INDUSTRIAL CLUSTERING, URBAN POLITICS AND REGIONAL DEVELOPMENT:

ARE WE GOING TO BETTER REGIONAL POLICY OR MUDDLING THROUGH?

A paper presented in

International Conference on
Regional Development and Infrastructures:

“Trends, Issues and Challenges Confronting Regional Development,

Infrastructure and Environment in Developing Countries”

Bandung, 18-19 June 2009

By: Mr. Prihadi Nugroho

Department of Regional and City Planning

Faculty of Engineering Diponegoro University
Postal Address: Jl. Prof. Soedarto, SH Tembalang Semarang 50275 INDONESIA
Tel: +62-24 7059 1191, 746 0054 Fax: +62-24 746 0054, 746 0701
URL: www.pwk.undip.ac.id Email: prihadi.nugroho@yahoo.com
 INDUSTRIAL CLUSTERING, URBAN POLITICS AND REGIONAL DEVELOPMENT:
ARE WE GOING TO BETTER REGIONAL POLICY OR MUDDLING THROUGH?

Prihadi Nugroho 1
Department of Regional and City Planning, Diponegoro University

Industrial clustering approach has increasingly drawn much attention from a wide range of development
agencies in Indonesia regarding to its instrumentality to supporting regional developments. Arguably,
this approach can provide broader access to and redistribution of resources through interregional
linkages and cooperation between firms in producing goods and services. More importantly, it is likely to
empower the role of small and medium industries (SMIs) in stimulating economy. However, until now
this sector remains facing institutional obstacles associated with distortive policies which are more
favouring large firms on particular issues such as bankable conditionality, export promotion, business
slowdown and unemployment crisis. The interplay between prevailing decision making structure and
political interventions of urban elites has made the sector being marginalised. As a result, the sector
survival is still largely relied on their internal capacity even though the government support getting
improved over time. This paper suggests the greater involvement of SMI stakeholders in redirecting
regional development policy is required to diminish such obstacles. This would be beneficial not only for
securing sector’s special interests but also ensuring sector contribution to income generation.

Keywords: industrial clustering, urban politics, regional development, SMIs

INTRODUCTION
The growing attention from policymakers, scientists and practitioners on the
significant role of small and medium industries (SMIs) in Indonesian economy can be dated
back to the event of the 1997 Asian economic crisis which hit most countries in the region.
During the early years of the crisis it was acknowledged how the SMIs could survive to run
businesses while many larger industries closed down. Some praised their flexibility to adapt
to unstable business environment by focusing on limited market penetration (Tambunan,
2005) and depending on a social network of value chains (Rahmawati, 2006). Alternatively,
their survival was also able to create new employments for soon-to-be jobless due to the
collapse of large manufacturing industries. Others reckoned their ability to develop social
and human capital potentials through transfer of knowledge and technology suitable to
typical Indonesian customs. This situation leads SMIs to play significant role in permeating
structural transformation from traditional agricultural to modern industrial-service
economy. All of these factors has shaped a unique character of SMIs in generating economic
growth and social transformation to deal with difficult times.
In recent years the Indonesian Government has put forward the development of
SMIs through industrial clustering policy. Basically the policy is aimed at promoting the
creation of industrial linkages across sectors and regions in certain products which may
increase competitive advantages. Flexible specialisation and collective action which

1
The author currently works as lecturer and researcher at Department of Regional and City Planning,
Diponegoro University in the section of Regional Development and Environmental Management Laboratory.
For further inquiries regarding this paper please send by email to: prihadi.nugroho@yahoo.com or
telephone/facsimile to: +62-24 746 0054 or postal address to: Department of Regional and City Planning,
rd
Building B 3 Floor, Jl. Prof. Soedarto, SH Tembalang, Semarang 50275 INDONESIA.

1
represent the key features of industrial clustering can be maximised if stakeholders of similar
products work together so that unfair competition and other institutional obstacles can be
reduced. In this sense the inception of industrial clustering policy may be foreseen the
greater attention of the government to develop SMIs along with LMIs. Some local
governments have emphasised the policy adoption in various government documents such
as Rencana Pembangunan Jangka Menengah (Mid-Term Development Plan) and Peraturan
Daerah (Local Government Regulation). Moreover, they also have ruled on supporting
policies to promote industrial clustering policy while others by contrast places this policy
inferior to economic development strategies and sectoral programs. At national level the
central government shows a strong commitment to promote industrial cluster development
for ten strategic products, that is, food and beverage, fishing, textile and textile products,
footwear, palm oil, timber, rubber and rubber-based products, pulp and paper, electrical
machinery and electrical equipment, and petrochemical (Ministry of Industry, 2008).
However, the practices of industrial clustering policy is still far away from its purpose.
In fact, there is little evidence showing the respective policy might have realised stronger
linkages across sectors and regions. Most policy substances are concerned with the
upgrading of SMI internal capacity by providing broader access to microfinance, export
promotion, labour training, business development and clean/efficient production. In some
regions the SMI communities along with local governments have run nonformal coordination
forums to accommodate emerging needs and interests in developing industrial clusters. 2
The latter indeed provides broader participation in policymaking but its effectiveness is not
convincing yet due to the superiority of formal decision making structure. In addition, such
formal process is somewhat unreliable since political deals between interest groups are
more influential rather than government sincerity to realise the objectives of industrial
clustering policy. Otherwise, there is a number of regional policies which are designed with
little or no considerations of their impacts on industrial clusters. As a result, many industrial
clustering policies only represent government rhetoric and fail to overcome substantial
problems the SMI stakeholders must deal with.
This paper hence is aimed at investigating the emergence of urban politics which
determines the direction of industrial clustering policy. I will argue that the policy failure to
create intersectoral and interregional linkages resulting from industrial cluster development
is associated with prolonged government support to promoting large manufacturing
industries (LMIs). For decades the government has been more favouring the provision of
facilities and infrastructure as well as friendly business environment to support the growth
of LMIs. The rationale behind such attitude is related to government emphasis on export
promotion strategy and foreign direct investment (FDI) policy since late 1970s (Handayani

