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Big firms too dominant in Indonesia, World Bank says
A shortage of mid-sized companies has negative repercussions for employment and competition, according to the global financial institution.
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Yaurohmi Fauzanah, an employee of Santishop Manufacture Indonesia UKM, makes a hazmat suit on March 28, 2021, in Bantul. (JP/ Bambang Muryanto)
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ndonesia has a bigger revenue gap between small and big firms than other emerging markets, such as India, Mexico, the Philippines and Turkey, according to a World Bank report, with repercussions for the domestic economy.
Furthermore, those large companies failed to translate their revenue into as much employment as in other countries and were less efficient in allocating capital resources, the global financial institution noted, citing the manufacturing sector in Indonesia as a case in point, where the top 5 percent of firms accounted for 90 percent of revenue.
“[The top 5 percent of firms] control only 20 percent [of revenue] in Turkey, 35 percent in Mexico, 67 percent in India and 75 percent in the Philippines. These figures are much lower than the staggering 90 percent in Indonesia. It indicates an imbalance that could hinder competition and innovation in Indonesia,” Alexandre Hugo Laure, a senior private sector specialist at the World Bank, said on Monday.
Speaking at an event in Jakarta to publish the World Bank’s latest report on Indonesia, he said that was why small manufacturers in the country, despite comprising 56 percent of companies, only produced some 3 percent of total output and accounted for 11 percent of total full-time employment. These firms were also mostly disconnected from international markets, with only 2 percent of small firms using imported inputs or supplies.
The situation was similar in other sectors, the financial institution noted.
The World Bank acknowledged that a concentration of business activity among large firms was not always a bad thing and had some benefits as well. Their size may allow them to lower production costs, invest in quality improvements and expand globally by exporting products, which could result in positive spillover effects for the country’s overall economy.
However, the World Bank pointed out that sales growth at large Indonesian firms did not translate into as much employment as in other emerging economies and that those large firms were less efficient at allocating capital resources.
