THE EFFECT OF THE DEVELOPMENT OF SMES

TOWARDS ECONOMIC GROWTH

 Abstract
Small Medium Enterprises (SME) plays a big role in pushing the growth of the
economy of Indonesia, as seen from the contribution that it brings to

This study aims to analyze the affect of the empowerment of SMEs toward its
economic growth.
1. Introduction and Background
1.1 Problems
1.2 Purpose of the Research
1.3 Methodology
To achieve this purpose, the author uses Panel Data Regression Method
1.4 Hypothesis
1.5 Structure of the Thesis

2. Economic Situations
2.1 Characteristics of Indonesian SMES

Entity Value of assets (Excluding Number of employees

Table 1. The characteristics of Indonesian micro, small, and medium enterprises (SMEs).
Lands and Building) in IDR

Micro Assets less than 50 million 1-4

or sales less than 300
million

Small Asset 50-500 million or 5-19

sales 300 million – 2.5
billion

Medium Assets 500 million-10 20-99

billion or sales 1.5 billion-
50 billion

Table 1 explains that an SMEs is an entity owned by an individual or individual business

unit, excluding foreign-owned or foreign-invested firms, and defined by both assets

Source: Indonesia Law Number 20, 2008; The National Bureau of Statistics Indonesia
(excluding land and buildings) and annual sales, while the number of employees is based
on the value of the assets of SMEs. The competitiveness of SMEs (the Law Number 20 for
Micro, Small and Medium Enterprises, 2008) oversimplifies the scope of SMEs only on the
basis of assets and capital ownership, and it is clear that most elements within the law are
not representative of most Indonesian micro-enterprises. For instance, the regulation
neglects both the employee’s occupation rate and the specific sales criteria of these
enterprises. In reality, it is not easy for such enterprises to comply with these criteria. This
is due to a series of long-standing issues, including access to competent human resources,
the utilization of technology, modalities, and the market. This has led to a minimum
contribution of 27% of the national economy from such enterprises. Ruthinda further
explains that several factors are involved in an SME’s ability to export, including the firm’s
internal circumstances, organizational issues, policies in the foreign market industry, and
the very limited government support.

Below are key findings from the research along with recommendations grouped by
regulatory and macro environment, supply, and demand for SMEs.

