual structure. More specic, why do some clusters do well,
even without government supports and others not or stagnate, even with government
supports. In short, the evidence in Indonesia as discussed above indicates that there are
differences between clusters, within clusters and over time, and, as stated in Schmitz
(1997a, b), nding systematic explanations is not easy.
As shown in Table IX, according to their level of development, clusters in Indonesia
can be classied into four types, each with its own characteristics (Sandee and ter
Wingel, 2002). The rst type of clusters dominated clusters in Indonesia (roughly
speaking more than 90 percent), indicating that the process of clustering in the country
is still at an infant stage. Altenburg and Mayer-Stamer (1999) refer to such clusters as
survival clusters of MIEs, as this type of cluster displays many characteristics of
MIEs with level of productivity and wages being much lower than that of SMEs.
In these clusters the degree of inter-rm cooperation and specialization is low,
reecting the lack of specialists in the local labor force as well as a fragile social fabric.
The process of clustering of this type is still at an infant stage, as many of the clusters
are stagnated in the sense that for many years there has hardly been any development
in terms of market expansion, increased investment and size of production, improved
production methods, management and organization, and product development (ADB,
2001). Sandee and ter Wingel (2002) argue that artisanal clusters are characterized by
lack of change through time: the producers produce the same products, with the same
technology that are sold to the same local markets as decades ago. But, they still exist
JEC
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40
because there is still market for their products, mainly from local demand, from
low-income households[6].
The second type developed rapidly in terms of skill improvement, technological
upgrading and successful penetration of domestic and export markets. The active
clusters may still be artisanal in character, which still face quality-related problems
and their markets are mainly local or domestic. Typical examples of these clusters are
such as roof tiles clusters, metal-casting clusters, shuttle-cock clusters, shoe clusters,
and brass-handicraft clusters. In these clusters, some enterprises start to inuence the
development trajectory of the clusters, and some enterprises produce for export
through middlemen or traders or trading houses from outside the clusters.
Examples of the third type are textile weaving clusters in Majalaya and
Pekalongan, furniture cluster in Jepara, wig and hair accessories cluster in
Purbalingga, and handicraft cluster in Kasongan. Many producers in these clusters
have developed extensive trade networks not only domestic, but also overseas. Internal
heterogeneity within clusters in terms of size, technology, and served market is more
pronounced. Inter-rm specialization and cooperation among rms inside clusters are
well developed. One of the most striking features of this type (and also to a certain
extent in the active clusters) may be the decisive role of leading/pioneering rms,
usually larger and faster growing rms, to manage a large and differentiated set of
relationships with rms and institutions within and outside clusters. Some leading
rms have utilized cutting-edge technologies in production (Supratikno, 2002a).
Examples are clove cigarette cluster in Kudus, tea-processing cluster in Slawi, and
No. Type Characteristics
1 Artisinal Mainly MIEs; low productivity and wage; stagnated (no market
expansion, increased investment and production, improved production
methods, and management, organization and production development;
local market (low-income consumers) oriented; used primitive or
obsolete tools and equipment; many producers are illiterate and
passive in marketing (producers have no idea about their market); the
role of middlemen/traders is dominant (producers are fully dependent
on middlemen or trader for marketing); low degree of inter-rm
cooperation and specialization (no vertical co-operations among
enterprises); no external networks with supporting organizations
2 Active Used higher skilled workers and better technology; supplied national
and export markets; active in marketing; the degree of internal as well
as external networks is high
3 Dynamic Trade networks overseas are extensive; internal heterogeneity within
clusters in terms of size, technology, and served market is more
pronounced; leading/pioneering rms played a decisive role
4 Advanced The degree of inter-rm specialization and cooperation is high;
business networks between enterprises with suppliers of raw
materials, components, equipment and other inputs, providers of
business services, traders, distributors, and banks are well developed;
cooperation with local, regional or even national government, as well
as with specialized training and research institutions such as
universities is good; many rms are export-oriented (mainly through
trading houses or exporting companies)
Table IX.
