Bulletin of Indonesian Economic Studies, Vol. 37, No.

3, 2001: 36384

S MALL AND MEDIUM ENTERPRISE D YNAMICS IN INDONES IA

Albert Berry University of Toronto

Edgard Rodriguez Asian Development Bank, Manila Henry Sandee Vrije Universiteit Amsterdam

This paper discusses the development of small and medium enterprises (SMEs) in Indonesia before and during the crisis. It argues that SME productivity has risen substantially, at rates not far from those of larger firms. Case studies indicate that various mechanisms are at work, such as technology diffusion through foreign buy ers and subcontracting. The prevalence of SME clusters suggests that they benefit small and medium enterprise development. SMEs are found to have been weathering the crisis better than larger companies, though many have been hit hard too. Being less reliant on formal markets and formal credit, SMEs are able to respond more quickly and flexibly than their larger counterparts to sudden shocks. The pa per argues that, rather than providing direct assistance to smaller firms, government should concentrate on creating a business environment conducive to small and medium business growth, and promoting provision of business development services by the private sector.

INTROD UCTION Developing countries value small and medium enterprises (SMEs) for several reasons, such as their potential to grow into larger, more productive units; their ability to invest and adopt new technologies; and their ability to adapt to new economic circumstances. First, SMEs perfo rm better than microenterprises in generating productive employment. The SME sector is perceived as being populated largely by firms that have considerable employ ment growth potential. Many SMEs may expand significantly (the seed-bed for large firms function), while the great majority of microenterprises tend to grow little and hence do not graduate

from that size category (Liedholm and Mead 1999). Second, as part of their dynamism, SMEs often achieve rising productivity over time through both investment and technological change. In developing countries, large enterprises achieve productivity increases to a great extent sim ply by borrow ing from the shelf of technologies available in the world. Processes such as foreign direct investment, technology licensing, joint ven tures, and access to engineering and other advances provide productivity increases for large enterprises. For SMEs as a group this is not so evident. Yet they do need to raise productivity if they are
2001 Indonesia Project ANU

ISSN 0007-4918 print/ISSN 1472-7234 online/01/030363- 22

364

Albert Berry, Edgard Rodriguez and Henry Sandee

to increase their contribution to overall development as capital becomes less scarce and the range of available tech nologies expands. Finally, it is often argued that an ad vantage of SMEs is their flexibility, rela tive at least to larger firms. This is construed by some as being especially important in industries and economies that, for whatever reason, face rapidly changing market conditions, such as the sharp macroeconomic downturns that have bedevilled most of the countries of East Asia in the last few years. This paper undertakes a selective review of evidence from Indonesia on the SME manufacturing sector, with emphasis on these three issues of firm dynamics. It first reviews the role and growth record of the SME sector in recent times in the context of overall economic development. Next, it looks at selected factors affecting the productivity, com petitiveness and survival of SMEs, in cluding their involvement in clusters, subcontracting and exports. The re sponse of SMEs to the economic crisis at the turn of the century is reviewed, and the paper concludes with a discussion of government support for SMEs. TRENDS IN THE SM E S ECTOR Indonesia achieved strong and widely applauded growth and development between the late 1960s and the onset of the crisis in 1997. Average GDP growth was 6.8% per annum over the period 197097, with per capita income rising at 4.7% annually. Industrialisation proceeded apace, manufacturing output growing at an average of 12.4% per year, first under an import substitution industrialisation policy, and then, since the early 1980s, under an increasingly open economy strategy. M anufacturings share of GDP (at current prices) rose from 10.3% in 1970 to 25% in 1996, while the employment share of the sector ex -

panded from 7.8% in 1971 to 12.6% in 1996.1 While average labour productivity in the economy as a whole was ris ing at about 3.9% per annum, that in manufacturing was increasing at 7.3%. The share of manufacturing products in total exports jumped dramatically, from 4% in 1984 to 48% in 1992, with the absolute level (in current dollars) having risen more than eightfold from $1.8 to $16.1 billion (Hill 1997: 41). In the 1990s, non -oil and gas exports continued to expand, growing from $26.1 billion in 1993 to $41.9 billion in 1998 (World Bank 1999). These included both labour-intensive products, whose competitiveness lay in the countrys large labour force, and products that relied on natural resources and special policy support. Enabling macro and regional eco nomic policies, including the development of financial, trade and physical infrastructure, contributed to the growth of medium and large industry. In some industries this growth was at the expense of small enterprise, as in the cases of bamboo weaving and palm sugar processing (Sandee et al. 2000). In other industries, small firms performed well relative to larger industries (Hill 1996). During the New Order period, Indonesia experienced a rapid rise in largescale manufacturin g, w hich was characterised by its concentration on labour -intensive assembly operations and a growing orientation towards ex port markets. In spite of the impressive growth of large-scale manufacturing, the overall importance of the small - scale sector has not declined.2 According to Hill (1992: 249), the principal explana tion of the latters resilience is its ability to exploit market niches, to concentrate on activities characterised by economies of agglomeration rather than economies of scale, to serve particular markets not of commercial interest to larger firms, and to produce goods not easily adapted

Small and Medium Enterprise Dynamics in Indonesia TABLE 1 Manufacturing by Establishment Size (Employment -based Definition), Census Data, 197596a

365

1975 No. of workers (000) Micro (14) Small (519) Medium (2099) Large (100+) Workers (%) Micro (14) Small (519) Medium (2099) Large (100+) 5,170 3,900 343 272 655

1986 5,503 2,714 770 493 1,526

1996 10,206 4,076 1,915 624 3,591 100.0 39.9 18.8 6.1 35.2 5,148

Annual Average Growth Rate (%) 197586 198696 197596 0.6 -3.2 7.6 5.6 8.0 6.4 4.2 9.5 2.4 8.9 3.3 0.2 8.5 4.0 8.4

Value added per worker (1990 Rp 000) Micro (14) Small (519) Medium (2099) Large (100+)
a

100.0 75.4 6.6 5.3 12.7 1,525 132 959 4,088 9,055

100.0 49.3 14.0 9.0 27.7 3,391 689 1,500 4,105 8,921

572 1,371 4,351 12,495

16.2 4.2 0.0 -0.1

7.5

-1.8 -0.9 0.6 3.4

4.3

6.0 7.2 1.7 0.3 1.5

Estimates are from Rice and Abdullah (2000), who adjusted manufacturing census data on the basis of more recent information on the manufacturing sector in Indonesia. Annual growth rates are our estimates. Source : Rice and Abdullah (2000).

to mass production technologies. Clustering helps to explain the resilience of small and medium industries: a key feature of small-scale industrial organisation, particularly in densely populated Java, is the tendency for enterprises to group together geographically and by economic subsector to exploit economies of agglomeration. There is ample evidence of their technological upgrading, which has been essential to adjusting to changes in consumption patterns during the growth years (Sandee et al. 1994; Sandee 1995; Van Diermen 1997). Small firms continuing role as the locus of most employment in Indonesias manufacturing structure is reflected in the fact that, in 1996, 40% of all work-

ers were found in units of under 5 workers and almost 60% in units of under 20 workers (table 1).3 Labour productivity is much greater in larger plants, howev er, with the result tha t, though microenterprises had some 40% of em ployment in 1996, they generated less than 5% of value added, while large firms generated respectively 35% of employment and more than 85% of value added (Hill 1997: 71). The labour productivity gap between small and large enterprises is one of the largest observed among developing countries (Berry and Mazumdar 1991). Clusters and rural industry represent notable features of Indonesian manufacturing employment. The prevalence of