2.1.1 Indonesia’s Regulatory and Macro Environment

 The requirement for banks to lend 20% of their portfolio to small businesses is not
entirely clear. There is no doubt the requirement has helped, especially with banks
lacking a culture of lending to small businesses, as has been the case in other
countries. However, a large proportion of SMEs loans are for trading purposes.
Some of the loans made to SMEs have been used for consumption or wholesale
lending to rural banks or Bank Perkreditan Rakyat (BPRs), as not all the financial
institutions have the capacity to lend for production purposes. Recommendation to
Financial Fervices Authority (OJK): It may be worth considering setting targets for
loans to be made for production sectors. Also, the regulation should further clarify
the implications of non-compliance
 The focus on non-performing loans (NPL) from OJK, and a perceived limited
flexibility, is making some banks reluctant to lend to SMEs. The result is that the
client may be referred to a different financial institution with lower liquidity, or the
funds redirected by the bank to another bank product or existing client. The
classification of loans in arrears is also now more demanding for the banks, with
issues such as business prospects, repayment capacity and payment history being
difficult to ascertain for many SMEs. Recommendation to OJK: To encourage more
lending to SMEs, there may be some value in loosening the NPL requirements for
banks making such loans, and the current data does not suggest that the NPL rates
are appreciably higher for SMEs than for other classes of borrower. It would also
help if OJK could signal the possibility of FSPs not moving straight to enforcement
but sometimes allowing SMEs time to restructure
 The Financial Information Service System (SLIK) credit data registry needs
improvement. Currently, access to the system requires contacting the OJK call
centre or visiting one of its offices. Whilst it may go online at some time, the need
 to make a request and then wait for a response is inefficient. The other challenge is
that the number of SMEs with credit data in SLIK is fairly limited.
Recommendation to OJK: Firstly, the move to online processing should continue
and other changes should be considered to make the SLIK system more accessible
and useful. Secondly, measures should be explored to rapidly increase SME credit
data in SLIK
 There are weaknesses in Insolvency and Creditor Rights (ICR). Such weaknesses,
particularly regarding the costs of using formal insolvency procedures, impede
banking efficiency and inclusion through higher intermediation costs and inhibit
capital market development through diminished investor demand for private
instruments. Recommendation to Government: ICR laws and practices need
enhancement to improve their effectiveness, and hence increase the willingness of
FSPs to lend to the sector
 Lack of credit information is a factor that contributes to the constraints faced by
SMEs. Assessing the creditworthiness of SMEs represents a unique challenge, as
they have less access to traditional sources of finance such as banks and other
financial institutions whose data is typically used in the production of credit reports.
However, such ratings can be expensive for SMEs and, therefore, are often funded
by a donor agency.
 Recommendation to Government: In order to address this issue, Bank Indonesia
(BI) has introduced an SME Credit Rating Agency and two of the credit rating
agencies operating in Indonesia are also looking to expand into the SME finance
market. The Government should further support this as progress has been slow to
date
 The regulatory arrangements for smaller financial institutions are not ideal and do
not match with best practice in other countries. One major issue is that financial
institutions other than commercial banks cannot be foreign owned and, therefore,
the larger ones are licensed as Ventura Companies (VCs). Some of these companies
are now actively considering SME lending but may be constrained by their licence
in doing so. Recommendation to Government: Rather than forcing these companies
to look for a 2nd best option, such as to transform into a multi-finance company
(MFC), it would be preferable to amend the regulations to allow for at least a degree
of foreign ownership.
 The People’s Business Credit (KUR) product is now less focussed on new clients
such as unbanked SMEs. Whilst its volume and wide dissemination alone has made
it a success, the current KUR program has been criticised for focussing more on an
interest rate subsidy than a credit guarantee, which would be of assistance to first-
time borrowers. There are also some uncertainties regarding the way that KUR is
implemented, especially whether there is a need to take collateral for the smaller
KUR “Micro” loans. It is important to note here that the Ministry of Cooperatives
and SMEs (MoCSMEs) is implementing a programme for SMEs to obtain land
certificates for free. The objective is to help SMEs to use registered assets as
collateral. During the expert FGD it was mentioned that the responsible agency
 (BPN) faced challenges and as a result the programme is not being executed
optimally. Recommendation to Government: In designing KUR for future, the
Government should consider re-introducing the idea of additionality, i.e. at least a
percentage of the loans goes to businesses that have not been able to access formal
finance to date. Although most KUR loans still have the benefit of a guarantee for
the financial institutions, the government needs to be more targeted, for example, to
directly guarantee loans up to a certain (higher) limit to small businesses to
purchase land, buildings or equipment
 There is no ‘one stop shop’ for SMEs. There is no shortage of projects and
stakeholders supporting SMEs, both generally for business development services
and specifically for access to finance. However, there is no single source of
information on the various services or funds available. It is intended that the
MoCSMEs should provide such a central facility, but this has not occurred to date.
Recommendation to Government and Donors: It would be very helpful for SMEs,
FSPs, NGOs and all the other stakeholders working in the sector for such a facility
to be established as soon as possible. There is also a role for the development
community to build platforms to bring together all stakeholders to foster the
exchange of good practices on SME growth and finance.
 There may also be a need for a more specifically focussed organisation to help SME
develop their business capacity. In some countries, an institution has been set up
specifically to provide advice to SMEs. The GoI established the Small and Medium
Enterprises and Cooperatives Indonesia Company (SMESCO) in 2007 but its
objective is mainly to promote the products of Indonesian SMEs. Recommendation
to Government: It would be worthwhile considering whether Indonesia needs a
specific SME focussed body to provide advice on all matters relating to SME and
entrepreneur capacity building.
 Some Fintech and tax regulations are burdensome. Whilst OJK has been praised for
the decision to establish a regulatory sandbox, there are issues with other
regulations, for example affecting eMoney licences and P2P transactions. In
addition, leasing is discouraged by VAT being payable at both the beginning and
end of the contract. Recommendation to OJK and Government: Whilst OJK
generally does a good job with its ongoing regulation of a very vibrant sector, there
is still a need to facilitate the Fintech advances in a way that both encourages the
new technologies whilst ensuring that consumers are protected. Similarly, the GoI
should consider the tax regime for leasing to determine if some relaxation of the
VAT can be justified by the resulting increase in finance to SMEs
2.1.2 Supply side
 There is a general lack of loan products that SMEs need. Whilst all the banks and
other FSPs offer working capital and investment loans, there is literally very little
else and virtually no cashflow-based lending. Whilst there are many reasons, one of
the key ones is the inability of FSPs to assess SME credit risk, due to their lack of
records and cash accounting. Recommendation to FSPs: New product development
involves both SME friendly terms, instead of pure asset-based financing, as well as
 appropriate pricing, based on a proper risk assessment by the lender. FSPs should
look for alternatives to traditional collateral-based lending or, at least, use movable
collateral registries to cover their perceived risks of lending. There are also
opportunities in supply chain finance, where small businesses are financed through
the relationships they have with their major suppliers or customers.
 Many banks do not possess the necessary systems, data and infrastructure to expand
their SME lending. Especially the smaller banks engage in time consuming credit
procedures, use inefficient and expensive core banking systems and lack an
appropriate branch network. Some FSPs are seeking to overcome these issues, by
working through agents and other intermediaries including Fintech companies, and
using new forms of business information such as digital data. Recommendation to
FSPs and Donors: There is more that the FSPs can do in this area, supported by
donors, to capture market opportunity. Some financial institutions are beginning to
emphasize relationship lending technologies, which are based on “soft” information
such as payment histories and social media interaction, more attuned to the
characteristics of SMEs compared to banking norms and procedures. One
possibility already happening is for the traditional FSPs with the capital to partner
with the Fintech companies who own the technology and data. In addition, banks
should move to decentralize operations, with additional branches or other ways to
reach clients, such as digital banking.
 Many FSPs also lack an understanding of the sectors in which the SMEs operate.
Even with the current products, many bank field staff require training in SME
lending and how to assess loan applications against the background of the sectors in
which the SMEs operate. There is a general need to improve the skills of
loan/account officers for marketing to SMEs and analyzing their business. Detailed
market research on the SME sector is also missing, not just on the numbers of
SMEs in existence but their activities and financing needs. Recommendation to
FSPs and Provincial Governments: The focus in this area should be on equipping
the SME relationship managers, as they are the interface between the clients and the
bank, with the capacity to serve SMEs. In some provinces, there is a specialist SME
bank, for example Bank (BPR) SME owned by the government in East Java, which
can be helpful. A better strategy would be for FSPs in general to target SMEs as a
separate and strategic customer segment, as they differ substantially from
microenterprises and corporate sector in its financial and operational needs and
require more alternative services
 Alternate credit scoring and loan monitoring methods are needed. Given the “ticket
size” of SME loans versus the loan administration costs, banks need more efficient
loan assessment processes for SMEs. Recommendation to FSPs: Some innovative
approaches already exist, such as psychometric testing. However, the best prospects
will be using ‘big data’ from online sources such as digital payment platforms and
social media, which should be examined by the FSPs more actively. The loan
monitoring approach also needs to change for SMEs, in areas such as portfolio
quality and delinquency management.
 The presence of both commercial and subsidized lending can create confusion.
Despite some reservations on the targeting of KUR, the terms of the product are
clear enough. There are also loan schemes at provincial level with subsidies. These
may create confusion in the market. If this is unchecked, it can lead to higher NPL
rates and discourage other lenders from entering the SME market. Recommendation
to FSPs and Government: There should be greater clarity in the product disclosures
to avoid this confusion. At the sector wide level, the funders or providers of the
subsidized products, whether KUR or provincial government products, should
assess the products regularly, to ensure they are having the desired impact and not
‘crowding out’ commercial, and hence more sustainable, alternatives for SME
finance