2
For instance in Central Java Province there are 33 out of 35 local governments which have established quasi-
government bodies to promote the development of industrial clusters in the region, namely Forum for
Economic Development and Employment Promotion (FEDEP). One of FEDEP’s major tasks is to facilitate and
supervise local cluster communities in the formulation of actions to promote cluster development. The FEDEP
operation is legally supported by local regulation and funded by Anggaran Pendapatan dan Belanja Daerah
(Local Government Budget). The recommended actions from FEDEP normally will be considered into
government policy process and/or ongoing development projects.

2
and Nugroho, 2004) that lead to the expansive growth of LMIs in many urban regions. 3 In
line with these policies the government then spends most budget allocation for a plenty of
urban sector projects. Aside from this tendency the more important thing is that the
prevailing decision making structure and political interventions of urban elites has been
undermining the capacity of SMIs to determine appropriate policies that shape their future.
Therefore, regardless of the virtues of industrial clustering policy the government has
introduced, it is still not enough for securing SMIs attempts to strengthen industrial linkages.

INDUSTRIAL CLUSTERING IN REGIONAL POLICY: A REVIEW

The Origins of Industrial Clustering Concept in Indonesia
The inception of industrial clustering approach to regional development policy in
particular demonstrates government reactions over the impacts of the 1997 Asian economic
crisis to Indonesian economy. During the worst crisis period, let say 1997 to 2001, the
central government was much concentrating on national economic recovery efforts through
international debt restructuring, bank restructuring, social safety net, and so forth which
were all emphasised to support private sectors and households to regenerate economic
activities normally. These efforts were also prompted to regain international trusts of donor
community and investors about the security of investment projects in Indonesia. That was
perhaps the most chaotic moment in the country since the pressures of the crisis were
intertwined with both political and security turmoils. 4 Along those years the economic
performance was greatly underpinned by domestic consumption, government expenditure
and export. Surprisingly, the contribution of export was resulted from agriculture and SMIs
products, neither LMIs nor multinational corporations (MNCs), mainly because of sudden
windfall profits of currency exchange rate. 5 Later the endurance of SMIs during the crisis
attracted much attention and admiration from the government not only because the sector
was promising to increase export promotion, but also its capacity to deal with difficult times
with limited government assistance. In addition, the sector was also able to provide
alternative employment for the jobless when many LMIs collapsed.
Up to this point the increasing attention from the government on the significant
contribution of SMIs to economy merely falls into its comparable value added outputs. This
means that the government admits the potential competitive advantages of SMIs in global
market, resulting from a type of industry which is depending largely on (natural) resources-

3
The industrial policy shift from import substitution to export promotion introduced in the commencement of
Rencana Pembangunan Lima Tahun III (The Third Five-Year Development Plan) in 1979 disclosed the inflows of
FDIs through the operation of multinational corporations (MNCs). At the same time the central government
also encouraged the establishments of domestic LMIs and strategic projects which were emphasised to
increase local ingredients of industrial products in the market.
4
Following the fall of Soeharto regime in 1998, the unstable economic environment triggered the call for
dramatic decentralisation shift which exerted greater acquisition of local resources and national budget
allocation to local governments. Separatism movements, particularly in Aceh and Papua, were also escalating
creating heightened anxieties over national security.
5
Before the crisis the exchange rate of Indonesian Rupiah to US Dollar was about Rp 2,500 per one dollar but
during the crisis it doubled five-six times to the level of Rp 10,000 – Rp 15,000.