Different types of small
and medium industrial
cluster in Indonesia
Export-oriented
SME clusters
41
tourism cluster in Bali. In the case of clove cigarette cluster in Kudus, their products are
able to outperform products from Philip Morris and BAT. Similarly, tea-processing
cluster in Slawi, led by a big company named Sostro, has grown up as the market
leader in the Indonesian soft drink market, leaving a giant Coca Cola behind
(Supratikno, 2002a)[7]. Some other leading rms in active and dynamic clusters are
presented in Table X. Interestingly, in some cases, such as in furniture cluster in Jepara
and handicraft cluster in Kasongan, there are considerable direct investments made by
foreign immigrants (Supratikno, 2002a)[8].
With respect to the fourth type, only a very few clusters can be included in this
category, namely clusters that are more developed and become more complex in
structure than those in the third type. The main characteristics of this type of clusters
that make it different from the third type are especially in the following areas. The
degree of inter-rm specialization and cooperation is high, and enterprises in these
clusters have developed business networks with suppliers of raw materials,
components, equipment and other inputs, providers of business services, traders,
distributors, banks and other supporting institutions. This type of cluster has good
cooperation with local, regional or even national government, as well as with
specialized training and research institutions such as universities. Within this process,
the clusters may also expand geographically, e.g. by regularly drawing on inputs from
a nearby region, or developing regular cooperation with a university or research
institution in another city. Many enterprises in this type of clusters are export-oriented.
However, most of them do export indirectly through trading houses or export
companies (ADB, 2001).
Moreover, advanced clusters often overlap and interlink with other clusters in the
same region. Such cluster agglomerations or often-called as industrial districts
(the Italian term) form the most complex form of clustering, where different sectors or
sub-sectors mutually depend on and benet from each other. Prominent examples of
cluster agglomerations include North-Central Italy (tourism, food industry, fashion
industry, furniture industry, and machinery industry), southern Germany (vehicle,
electronics, machinery, and software industries) and Greater London (banking,
insurance, software, publishing, lm and music, tourism, fashion industry,
advertisement, business services). In Indonesia one example of a cluster
agglomeration is the Yogyakarta-Solo area with its tourism, furniture and interior
Cluster Location Leading rms
a
1. Wig and hair
accessories
Purbalingga (Central Java) PT Royal Korindah, PT Indo Kores
2. Handicraft Kasongan and Sleman
(Yogyakarta)
PT Out of Asia
3. Textile weaving Pekalongan (Central Java) PT Pismatex
4. Furniture Jepara (Central Java) Duta Jepara, Grista Mulya, Satin
Abadi
5. Brass handicraft Juwana (Central Java) Krisna, Samarinda
6. Roof tile Kebumen (Central Java) Mas Sokka
Note:
a
PT means a limited corporation
Source: Supratikno (2002a)
Table X.
Leading rms in some
active and dynamic
clusters
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decoration, metal processing, leather goods and textile/clothing clusters, which all
mutually benet each other.
The role of networks
Clustering creates external economies and joint actions and increases scope. In effect,
individual enterprises in a cluster can gain collective efciency. Close proximity
facilitates the establishment of business networks by enterprises in the locality of
industrial links without substantial transaction costs or difculties. However, these
economic advantages can only be achieved if the cluster has well-developed internal
and external networks. Internal networks can be dened as business co-operations or
links among enterprises inside the cluster, which can be in various forms, for example
marketing, distribution, production, procurement of materials, training for workers,
etc. External networks are business and other forms of relation between enterprises
inside the cluster and actors outside the cluster such as LEs, including foreign direct
investment-based companies (LEs), suppliers of inputs, providers of business services,
and so on (Ceglie and Dinni, 1999). In Indonesia, many small and medium industry
clusters show that traders, trading houses and local consumers or foreign tourists are
among their important external networks (Figure 5).