2.1.3 Demand side

 SMEs need to take steps to become more ‘bankable’ in order to access financial
services. Many SMEs need to adopt a more business-like mindset, rather than
seeing their enterprise as an extension of family activities. Key to this is usually a
business plan, with details on its operations, products, employees, marketing and
processes. Recommendation to SMEs and Donors: SMEs should take a more
entrepreneurial approach to their businesses and build their own technical capacity,
overall operational quality and enterprise information transparency. Moreover,
SMEs should offer effective financial reports with high authenticity to help
commercial banks make judgments on their credit worthiness. Donors can play a
role, for example to provide proper business bookkeeping with cash flows and the
capacity to plan for expansion, as well as workshops on topics such as financial
literacy and use of Fintech
 SMEs also need to be better informed on the potential finance and other services
available to them. Once the SME has a full understanding of its future financing
needs based on some sort of a business plan, it is then a matter of determining what
type of product and what quantum of funding best meets the SME’s financing
needs. Recommendation to SMEs: As part of any financing decision, the SME
should make detailed enquiries with the FSPs based on their situation and needs. In
addition, the associations representing SMEs and entrepreneurs can do more, ideally
operating in a coordinated manner to save costs and avoid duplication in serving
their members, by bringing to their attention some of the appropriate financial
products, training and other business development services
 The lack of required collateral hinders access to finance. Whilst it can be argued
that the lenders need to be more flexible in this regard, in most cases SMEs need to
have some form of collateral in order to obtain finance. Recommendation to SMEs:
Management needs to take steps to clarify their title to land and other assets and
obtain documentation that can be pledged for loans. If collateral cannot be provided,
the SME should examine its capacity to provide alternatives, such as security over
other assets, liens, guarantees and post-dated cheques
  Many SMEs operate in remote areas where it is difficult to connect with banks and
other services. The banks are beginning to use networks other than physical bank
branches, such as online processes or local agents, to reach potential clients. As for
the supporting services, this is an issue for the regulators and FSPs, but it may also
be the fault of SMEs themselves in not reaching out for the banks and the
information. Recommendation to SMEs, Government and Stakeholders:
Management should adopt a similar approach, particularly using the technologies
being employed by the FSPs, such as the internet and digital payment platforms.
Understanding and accessing these avenues for finance can be obtained from the
FSPs themselves and other stakeholders, such as government ministries, donors,
NGOs and business associations.
 There is a general lack of assessments of the impact of SME finance and other
services. The range of financial products, training and other business development
services available to SMEs is extensive. However, there is very little detailed
assessment done of what products and services work well and the impact on the
SMEs and their owners and employees. Recommendation to Government, Donors
and Stakeholders: More information on the SME sector, the finance available and
support services would be of interest to those operating on the macro and supply
sides and the SMEs themselves. The size and cost of impact assessments means that
it is more likely to be government and donors that undertake such studies - like this
one - but some of the analysis could be done on the demand side, perhaps again by
the business associations working in tandem

3. Literature Review

3.1 Competitive conditions in Indonesia’s Environment

In accordance to Indonesia’s current state of market environment and their sets of problems
and challenges, factors that provide competitive advantages needs to be determined. These
factors have been stated by researchers to help boost performance of an economic entity

Innovation

Martín-de Castro et al. (2013) state that the competitive advantage of an organization is
very important to be developed and maintained by developing technological innovation.
According to Zemplinerová (2010) to acquire a dominant market share, there needs to be a
fund budget for research, development and introduction of innovation, and Autant-Bernard
et al. (2013) argue the organization must have an original strategy and support the
development of knowledge from and to the organization. It can be concluded that
organizational innovation has a significant effect on the competitiveness of the company.
Competitiveness can be achieved higher by producing products of the highest quality than
competitors’ products.

Quality Strategy
Quality strategy is considered an important tool for a firm’s struggle to differentiate itself
from its competitors The relevance of quality strategy to companies is emphasized here
especially the fact that it offers a competitive advantage to companies that strive to improve
it and hence bring customer satisfaction. An analysis of the effect of quality on competitive
advantage has been done by many researchers. The researchers conclude there is a weak
influence between the two. The intended research is conducted by Wijetunge (2016).

Consumer Loyalty

There is a need for company to move from mere customer attraction to customer retention
which requires a focus on customer loyalty, particularly, on how it is influenced by word of
mouth, perceived service quality and trust in order to retain their existing customers and/or
attract new ones. Company managers pay more attention to the influence of customer
loyalty to company performance. Company performance reflects a company’s competitive
advantage and as an important tool to tie long term relationships with customers (Mittal et
al, 2015).