3
based inputs, labour intensive, traditional production technology and group working. There
are less convincing evidence, literature or public documents telling us clearly that such
increasing attention is related to interfirm processes by which SMIs being able to create
competitive products. Compared to LMIs where marginal benefits resulted from individual
firms, the total value added outputs of SMIs are commonly accumulated from collective
socioeconomic actions between firms. And the general strategies to promote the
development of SMIs since the past have been focusing on the strengthening of their
internal capacity to compete in the markets and the creation of more friendly business
environment for them. Therefore, it is still unclear who or which government agency have
introduced at the first time the industrial clustering concept officially into development
policies. Also there is unclear what is the genuine rationale behind government reactions to
adopt the concept despite its likely usefulness to boost economic growth.
But literally during the early 2000s there were many government policies and
regulations set out to promote industrial clustering approach to developments at both
national and local levels. For instance, in 2002 the State Ministry of Cooperatives and Small
and Medium Enterprises endorsed Ministerial Decree No. 32/Kep/M.KUKM/IV/2002 about
the Guidelines to the Development of Small and Medium Enterprises Clusters (DBPS-UKMK,
2007). In 2005 the Ministry of Industry introduced a blueprint of Kebijakan Pembangunan
Industri Nasional (The National Industrial Development Policy) outlining the government
direction and guidelines to industrial development in Indonesia, including the promotion of
ten priority industries with clustering approach within five years on (Media Industri, 2005).
Meantime, at the local level the Government of Jambi Province highlighted the necessity to
adopt clustering approach to support agroindustrial development in the region, as stated out
in the Mid-term Development Plan 2006 – 2010 (Jambi Government, 2008). Even some local
governments like Central Java Provincial Government has anticipated earlier the potential
growth of industrial clusters by establishing a semi-government agency in 2003, namely
Forum Pengembangan Ekonomi dan Sumber Daya (The Provincial Forum for Economic and
Resources Development), which one of its major tasks is to promote industrial cluster
development across the region through the enactment of Governor Decree No.
500.05/30/2003 (FPESD, 2006).
Even though we are unlikely to figure out completely the government intention over
industrial clustering adoption to recent development policies, at least we get enlightened
with the purpose of the approach use as the vital instrument for economic development.
However, we should be aware of that the resurgence of industrial clustering concept in
recent Indonesian development is associated with preceding SMIs promotion policy in the
past and attracting discourses of cluster development over the world since mid 1990s.
According to Tambunan (2005), the commencing industrial clustering policy can be traced
back to the mid 1970s when the Ministry of Industry created national program to support
the development of small industries, that is Bimbingan dan Penyuluhan Industri Kecil or BIPIK
(Supervision and Technical Assistance Program for Small Industries). Basically the program
was designed to strengthen the capacity building of small industries in microcredit use,
business management, efficient production system, distribution and marketing in response
to the fact of that their productivity remained low although the sector consisted of 48,400
firms with total employment of 343,000 workers nationwide. This program was reinforcing
notably since early 1980s through the introduction of typical parenting, subcontracting and

4
partnership schemes which encouraged the large firms, state-owned enterprises and MNCs
to take part directly in fostering the progress of small industry development. Furthermore,
the central government also initiated the establishment of industrial estates for small firms
and government technical support units across the country for ensuring facilitation and
supervision to their businesses (Siahaan, 2000; Tambunan, 2005). 6
Perhaps the greatest impetus of cluster development in Indonesia is closely related
to enthusiastic discourses and publications of Michael Porter’s work on the competitive
advantages of nations in 1990. The Porter’s diamond model (see Figure 1) explains clustering
approach as a localising process of increasing returns to scale resulting from a group of
interconnected firms and associated institutions, which is located proximately in certain
region and linked by commonalities and complementarities. Such definition provides a
general theory of clustering concepts which have been emerging since Marshallian theory of
industrial districts of Third Italy in 1919 until Porter’s business strategy theory of institutional
and social networks. Some key features of the definition are: i) the geographical proximity of
interconnected firms in which distance is a critical factor that determines transactional
relations between firms; ii) competition and collaboration between firms are co-existed in
order to increase economic returns of scale; and iii) institutional and social networks are
maintained to increase the spillovers of benefits within clusters (Gordon and McCann, 2000;
Tambunan, 2005; Asheim, Cooke and Martin, 2006). In addition to Porter’s definition of
clustering, Humphrey and Schmitz address the Triple-C principles of clustering, that is
customer-oriented, collective efficiency and cumulative. These principles shed light on the
realm of clustering ideal which constitutes collaborative networks of interfirms to build self-
reliance to deal with uncertainty (Schmitz and Nadvi, 1999). Hence, industrial clustering
concept tells us about the incorporation of mutual trusts and social networks into the
conventional mainstream of economy which is highly based on individual rationalism of
decision making.
The emerging discourses of competitive advantages somehow have inspired the
policymakers in Indonesia to take (renewed) industrial clustering concept into account in
regional development policy. Regarding deteriorating effects of the crisis onto economic
conditions and livelihoods, the search for alternative sources of economic prime movers that
could carry out competitive advantages becomes reasonably important. On one hand, this
attempt relates to endogenous development theory where value added of goods and
services is highly relied on the investments of human and knowledge capitals. This notion is
relevant to Indonesia because of the large number of and diversity of population from which
human creativity and innovation come from. Furthermore, the existence of widely dispersed
SMI clusters more or less depict the embeddedness of local customs and particularities,
thereby their potentials are promising to reshape competitive advantages. On the other
hand, within globalising world nowadays a small distinguishable quality of products does
matter in determining the winner and the loser. The main issue is not only linked to product

6
The policy sustainability of this SMI cluster development in fact lasted until mid 1980s, a starting period when
the central government deployed industrial development policy shift by much more focusing on the
development of large manufacturing industries and MNCs to realise pro-growth policy objectives. In line with
the greater permission of foreign direct investment (FDI) during 1980s, sooner or later the government
attention to SMI development was declining if not to be said being ignored.

