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Jakarta Post

Analysis: Scaling up micro, small and medium businesses

  • Bobby Hermanus

    The Jakarta Post

Jakarta   /   Wed, February 24, 2016   /  07:53 am

As we proceed into 2016, we have witnessed waves of layoffs of thousands of workers. At least 12,680 workers were laid off during January and February, most of them in the electronics, automotive, and textiles and garments industries.

In the midst of a decelerating economy, rising unemployment needs to be addressed seriously. In attempts to anticipate the current labor force situation, the government has taken several steps to encourage investment, both domestic and foreign direct investment, through the launch of a series of economic policy packages. It is hoped the subsequent investments will open up a lot of job opportunities.

The question is how to encourage job creation in a more systematic, effective and sustainable way. To answer this question, we need to examine first the distribution of labor in business sectors in Indonesia. Based on data from the Central Statistics Agency (BPS), the share of employment by micro, small and medium enterprises (MSMEs) continues to rise, from around 73.4 percent in the period of crisis in 1998 to reach 95.7 percent in 2012.

This indicates that MSMEs are crucial for job creation and absorb the labor force. Development of MSMEs is closely related to the dynamics of the entrepreneurial ecosystem itself. Based on International Finance Corporation (IFC) MSME Country Indicator data in 2010, Indonesia was among five countries in the world that had the highest density of MSMEs (number of MSMEs per 1,000 people), namely Brunei Darussalam (122), Indonesia (100), Paraguay (95), the Czech Republic (85) and Ecuador (84).

The average world MSME density is 31. Some neighboring countries have a much lower ratio, for example Malaysia (21.4), the Philippines (9), Singapore (34.9), Thailand (34), Vietnam (34) and China (7.7). Overall, economies with higher income per capita tend to have more formal MSMEs per 1,000 people.

Micro-sized businesses (with asset values and maximum turnovers of Rp 50 million [US$3,728] and Rp 300 million) dominate the number of MSMEs in Indonesia amounting to 98.9 percent. Small businesses (with asset values between Rp 50 million and 500 million and turnovers between Rp 300 million and Rp 2.5 billion) and medium-sized businesses (with asset values between Rp 500 million and Rp 2.5 billion and turnovers between Rp 2.5 billion and Rp 50 billion) only account for 1 percent and 0.1 percent, respectively.

In Malaysia, the Philippines, and Japan, for example, micro-sized businesses still dominate, but their proportion of total MSMEs is smaller than Indonesia. The proportion of micro-sized business in total MSMEs in Malaysia, the Philippines and Japan stands at 79.3 percent, 92.3 percent and 61.1 percent, respectively.

The more micro-sized business that can be elevated into small and medium-sized business, the better for the economy, as this increases output and employment. Indonesia has a larger micro-business proportion of total MSMEs and overall MSME contribution to gross domestic product (GDP) than Malaysia and Japan.

According to the BPS, Indonesia'€™s MSME contribution to GDP reached 57 percent in 2012, while in Malaysia and Japan it was only about 33.1 percent and 50 percent, respectively, in 2014. This is partially affected by the large number of Indonesia'€™s MSMEs in the national economy as indicated by MSME density. Another factor is associated with industrial structure. For example, compared with Indonesia, Japan is perceived as an economy of large manufacturers, thus the cumulative output of these larger manufacturers has a significant contribution to GDP.

In order to enhance the MSME'€™s contribution to the national economy, fostering a national entrepreneurial ecosystem is absolutely necessary. The scaling up businesses from micro-sized to small-sized and small-sized to medium-sized must be promoted, along with the ongoing efforts to foster new entrepreneurs (startups) in the country.

To achieve this, at least three things can be done together by the government and the private sector, which involve government policies and programs, research-and-development (R&D) transfers and innovation and business financing.

In regard to government policies and programs, it is recommended to focus on enhancing the capacity of start-ups and the scaling up of businesses by enabling business service providers, including teachers, lecturers, business development services (BDS), integrated public service centers (PLUT) and education institutions to provide better entrepreneurship education.

In addition to this, backward and forward linkage between businesses must be enhanced in order to strengthen the production capacity of MSMEs and upgrade their technical and business capabilities so as they will ready to scale up their businesses.

This will require close cooperation among government, big companies and MSMEs. When it relates to R&D the focus should be on technology transfers, which require the assistance of universities and research institutions such as the Indonesian Institute of Science (LIPI) and the Agency for the Assessment and Application of Technology (BPPT).

Some executable initiatives could be taken to support R&D transfers. These include the commercialization of research, facilitating collaborative action of commercialized research between R&D providers (universities and research institutes) and the private sector, and improving protection for existing intellectual property (IP) rights by regulating tolerance levels for new variants or ideas that have similarities to existing products.

Financing is considered one of the two biggest obstacles for businesses in developing countries, according to the IFC MSME survey in 2010. Access to finance affects small businesses much more than it does medium and large businesses.

There are some problems in entrepreneurial financing, especially for start-ups and SMEs, in terms of lack of awareness of suitable financial products and the anxiety experienced during the application process. Another drawback is also related to loan collateral, the requirements for which are difficult to fulfill by micro or small entrepreneurs. To support the emergence of startups, the government can provide seed funding from state owned-enterprises'€™ corporate social responsibility funds combined with an entrepreneurship mentoring program for students. Then it can continue by providing tax allowances for financial institutions that develop financing schemes for MSMEs in leading or priority sectors or commodities and tax exemptions for startups and MSMEs in leading sectors or commodities as well.

Redefining the role of SOEs'€™ venture capital and the venture capital sector to increase equity participation in start-ups or MSMEs would be another strategic choice that should be made by the government given the disinclination of the banking sector to finance start-ups because of the risks.

Scaling up micro-sized businesses and supporting the emergence of new entrepreneurs in the country will require collaborative action involving all stakeholders. As the government is the main stakeholder that orchestrates the overall ecosystem, any programs and initiatives will meet success only through effective coordination among government bodies before other relevant stakeholders become involved.

The writer is an industry analyst at Bank Mandiri

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