Respond to Change

If strategy research is to continue to offer credible guidelines on the strategic behavior of

firms it seems imperative to have a more fundamental understanding of the factors
influencing a firm’s choice of diversification strategy and how this evolves in response to
changing business conditions (Fatrisia & Raharja, 2015). The study in finding out the
strategic responses adopted by University of Nairobi to cope with increased competitive
advantages by public universities in Kenya.

Price

Company Performance is influenced by price. the results of the study indicate that the
company should focus on its competitors and customers. the differentiation of new products
and or services produced by the company will assist the company in determining the
pricing strategy. this will positively affect the level of profitability and competitive
advantage (Milan, 2013; Davcik & Sharma, 2015).

Labor

Human Assets can be an important source of competitive advantage and economic rents.
Both aspects of Human Resources (knowledge and motivation) have been shown to have
the potential to generate rents. The ability to create a sustainable competitive advantage
linked to Human Assets depends on the presence of isolating mechanisms that protect rent-
generating HR practices from imitation and substitution (Sin et al., 2015; Ngah et al., 2015;
Pe’er 2016).
From the reviews and literature regarding Indonesia’s market environment and competitive
conditions to improve the competitive conditions of SMEs, problem identification can be
formulized

3.2 Challenges/Problem Identification in improving SME capacity

In general, problems that SMEs faced based on analyzing the findings of Indonesia’s
situation and environment are:

3.2.1 Internal

Lack of Capital and access towards funding

Capital is one of the key factors that is needed to develop a unit of business. The lack of
capital in SMEs because of the majority of it is by nature a personal or closed business that
rely on the owner’s capital that in quantity, limited, while on the other hand loans from
banks or other financing firms are hard to obtain because of administrative and technical
requirements that could not be fulfilled. Requirements that become the biggest hindering
factor for SMEs are requirements regarding collateral because not all SMEs have sufficient
assets enough to be used as collateral.

Regarding this factor, SMEs also faced the challenge for a source of financing. Along this
time, financing methods that is familiar to them are financing mechanism that are provided
by banks (that requires collateral). Regarding access to other financing methods like
investing, a majority of them does not have access to it. From the investment side itself,
there is a couple of things that needs to be addressed things that need to be considered if
investment gates are about to be opened for SMEs, including policies, timeframes, taxes,
regulations, treatment, land rights, infrastructure, and the business climate.

Quality of Human Resources

A huge portion of small businesses are traditionally grown and/or family owned. The limit
of the quality of human resources whether it is in terms of formal education or general
knowledge and soft skills are very influential on the management of his business
management, so that said business will have difficulties to develop optimally. Other than
that, with the limited human resources, said business unit will relatively have difficulties to
adopt new technology to improve their product competitiveness. This is due to:

 Weak business networks and market penetration ability small businesses, which are
generally family business units, have very limited business networks and low
market penetration capabilities, plus the number of products produced is very
limited and has less competitive quality. In contrast to large businesses that already
have a solid network and are supported by technology that can reach international
reach and good promotion.
  Lack of transparence between the founding generation of the SMEs towards their
heir. A lot of information and network that is hidden and not disclosed towards the
successors. This creates difficulties for the next generation of successors for
developing said business

3.2.2 External Factors

 Inconducive Business climate
Efforts to empower Small and Medium Enterprises (SMEs) from year to year are
always monitored and evaluated in terms of their contribution to the creation of
gross domestic product (GDP), labor absorption, exports and the development of
their business actors as well as the existence of small and medium business
investment through the formation of fixed capital gross (investment).

All these macroeconomic indicators are always used as a reference in the

formulation of SME empowerment policies as well as an indicator of the success of
the implementation of policies that have been implemented in the previous year.
Government Policy for nurturing SMEs, though from year to year it continues to be
refined, but not yet fully felt conducive. This can be seen, among others, that there
is still unhealthy competition between small and medium entrepreneurs and large
entrepreneurs.

Another obstacle faced by SMEs is obtaining a license to run their business.

Complaints are often heard about the many procedures that must be followed at a
cost which is not cheap and takes long period of time. It is a little a lot to do with
policy the economy of the government which is considered not siding with small
parties such as SMEs however more accommodating the interests of the big
businessman.

 Limited facilities and Infrastructure

Lack of information related to the progress of science knowledge and technology,
cause the facilities and infrastructure they have also not fast growing and less
support the progress of his business as expected. Other than that, not infrequently
SMEs has difficulty in acquire a place to run business caused by the high cost the
rental price or the place is less strategic.

 Illegal Levies
The practice of levies is one of the obstacles also for SMEs because add to the
expenses of SMEs. This practice will not just happen once however can be repeated
periodically, for example every week or every month.

 Implications of Regional Autonomy

With the enactment of Law no. 22 of 1999 concerning Regional Government which
was later amended by Law No. 32 of 2004, regional authorities have autonomy to
 regulate and manage local communities. This system change will have implications
for small and medium businesses in the form of new fees imposed on SMEs. If this
condition is not immediately addressed, it will reduce the competitiveness of SMEs.
In addition, excessive zeal for regionalism, sometimes creates less attractive
conditions for entrepreneurs outside the region to develop their business in the area.
 Implications of Free Trade
As it is known, AFTA, which came into effect in 2003 and APEC in 2020, has
broad implications for small and medium enterprises to compete in free trade. In
this case, like it or not, SMEs are required to carry out the production process
productively and efficiently, and be able to produce products that are in accordance
with the frequency of the global market with quality standards such as quality issues
(ISO 9000), environmental issues (ISO 14,000), and human rights issues. Human
and labor issues. This issue is often used unfairly by developed countries as a
barrier (Non
Tariff Barrier for Trade). For that, SMEs need to prepare themselves to be able to
compete both in terms of comparative advantage and competitive advantage.