Based on experience of UNIDO in many developing countries, Ceglie and Dinni
(1999) state that collaborate actions through well developed business networks
involving SMEs and LEs, suppliers of inputs, providers of business services, nancial
institutions, other supporting private and public agencies, and local and regional
governments offer new opportunities for developing specic location advantages and
the competitive strengths of clustered SMEs. In addition, business networks among
enterprises and with other actors mentioned above also give rise to a collective learning
space, where ideas are exchanged and developed and knowledge shared in a collective
attempt to improve product quality, upgrade technology and move to more protable
market segments (ADB, 2001).
Further, internal networks or inter-rm co-operations can be divided into horizontal
and vertical co-operations. The rst type is a co-operation among SMEs occupying the
Figure 5.
Internal networks inside
and external networks of a
small and medium
industry cluster in
Indonesia
External networks
Cluster
Firm A Firm B
Internal networks
LEs (subcontracting)
Banks & other
financial
institutions
Suppliers of
inputs
Providers of
business services
University
Training/ R&D
institutions
Central & local
government
Other
supporting
institutions
Traders & Trading
houses/companies
Local consumers
/foreign tourists
Export-oriented
SME clusters
43
same position in the value chain. Through such co-operation, enterprises can
collectively achieve scale economies beyond the reach of individual enterprises and can
obtain bulk-purchased inputs, achieve optimal scale in the use of machinery, and pool
together their production capacities to satisfy large-scale orders. It also gives rise to a
collective learning process, where ideas are exchanged and developed and knowledge
shared among individual enterprises in a collective attempt to improve product quality,
upgrade technology and move to more protable market segments. The second type is
co-operation among SMEs along the value chain. With this, an enterprise can specialize
in its core business and subcontracts other related works to other enterprises in the
cluster (A in Figure 6). However, in many cases, it has been found that many individual
enterprises have vertical co-operations with LEs outside the cluster through
subcontracting systems (B in Figure 6). Thus, in many cases, the vertical
co-operation consists of both internal and external networks.
Although in general Indonesia is not well represented with small and medium
industrial clusters that feed into global commodity chains, rather than relationships
with overseas customers, Indonesian clusters tend to serve a variety of national
markets, some clusters have gradually become export-oriented. Among many factors,
well developed networks, are indeed an important factor for their increasingly export
activities.
Bali garment and Jepara wood furniture industry clusters are among the identied
export-oriented small and medium industry clusters with increasingly export activities
in Indonesia. Initially, they started by selling their products to foreign tourists who
visited their locations, and gradually they exported their products, rst, to psychically
close markets such as Malaysia and Thailand, and later expand to more distant
markets as far as some countries in Europe and the US. They came in touch with these
markets was the result of their rst relationships with the tourists from these countries
as mentioned before.
The Bali garment industry cluster grew spectacularly in the 1980s, and this case
shows how important are foreign tourists as an export channel for industries in the
cluster. Foreign tourists facilitated initial growth by connecting Balinese producers to
retail outlets overseas. Marketing links developed quickly and the industry changed
from a seasonal, home-based activity to a putting-out system with subcontracting
networks coordinated by the larger producers. A second wave of foreign buyers took
Figure 6.
Vertical inter-rm
co-operations
or
LEs: finalizing &
marketing
(a) (b)
Firms A: making semi-
finished product
Firm B: finalizing
Firm C: packing and
marketing
Firm: making
semi-finished
product or certain
components
JEC
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44
control after a slowdown in the early 1980s and this brought more sophisticated
business, production and design skills to the cluster. Further expansion came as
Balinese producers started to put out work to workers in East Java. This gave access to
a larger workforce but was also motivated by producers who wanted to protect their
clothing designs from copying. As the supply expanded, overseas countries buyers
tightened their quality inspection procedures in ways that necessitated factory
production. By this stage Balis reputation as a producer of low quality goods had
locked it into competition with other low wage Asian economies and the opportunity to
establish a unique Bali brand had been lost, at least for a time.
