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hy is entrepreneurial activity so low in Indonesia given the growth in per capita income, relatively high unemployment rates and its population’s young median age?

Indonesia has a vibrant small business sector with 42 million SME’s that contribute up to 56 percent of GDP and employ almost 32 percent or 78 million of the national population. That is a lot of 1 – 2 person family businesses!

Despite having this layer of stable business activity and employment, Indonesia has the lowest rate of new business growth in Asia. The prevailing reason given for this lack of growth is “problems obtaining finance” but surely the lack of start-up financing itself needs to be explained.

Indonesia only lacks entrepreneurs if we define an entrepreneur as someone who grows a business rather than simply starts one. Why are micro-enterprises so prevalent and entrepreneurial enterprises so few?

In a recent column in the Washington Post’s online news site Slate.com, the business and economics correspondent Matthew Yglesias juxtaposes two sets of data for OECD countries.

One set of data shows that the percentage of employees working for businesses with nine or fewer employees is 11 percent for the US, and around 20 percent for Germany, Denmark, New Zealand, and the UK. Greece, at 58 percent and Italy, Portugal and Spain at between 47 percent and 38 percent have the most people employed by small businesses. Interestingly the US, the country most renowned for entrepreneurial activity, is the economy most dominated by large employers.

In the other set of data, from Transparency International’s Corruption Perception Index, he shows this same split. The OECD countries that are perceived as more corrupt also have the largest number of small businesses, those that are perceived as less corrupt have economies dominated by large enterprises.

This relationship between business size and corruption is even more apparent for Indonesia where both corruption and small business activity as a percentage of the economy are greater.

Statistics draw a picture, they do not tell a story. As academics and business people who have been active entrepreneurs in Indonesia as well as other countries and teach entrepreneurship, we believe the story behind the statistics is about the lack of trust.

Talking to Indonesian undergraduate students in entrepreneurship programs, there is a common refrain: it is very difficult to start a business because of the red-tape and the money needed for bribes.

So, we then asked them to build the cost of bribes into their business plans if that is what it takes to realize their dreams.

Corruption is a normal part of life — we know this. Then, when it came time to look at their financial plans, none of the students were seeking outside funding or resources, and nobody knew the terms “bootstrapping” and “angel investor”. Instead, the reliance was solely on family with the unequivocal view that family members are the only people you can trust.

Doing business is about making and keeping promises: that employees will be paid at the end of the month and that employees will contribute their skills and effort honestly, and that investors will get a return on their money and will not use their powerful position to appropriate entrepreneurs’ ideas and efforts. In low trust societies it is hard to do business with people you don’t know.

This limits the market for employment and new venture funding to family and relatives. Trust is the lubricant that allows small businesses to grow. Rather than financial capital, human or physical resources, it is this social capital that is most lacking in Indonesia.

So what can Indonesians do to increase entrepreneurship, accelerate the growth of its many small businesses, and create more employment opportunities for its growing population?

Relying on the legal system to enforce investment and employment contracts is not an option. The courts are as much a reflection and product of Indonesia’s low trust society as they are an authority in it. We will all grow old waiting for a “cultural revolution”.

The solution is to establish what we call “communities of trust”.

Indonesia can take a cue from the world’s most entrepreneurial society. The church played a big role in establishing trusting business relationships in 19th century America as the population spread west faster than legal institutions. A newly arrived immigrant, a stranger, joined a church and gained access to information, capital and suppliers.

Chicago was a boomtown between 1860 and 1900, doubling in size every 10 years on average. And business clubs flourished to mitigate the risk of doing business with strangers. The Lions and Rotary clubs both grew out of business clubs in high growth Chicago at the beginning of the 20th century.

This affinity for business networking organizations continues today. Business Clubs America started in 2000 and began franchising in 2004. Its founding principle is: “people like doing business with people they know, like, and trust.” The Women’s Business Clubs in the UK is a similar organization dedicated to supporting woman entrepreneurs and business owners.

What can Indonesians do? Low trust societies are low entrepreneurship societies. So existing civic organizations need new business oriented programs to educate, motivate, inform, inspire and connect diverse small and medium business owners as well as wealthier citizens. And new business oriented civic organizations need to be (entrepreneurially) founded.

Our experience and research indicates that building business communities with diverse interests and resources is essential to the creation of the secret sauce, that vital business and entrepreneurship lubricant: trust.