3.3 Labor
There are 2 definitions of labor:
a. Labor is generally available in the labor market and is usually ready to be used
in a process of producing goods and services. Then the company or labor
recipient asks for labor from the labor market. If the workers work, they will
receive compensation in the form of wages/salaries (Sitanggang, 2004)
b. (Djalal, 2004)

Labor Demand

The amount of absorption or demand of labor is affected by; income (whish is

affected by productivity and inflation), output (GRDP), net migration (with
economic motivation), and population. Labor demand correlates with manpower
planning is a plan that contains the optimum, efficient and productive utilization of
manpower for national, sectoral and regional economic/social growth which aims to
reduce unemployment and improve worker welfare.

a) In several economists opinion, assumed that every business each company will
try to maximize profits, then the number of workers that will be employed is the
amount that will equate the real wage rate (payments to labor) with the marginal
product of labor (MPL)
b) Based on the Cobb-Douglas production function, the demand for labor work is
shown in the following equation:
β1 /a K -1/α
Ld= W
P
Where: Ld =Labor demand
W =Wage rate
 P =Minimum wage rate
α and β are the output elasticities of capital and labor
c) Labor demand is affected by output/final demand/consumption of the sector and
can be shown in the equation which derived from the structural model as
follows:
Di =f (CR)
Xi =g (Xl, Di)
Ei =h (Xi, Wi)
Where:
Di =Sector I final demand
CR =Regional consumption
Xi =Sector added value
Ei =Sector I labor
Wi =Sector I wage rate

Labor Absorption

3.4 Investments
Investment is capital investing for one or more assets owned, usually long term with
the hope of getting profits in the future as professional compensation for delays in
consumption, the impact of inflation and the risks borne. Investment decisions can be
made by individuals, from these investments which can be in the form of capital
gains/losses and yields. Investments can be made in the form of investments in
physical aspects (real assets) and investments in financial assets (financial assets).
Physical assets are assets that have a physical form, while financial assets are
securities which are generally claims or real assets of an entity. The reason an investor
invests is to get a better life in the future and to avoid the decline in the value of their
wealth. Investment can also be interpreted as a commitment to a number of funds or
other resources carried out at this time with the aim of obtaining profits in the future.
In this case, it is the investment made by investors in the SME sector.
3.5 Exports
3.6 Economic growth
3.7 SMEs Towards economic growth
3.8 Previous research
3.9 Link between Variables

4. Research Results

4.1 Study Framework

The Influence of Small and Medium Enterprise Development on

Economic Growth in the SME Sector in Indonesia
 Fact: There are internal and
external obstacles to SMEs Objective: Increase the GDP
Economic growth of SMEs by empowering
data (dependent SMEs and the workforce
variable): SME
GDP in 3 SME
sectors in Data on SME
Panel Data
Indonesia Development
Regression Analysis
Indicators (independent
variables) seen from 3
SME sectors: 1. SME
labor 2. SME exports
3. Number of SME
units 4. SME
Evaluation of regression results: investment
Statistical criteria (Adjusted R², F
test, t test)

Conclusions and suggestions

4.2 Hypothesis
To analyze the development of SMEs towards the economic growth, it is purposed
the following hypothesis.
H0: βi=0: It is assumed that there is no significant effect from the variables of
SMEs empowerment towards economic growth
H1: βi≠ 0: It is assumed that there is significant effect from the variables of SMEs
empowerment towards economic growth

4.3 The Scope of the Research

 The scope of this research includes variables of SMEs empowerment such as
SME labor, SME exports, number of SME units, and invesments towards SME
sectors from the year 2011-2020
4.4 Sample Determination Method
The sample in this research is GDP in the SME sector in Indonesia from the year
2011-2020
The sample determining method which is used was purpose sampling. Purpose
sampling is a technique of sample determining based on the characteristics of the
members that is adapted to the objective and the purpose of the research. Sample is
taken based on the consideration of certain criteria because in the year 2019
accumulated GDP of Indonesia reached Rp 3.957,4 trillion, where SMEs
contributed Rp 2.121,3 trillion or 53, 6 percent of the total GDP of Indonesia
(Official Statistic News, 2020), as well as based on the history of SMEs, the sector
is one of the ones that is less or even unaffected by the global crisis that occurred in
the world. With this fact, it is clear that SMEs can be taken into account in
increasing market competitiveness and stabilizing the existing economic system.
(Department of Cooperatives, 2008)
GDP in the SME sector is determined to be the sample of this research because
GDP data is one of the indicators to measure economic growth of a country
(Mankiw, 2007)
Independent variables are limited by a couple of indicators of SME development
such as SME labor, SME export, and the number of SME units, and investments
towards the SME sectors where the data is taken anually from 3 SME sectors; (1)
Agriculture, Livestock, Forestry and Fisheries; (2) Mining and Quarrying, (3)
Processing Industry. The researcher uses these 3 sectors because all three of them
are in every research variable that the researcher uses and all data uses annual data,
because the Ministry of Cooperatives and SMEs (Kemenkop) was founded in 2000
so that the data released is still in the form of annual data. The use of panel data was
originally used to solve problems data availability, this can happen because the form
of time series data is too minimal or the cross-section data is limited. For this
reason, in econometric theory, the limited data condition can be overcome by using
panel data (pooled data) in order to obtain good (efficient) estimation results with an
increase in the number of observations which has implications for increasing the
degree of freedom. (Widia Santikajaya, 2006)
4.5 Data Collection Method
Data Source The data used in this study is data sourced from the Ministry of
Cooperatives and SMEs in Indonesia. The author conducts research in places that
provide secondary data needed as reference materials such as the Ministry of
Cooperatives and SMEs.
a. Library Research A strong foundation and theory is needed in problem
solving, so the author conducts library research using books, scientific articles,
journals, magazines, data from the internet, and other sources of
documentation related to research.
b. Secondary Data
 The data used in this study uses SME macro-indicator data consisting of SME
labor, SME exports, number of SME units, investment in the SME sector, and
SME GDP from 2011 to 2020 obtained from the Ministry of Cooperatives and
SMEs.
In addition, the data for this research was obtained from various written
materials, both in the form of scientific literature used to lay the theoretical
foundations, as well as from magazines, newspapers, research reports,
scientific journals, and other writings that support and relate to this research