Even in the context of clusters based on a long history of production, that might
have been thought to generate a limited pool of expertise, immediate market
opportunities can bring forward rapid expansion that ultimately becomes a new
development challenge. The Jepara furniture cluster has had this experience. The
collapse of the Indonesian currency in 1997, as part of the larger Asian nancial crisis
(Arndt and Hill, 1999; Chang et al., 2001), resulted in a rapid growth of output that
exacerbated longer term weaknesses (Sandee and Ibrahim, 2001). Quality control has
not been maintained to the satisfaction of all foreign buyers, partly as a consequence of
a large inux of workers with no prior experience in furniture making. In response,
some buyers have shifted orders to other furniture clusters inside and outside
Indonesia. An outow of workers and entrepreneurs to emerging clusters has followed.
Overcrowding and a relatively unfavourable location have encouraged some producers
to move to other clusters in Central Java.
The case of Balis garment industry particularly show the importance of foreign
buyers (i.e. foreign rms, businessmen and tourists) as an important source of
innovation, as they were able to act as marketing intermediates, connecting local
producers with retail outlets abroad. In the process, these intermediaries dispended
important information on design and production technique. Foreign buyers provided
information and technical and managerial assistance on plant lay-out, the purchase of
the most appropriate machines, and quality control methods, and also often acted as
technical consultants to SMEs. As a result, these rms were able to achieve higher
levels of efciency and accuracy (Cole, 1998).
Foreign buyers also provided vital information as well as technical, managerial and
marketing assistances during the development of the export-oriented furniture
industry in Jepara, Central Java. As a result, the quality of Jepara furniture has been
steadily upgraded (Sandee et al., 2000, pp. 5-7). Foreign buyers have also played a
crucial role in providing guidance to SMEs on the furniture designs popular in the
export markets and the quality standards required to penetrate these markets (Berry
and Levy, 1994; Schiller and Martin-Schiller, 1997).
Other clusters with strong networks and are involved increasingly in export
activities are rattan processing clusters in South Kalimantan and in Padang
(West Sumatera). The rst case shows obviously that traders and trading houses are
the prime movers in linking the cluster to export markets. As well as providing access
to new sales outlets, traders help clusters modify designs of traditional products, give
advice on production improvements and may assist in nancing equipment. Typically
the traders having a signicant impact on clusters are connected to the markets that
they serve rather than the areas that they buy from (Sandee and ter Wingel, 2002). The
cluster was transformed from making low-value products for local consumers into
Export-oriented
SME clusters
45
exporters of mats to Japan. The stimulus for change is credited to a Japanese
businessman who made the new specialization possible by introducing technology and
product ideas. After an initial success, which saw several clusters participate in the
new trade, the Japanese market has declined because of consumer resistance to the
product quality. Improvements in production equipment are required that it appears
Japanese buyers are reluctant to assist the clusters make. The clusters were selected for
a rudimentary activity and there is now opportunity to source product from elsewhere
in Indonesia where buyers can be more condent of quality production than in
Kalimantan. The experience may be unusual but it illustrates how traders may
promote upgrading without developing long-term commitment to the clusters they
trade with. In this context, the development of home-grown buying organizations is
signicant although they tend to be restricted to handicraft sectors. For example, the
Indonesias Peoples Handicraft Marketing Service (Pekerti Nusantara) handles output
from over 60 clusters (Sandee and Ibrahim, 2001).
The case of rattan-based furniture industry cluster in Padang provides also some
evidence on the importance of having well-developed networks for the sustainable
growth, though its export orientation is much lower than those in the other cases
discussed above (Tambunan, 1998a, b). With respect to output and input market
networks, Figure 7 can give some idea about the output and input market networks of
the cluster. In the demand-side (output market), the producers sell their products to
domestic markets (local, regional or national), e.g. traditional markets (pasar),
small/medium shops, wholesalers, shopping centers and individual consumers. Such
as small traders, agents, wholesalers, and to a smaller extent, individual buyers were
found to be important domestic marketing channels for the rms in the cluster.
Only some producers were found to also do export, but indirectly, either via agents
in foreign countries (e.g. Malaysia and Singapore), or through trading companies in
Figure 7.