366

Albert Berry, Edgard Rodriguez and Henry Sandee

clustering is considerable: about half of manufacturing employment is located in clusters (Sandee 1995). Rural industry employment, while also large, is characterised by its instability (Klapwijk 1997) and the low incomes it generates. Between 1975 and 1996, growth of manufacturing value added was very rapid, reaching about 9% per year in real terms. Both labour productivity (5.7%) and employment (3.1%) contributed strongly to this growth. Labour productivity defined as value added per worker rose during the period 197596, by an average for all manufacturing of about 5.7% per year (6.9% annually between 1975 and 1986 a nd 3 .9% between 1986 and 19 96 : table 1). Productivity growth reflects rising factor productivity and increases in the capitallabour ratio. Labour productivity is a useful indicator of a sort of progress, since firms that cannot raise it through some combination of these two sources will not be able to remain com petitive as wages rise. The Central Statistics Agency (BPS) conducts a census of the manufacturing sector every 10 years (1975, 1986 and 1996). In the first intercensal period (197586), the fastest increase in labour productivity may have occurred in establishments with under 20 workers: our estimates, based on research by Rice and Abdullah (2000), suggest increases of 3.8% per year for small enterprises and 14.8% for micro enterprises. In the second intercensal period (1986 96), labour productivity declined in both micro and small firms. Over the entire period (197596), labour productivity appears to have grown most for microenterprises, with more modest (and quite similar) estimates for small and large firms. Labour productivity figures are difficult to interpret for the household establishments that make up the bulk of the microenterprise group, because effective hours worked

(rather than numbers of workers) in these firms tend to be quite variable, and extremely hard to measure. It is prob able that productivity per hour worked rose less than the observed value added per worker, but nonetheless increased considerably. Although manufacturing remains a very low -income activity for many people, this characteristic prob ably became less marked over time. The estimates by Rice and Abdullah (2000) used in table 1 s uggest continued growth in labour productivity among large establishments, but a possible slowdown for small ones and no reliable evidence on the hard-to-measure pro ductivity of household workers. The labour productivity gap between small and large establishments has remained substantial. The ratio was 9.4 in 1975 and 9.1 in 1996. The data suggest that there was fast labour productivity growth in large enterprises between 1986 and 1996 (3.1% per annum), and that some investment and technology upgrading must also have occurred in the small size categories. Total factor productivity (TFP) measures the relative efficiency of SME firms and its advance over time, whereas labour productivity does not. Unfortu nately, the TFP measure is harder to operationalise owing to problems in the measurement of capital (and of human capital). A number of studies in various countries have focused on relative efficiency, measured by TFP, across size categories.4 The indifferent quality of the data means that they do not lend them selves well to this sort of effort. There have, nevertheless, been several analyses of how TFP has changed over time in the medium and large sector as a whole in Indonesia, the most recent and perhaps the most accurate being by Timmer (1999). He reports that TFP fluctuated without trend over the period 197583, and then rose at an average rate

Small and Medium Enterprise Dynamics in Indonesia

367

of about 6% per annum between then and 1995, for a 20-year average rise of 2.8% per year. By 1995, TFP was at 176% of the 1975 level, with labour productivity at 220% of it. The figures indicate that capital input accounted for 60% of the output growth over this period, labour for just 18% and TFP for 22%. No TFP estimates have to our knowledge been undertaken for Indonesia by establishment size category. The growth of total employment results both from creation of new firms (minus the exit of existing ones) and from the em plo ym ent gro wth of existing firms. Though no organised in formation is available to permit a disaggregation between these two sources, scattered evidence suggests that firm growth is important. Steel (1993: 15) notes that there was considerable graduation into the larger size categories over the period 1975 90. Whereas in 1990 63.7% of all employment in medium and large establishments was located in establishments with 500 or more workers, only 28.8% of the initial year employment of this set of establishments was found in the 500+ size range.5 Hill (1997: 71) presents somewhat similar information for three size categories. In 1990, whereas the 500+ category accounted for 65.7% of value added, firms created in that size range accounted only for 41.7%. More directly related to our concerns here, establishments currently in the medium range produced only 7.0% of valued added, but those created in that range produced 25.4%. Hence, those that had graduated up from this size category accounted for a hefty 18.4% of output, more than twice what firms currently in the size range were producing. This multiple had risen over time (from under 2 in 1977 to 3.6 in 1990). More importantly, the share of all value added generated by establishments of 20 workers or more that comes from those start-

ing in the 2099 range rose from 15.9% in 1977 to 25.4% in 1990. Further evidence on the growth trajectories of firms comes from a study of SME exporters by Berry and Levy (1999). These firms were doubtless atypically capable of growth because of their success in breaking into export markets, and are thus better thought of as giving a feel for how fast growth can be under those circumstances. For example, the 32 rattan firms interviewed began operations with an average of 136 workers and had 377 by date of sample in 1992, by which time the average firm age was about 10 years. Still, a lower share of this sample of exporting SMEs had started small (defined by number of workers) than in a comparable study of SME exporters from Colombia (Berry and Escandon 1999: 173). S OUR CES OF PROD UCTIV ITY G ROWTH Raising productivity (labour or TFP) is achieved through a variety of mechanisms. Technological upgrading is one of them and, in the broadest sense, includes not just better machinery but also improvements in areas such as workplace organisation, inventory handling and product design. It is accepted that most small firms will be less able to handle this process successfully on their own than will larger ones. Accordingly, much attention has been given to the possible roles of subcontracting and clustering as arrangements that make such advances more easily accessible to small firms, and of collective support systems, including those of the public sector and of private associations. What are the sources of rising productivity in Indonesias SMEs? As discussed above, the evidence suggests that al though absolute levels of labour productivity in most SMEs remain quite low, they have been rising over the last

368

Albert Berry, Edgard Rodriguez and Henry Sandee

couple of decades. Productivity has risen at rates not far from those of the larger firms, for which the data referred to above clearly confirm substantial im provements.

S ources of Technological Upgrading There are no general data on the sources of labour or total factor productivity gains of SMEs or their relative importance. But some suggestions do emerge from the few studies available. In their analysis of sources of technological ca pability for exporting SMEs in rattan furniture, wood furniture and garments (three important export industries in which SMEs play significant roles), Berry and Levy (1999: 50) highlight sev eral major sources. One is private chan nels (e.g. suppliers of equipment or buyers), which have been the dominant mechanisms for acquiring technical ca pability in all three sectors. Second, subcontracting is pervasive in all three industries, and has been crucial to harnessing traditional skills for export production. Third, employment of expatriates is an especially powerful mechanism fo r a cquiring technological capability in the rattan and garment sectors, but this practice is concentrated disproportionately among non -pribumi (mainly Chinese) entrepreneurs who have the advantage of being embedded in an extended ethnic community that transcends national boundaries. Finally, collective support mechanisms (public sector bodies and private associations) have played only a limited role overall; their impact has been concentrated on the smaller ( pribumi) firms, but their overall contribution has been limited by pervasive institutional weaknesses. These three case studies of small export industries illustrate the range of mechanisms at work in the process of technology upgrading. Much of it involves ideas coming from the outside,

but on-the-job learning by both employees and the entrepreneur are rated very highly as well (Berry and Levy 1999: 51, 59). Foreign buyers are the most impor tant single source of outside technological support (and of outside marketing assistance) in all three industries. This reflects both the need for a strong mu tual interest in raising productivity for the process to be successful, and the fact that the buyers product preferences and specifications have implications for the technological capability that a firm needs. Expatriate employees were the second most important source of tech nological capacity in rattan and garm ents, tw o in dustries in which Indonesia has emerged as a significant producer. Equipment suppliers were rated by respondents, especially the few pribumi entrepreneurs in the garment sector, as moderately useful providers of technological information. Similar firms provided considerable information in the garment industry, especially to pribumi entrepreneurs, and the technical litera ture mattered to a moderate number of firms. On the other side of the ledger, private consultants were rated as of lim ited importance, as were public sector providers, industry associations and foster parents.6 Collective sources (public and private non-profit) have clearly been more important to firms that started smaller and to those run by pribumi entrepreneurs. This implies that, rather than concluding that such sources are not necessary, ways should be found to make them function better in future than in the past. Doing so requires rec ognition of what such collective sources can do best and how they can best do it. It is important that they not try to do too much, nor to replace private mechanisms when these have real potential. Berry and Levy (1999) point to the merits of light touch public support, which