4.6 Analysis Method: Panel Data

Panel data is a combination of cross section data and time series data. Panel data
was introduced by Howles in 1950 (I need to find the article). Time series data
usually includes one object (e.g stock prices, currency rates, or inflation rates),
but covers several periods (can be daily, monthly, quarterly, annually, and so
on). Cross data consists of several or many objects, often called respondents,
(e.g companies) with several types of data (e.g profits, advertising costs,
retained earnings, and level of investment). (Winarno, 2007)
There are many reasons why panel data is better used in regression models than
time series or cross section data, among them according to Baltagi (1995) are:
a. If panel data relates to individuals, companies, countries, regions, and others
at the same time certain, then the data is heterogeneous. Heterogeneous
panel data estimation techniques can be explicitly considered in the
calculations.
b. The combination of time series and cross section data will provide more
complete, more diverse, less correlated information between variables,
greater degrees of freedom and more efficiency.
c. Panel data studies are more satisfactory for determining dynamic changes
than repeated studies from cross sections.
d. Panel data is better at detecting and measuring effects that simply cannot be
measured by time series or cross section data, for example the effect of
regional minimum wages.
e. Panel data helps studies to analyze more complex behaviors, such as
phenomena of economies of scale and technological change.
f. Panel data can minimize the bias generated by the aggregation of
individuals or companies because there are more data units.

Among the many uses of panel data, one of the benefits that economists feel the
most is the use of panel data to overcome the problem of data shortages that
cannot be met by time series data. Completion of panel data models when
viewed from the interference error can be solved by using the fixed effect
method (FEM) or random effect method (REM). Both of these methods
produce coefficients that are very different from each other. The difference is
due to the different assumptions used between the two methods. In FEM, the
error variance from one observation to another is considered constant. While in
 REM, the error variance is assumed to be unequal. As a result of the
dissimilarity of the two assumptions, there may be differences in decisions
regarding the significance of the independent variables included in the model.

One of the econometric methods commonly used to analyze whether FEM or

REM is more appropriate to solve the panel data equation system is the
Hausman-test. In addition, based on several advantages of each of the two
models, as described it can also be seen a priority which model is more
appropriate. The advantages in question are as follows. (Gujarati, 2003If the
amount of time-series data (T) is large and the number of cross-sectional units
(N) is small, then there is a slight difference in the value of the estimated
parameter values with FEM and REM. It means that the choice based on the
appropriate calculation may be FEM is preferred.

a. If T is small and N is large, the estimates obtained from the two models are
very different. If the individual or cross section units are not random, then
FEM is appropriate. However, if the unit of analysis is random then REM is
more appropriate.
b. If the individual error components and one or more independent variables
are correlated, then the estimate with REM will be biased, while the results
of the FEM estimate are unbiased.
c. If T is small and N is large, and the assumption used is REM, then REM
estimation is more efficient than FEM.
(Arief Dariyanto and Yundy Hafizrianda, 2010)

4.7 Estimation of Panel Data Model

To estimate model parameters with panel data, several techniques are offered,
namely:
a. Ordinary Least Square
This technique is similar to making regression with cross section or time
series data as previously studied. However, for panel data, before making a
regression we must combine the cross-section data with the time-series (data
pool). Then this combined data is treated as a unified observation that is
used to estimate the model using the OLS method.

If we have the assumption that and will be the same (constant) for each time
series and cross section data, then and can be estimated using the following
model using NxT observations. Yit = + Xit+ it; i=1,2,....N; t = 1,2,....,T
The question is whether the assumption that and are constant is realistic? In
this study, the author observe the effect of SME development on economic
growth in 3 SME sectors. Is it realistic to make a model, in which the mining
and quarrying sector has the same intercept as the manufacturing sector? To
overcome this problem, there are two techniques that are usually used to
 create a model from panel data, namely the Fixed Effect Method and the
Random Effect Method.
b. Fixed Effect
the existence of variables that are not all included in the model equation
allows this intercept to change for each individual and time. This thinking is
the basis for the formation of the model. The assumption of making a model
that produces a constant for each individual (i) and time (t) is less realistic.
In Fixed Effects (Fixed Effect Model) or abbreviated (FEM) we can
overcome this, because this method allows for changes in at every i and t.
Mathematically the FEM model is stated as follows:

Yit= α + βXit+ γ2W2t+ γ3W3t+ ...+ γNWNt+ δ2Zi2+ δ3Zi3 + ... + δTZiT+εit

Where:
Yit=The dependent variable for the i-th individual and the t-time
Xit= the independent variable for the i-th individual and the t-time
Wit and Zit dummy variables which are defined as follows:
Wit=1; for individual i;i = 1,2,..., N
= 0; others.
zit=1; for period t; t=1, 2,…,T
= 0; other
From the model above, it can be seen that FEM is actually the same as
regression using Dummy Variables as independent variables, so it can be
estimated using Ordinary Least Square (OLS). With the estimation using
OLS, an unbiased and consistent estimator will be obtained.
c. Random Effect Model (Random Effect)
If in the Fixed Effects Model, differences between individuals and/or time
are reflected by intercepts, then in the Random Effects Model, these
differences are accommodated through errors. This technique also takes into
account that errors may be correlated across time series and cross sections.
In FEM, differences in individual characteristics and time accommodated in
the intercept change between individuals and between time. Meanwhile, the
Random Effect Model (REM) accommodates differences in individual
characteristics and time on the error of the model. Considering that there are
two components that contribute to the formation of errors, namely individual
and time, then random error for individual components, time component
error and combined error. Thus, the REM equation is formulated as follows:
Yit= α + βXit+εit ;εit = ui + vt + wit
Where:
ui: component cross-section error
vt: Time-series error component
wit: Combined error component
The assumptions used for the error component are:
ui~ N(0, u2);
 vt ~ N(0, u2);
wit ~ N(0, w2);
Looking at the equation above, it can be stated that REM considers the
average effect of the cross-setion and time series data to be represented in
the intercept. Meanwhile, the random effect deviation for time series data is
represented in vt and the deviation for cross-section data is expressed in ui
We already know that:
εit = ui + vt + wit.
Thus the variance of the error can be written as:
Var (εit) = δu2 + δv2 + δw
4.7.1 Selection of Estimation Methods
in Panel Data There are 2 stages in selecting panel data estimation methods.
We will first compare PLS with FEM first. Then the F-test was carried out.
If the results show that the PLS model is accepted, then the PLS model will
be analyzed. But if the FEM model is accepted, then the second stage is
carried out, which is to do another comparison with the REM model. After
that, the Hausman test was conducted to determine which model to use,
whether FEM or REM.
a. PLS vs FEM
Relative to the Fixed Effect Model, the Pooled Least Square is a
restricted model where it applies the same intercept to all individuals. In
fact, the assumption that each cross-sectional unit has the same behavior
tends to be unrealistic considering that it is possible for each unit to have
different behavior. To test it, the restricted F-test can be used, with the
following hypothesis:
H0 : PLS Model (Restricted)
H1 : Fixed Effect Model (Unrestricted)
Where the restricted F-test is formulated as follows:
R 2UR−R2R /m
F= 2
1−RUR / df
Where:
R2UR= Unrestricted R2 ; m= degrees of freedom for numerator (N-1)
R2R= Restricted R2 ; df= df for denominator (NT-N-K)
N = Total cross section data
T = Total time series data
K = Number of Variable Coefficients
If the value of F-count > F-table, then H0 is rejected, meaning that a
good panel model to use is the Fixed Effect Model, and vice versa. If H 0
is accepted, it means that the PLS model is used and analyzed. However,
if H0 is rejected, then the FEM model must be retested to choose whether
to use the FEM or REM model and then analyzed.
b. FEM vs REM
There are several technical-empirical considerations that can be used as a
guide to choose between fixed effects or random effects (Training of
Trainers for Economics lecturer FEUI, 2006), namely:
1. If T (number of time series units) is large while N (number of cross-
section units) is small, then the results of FEM and REM are not much
different. In this case the choice will generally be based on convenience
of calculation, i.e. FEM.
2. If N is large and T is small, then the estimation results of the two
approaches can be significantly different. So, if we believe that the
cross-sectional unit that we choose in the study is taken random
(random) then REM should be used. On the other hand, if we believe
that the cross-sectional unit, we chose in the study was not taken at
random, then we use FEM.
3. If the cross-section error component (εi) correlates with the
independent variable X, then the parameters obtained by REM will be
biased while the parameters obtained by FEM are unbiased.
4. If N is large and T is small, then if the assumptions in the foundation
of REM can be met, then REM is more efficient than FEM. The decision
to use FEM and REM can also be determined using the specifications
developed by Hausmann. This specification will provide an assessment
using Chi-square statistics so that the decision to select the model can be
determined statistically. This test is carried out with the following
hypothesis:
H0: Random Effect Model
H1: Fixed Effect Model
After this test, the results of the Hausman test are compared with Chi-
square statistics with df = k, where k is the number of estimated variable
coefficients. If the results of the Haussman test are significant, then H0 is
rejected, which means that FEM is used. Classical assumption testing
was not carried out because this study uses panel data types that allow
the identification of certain parameters without the need to make strict
assumptions or do not require the fulfillment of all classical linear
regression assumptions on the Ordinary Least Square. (Verbeek, 2000,
as cited in Yuanita Handoko, 2010)
5. Empirical Model
To determine the effect of the dependent variable on the independent
variable, the panel data regression model is used with the following
equation:
Yt = β0+ β1 TKit + β2 EXit + β3 JUit + β4 IUit + εit`
Note:
Y = GDP
TK= SME workforce to GDP
EX= SME exports to GDP
JU= number of SME units to GDP
IU= SME investment to GDP
i = 1,2,....N (for individuals)
t = 1,2,.. ..,T (for time)
Calculation and data processing in this study using tools through
statistical and econometric software in the appropriate computer, namely
E-Views 7.
E. Operational Research Variables

Dependent Y = GDP Economic growth

describes the
economic
development of a
country in a given
year compared to the
previous year in the
form of a percentage
change in national
income. GDP growth
data is obtained from
the value of
Indonesia's GDP in
2015-2019

Independent TK= SME workforce Manpower is the

to GDP entire population of
working age who has
the potential to
produce goods and
services. This
indicator is used to
find out how many
workers or potential
working age
population can
produce goods and
services. In this case,
the workforce is
absorbed by the SME
sector.
 Independent EX= SME exports to SME exports are the
GDP total products of
SMEs that are traded
by removing goods
from within to outside
the customs area of
one country to
another country by
complying with
applicable
regulations.