The output and input
market networks of the
Padang cluster
raw (f )
raw
(f )
(s) (f ) (f )
Subcontracting
(f ) & (s) *)
(f )
Planters/
gatherers
Cluster of
rattan SMEs
Local
market
LEs making semi
(s) and finished
(f) rattan products
Regional or/and
national market
Export
JEC
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46
Jakarta, or foreign tourists who regularly visited the cluster. Those who serve regional
markets in, e.g. North Sumatera (Medan) and Java (large cities like Jakarta, Bandung
and Surabaya) trading companies in the cities are also a very important marketing
channel. For instance, there were two furniture producers who have business linkages
with trading companies outside the cluster. The rst producer made on orders
regularly for a trading company, but sometime also for other rms. The second one
had more complex business linkages with several companies for the marketing of his
output and the supply of his inputs he exported chairs and tables to The Netherlands.
He sold his products rst to a large company in Jakarta. Further, this company
exported the products via another large company. He obtained his semi-nished rattan
from a large company outside the cluster, and his chair skeleton from a local workshop
that produced a variety of goods from iron. For the production (or some part of it), the
workers often (though not always) do the work in their own houses. For their
semi-nished rattan products, some of the furniture producers in the cluster obtained
them from local small workshops located outside the cluster.
In the supply-side (input market), the producers buy semi-nished rattan from LEs,
or raw rattan from planters or gatherers. There were also some producers who have
established business sub-contracting linkages with LEs. By establishing good
networks in the supply-side, the cluster can secure their long-term procurement of raw
rattans from many districts not only in West Sumatera but also from Kalimantan and
Sulawesi. Many enterprises in the cluster also have networks with LEs outside the
cluster who supplied semi-nished rattan products.
The cluster has also developed extensive networks with other institutions at local
and regional level such as banks, government, university, research institute,
state-owned companies, business associations, and local Indonesian Chamber of
Commerce and Industry. Through such networks, local banks provide credits,
government and university organize various trainings, research institute assists the
cluster with quality control and better method of production, state-owned companies
provide marketing supports and business association and Indonesian provides
trainings, market information and trade-promotion supports.
The cluster has developed extensive external networks with institutions at local or
regional level such as banks, government, university, research institute, state-owned
companies, business associations, and Indonesian Chamber of Commerce and Industry
(Figure 8).
It is often argued in the literature that one important form of external network is
strategic alliance. Strategic alliance is dened as the development of a long-term and
stable relationship with other enterprises[9]. Many researchers such as Perry and Pyatt
(1995) and Weaver and Dickson (1995) suggest that such alliances are a key component
of successful rms competitiveness. Such partnerships are especially important for
SMEs, which in general have limited capital, human resources, information, and
technology. Through collaborations, LEs can share their capacities with SMEs in order
to reduce costs, without having to reduce the creativeness and competitiveness of each
company involved (Weaver and Dickson, 1995).
Tambunan (2006, p. 237) surveyed 124 respondents, most of which are MEs and
some of them do exports. The result shows that more than 50 percent of them have
had strategic alliances with other rms. However, the percentage of those who have
strategic alliances varies among various industries. A majority of the rms surveyed in
Export-oriented
SME clusters
47
food, beverages, and tobacco industries and industries manufacturing metal products,
machines, tools and other capital goods had some kind of strategic alliances with other
rms, while the proportion in other industries is considerably lower.
Most of the rms surveyed have had more than one type of strategic alliances
(Table XI). The most important types are long-term marketing agreements
(i.e. cooperation among rms in marketing of output), purchase-supplier alliances (i.e.
cooperation between input suppliers and their purchasers), joint venture with other
enterprises, and co-operation in technology. With respect to the kinds of assistance that
the surveyed rms have received from their strategic alliance partners, technology,
market information, and worker skill training are the most important. Cooperation in
marketing, rather than in technology, is also the most prevalent formof partnership in a
Figure 8.