5
 Geographical clustering of related Competitive rivalry and knowledge
industries/firms intensifies interactions within spillovers within the cluster
the competitive diamond stimulate innovative activity

Firm rivalry Clustering

and strategy enhances
innovation

Factor input Demand

conditions conditions Investment
upgrading

Related and Innovation

supporting enhances
industries productivity

High productivity raises competitive

advantage of cluster, enables high
wages and employment, which in turn
attract skilled and educated labour

Figure 1. Porter’s Diamond Model

Source: Asheim, Cooke and Martin (2006)

price and its compliance with international standards, but also personalised uniqueness the
product can attach to its users. In this sense, the product identity is intertwined with typical
social status of the users following the growing appreciation on localities. Characterised with
flexible specialisation of production, the SMIs are likely to fulfil such specified market
demands so that the product competitiveness is getting increased afterwards.

The Recognition of Clustering Concept in Regional Policy

Most policies and literature regard the importance of industrial clustering concept to
regional development in response to the weaknesses of SMIs to cope with economic and
institutional obstacles. Generally they are seen not having sufficient capacity to continue
their operations without external assistance. They are often being marginalised due to its
closeness to traditional peasant economy away from modernised order of production
chains. It is not surprising since the rise of SMIs is often based on communal boundaries and
they grow naturally depending on predetermined social order that exist to protect their life.
Once the presence of social capital elements is overwhelmingly embedded within the sector
businesses, it is likely to raise conflicts with the prevailing economic system. Collectivism of
SMIs is often inhibited by common practices of capitalist market-driven system which praise
much the principles of individual property rights, profit orientation and capital accumulation.

6
To some extent, this system sometimes represents patriarchal and male-dominated culture
so that the SMI’s opportunities to grow are perceived determined by the existing power
structure of decision making. Therefore, most policy substances are created with respect to
the problems of internal capacity of SMIs, providing less spaces for contending their
empowerment to decide the best ways for survival properly.
The first discussion will look at the comparison between central government
clustering policies in the past and the recent dates. The reason relates to the dominance of
central government in Indonesia and immature local governments with regard to renewed
decentralisation regulation, that is Law No. 32/2004 about Regional Governance. The
powerful influences of central government, however, remains exist particularly in reshaping
regional development policy. Thus, it is no wonder if the policy framework is reflecting the
abundance of central government will. The second discussion will attempt to examine how
the local governments have paid proper attention to the development of SMIs in the region.
In this part we may figure out whether the regional policy presents local-based appreciation
to clustering development, thereby we can find similarities and dissimilarities of government
actions between central and local governments.
As mentioned above, the earliest attempt to industrial clustering is associated with
BIPIK program during 1974 – 1978. BIPIK was designed to assist small entrepreneurs in
accessing and managing government-facilitated microcredits such as Kredit Investasi Kecil or
KIK (Small Investment Credit) and Kredit Modal Kerja Permanen or KMKP (Permanen Capital
Venture Credit). The program comprised i) trainings and workshops, ii) facilitation and
supervision, iii) technical and management assistance, and iv) promotion and exhibition for
small industries. In reality, the program implementation was unsuccessful primarily because
it provided knowledge transfer scheme incompatible with special needs and interests of
small entrepreneurs. Both training materials and one-way teaching delivery did not fit to the
sociocultural background of participants, creating sustained gaps between traditional
peasant economy and the practices of modern economic system (Wie, 1996; Siahaan, 2000).
Therefore, during Pembangunan Lima Tahun (PELITA) III (The Third Mid-Term
Development Program) 1979 – 1984 the improvements of small industries assistantship was
undertaken by providing more direct assistance to small entrepreneurs. In this period the
renewed program consisted of four modes of assistantship: i) institutional arrangement, ii)
soft infrastructure, iii) hard infrastructure, and iv) facilitation and supervision. The
institutional arrangement was made up by centralising the authority and responsibility to
small industry development to the hands of Directorate General of Small Industry at Ministry
of Industry, and the grouping of product-based small industries as mandated through
Ministerial Decree No. 176/1978 and No. 133/1979. The provision of soft infrastructure
covered from simplified procedures for business permit, product design, research and
development, export-import facilities, tariff and tax protection, to promotion and marketing.
Meantime, the hard infrastructure support was realised through government subsidies for
purchasing raw materials, machineries and technology and the establishment of industrial
estates and business services units for small industries. At last the facilitation and
supervision for small industries were undertaken not only by improving the quality of
trainings and workshops but also daily services to business development support (Wie, 1996;
Siahaan, 2000). Clearly this period represents abundant protection policy for small
industries. However, in fact the policy accomplishment is still far away from targeted