Small and Medium Enterprise Dynamics in Indonesia

369

focuses on bringing private actors together, facilitating their contacts, and the like. One of the best examples of this, most directly relevant to the marketing needs of the surveyed rattan SMEs, but also surprisingly relevant to technological learning, is government support for participation in fairs, both in- country and abroad, which has been found to trigger pro cess es of techno lo gical change and contribute to rising productivity (Cole 1998; Sandee et al. 2000). Unfortunately, it is not possible to say to what degree the above findings can be generalised to the majority of SMEs, which have weaker or no links to exporting. The role of foreign buyers would of course be absent in non-exporting firms, and the benefits and density of subcontracting very probably lower, because commercial linkages between small and large firms appear to be best developed in the case of export -oriented industries. We suspect that technological improve ment is on average slower in the domestic market-oriented SMEs because these important sources of technology are weak and because the achievement of export capacity is likely to require a higher than average level of perform ance. But most of the same sources of gains are at work in the broader universe of firms as well, their relative importance is probably rather similar, and the policy conclusions reached on the basis of Berry and Levys 1999 study of exporting SMEs are also more generally applica ble (Levy et al. 1999). S ubcontracting Subcontracting has played a central role in the successful integration of SMEs into dynamic manufacturing sectors in countries like Japan and Korea, where it has been a major vehicle for the achievement of rising and eventually high levels of productivity in those firms. Its role is clearly smaller in Indo-

nesia, but is not inconsiderable, especially on Java. The issue is how that role will evolve in the future. The prevalence of subcontracting in the exporting SMEs studied by Berry and Levy (1999: 535) is encouraging. For instance, three quarters of rattan furniture exporters used subcontractors. Quality maintenance involves technical assistance to subcontractors. In a study of the furniture industry in Jepara, Central Java, Sandee et al. (2000) found that one function of in -house capacity among exporters is to undertake quality control and to spin off capable new subcontractors from among their em ployees. Subcontracting is encouraged by large export orders, fluctuating orders and the risks associated with a heavy investment by a single firm in such circumstances, as well as by the lower costs that subcontractors can often achieve. Subcontractors may achieve lower costs because they pay lower wages than large firms, they specialise in specific tasks that are carried out very efficiently, and they are able to bring down capital costs by sharing equipment with neighbouring firms. Kinship, friendship or former business contacts also encourage s ubcontracting. Supratiknos (1998) study of subcon tracting arrangements in three manufacturing firms found that large firms contract out items that have low value added, that require much labour input, and that are not essential to the overall production process. The latter finding implies an interest in being able to switch to other subcontractors in case of unsatisfactory performance. Nevertheless, Supratikno con cludes that the potential contribution of the subcon tracting arrangement to the competitive ness of the firm is not widely perceived as significant, so that, in general, sub contracting relationships in Indonesia remain underdeveloped. Okamoto and

370

Albert Berry, Edgard Rodriguez and Henry Sandee

Sjohlm (2000) report in their study of the automotive industry that large enterprises, especially foreign firms, do not seem to link with small local firms.

Clustering Meanwhile, the prevalence of clusters of small firms, in both rural and urban areas, suggests that they need to be taken into account in explaining the performance of small industries. In some circumstances, clustering results in lower total cost of production, enhancing the competitiveness of small firms.7 The general literature on clusters has focused on sources of static productiv ity gains, such as economies of scale in the purchase of raw materials or machinery and in the sale of output, and the spread of risk associated with demand fluctuations. More recently, it has also taken account of the dynamic advan tages of this structure, such as the sharing of R &D expenditures and the diffusion of information on new designs, processes and products. It is widely ac knowledged that small industry clusters are important in both developed and developing countries. A key concept in successful cluster development is collec tive efficiency. Clusters of firms may enhance their competitiveness through specialisation by individual firms and the simultaneous outsourcing of tasks to other firms. Evidence from developing countries shows that in the majority of clusters small firms work together only to a very limited extent. This is confirmed in the study by Sato (2000) of a cluster of small rural metal-casting firms in Central Java. She found that intra -cluster linkages (collaboration among firms) are of lim ited importance. Most firms do not specialise. Purchase of inputs, production, information collection, and selling of output are done individually. However, there is evidence that clusters are of im -

portance for small firms development, because productivity in clusters appears to be higher than in dispersed firms (Klapwijk 1997; Weijland 1999). One of the main reasons is that clustering stimulates active involvement of traders and large firms in agglomerations of small firms. Buying large amounts from sev eral small producers through a single visit reduces transactions costs. Furthermore, involvement of traders and large firms lessens the need for small firms to develop their own marketing capacity, frequently a significant constraint in the penetration of urban and international markets (Sandee 1995). The main difference between clus tered and dispersed rural industry is that the former is primarily oriented to markets outside its own community. Products are on average less perishable and less local-taste specific. Examples are batik, leather and leather products (including footwear), some food pro cessing activities (e.g. coconut, sugar), wood working (e.g. carving), bamboo and rattan, bricks and tiles, pottery and some metal products such as agricul tural tools and iron wares. Technological change is more likely when the clusters are linked to urban or international markets. Klapwijk (1997) suggests that only those rural industrial clusters that specialise in the production of products in small batches to customers orders are likely to survive in the long run. This limits the prospects to such sectors as clothing, footwear, mechanical engineering and furniture, with a high need for flexibility on the shop floor, and where economies of scope promote the division of tasks among several enterprises. Though many rural clusters will not survive as the economy develops, there are interesting examples of firms successfully upgrading or finding new market niches. Subcontracting arrangements often link such rural industries to

Small and Medium Enterprise Dynamics in Indonesia

371

nearby urban or even international markets (Sandee and Rietveld 2001). There is increasing empirical evi dence that small firms that are parts of clusters are in a better position to adopt innovations than their dispersed counterparts. Sandees (1995) study of five roof tile clusters in Central Java illustrates several of the elements at work. Through the 1980s, the demand for roof tiles increasingly shifted towards urban areas, where customers pay more atten tion to quality. This meant that upgrading was necessary to retain or increase demand. As a result, some clusters stag nated and others grew, through a process of adaptation that encompassed changes in processes of production, in patterns of interfirm cooperation, in employment conditions and in the marketing of new output. The range of experience in clustering is varied, depending on whether the process is buyer or producer driven. In two cases in the roof tile study (the clusters of Mayong Lor and Klepu), it was demand driven. The buyers, agents from urban building material shops, largely took care of the financial, technical and marketing sides of the adoption of a new hand-press technology. They competed with each other to do so, a reflection of the expanding urba n dem and for pressed tiles. The pioneer adopters of the technology were young males who had had experience in this technology elsewhere in rural Java. Since its introduction in the early 1970s, virtually all of the producers in these clusters have adopted it (Sandee 1995: 170).8 In pro ducer-driven clusters such as Karanggeneng, networks of producers are at the heart of the process of technology upgrading; they organise to finance new equipment, share existing equipment and facilities and gain access to new markets. In buyer-driven clusters, collaboration among producers and trad-

ers obviates the need to form such pro ducer networks. For example, urban building material shops play a key role in assuring demand, but also provide loans for the purchase of presses and the renting of mixers. In both cases, innova tion trickles down among an increasing number of producers. Diffusion is stimulated by the growing involvement of suppliers, while the government prin cipally contributes by improving the business environment and keeping official intervention to a minimum (Sandee 1995: 170).9