Independent JU= number of SME The number of SME

units to GDP units is the total
number of business
units that are included
in the criteria for
small and medium
enterprises

Independent IU= SME investment SME investment is

to GDP investment in the
SME sector for one or
more assets owned,
usually long term
with the hope of
getting profits in the
future

The dependent variable in this study is economic growth (Y) and the
independent variable (independent variable) is the independent variable
of SME workforce (X1), total exports of SMEs (X2), number of SME
units (X3), and SME investment (X4).

1. Statistics Test
Furthermore, to determine the accuracy of the data, it is necessary to do
several tests (Gujarati, 2003):

a. T-Statistics Test
 The t-statistical test looks at the relationship or influence between the
independent variables individually on the dependent variable.
Hypothesis used:
1) If the Hypothesis is positive
Ho: βi = 0
Ha: βi ≠ 0
2) One-sided testing
If t table ≥ t count, Ho is accepted, which means that the independent
variables individually have no effect on the dependent variable. If t
table < t count, Ho is rejected, it means that the independent variable
individually affects the dependent variable.
b. F-Statistics Test
This test will show the relationship or influence between the
independent variables together on the dependent variable, namely in
the following way:
Ho: βi = 0, then the independent variables together do not affect the
independent variables.
Ha: βi ≠ 0, then the independent variables jointly affect the
dependent variable.
The test results are: Ho is accepted (not significant) if F count < F
table (df = n – k) Ho is rejected (significant) if F count > F table (df
= n – k) Where:
K: Number of variables
N: Total observation
c. R2 Adjusted
The coefficient of determination test is intended to see how much the
independent variable's ability to explain the dependent variable can
be seen through the adjusted R square because there are more than
two variables in this study. (Winarno, 2007)
5. Analysis and Discussion
5.1 Brief Overview of Research Objects
5.1.1 A Brief History of Small and Medium Enterprises (SMEs)
Empowerment of SMEs in Indonesia is a form of implementation of the
1945 Constitution, particularly Article 33. This article contains a basic principle,
namely the juridical recognition of economic democracy. Even in the amendments
to the 1945 Constitution, two paragraphs have been added to make it five
paragraphs. In paragraph 4, it is emphasized about economic democracy, namely
"the national economy is organized based on economic democracy with the
principles of togetherness, efficiency, justice, sustainability, environmental insight,
independence, and by maintaining a balance of progress and national economic
unity. History shows that ideas and thoughts to build a national economy on the
basis of democracy and alignment with small and medium-sized economic groups
(SMEs) have long been on the agenda in national economic development. In the
introduction to Clifford Geertz's book entitled "Vendors and Kings: Social Change
 and Economic Modernization in Two Cities of Indonesia", states that siding with
groups Indigenous entrepreneurs or economically disadvantaged groups (GEL),
have existed for a long time in various governments (Kuntjoro-jakti,1989). Many
parties view that the main weakness in national economic development is because it
deviates from the basic principles of development, namely from community for
community. The fundamentals of the national economy are very weak and seem
fragile because they ignore equity and side too much with big economic groups
such as conglomerates. Nevertheless, the Indonesian people should be grateful that
in a multi-crisis condition, the national economy is still able to survive and not go
bankrupt completely because it was saved by SMEs.
5.1.2 Development of Small and Medium Enterprises
In economic development in Indonesia, SMEs are always described as a sector that
has an important role, because most of the population has low education and lives in
small business activities both in the traditional and modern sectors. The role of
small businesses is a priority in every stage of development planning which is
managed by two departments, namely the Ministry of Industry and Trade, as well as
the Ministry of Industry and Trade. Department of Cooperatives and SMEs.
In the era of globalization and free trade, SMEs have a new and more important
role, namely as one of the main factors driving the development and growth of non-
oil and gas exports and as a supporting industry that makes components and spare
parts for large enterprises through production linkages. for example, in the form of
subcontracting. Not only large enterprises, but SMEs can also play an important role
in export growth and can compete in the domestic market against imported goods as
well as in the global market. In Indonesia, SMEs are expected to become one of the
important players in the creation of new markets for Indonesia, not only
domestically but more importantly abroad, becoming one of the important sources
for the trade and services balance surplus or balance of payments.
5.2 Analysis and Discussion
5.2.1`Descriptive Analysis
Descriptive Analysis of Small and Medium Enterprises GDP by Economic
Sector Year 2011-2020 at Constant Prices (Billion Rupiah) in Indonesia
Gross Domestic Product (GDP) is the total national income and expenditure on
the output of goods and services. Gross domestic product is often considered the
best measure of an economy's performance. The purpose of GDP is to summarize
economic activity in terms of a certain amount of money over a certain period of
time. (Mankiw, 2007).
There are two ways to view GDP. One way is to look at GDP as the total income
of everyone in the economy. Another way of looking at GDP is as the total
expenditure on the economy's output of goods and services. GDP is presented in
two versions of the valuation, namely “at current prices”, which uses current year
prices and “at constant prices”, which uses price data for a particular year (base
year).