7
objectives albeit the conditions of small industries are getting improved. The reason is, on
one hand the larger industries are not fully engaged to support policy implementation. Even
though many partnership and cooperation schemes are encouraged by the government, the
larger industries are still considering small industries the subjugated producers. On the other
hand, there are external policies that contradict to policy implementation. For instance, the
practice of foreign investment policy that allows MNCs operations in Indonesia. Their
existence actually creates footloose industries by which intersectoral linkages with local
producers, including small industries, are impossible to appear.
Responding to difficulties to realise partnership and cooperation schemes through
production linkages (subcontracting) between PELITA IV and V (1984 – 1994), the central
government changed policy direction by stressing on export promotion strategy. The
interindustrial linkages were set up indirectly by suggesting large firms and state-owned
enterprises to assist the marketing of small industry products mainly to export market, the
purchasing of input factors, and business development support. Such policy shift was
expected to succeed the implementation of preceding policies. Turning to PELITA VI (1994 –
1999) the prominent policy change was related to coordination issue within the Ministry of
Industry. The policy responsibility was spread into some subministerial agencies and the
respective budget allocation was on the Ministry of Cooperatives and Small Entrepreneurs.
As a result, the conflicts of interests between government agencies created distortive
policies to support the development of small industries (Wie, 1996; Siahaan, 2000).
During the crisis period of 1997 – 2001 there was not much to say about the
development of SMI clusters. Most government attention were given to national economic
recovery and regaining international trusts on foreign investment security. Although many
publications pointed out the success of domestic farmers and SMI entrepreneurs in export
market, there was little evidence showing the contribution of SMI clusters. However, since
2002 the government has showed broader concerns on national industrial clustering.
Through a national policy called Revitalisation and Development Program for Industry and
Trade the Ministry of Industry and Trade prioritised 14 industry branches with focus on the
development of four industries: textile and textile products, electronics, footwear and
timber processing and pulp/paper industries. Meantime, there were three supporting
industries (metals and machineries, leather processing and accessories) and seven related
industries (leather and leather products, fish processing, crude palm oil processing, fertiliser
and farming equipments, food, software, jewellery and handicraft) which all prepared to
create interfirm linkages with the four prioritised industries (Figure 2). The reasons of
choosing these industries were because they have employed a large number of labour force,
have been probably dealing with massive unemployment due to export decline, and have
strengthened food security and job creation. Hence, the program contained general actions
as follows i) to overcome smuggling, ii) to facilitate financial sector revitalisation, iii) to
facilitate financing efforts from alternative sources, iv) to facilitate incentive schemes for
industries and v) to undertake programs necessary to funding gathering; and special actions
which were borne to related government agencies and industries (Media Industri dan
Perdagangan, 2002). Such policy is directed to recreate national competitiveness in global
market through promotion of strategic products with high proportion of local contents and
selective protection for domestic farmers and industries. This approach in turn will
stimulate the growth of downstream industries in order to build a firm industrial structure.

8
 Core Industries
 Textile and textile products
 Electronics
 Footwear
 Wood processing and
pulp/paper

Related Industries
 Leather and leather products
Supporting Industries
 Fish processing
 Metals, machineries and
 Crude palm oil processing
supporting electronics
 Fertiliser and farming equipments
 Leather processing
 Food
 Accessories
 Software
 Jewellery and handicraft

General Actions:
 Anti-smuggling policy
 Facilitation to financial sector revitalisation
 Facilitation the search for alternative funding sources
 Facilitation incentive schemes for industries
 Funding gathering for industrial development

Special Actions:
Undertaken by related government
agencies and industries with coordination
from Ministry of Industry and Trade

Figure 2. Revitalisation and Development Program for Industry and Trade

Source: Media Industri dan Perdagangan, 2002 with modification

9
 Following up the pathways resulting from preceding years, in 2005 the Ministry of
Industry initiated to create a blueprint of national industrial development, namely Kebijakan
Pembangunan Industri Nasional (The National Industrial Development Policy). The policy
continued the promotion of industrial clustering and expanded the prioritised industries up
to 32 industrial branches, where ten industries would be focused to develop until 2009 and
the rest until 2025. These industries included food and beverages, fish processing, textile
and textile products, footwear, palm oil processing, timber products, rubber processing, pulp
and paper, petrochemical, and electrical machineries. These ten industries were considered
the core industries while the rest were supporting and related industries, which would be
developed until 2025. At the same time, the development of SMI clusters was directed to be
linked with these core industries but with special treatments due to their different
economies of scale. Strategies that would be conducted to realise the policy covered the
strengthening of interfirm value chains, the increase of value added of goods and services,
the improvement of resources quality for industries, and the fostering of SMIs (Media
Industri, 2005; Ministry of Industry, 2008). In addition, referring to the Strategic
Development Plan of Ministry of Industry 2004 – 2009 industrial clustering was very
important to the building of national competitiveness because it would encourage the
pursuit of strongly integrated industrial development. Some policies to realise this
government will were: i) non-subsidised petroleum incentives are given to export-oriented
industries, ii) production acceleration and alternative energy development, and iii) energy
saving policy (Media Industri, 2008).
Now let us turn to discuss how local governments adopt industrial clustering concept
in regional policy. In general, there is no significant dissimilarities of concept adoption
between central and local governments. This is primarily because the practice of regional
autonomy still in the early stage following the endorsement of renewed decentralisation law
in 2004. Another reason is that the SMI cluster development is under coordination of
Ministry of Industry. Besides, there are some government agencies who are also concerned
with clustering development such as State Ministry of Cooperatives and Micro, Small and
Medium Enterprises, Ministry of Agriculture, Ministry of Public Works and National
Development Planning Board. Therefore, it is not surprising that most regional policies
reflect central government interests.
However, in some regions it can be found the extended use of clustering concept not
only limited to SMI cluster development. For instance, in Banten Provincial Mid-Term
Development Plan 2007 – 2012 the clustering concept is adopted in agriculture sector
through agropolitan development policy. This policy is aimed at developing forward and
backward linkages of agriculture-based businesses and industries in order to increase the
value added of agriculture commodities. The programs that relate to this policy are the
increase of productivity and quality, the increase of microcredit access, the improvement of
soft and hard infrastructure, and the increase of distribution, marketing and promotion.
Meantime, the SMI-specific clustering development is created through programs such as the
improvement of business climate, the provision of soft and hard infrastructure, the increase
of interindustrial partnership and cooperation, the extended use of appropriate technology,
and the introduction to industrial standardisation. These policies and programs more or less
represent the local version of central government policy, so that the next question should be
addressed to local government capacity to realise them (Banten Government, 2008).