Exporting As economies turn outward it becomes more important for any group of firms to be able to gain export markets or to compete effectively with imports which no longer have to jump high protection ist fences. It has been widely accepted that for SMEs to succeed on the export front (how well they do in competing with imports must be judged differently) they must have some way to lower transactions costs, which tend to have an important fixed cost compo nent. Subcontracting is one route, whether with larger-scale manufacturers or with commercial intermediaries. Berry and Levy (1999) reported that subcontracting was common among me dium -sized exporters in rattan, furniture and garments. The second recognised route is by reaping the advantages of clustering. All studies show that small exp ort - oriented clusters operate in buyer-driven commodity chains requiring continuous upgrading and adaptability, which in turn requires a professional interaction on tailor-made product specifications between buyers and producers (Knorringa 1998). SMEs may do relatively better under volatile macroeconomic conditions, because their greater flexibility allows them to adjust production processes

372

Albert Berry, Edgard Rodriguez and Henry Sandee

during a crisis, while reorganisations of large firms, which are more structured around assembly line production, may take more time (Sandee et al. 2000). Initial investments are by definition lower in small firms than in large ones. One might add that labour capital struggles are less likely in smaller firms, a factor less commented upon than it might be. Van Diermen (1997), Cole (1998) and Sandee et al. (2000) show how small en terprises penetrate export markets via buyer- driven trade networks, in the cases of Jakarta (furniture and garments), Bali (garments), and Jepara (carved wooden furniture). In all cases there are brokers, agents and traders that function as intermediaries between international buyers and small - scale producers. Foreigners have played an important role in modernisin g the Jepara furniture and Bali garments in -

dustries and linking them to global markets. Indonesias small and medium firms seem to have shared nicely in the manufactured export boom of recent years. The absolute level of direct exports rose from $137 million in 1983 to $2.1 billion in 1992 (Hill 1997: 49), and Hill estimates that the SME share of such exports over that period increased from 10% to 13.2%, after reaching 17.3% in 1987. Using figures reported by the Ministry of Industry and Trade, Urata (2000) reports a rising trend in exports from small industry during the 1990s, with a clear growth spur in the crisis years. Between 1993 and 1997, small industry exports grew from $1.7 billion to $2.5 billion that is, by an average of 8% per year. A significant increase occurred between 1997 and 1998, when exports from small industry jumped to $3.7 billion, an astonishing

50 40 30 20 10 0

FIGURE 1 SME Exports and Total Exports (excluding oil and gas), 199398 ($ billion)

Total exports (non -oil & gas)

Small & medium industry exports 1 99 3 19 94 1 99 5 1 9 96 19 97 1 99 8

Source : Small and medium industry exports: Ministry of Industry and Trade, as cited in Urata (2000: tables I7); total exports (non -oil and gas): Bank Indonesia, as cited by World Bank (1999: table 6).

Small and Medium Enterprise Dynamics in Indonesia

373

increase of 144% in value. Over the same period, total non -oil and gas exports declined from $43.1 to $41.9 billion, reflecting the contraction of large enterprises in the export sector during the crisis (figure 1). As with larger firms, the main export items of SMEs are garments, textiles and footwear, together with wood products. Using figures from the former Ministry of Cooperatives and SMEs,10 both Hill (1997) and Van Diermen (2000) find that these sectors dominate exports. Data for 1999 exports show that 18% of all ex ports came from SMEs (equivalent to approximately Rp 47 trillion in that year) and that these exports were concentrated in textiles, garments and footwear (27%), wood products (22%), and basic machinery (16%) (figure 2). From the viewpoint of technology and adaptabil-

ity, growth in SME exports has been achieved substantially by finding niche markets and adapting costs and quality to market demand (Thee 1993). More over, this growth no doubt reflects a rapidly increasing share of SME output that has been exported indirectly through subcontracting arrangements. RES PONSE TO CRIS IS Indonesia suffered a severe economic setback in 1998, with GDP contracting by 13%. There was almost no growth in 1999, and only moderate growth of 4.9% in 2000 (Dick 2001). The crisis was in large part the result of the major conglomerates involvement in banking and investment, and it is therefore not surprising that large firms were affected most severely. Figures from the State Ministry of Cooperatives and SMEs

FIGURE 2 Composition of Non-oil Manufactured Exports by SMEs in 1999a (%) Miscellaneous Basic metal products Basic machinery Non -metallic products Chemicals Printing & paper Wood products Food & beverages 10 Textiles, garments & footwear 15 20 25 30

0
a

Source: Based on BPS, Ekspor Barang Usaha Kecil, Menengah dan Besar, 19971999, Kantor Menteri Negara, Urusan Koperasi dan Usaha Kecil Menengah: tables 1725.

Exports from SMEs total Rp 47 trillion, or 18% of all non -oil manufactured exports .

374

Albert Berry, Edgard Rodriguez and Henry Sandee

(MOCSME) show that large and me dium firms experienced a substantial decline in their 1998 real value added (5.4% and 27.2%, respectively, compared to 1997 levels), with little change in the following year. On the other hand, small firms performed better than their larger counterparts, growing by 34.9% in 1998 (table 2). We need to keep in mind, though, that MOCSME uses a sales based rather than an employment-based definition of size, and includes all types of commercial activity, not only manu facturing. When the recent crisis led to a major devaluation, it also raised the potential profitability of exporting industries such as furniture making in Jepara. Worst off are industries relying on domestic demand and not competing with imports (which devaluation will help to cut out) and drawing heavily on imports of material or ca pital goo ds (AD B et al. forthcoming). While there is a widespread impression that small -scale enterprises have been weathering the crisis better than larger companies because they are less reliant on formal markets and on now far m ore costly borrow ed funds

(Cameron 1999; Hill 1999), there is no doubt that SMEs in different sectors have fared very differently. Hill (1999) reported that the manufacturing sector had contracted at about the economywide average ( 1 5%) durin g 1998, though there were differences between export-oriented and local market activi ties. Every sector had shed labour, with the exception of agriculture, while the largest decline had occurred in manufacturing.11 The various effects of the crisis are apparent in manufacturin g. Va n Diermen et al. (1998: 32) report that some SME clusters, such as Jeparas furniture makers and the traditional batik cloth weaving industry in Central Java, have been doing well. Nails, latches and door bolts are now produced locally rather than imported as before, despite their quality disadvantage vis- -vis imports. In the case of some exports the benefits to firms are less than might appear at first glance, because foreign buyers negotiate part of the surplus away. While the currency devalued by 60% in real terms (80% in nominal terms) during 1997/98, the textile and garment industries international buyers have insisted

TABLE 2 Industrial Value Added per Worker by Firm Size (Sales-based Definition), MOCSME Survey Data, 199799a (Rp) Firm Size (Sales Definition) Total industry Small (< Rp 1 billion) Medium (Rp 150 billion) Large (> Rp 50 billion)
a

1997 12,358 2,899 7,045 341,526

Sales (Rp) 1998

1999 12,605 3,901 5,116 322,844

1998/97 2.3 34.9 27.2 5.4

Growth (% p.a.)