Overall external networks
of the Padang cluster
Supply-Side Demand-Side
Notes: MOIT ministry of industry & trade; MC&SME ministry of cooperative & small and
medium entrepreneurs; MOMP ministry of manpower; CCI chamber of commerce and industry
Farmers/
gatherers
Collectors
LEs
Local
market
(traders)
Cluster
- traders
- wholesalers
- agents
domestic
market :
- local
- regional
Individual buyers
- individual
buyers
- agent
- trading
houses
LEs
Export
market
Non-bank government
agents, e.g.:
- MOIT
- MC$SME
- MOMP
Capital sources:
- Banks
- State companies
(BUMN)
- Private companies
Business
association &
local CCI
Education inst.:
Management Institute (Andalas
University)
JEC
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48
study of 300 enterprises in the food, wood products and clothing industries in six
provinces in Indonesia (TAF, 2000).
Overall, ndings, and conclusion
In overall, the experiences of the above clusters in developing their export activities
have three important conclusions as the contributions of this paper to the international
entrepreneurship literature. First, their gradual developments in export activities are
similar to the so-called Uppsala model often mentioned in the international
entrepreneurship literature. Based on their studies of Swedish manufacturing rms,
Johanson and Vahlnes (1977) showed initial internationalization activities of these
rms were targeted to psychically close markets. They explained that the rms learned
and increased its foreign market knowledge over time primarily through experience,
and only then they expanded to more distant markets. Similarly, the Bali, Jepara, and
to smaller extent, Padang cases started rst as local market oriented producers, selling
their products to local consumers including foreign tourists. After they experienced
with foreign tourists demand, which used as a measure of foreign market needs, they
started to export in small amounts, rst, to psychically close markets such as Malaysia
and Thailand, and later expand to more distant markets as far as Europe. They came
in touch with these European markets was the result of their rst relationships with
the European tourists.
The second contribution is to network theory which is an important issue discussed
in the international entrepreneurship literature. For example, the ndings of Bells
(1995) comparative study of export behavior among entrepreneurial software rms in
Finland, Ireland, and Norway led Bell to the conclusion that the network approach was
a better explanation of the internationalization process of these rms. McDougall et al.
(1994) explained that networks helped founders of international new ventures, or
born-global, to identify international business opportunities, and those networks
appeared to have more inuence on the founders country choices than did their
psychic distance (Coviello and Munro, 1995, 1997; Oviatt and McDougall, 1994, 1999;
Servias and Rasmussen, 2000; Rasmussen et al., 2001).
In their recent paper, Johanson and Vahlne (2003) they combine the traditional
Uppsala model with a new focus on network relationships involving customers and
suppliers. They hypothesize that rms learn and benet from such relationships.
Those relationships, in turn, sometimes lead them to enter foreign markets, at times
Types Percentage use
Long-term marketing agreements 25.3
Purchaser-supplier alliance 23.9
Joint venture with other SMEs 22.8
Technology alliances 22.0
Outside contracting 21.2
Licensing 20.0
Joint venture with LEs 18.9
Equity investments 14.8
Export management 13.4
Source: Tambunan (2006) (eld survey 1997)
Table XI.
Types of strategic
alliances by the surveyed
rms in Indonesia, 1997
Export-oriented
SME clusters
49
incrementally and at times quite rapidly. The experiences of the Bali and Jepara
clusters support the hypothesis: especially the roles of foreign tourists and, to a lesser
extent, local traders, have made the producers became exporters.
However, Johanson and Vahlne (2003) draw the conclusion that with a
network-based model foreign entry and expansion are no longer the most
interesting scholarly issues. Rather, how customer and supplier relationships are
established and developed are the key research questions. The cases of Bali, Jepara and
Padang show that the establishment of customer and supplier relationships is based on
personal relationships, reputation, and trust, without formal arrangements or
contracts. This is indeed one important characteristic of small and medium
entrepreneurs in Indonesia, especially in rural areas were social capital is still stronger
than in urban or big cities. As Coleman (1990) states that the entrepreneurs networks
represent social capital that is intangible and idiosyncratic, and it appreciates through
repeated interactions that help build trust, and Dubini and Aldrich say that trust is the
basic element that determines the solidity of the network link.