10
 Table 1. The Policy Shift on Industrial Clustering in Indonesia

Subject 1974 – 1978 1979 – 1984 1984 – 1997 1997 – 2001 2002 – 2004 2005 – 2009
Direction Import substitution  Import substitution Export promotion N/A  Export promotion  Export promotion
 Export promotion  Domestic product use  Domestic product
(1982) campaign use campaign
Focus  Capacity building  Capacity building  Capacity building N/A  Capacity building  Continuing prior
 Indirect assistance  Direct physical  Combined direct and through the policy
assistance indirect assistance rebuilding of  Increasing value
 Protection  Protection industrial clustering added of products
 Agriculture and to reshape national
resources-based competitiveness
industries
Policies  KIK  Small Industries Broad-based N/A Revitalisation and Blueprint for National
 KMKP Consolidation engagement between Development Program Industrial Development
 BIPIK  Centralised SMIs and LMIs and for Industry and Trade
coordination state-owned enterprises
Ingredients  Trainings and  Renewed institutional  Continuing renewed N/A  Prioritisation to 4  Expanded
workshops arrangement prior policy core industries, 3 prioritisation to 10
 Facilitation and  Soft infrastructure  Interindustrial linkages supporting and 7 core industries and
supervision  Hard infrastructure in marketing, input related industries 22 supporting and
 Technical and  Extended facilitation provision and business  Anti-smuggling related industries
management and supervision development support  Facilitation to  Special treatments
assistance financial sector for SMIs
 Interindustrial
 Promotion and linkages in production revitalisation  Non-subsidised
exhibition chains  The search for petroleum for
alternative sources of export industries
funding  Production
 Incentive schemes for acceleration and
industries alternative energy
 Funding gathering for development
industrial  Energy saving policy
development

11
Examining Policy Support to the Implementation of Industrial Clustering Policy
Understanding how far the policy support have been weighted by the government
will shed light on the future of certain policies. Based on longitudinal observation we can
examine whether respective policies are designed really to meet the objectives. Sometimes
we cannot realise that a good policy does not always present a good intention of
policymakers and vice versa. Of course we cannot compare the quality of government policy
exactly because the challenges the government must deal with change over time. The
internal and external conditions surrounding policy process are sometimes unpredictable so
we cannot assess the levels of government sincerity to overcome certain problems.
However, such circumstance does not obstruct the search for better policy design. Still we
can analyse how the government look after particular policies in order to satisfy policy
beneficiaries. The discussion below will prompt some policy criteria that we can use to
analyse the policy support to the implementation of industrial clustering.

1) Focus
For more than three decades there is no substantial change on the policy issue the
government tends to overcome. The lack of SMI internal capacity always becomes the main
focus of government policy. Such proposition provides sufficient reasoning to authorise the
government to initiate the control over respective policy. This will place the government to
decide what the best ways to handle the problems and on the other hand, asserting policy
obedience from related stakeholders. In this sense, the government plays as the driver of
policymaking therefore the government can choose the preferential direction all policy
community should better go. Looking at industrial clustering policy trajectories, it is clear
that the government involvement in SMI capacity building demonstrates the tension
between direct and indirect government assistance. The direct assistance will be taken for
granted when the government view themselves quite powerful to handle the situation, or in
contrast, when there is no way to run. The period of 1979 – 1984 demonstrates the former
following the failure of prior policy and the sudden increase of government revenue due to
oil boom in the early 1980s. The latter is best explained with the period of 2002 – 2004
which presents unavoidable landscape of economic recovery. What we may conclude from
these lessons is that explicitly the government capacity determines the levels of government
involvement in particular policies. In other words, the achievement of policy objectives can
be adjusted in favour of government capacity regardless how urgent they are.

2) Relevance
In general, we may say that industrial clustering policy is relevant to Indonesian
context for any reason, ranging from conventional perspective which is associated with its
potentials to job creation and structural transformation to recent perspective which reckons
its significant role in reshaping national competitiveness. Furthermore, we can observe that
the government awareness and attention to the importance of industrial clustering are
getting intensified over time. However, we should better appreciate this tendency carefully
because the government only takes the clustering concept into account partially. Clearly the
government is only concerned with how the interindustrial linkages can be created by
involving SMIs and LMIs. Although the government attention on the building of strong
industrial structure has emerged since 2002, the government is still favouring the

12
development of modern LMIs instead of agriculture-based and rural industries. This reflects
the government ignorance over the factual conditions that most Indonesians are depending
on agriculture and rural livelihood even though they are mostly living in urban regions. As a
result, most industrial clustering policies have subordinated the development of agriculture-
based and rural industries as well as SMIs following the enormous government attention to
LMIs as the prime mover of economic development. However, at least we can notify that
during 2002 – 2004 the government has placed these sectors better following the more
balanced policies between the preservation of agriculture-based and resources-based
industries and LMIs. Because basically the principle of industrial clustering is that the
interindustrial linkages grow naturally by utilising local resources and values at most.
Therefore, if the government suggests the adoption of clustering concept, they should look
at the potentials of local resources both in physical-economic and sociocultural terms.