1999/98 0.3 0.3 0.3 0.1

12,639 3,911 5,131 323,154

Using manufacturing wholesale price index (base 1996 = 100) as a deflator (132 in 1997; 217 in 1998 and 268 in 1999). Value added is defined by GDP in manufacturing. Source : MOCSME (1999): tables 8.58.8 (employment: 4851); tables 8.98.12 (GDP: 525).

Small and Medium Enterprise Dynamics in Indonesia

375

on discounts of 2040%, so the rupiah price increases are less than might be expected (Van Diermen et al. 1998: 24). Also, foreign banks unwillingness to accept Indonesian banks letters of credit has made exporting more difficult (Van Diermen et al. 1998: 40). At the negative end of the spectrum is the demise of tahu (soybean curd) producers in West Java and small clove cigarette (kretek ) producers in Central Java, in both cases due to a steep rise in the price of inputs. Other examples of small-scale enterprises in distress because of disruption to normal financing arrangements include those garment producers (often operating in subcontracting networks) who depend on a steady flow of imported cloth and other raw materials. While there have been modest job losses in small - scale firms, there has been a growth of self-employment, especially in activities with easy access and very limited start-up capital. Small firms have been able to cope without major reductions in their workforce. There is evidence of small firms redirecting output to new market opportunities whenever possible, or adjusting real wages, rather than reducing their labour force. Two distinct interpretations of the resilience of small -scale firms in the current period of economic distress have been highlighted. First, Jellinek and Rustanto (1999) argue that there has been an unprecedented upsurge of the small-scale sector since the onset of the crisis, with new economic opportunities in blacksmith communities, in manufacture of furniture, agricultural tools, bricks and tiles, in fishing, and in smallscale vending activities. They suggest that cottage industries that were almost completely destroyed over the past 20 years are finding it hard to keep up with the new demand (Jellinek and Rustanto 1999: 2). The economic crisis has thus offered renewed opportunities to a

small- scale sector that was gradually losing ground during the New Order. In this respect, the depreciation of the rupiah has created growth prospects for communalcapitalist systems currently being created by the people themselves (Jellinek and Rustanto 1999: 2). Their argument is that the crisis has shifted consumption patterns somewhat back to products and services offered by small firms, now that the modern sector no longer has easy access to capital and markets as was the case during the New Order period. A second view is that many small-scale enterprises have been performing well since the mid 1980s, even though they often faced considerable discrimination, especially relative to the opportunities enjoyed by the conglomerates. Being less reliant on formal markets and formal credit, they are able to respond more quickly and flexibly to sudden shocks than can their larger counterparts. We now turn to a brief review of available evidence on this issue. The second view of the crisis and of the pre-crisis period appears much more consistent with the statistics reviewed above. Nonetheless, both may offer insights into the events of the crisis period itself. Findings from S urveys and Case Studies Various surveys have attempted to measure the social and economic impact of the crisis, focusing especially on how it has affected poverty, education and health (Wetterberg et al. 1999; Poppele et al. 1999; Cameron 1999). They generally report that urban areas have been hit harder than rural ones. They also show that both urban and rural areas of Java have been affected more severely than other regions, the latter owing to the relatively high density of urban rural linkages on Java, as a consequence of which urban economic distress trick -

376

Albert Berry, Edgard Rodriguez and Henry Sandee

les down to rural areas. The surveys in dicate that although unemployment rates for 1998 were up to around 6%, this was substantially below earlier forecasts of massive unemployment flowing from such a major economic downturn. This suggests that workers who have lost their jobs in the formal sector have been able to find alternative (possibly parttime) employm ent in the in formal sector. Comparison of the Susenas (National Socio - Economic Survey) figures for 1995, 1997 and 1998 shows little change in the structure of employment by em ployment status. The paid workers category continued to dominate manufacturing employment (of persons aged 10 and older) with about two-thirds of the total, including both the formal and informal branches of manufacturing; this category gained a couple of percentage points at the expense of the unpaid worker category. Self -employment in firms that employ other workers fell by about 2% between 1997 and 1998, while self-employment in firms that employ temporary and unpaid workers in creased by about the same amount. This suggests that small firms have shed la bour during the crisis, a shift that was apparent in both urban and rural areas, and has characterised the economy as a whole, not just manufacturing. Some self-employed trade and service activi ties have a last resort character, and it is likely that the adjustment process has involved a shift into these. A few surveys have focused more specifically on the impact of the crisis on SMEs. The Akatiga Foundation monitored the performance of 800 small-scale entrepreneurs in West Java, Central Java, Yogyakarta, North Sulawesi and North Sumatra. Entrepreneurs were visited in July 1997 and October 1998 to assess changes in their performance. The study found that in this period 72% of the pro -

ducers had experienced a decline in the performance of their business. The remainder reported that their business performance was not affected negatively by the crisis (Akatiga Foundation 1999). Export-oriented small firms did better than counterparts that concentrated on the domestic market. Moreover, smallscale enterprises in Java suffered more than those on other islands of the archipelago, and those in urban areas more than their rural counterparts. The survey identified various coping strategies of small-scale entrepreneurs for dealing with economic adversity, of which the most important was acceptance of lower profit margins (Akatiga Foundation 1999). The study also reported that the social safety net programs established by the government to combat the effects of the crisis had given rise to an upsurge in the number of microenterprises, especially in sectors characterised by low entry barriers. Musa and Priatnas (1998) survey of access to credit for small and medium enterprises during the crisis, based on a sample of some 300 firms in eight prov inces and various sectors, reports that self - finance has remained the main source of funds for investment and working capital. More than 75% of small firms were fully reliant on own funds to finance business activities, and less than 13% had access to formal finance, with the number having declined slightly since the outbreak of the crisis. It is like ly that the limited exposure of small scale business activities to borrowed funds from the formal sector is one of the factors explaining the resilience of these activities during the current period of economic distress. The main cop ing mechanisms of the sampled firms include the use of cheaper inputs to replace expensive (imported) materials, and downsizing of their labour force. Of the respondents, 80% have seen their

Small and Medium Enterprise Dynamics in Indonesia

377

business shrink (though only 21% report laying off workers); in 12% of cases profits have remained constant, and 8% have achieved an increase, the latter occurring mainly in those activities which export and which have limited need for imported materials. The overwhelming impression from these surveys is that small firms have indeed been hit hard by the crisis, with many small entrepreneurs reporting a decline in the performance of their business in the period 199798. An examination of specific industries identifies a broad range of effects from the crisis. There is evidence of rapid growth and employment generation in the small-scale furniture industry, especially in Central Java but also in North Sulawesi (Sandee et al. 2000; Jellinek and Rustanto 1999; Akatiga Foundation 1999). This is an industry that uses domestic inputs and has plenty of export potential. Large and small firms in the furniture industry are developing longterm linkages to overcome the effects of the present insecure environment. Foreign actors play an important role as intermediaries between domestic pro duction networks and international buyers, and also contribute to easing the credit constraint caused by the collapse of the banking system. In Central Java, policy has contributed positively to the transition through the development of the provincial harbour of Semarang to accommodate container transport, simplified procedures for foreign investors, and improved facilities for clearing exports. Some of the small enterprises already engaged in exporting (usually indirectly) are being pressured by contractors and large firms to sign longterm contracts. The trend towards producing for export markets has necessitated greater standardisation and a stricter division of labour and tasks among firms. Before the crisis the small firms had access to various trade net-

works, and these have expanded during the recent buyer-driven export expansion. The experience of the construction materials sector contrasts strongly with that of furniture, as befits the non tradable character of products such as bricks and tiles. Wiradi (1998) reports that brick making in certain villages in West Java has collapsed as a conse quence of the substantial decline in urban building activity. Sandee (1998), however, found that tile and brick makers in specific villages of Central Java maintained pre-crisis production levels through a gradual shift away from urban markets to rural ones. This shift was possible because of the relatively good economic circumstances of farmers in the area, and the channelling of funds from social safety net programs into rural building activities. POLICY SUPPORT FOR S MES Almost all known types of intervention for small industry development have been tried at one time or another in Indonesia: subsidised credit, training programs (in technical skills and entrepreneurship), provision of advisory extens io n wo rkers, other subsidis ed inputs, marketing assistance, provision of infrastructure, common facilities, industrial estates, and so on. There are numerous technical and financial assistance programs spread over various ministries and the banking system. Official assistance to small enterprises is deeply embedded in a philosophy that government has an obligation to guide and uplift the weaker groups in society, who are working overwhelmingly in small businesses. Pembinaan (guidance) and golongan ekonomi lemah (weaker econom ic groups) are basic concepts in past, present and probable future govern ment approaches. Commitment to pem binaan needs to be taken into account in