The third contribution is to learning theory, which is also an important point of
discussion in the international entrepreneurship literature. No doubt that the need to
acquire local market knowledge is a key tenet of internationalization. Even, an
export-oriented rm having fully knowledge on its targeted foreign markets (and their
local related aspects such as social-culture, tradition, and norm in countries where the
markets are located) can be its most competitive advantage against its global
competitors. For this reason, many studies have been made on the importance of
learning for entering or expanding in the international marketplace (Erramilli, 1991;
Andersen, 1993; Inkpen and Beamish, 1997; Luo, 1997; Barkema and Vermeulen, 1998;
Lord and Ranft, 2000; Zahra et al., 2000; Johanson and Vahlnes, 1977, 2003).
Notes
1. See among others, Alvarez and Barney (2001), Bonaccorsi (1992), Hitt and Ireland (2000), Das
and Teng (1998), and Gulati (1995).
2. Unfortunately, evidence on constraints faced by LEs is very rare, and there are no data from
BPS. Although some reports on competitiveness and business environment may give some
idea about business constraints faced by LEs such as distorted market, labour disputes, red
tape, business unfriendly tax system, lack of infrastructure, too many retributions, and
many others. However, there are data on the constraints on technology acquisition.
3. Unfortunately, since no data are available on the proportion of women-led larger enterprises
in Indonesia, there is no indication on whether the percentage of women owners relative to
men decreases or increases as rm size increases. Also, no data exist on the number of
women starting enterprises each year, or on their growth rates into the next rm-size
category. But, it is probably safe to say that a very small proportion of women-led SEs grow
into larger enterprises.
4. For more detailed information about each program from each institution, including the name
of the program, type of assistance, program executor, timeframe, fund used, area,
beneciaries, status, problems and potential, see SMERU, available at: www.smeru.or.id
5. More empirical studies shown in Sandee and Weijland (1989), Sandee et al. (1994), van
Dierman (1997), Tambunan (1994) Tambunan (2000), Tambunan and Keddie (1998),
Glasmeier (1990), van Velzen (1990a, b, c), Sadyadharma et al. (1988), Supratikno (2002a), and
Knorringa and Weijland (1993).
JEC
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50
6. Producers in these clusters are truly marginal almost in all respects. They use primitive or
obsolete tools and equipments. Many of them (and their workers) are illiterate. The
producers are very passive in marketing; even many of them do not have any idea where
their goods were sold and how big is the market potential for their products. They just stick
to known products and wait for buyers or traders to come. They remain so poor and
stagnant that one may wonder whether the producers would not be better off elsewhere
(Supratikno, 2002a).
7. Schmitz and Nadvi (1999) provide some examples of advanced export-oriented clusters in
other developing countries including shoe manufacturing in Brazil, India, and Mexico,
surgical instruments in Pakistan, and garments in Peru.
8. Foreign immigrants who established production facilities have contributed signicantly to
the clusters dynamics. They are clearly in advantageous position vis-a`-vis local producers in
the clusters, as these foreign immigrants have better accesses to market, technology, and
nancing sources (Supratikno, 2002a).
9. SAs can take many forms, including subcontracting, joint ventures, and cooperation in
marketing, promotion, or R&D activities.
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About the author
Tulus Tambunan is Professor of Economics at the Faculty of Economics, University of Trisakti,
Jakarta. He has researched and taught in the elds of Indonesian economy, economic
development, poverty, international economy, and SMEs. His current research interests include
development of SMEs, poverty, especially the role of agriculture for poverty alleviation
in developing countries. He has worked for several regional and international institutes such as
Asia Development Bank, World Bank, UNIDO, and GTZ for research projects on SMEs in
Indonesia. Currently, he is the director of Center for Industry and SMEs Studies in the same
university and his recent research is in the publishing process as a book on Development of SMEs
in ASEAN. Tulus Tambunan can be contacted at: syarir@rad.net.id
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