3) Coherence
Basically a good policy is created not only with regard to the interests of policy
beneficiaries but also those outsiders who are likely to influence or being affected by the
policy. So the policy fitness should take place vis-a-vis other contending policies. From such
observation we can predict the policy usefulness in real conditions. In general, we can see
that the respective clustering policies are treated less important than other policies such as
trade and investment policies. Theoretically, these policies will provide a framework for
clustering policymaking and others. However, in practice these policies also result in
contradictions and ambivalence within particular policies. For instance, during 2005 – 2009
the government keeps export promotion strategy continuing, but at the same time the
government also reduce petroleum subsidy for export industries. Such policy is problematic
mainly because most export-oriented SMIs are depending on petroleum subsidy, from which
their product price competitiveness can be attained. In other case, the government favour
on large industry development intensifies government ambivalence in adopting industrial
clustering approach. This situation emerges when the government intends to reconcile
between the modernisation of domestic LMIs and the preservation of traditional peasant-
styled SMIs. As a result, we can see how the SMI development is being marginalised over
time. In addition, surprisingly we can figure out that before the crisis the government
ambivalence is less appearing when the government has paid much attention on SMI
development in particular. The government actions to assert LMIs and state-owned
enterprises to assist the development of SMIs are increasing during 1974 – 1997. In contrast,
after the crisis when the government attention to SMI development declines as indicated by
its greater subordination within the practice of industrial clustering system, the government
ambivalence appears to be more intensifying.

4) Reliability
No matter how good the policy is, it would be meaningless if its instrumentality
cannot be realised in the real conditions. In this sense it is necessary to analyse whether the
policy ideals and practicalities fit each other. Again, we can see that before the crisis the
policy design is specified to tackle particular issue, that is the strengthening of SMI internal
capacity to pursue its own independent development. Of course some people may argue
that such understanding is oversimplistic, but at last we can measure definitely the

13
performance of policy implementation. In contrast, after the crisis we can see that the
improvement of SMI internal capacity is much more complicated with respect to the
increasing influences of external environments. However, it is quite difficult to find out how
the interindustrial linkages may appear within respective clustering system. Also, we cannot
easily understand how the SMI development is getting improved under sector
subordination. Therefore, in terms of practicalities the SMI clustering policy before the crisis
is more reliable than those after the crisis.

THE URBAN POLITICS IN THE MAKING OF CLUSTERING SENSITIVE REGIONAL POLICY

The notion of urban politics refers to the use of asymmetrical power structure and
relations involving corporate interests and political officeholders, who are particularly urban
elites, in coping with the problems of unequal distribution of political and economic
resources and the conflict (or partnership) between them (Sapotichne, Jones and Wolfe,
2007). According to Pierre (1999), urban politics illuminates the coordination and fusion of
public and private resources, resulting embryonic approach to the patterns of public-private
partnerships. These definitions simply highlight the tensions between government and
private sector to get the most from bargaining process in public domain (Mossberger and
Stoker, 2001). And policymaking provides an interface for contesting both public and private
interests. Within this context the private sector is often seen as individualistic profit
maximiser who acts rationally to enlarge resources ownership. Therefore, the private sector
(individuals or firms) is always seeking for the attainment of maximum benefits necessary to
maintain their business sustainability. Meantime, public officials are naturally positioned to
providing public services equally to all members of society. Having authority to rule the
society from the prevailing laws and regulations, the government then can force people to
obey certain public policies in order to assure social welfare. Thus, if there are some
mistakes in policy design or something goes wrong in policy implementation, the responsible
government officials cannot be prosecuted in the court. In this sense, to some extent the
government officials hold some privileges in accomplishing their functions and duties. That is
why that the existence of asymmetrical power structure and relations becomes an important
issue in the discourses of urban politics. This is relevant to finding out whether the policy
process and implementation are really set out to meet public interests.
Regarding the introduction of industrial clustering into regional policy we can figure
out the exercise of urban politics in reshaping the policy. First, there is an unequal treatment
from the government in promoting the development of SMIs and LMIs, which is reflected by
the greater supply of urban facilities and infrastructures. The LMIs are mostly benefited from
such policy since the agglomeration of facilities and infrastructures in urban regions will
attract the concentration of modern LMIs. Based on growth pole theory, this circumstance
will lead to the increase of total productivity and outputs and also the reduction of
interindustrial transaction costs. In turn, this process will boost urban economic growth
required to generate overall economic activities. Regarding this, the performance of urban
growth provides key indicator for determining national competitiveness (Sellers, 2005). This
is because both theoretically and empirically urban regions function as intermediate market
places that allow the meeting of global and local interests. Therefore, urban sector
development somehow will always be prioritised rather than rural (and agriculture) sector
due to its significance to national economic development.