378

Albert Berry, Edgard Rodriguez and Henry Sandee

both domestic and donor-driven initia tives to reform assistance programs for small enterprise development. It will be difficult to bring about a change in pol icy approaches, especially given that there is surprisingly little information about the effectiveness of existing pro grams. Their success and effectiveness is typically measured merely by whether the annual outreach targets have been achieved. Government officials view the growth of the small enterprise sector, and its resilience during the crisis, as an indicator that service provision is bearing fruit (Sandee 1995; Tambunan 1999). Evidence from the field suggests, however, that these claims are not valid. First, the majority of small enterprises have received neither technical nor financial assistance. Participation rates of small firms in assistance programs are very low. Sandee et al. (1994) found for Central Java that in 1992 participation rates were below 10%, while the more recent survey by Musa and Priatna (1998) mentions that only 17% of small enterprises in selected provinces actu ally used any type of bank loan, let alone government-subsidised loans. Second, a review by Sandee et al. (1994) of tech nical and financial assistance to six small industry clusters revealed little evidence that government support contributed to firm growth and employ ment generation. Firms that did and did not receive assistance show similar patterns of development, suggesting that other factors explain firm growth. The review also showed that the probability of receiving assistance is signifi cantly positively related to firm size, a nd tha t female pro ducers are underrepresented. Government-sponsored technical assistance is largely delivered free of charge. The combination of its being free to the client and the enormous size of the target group (small-scale and cottage

enterprises) has resulted in a pattern of one-shot services to small firms, with little possibility of follow -up. The typical assistance package consists of a brief training course on such topics as entrepreneurship, bookkeeping, marketing and management. Field evidence shows that this is not sufficient to trigger structural change processes. On the other hand, throughout the years Indonesia has also implemented a large number of projects sponsored by donor agencies. These are usually adequately funded, tailored to the needs of target groups and well monitored; they generally in clude a credit component, and attention is paid to marketing issues. Though these programs are presumably more successful in terms of benefits per client firm, they are relatively expensive and have frequently proven not to be sustainable after withdrawal of contribu tions from donor agencies. Likewise, there are many Indonesian NGOs involved in small enterprise development, some of which are successful and effective. On a nation-wide scale their impact is limited, however, with little evidence of successful replication of their projects. Various studies of credit for small industries in Indonesia stress that entrepreneurs do not generally complain about high interest rates for formal credit, but that they do consider access to formal credit a major constraint. It is well known that small-scale enterprises make only limited use of formal credit facilities (Sandee et al. 1994; Poot 1997; Musa and Priatna 1998). Moreover, evidence from Bank Indonesia indicates that credit to SMEs (and this includes microcredit) remains below 10% of total outstanding credit in the system. A number of reasons explain why small entrepreneurs may not demand formal bank loans. Some relate to the high cost of the transaction itself, such as the loan requirements (providing collateral and

Small and Medium Enterprise Dynamics in Indonesia

379

undertaking feasibility studies, for example), others to the availability of less expensive funds through self-finance or credit from family and friends com mon sources of credit for small firms. (Formal credit is, of course, generally much cheaper than the loans small-scale entrepreneurs obtain from moneylenders and traders.) Timberg (1999) argues that changes in financial institutions following the crisis may have reduced ac cess to credit for SMEs, in particular, the increased conservatism of banks and the enhanced role of foreign bank owners, who are less likely to lend to small business. Throughout the years, many credit programs for small (and large) firms were heavily subsidised, creating such a high demand for credit that it had to be rationed. A positive effect of the crisis is that subsidisation of credit for small firms has become unsustainable, and the government is moving towards dismantling the complex subsidised programs of the past. Since 1999, Bank Indonesia (BI) has not been allowed to fund subsidised credit programs. However, as a transitional measure, BI Law 23/1999 requires that loans already committed under credit programs before its enactment should continue in force, and the interest subsidy for these loans should be paid by the government. Today, besides the interest subsidy for these outstanding loans, the government continues to provide an interest subsidy for two major credit programs: KPRS/RSS (consumer and housing credit) and KKP (a consoli dated credit line from five previous schemes for agriculture and coopera tives). 12 Despite the trend towards reduced subsidisation, there is resistance with in parts of the government to elimi nating subsidies to microenterprises. This reflects the political as well as the

economic rationale for supportin g mic ro enterprises and SM Es pem binaan for weaker economic groups. Despite having one of the largest com mercially viable microfin ance pro grams (within Bank Rakyat Indonesia, BRI), Indonesia remains committed to offering subsidised credit to microen terprises and cooperatives through a number of schemes. Patten et al. (1998) fear that such programs, undertaken in the name of alleviating the impact of the crisis on the golongan ekonomi lemah (including small - scale entrepreneurs) could undermine sound enterprises. Since the outbreak of the crisis, various new credit programs with subsidised interest rates have been launched, within the framework of poverty alleviation and social safety net programs. Under the previous government, the Ministry of Coopera tives and Small Enterprise Develop m e n t p la y ed a m a jo r r o l e i n th e formulation, management, coordina tion and disbursement of credit funds. S in c e Jan uar y 2 001, th is r o l e has begun to s hift to a new SM E and c o o p er ati v e d ev e lo p m e nt a ge nc y (SMECDA). Beyond these short - term solutions involving fragmented credit and support programs, the govern ment has developed a medium -term development strategy (Propenas) cov ering the period from 2001 to 2005, and a 2000 Strategic Plan for Coopera tives and SMEs devised by MOCSME. Prioritising these plans, in October 2000, the Coordinating Ministry for Economic Affairs presented the Con sultative Group for Indonesia (CGI) with its Ten - Point Recovery Program, which includes SME development as a priority (ADB 2001). To implement its new policy for SMEs, the government has agreed to reform industrial policy so that it furthers

380

Albert Berry, Edgard Rodriguez and Henry Sandee

SME development and increases the competitiveness of Indonesian industry. Among other reforms, the government has streamlined existing subsidised lines of credit for SMEs and prepared a com petitive investment policy (yet to be an nounced). Two interministerial task forces (the SME Task Force, housed at the State Ministry of Cooperatives and SMEs, and the Deregulation and Com petition Task Force, housed at the Min istry of Industry and Trade) have begun to develop further reforms, supported by an Asian Development Bank pro gram loan for Industrial Competitive ness and SME Development. The SME Task Force will develop policy recom mendations based on its assessment of: (i) the institutional framework needed for SME promotion; (ii) the provision of commercially -based credit to SMEs; and (iii) the provision of sustainable supporting business services for SME trading, marketing and exports. The Deregulation and Competition Task Force will review and suggest modifications to policies that negatively affect industrial development and investment. Some ex isting regulations force SMEs to deal exclusively with larger firms, while oth ers simply create barriers to entry. For instance, some ports are only licensed to handle certain types of cargo, raising the transport costs and thus reducing the competitiveness of exporters, including export-oriented SMEs, that are not able to use the nearest port. Finally, some regulations impose import and antidumping duties, creating monopolistic practices in a number of markets for key industrial inputs such as tin, oil, basic foods and timber. Plans to unlock the economic potential of SMEs are running ahead of im plementation, however, and the political instability of the last two years is only one of the main explanations. In early 2001, Ekuin (the Coordinating Ministry

for Economic and Financial Affairs) finalised a small and medium enterprise development strategy that sets out the long-term goals for SME development in Indonesia. The recommendations of the task forces will assist the government in developing policy to fulfil these longterm goals. However, decision making in the SME policy area is complicated by the overlapping functions of multiple government agencies. The governm ent has had limited success in fostering SME development through a wide range of interventions. There is a danger that current and proposed strategies and programs will be no more successful. A somewhat more optimistic stance is justified, however, since both the government and donor agencies are seek ing to redefine the formers role in SME development. Government is increas ingly viewed as responsible not for pro viding direct assistance to SMEs, but rather for creating an environment conducive to small business growth, and facilitating provision by the private sector of business development services (BDS) to SMEs. There are some promising initiatives in BDS, although it is too early to assess whether they can be success fully executed beyond current pilot projects. Government officials are in creasingly taking the view that small firms should pay for services. As Indonesia recovers from the cri sis, aid agencies have adjusted their operations from short-term responses to medium - term development. Current donor- sponsored discussions on SME development concentrate on three is sues. First, there is emphasis on the creation of a competit ive business environment that will be more conducive to small firm development. Implem entatio n o f anti - m onopoly and bankruptcy laws is considered of importance in fostering a level playing field

Small and Medium Enterprise Dynamics in Indonesia

381

for large and small firms. Ensuring that local authorities use simple and clear regulations reduces the transactions costs of setting up and expanding small businesses. Second, further streamlining of credit schemes is being discussed, with the aim of increasing access to financial support for sound investments. Using market-based rates for credit and improving the banks ability to lend to SMEs feature prominently in the discussions. Third, business development services are under review, with the aim of improving the performance of technical assistance programs. A few years after the financial crisis hit Indonesia, the country is still seekNOTES
1 2 3 Based on adjusted population census figures (World Bank 1980: 122) and data from ILO (1997: 126) for 1996. The term small in relation to industry or enterprises is sometimes used in this paper to encompass both small and medium enterprises. In this paper we use the official enter prise size classifications of the Central Statistics Agency (BPS): m icro: 1 4 workers; small: 5 19; medium: 20 99; large: 100+). Given the high turnover and pattern of chan ge at the firm lev el am ong SMEs, any static comparisons among t h e s e f ir m s o r b e t w e e n t h e m a n d microenterprises or large enterprises must be interpreted with caution. It is to be expected that there will be a wide range of productivity and efficiency levels among SMEs in most industries at most points in time. Some are re cently created, will never succeed and will soon exit; others are very efficient and will grow rapidly as a result. In industries where most firms are either small or medium at creation, compari sons of average efficiency between the SME sector and the large sector must be interpreted with great care. Steel (1993: 18) also provides upward and downward graduation rates of firms

ing a solid path to economic recovery and political stability. As the dust settles from the financial turmoil of the 199798 episode, it has become clear that SMEs face a very different economic and political environment. Unfortunately, it is also clear that the new market-driven policies for SMEs may take some time to be implemented and fully embraced by all Indonesians. As Hill (2001) con cludes, the challenge is to ensure that government policie s support broad based industrial sector growth in ac cordance with Indonesias competitive advantages, while guarding against overloading the SME policy program with equity objectives.
over 10 years, by size at creation. These reveal significant movement in both directions. For most size categories the likelihood of graduating upward is not very different from that of moving to a lower category (except for the top category, which by definition has only downward movement). These figures alone do not permit any assessment of whether the representative establishment shrinks or grows. They probably tend to unde rstate the net upward movement. The Indonesian government has pro moted linkages between small firms (foster children) and large firms (fos ter parents). Large firms are expected to play a role in small firm develop ment, for example, through dissemination of information and technology, skills upgrading and assistance in marketing. The scheme has not been successful in establishing commercially viable linkages between different types of firms, mainly because large firm owners do not consider small firms to be of interest in the development of their businesses. Subcontracting and clustering are not mutually exclusive: a good deal of the former can go on in the context of the latter. We separate them in the discussion

382

Albert Berry, Edgard Rodriguez and Henry Sandee Enterprise Development to a State Ministry at the beginning of 2000. 11 Susenas (National Socio -Economic Sur vey) data show a smaller decline in manufacturing employment in 1998, but we are not in a position to assess the com parability of the figures used. Based on Susenas, the figures from BPS confirm a drop in manufacturing employment in absolute and relative terms in 1998: it fell by 11% to 9.9 million people from 11 million in 1997; and it dropped to 11.3% of total employment, from 12.9% in 1997. By 2000, manufacturing employment had increased to 11.7 million people and 13% of total employment. 12 The previous schemes replaced by KKP are for farmers of basic foods (KUT), cooperatives (KKOP), sugar cane growers (KKPA-TR), fishermen (KKPA-Nelayan) and poultry farmers (KKPA-Unggas). Berry, Albert, and Brian Levy (1999), Technical, Financial and Marketing Support for Indonesias Small and Medium Industrial Exporters, in Brian Levy, Albert Berry and Jeffrey B. Nugent (eds), Fulfilling the Export Potential of Small and Medium Firms, Kluwer Academic Publishers,Boston. Cameron, L. (1999), Survey of Recent Developments, Bulletin of Indonesian Economic Studies 35 (1): 340. Cole, William (1998), Balis Garment Export Industry, in Hal Hill and Thee Kian Wie (eds), Indonesias Technological Challenge, Research School of Pacific and Asian Studies, Australian National University, Can berra, and Institute of Southeast Asian Studies, Singapore: 25578. Dick, H. (2001), Survey of Recent Developments, Bulletin of Indonesian Economic Studies 37 (1): 741. Hill, Hal (1992), Manufacturing Industry, in A. Booth (ed.), The Oil Boom and After: Indonesian Economic Policy and Performance in the Soeharto Era , Oxford University Press, Singapore: 20457. ____ (1996), Industrial Policy and Performance: Orthodoxy Vindicated, Economic Development and Cultural Change 45 (1): 14774.

here partly because they are different phenomena and partly because the literature tends to focus on one or the other. 8 As several authors have pointed out, buyers may be so dominant that individual producers have little say in the production process (Knorringa 1998). 9 Government agencies have provided no technical or financial assistance to tile producers in Karanggeneng. How ever, the government has played an important role in the development of the tile cluster by allowing the produc ers to open new clay pits. Moreover, the local government successfully lob bied the provincial government to re duce the latters concern about the environmental impact of expansion of the tile industry. 10 The Wahid administration downgraded the Ministry of Cooperatives and Small

REFERENCES

ADB (Asian Development Bank) (2001), National Workshop on Small and Me dium Enterprise Development in Indo n e s i a : Wor k s h o p P ro c e e d i n g s , Occasional Papers on SME Develop ment No. 1, Financial Sector East, ADB, Manila. ADB (Asian Development Bank), Asia Foun dation and Swisscontact (forthcoming), SMEs after the Crisis: The Role of Ex port - oriented SMEs, ADB, Indonesia Resident Mission, Jakarta. Akatiga Foundation (1999), Crisis Impact Monitoring Study on Small-scale Enterprises, Report to the Asia Foundation, Jakarta. Bank Indonesia (2000), Annual Report, Jakarta. Berry, A., and D. Mazumdar (1991), Smallscale Industry in the AsiaPacific Region, Asian Pacific Economic Literature 5 (2): 3567. Berry, Albert, and Jos Franscisco Escandn (1999), Colombias Small and Medium Exporters and Their Support System, in Brian Levy, Albert Berry and Jeffrey B. Nugent (eds), Fulfilling the Export Potential of Small and Medium Firms, Kluwer Academic Publishers, Boston.