14
 Table 2. Elements of National Infrastructures for Urban Politics and Governance

National Local

Government and policies Governmental institutions, Local government systems,

Political organisation
Economic organisation
Sociocultural elements
Source: Sellers, 2005
policies
Nationally organised political
interests and parties
National capitalist
institutions (business,
labour, economic
interests, training
systems)
National associations, media,
embedding of culture in
religious and other
institutional practices
policy implementation,
interlocal governance
Local representatives of
national organisations,
local parties and
coalitions, electoral rules
Local economic rules,
business structure, labour
organisation, interlocal
competition and markets
Individual, household and
local identities, values,
cognitions

Second, it is not surprising finding out the fact that the LMIs are more favoured than
SMIs since 1974. The only difference lies on the proportional emphasis between their
developments and how the SMIs should be placed in relation to LMIs. As we can see that
before the crisis the respective policy is designed to urge the LMIs to provide required
assistance to help the development of SMIs. But after the crisis such emphasis is less
preferred, following the greater attention from central government to increase SMI outputs
in order to supply required intermediate goods for LMIs. Furthermore, there is a plenty of
macroeconomic policies beneficial to LMIs. For instance, the endorsement of tax holiday
policy for imported machineries and technology actually is only preferable to LMIs even
though it is aimed at protecting all domestic industries (Wie, 1996). However, since it is not
supported with appropriate fiscal and monetary policies many SMI stakeholders cannot
access to government loans. As a result, the failure of SMIs to meet bankable conditions has
caused them being discriminated with such institutional obstacles. In other case, there is a
number of special policies directed to support SMIs such as the dropping of machineries and
business development trainings. However, in reality these policies are less successful mainly
because the policy design is usually centralised and disregards the special needs and
interests of the targeted SMIs.
Third, in general the local governments lack of capacity to design appropriate policies
with respect to localities. It is very common that most local governments only pick up or
follow the policy direction from the central government. In other case the local governments
excessively pay attention to the development of SMIs in their region without considering the

15
importance of building broader network of value chains with other regions. For instance, in
the case of business climate improvement many local governments have attempted to
introduce local market points for raw material supplies. For Kebumen Regency this would be
realised through the facilitation for SMIs to get access easier to local suppliers (Bappeda
Kebumen, 2009). This policy is vague because it does not explain how such access can be
attained. In addition, generally each firm has special links to particular suppliers and the
operations of these suppliers cannot be confined with such policy. Therefore, if the local
governments intend to assure raw materials sufficiency, they should not look at into their
own boundaries. Rather, they should look further at the possibilities to build interregional
networks of value chains.
The presence of urban politics in the making of clustering sensitive regional policy has
created troublesome environment for succeeding clustering objectives. Apparently, the
government has been too much focusing on the problems of inside SMIs and LMIs but paid
less attention to clustering per se. The urban politics has also contributed to never-ending
debates on deciding which industries should be given more policy support than others. This
situation leads to the search for the improvement of internal capacity suitable to industry’s
special interests but ignoring the attempts to diminishing the institutional obstacles that are
persisting between the government and industries and between SMIs and LMIs. As long as
the government does not shift the agenda-setting towards the reconciliation between
traditional peasant-styled SMIs and modern LMIs, there is still a long road to realise a firm
industrial structure. Implicitly, this does not only imply on the discovery of mixed economic
system but also asserts the importance of creating better rural-urban linkages, a process
that provides smoother medium of gradually structural transformation from agriculture to
industry society. This requires greater emphasis on agriculture and rural industrialisation
where most SMIs take place (Tambunan, 2001). Such policy has been adopted by India since
20th century (Wie, 1996) and now we can see how India has emerged as one powerful
economic state in Asia along with China, challenging the older ones like Japan, South Korea
and Taiwan.

CONCLUSION
The influences of urban politics on the adoption of industrial clustering policy both at
national and local levels determine the quality of respective policy. With regard to the fact
that most policies are only concerned with the enlargement of potential returns of clustering
through the improvement of internal capacity, we can see that such policies have failed
since the beginning. The excessive government intention to boost economic growth and
income generation in short time will only create pitfalls for the building of firmer industrial
structure. These policies are rarely looking after the necessity of social (and human) capital
improvements as essential foundation to underpin the process of knowledge economy
accumulation. In fact, according to Humphrey and Schmitz (1995), the strength of industrial
clustering rests on the enhancement of reciprocal trusts and social networks between
industries. Therefore, if the government is taking the industrial clustering concept into
account seriously in the making of national/regional development policy, it should be
understood carefully that the strategies of internal capacity improvement are insufficient to
tackle the complex problems between and within industries. The government should also

16
acquire the prevailing social ties and norms that lubricate the thickness of clustering by
engaging industry stakeholders in policy process (Bovaird, 2005).
Further, the discussion above also reveals pragmatism approach in policy process.
Simply the government considers the importance of clustering temporarily when it appears
to be beneficial for entire economy. This means that the government seems to appreciate
the useful practicalities of clustering concept for obtaining greater public support, indicated
by partial approach to the engagement of the concept in development policies. Another
indicator can be seen at the uniformity of national and local government approach to
clustering promotion. In many cases this approach contests coercive government intention
to pro-growth regime rather than the development of industrial clusters themselves. Thus, a
more comprehensive understanding and government sincerity is required to the re-making
of better industrial clustering policy.

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