Small and Medium Enterprise Dynamics in Indonesia (1997), Indonesias Industrial Transformation, Institute of Southeast Asian Studies, Singapore, and Allen and Unwin, Sydney. ____ (1999), The Indonesian Economy in Crisis: Causes, Consequences and Lessons, Institute of Southeast Asian Studies, Singapore. ____ (2001), Small and Medium Enterprises in Indonesia: Old Policy Challenges for a New Administration, Asian Survey 41 (2): 24870. ILO (International Labour Organization) (1997), Yearbook of Labour Statistics 1997, ILO, Geneva. Jellinek, L., and B. Rustanto (1999), Survival Strategies of the Javanese during the Economic Crisis, Consultancy Report to the World Bank, Jakarta. Klapwijk, Martin (1997), Rural Industry Clusters in Central Java, Indonesia: An Empirical Assessment of their Role in Rural Industrialization, Tinbergen Institute Research Series, Vrije Universiteit, Amsterdam. Knorringa, Peter (1998), Cluster Trajectories in Developing Countries: Towards a Typology, Institute of Social Studies, The Hague (preliminary draft). Levy, Brian, Albert Berry and Jeffrey B. Nugent (eds) (1999), Fulfilling the Export Potential of Small and Medium Firms , Kluwer Academic Publishers, Boston. Liedholm, Carl, and Donald Mead (1999), Small Enterprises and Economic Develop ment: The Dynamic Role of Micro and Small Enterprises , Routledge, London. MOCSME (Ministry of Cooperatives and SMEs, Departemen Koperasi, Pengusaha Kecil dan Menengah) (1999), Statistik: Koperasi, Pengusaha Kecil dan Menengah [Statistics: Cooperatives and Small and Medium Enterprises], Jakarta. Musa, Agustina, and Priatna (1998), The Policy Reform for Capital of SME (Small Medium Enterprises) in Indonesia: Im pact Analysis of Financial Crisis: Study Report, Report for the Asia Foundation, Jakarta. Okamoto, Y., and F. Sjohlm (2000), Productivity in the Indonesian Automobile Industry, ASEAN Economic Bulletin 17 (1): 6073. Patten, Richard H., Jay K. Rosengard and Don E. Johnston Jr. (1998), Improving
____

383

Microfinance and Small and Medium Enterprise (SME) Finance in Indonesia, Harvard Institute for International Development (mimeo). Poot, H. (1997), Indonesia, SMEs, Finance and BPDs, Netherlands Economic Institute, Rotterdam. Poppe le, J., S. Sumarto, and L. Pritchett (1999), Social Impacts of the Indonesian Crisis: New Data and Policy Implications, Social Monitoring and Early Response Unit (SMERU), Jakarta (mimeo). Rice, R., and I. Abdullah (2000), A Compari son of Small and Medium/Large Indonesian Manufacturing Enterprises from 1986 and 1996 by Sector, Partnership for Eco nomic Growth Project, USAID, Jakarta (mimeo). Sandee, Henry (1995), Innovation Adoption in Rural Industry: Technological Change in Roof Tile Clusters in Central Java, Indonesia, Unpublished PhD dissertation, Vrije Universiteit, Amsterdam. ____ (1998), The Impact of the Crisis on Small-scale Industries in Indonesia: Some Preliminary Findings from Central Java (mimeo). Sandee, H., P. Rietveld, H. Supratikno and P. Yuwono (1994), Promoting Small-scale and Cottage Industries in Indonesia: An Impact Analysis for Central Java, Bulletin of Indonesian Economic Studies 30 (3): 11542. Sandee, Henry, Roos Kities Andadari and Sri Sulandjari (2000), Small Firm Development during Good Times and Bad: The Jepara Furniture Industry, in C. Manning and P. van Diermen (eds), Indonesia in Transition: Social Aspects of Reformasi and Crisis, Indonesia Assessment Series, Research School of Pacific and Asian Stud ies, Australian Nati onal U niversity, Canberra, and Institute of Southeast Asian Studies, Singapore: 18498. Sandee, Henry, and Piet Rietveld (2001), Upgrading Traditional Technologies in Small-scale Industry Clusters: Collaboration and Innovation Adoption in Indonesia, The Journal of Development Studies 37 (4): 15172. Sato, Y. (2000), Linkage Formation by Small Firms: The Case of a Rural Cluster in In-

384

Albert Berry, Edgard Rodriguez and Henry Sandee Indonesia, Report of JICA Senior Advisor to Coordinating Minister of Economy, Finance, and Industry, Tokyo. Van Diermen, Peter (1997), Small Business in Indonesia, Ashgate Publishing, Aldershot. ____ (ed.) (2000), Small and Medium Enter prise Development in Indonesia: Workshop Proceedings , Asian Development Bank, Manila. Van Diermen, Peter, Thee Kian Wie, Mangara Tambunan and Tulus Tambunan (1998), The IMF 50-Point Program: Evaluation of the Likely Impact on SMEs, The Asia Foundation, Jakarta. Weijland, H. (1999), Microenterprise Clusters in Rural Indonesia: Industrial Seedbed and Policy Target, World Development 27 (9): 1,51530. Wetterberg, A., S. Sumarto, and L. Pritchett (1999), A National Snapshot of the Social Impact of Indonesias Crisis, Bulletin of Indonesian Economic Studies 35 (3), December: 14552. Wiradi, G. (1998), Rural Java in a Time of Crisis: With Special Reference to Curug Village, Cirebon, West Java, Paper pre sented to a workshop on The Economic Crisis and Social Security in Indonesia, Berg-en-Dal, The Netherlands. World Bank (1980), Indonesia: Employment and Income Distribution in Indonesia, Washington DC. ____ (1999), Indonesia: From Crisis to Opportunity, Washington DC, July.

donesia, Bulletin of Indonesian Economic Studies 36 (1): 13766. Steel, William F. (1993), Small Enterprises in Indonesia: Role, Growth and Strategic Issues, Development Studies Project #194, Jakarta. Supratikno, Hendrawan (1998), Competitive Strategy, Production Organization and InterFirm Collaboration: A Case Study of Subcontracting Arrangements in Three Man ufacturing Firm s in Indonesia , Tinbergen Institute Research Series, Vrije Universiteit, Amsterdam. Tambunan, T. (1999), The Performance of Small Enterprises during the Economic Crisis: Evidence from Indonesia (mimeo). Thee Kian Wie (1993), Industrial Structure and Small and Medium Enterprise Development in Indonesia, EDI Working Papers, World Bank, Washington DC. Timberg, Thomas (1999), What We Know about Small and Medium Enterprise (SME) Finance in Indonesia, Paper prepared for the conference on The Road to Indonesian Economic Recovery, Jakarta, 19 August. Timmer, Marcel P. (1999), Indonesias As cent on the Technology Ladder: Capi tal Stock and Total Factor Productivity in Indonesian Manufacturing, 1975 95, Bulletin of Indonesian Economic Studies 35 (1): 75 97. Urata, S. (2000), Policy Recommendations for SME Promotion in The Republic of