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GOVERNMENT POLICY TO ENHANCE MSMEs CAPACITY IN COPING WITH FIERCER FOREIGN COMPETITION RESULTING FROM TRADE LIBERALISATION: THE STORY FROM INDONESIA
Tulus T.H. Tambunan
Center for Industry, SMEs and Business Competition Studies, Trisakti University, Jakarta,
Indonesia
THE MAIN ISSUES: • CAN INDONESIAN MSMEs SURVIVE UNDER
GLOBALIZATION/TRADE LIBERALIZATION?• WHAT ARE THEIR MAIN CONSTRAINTS TO
COPE WITH FIERCER FOREIGN COMPETITION IN BOTH DOMESTIC AND FOREIGN MARKETS?
• WHAT THE INDONESIAN GOVERNMENT HAS BEEN DOING IN SUPPORTING THEM?
Part 1: THE CURENT STATE OF MSMEs’ DEVELOPMENT
The main characteristics of MSMEs:• MSMEs are the majority in number of enterprises and
employment creation• The majority of MSMEs are MIEs• They are concentrated in agriculture, though it varies
by subcategory• They are yet so strong in manufacturing industry• In the manufacturing industry, they are mainly in low
technology based industries and subcontracting between MSMEs and LEs are still weak
Total enterprises by size category, Indonesia,
2000 2003 2005 2007 2009 MIEs & SEs
39,705 43,372.9 47,006.9 47,720.3 52,723.5
MEs 78.8 87.4 95.9 120.3 41.1 LEs 5.7 6.5 6.8 4.5 4.7 Total 39,789.7 43,466.8 47,109.6 49,845.0 52,769.3
Total Employment by Size Category and Sector in Indonesia, 2008 (workers) Sector MIEs SEs MEs LEs Total Agriculture Mining Manufacture Elect, gas & water Construction Trade, hotel & rest. Transport & comm. Finance, rent & service Services Total
41,749,303 591,120
7,853,435 51,583
576,783 22,168,835
3,496,493 2,063,747 5,096,412
83,647,711
66,780 28,762
1,145,066 19,917
137,555 1,672,351
145,336 313,921 462,683
3,992,371
643,981 21,581
1,464,915 31,036 51,757
472,876 111,854 279,877 178,311
3,256,188
229,571 78,847
1,898,674 54,233 31,016
179,895 98,191
156,064 49,723
2,776,214
42,689,635 720,310
12,362,090 156,769 797,111
24,493,957 3,851,874 2,813,609 5,787,129
93,672,484
GDP by Size of Enterprise, Indonesia (Rp trillion) Sector Size of
enterprises GDP share (%) at
constant prices (2000)
2006 2007 2008 Agriculture MSME
LE 14.00 0.60
14.26 0.57
13.65 0.58
Mining
MSME LE
1.02 7.01
1.15 7.20
1.09 7.54
Manufacture MSME LE
6.99 19.85
7.81 19.29
8.62 19.30
Elect, gas & water supply
MSME LE
0.06 0.60
0.06 0.63
0.06 0.69
Construction
MSME LE
4.04 2.04
4.39 2.06
2.48 4.07
Trade, hotel & restaurant
MSME LE
17.00 0.65
16.60 0.66
17.44 0.74
Transport & communication.
MSME LE
3.32 3.45
3.29 3.89
3.43 4.89
Finance, rent & service
MSME LE
7.20 3.32
5.96 3.25
6.33 3.62
Other services MSME 4.86 4.92 5.23
Part II: MSMEs’ EXPORT PERFORMANCE AND COMPETITIVENESS
The Main Characteristics:
• Though export of Indonesian MSMEs increases annually, rhe majority of MSMEs are domestic market oriented.
• The majority of exporting MSMEs only export some proportion of their total output.
• Exports of Indonesian MSMEs are traditionally in low technology-based products.
• The majority of exporting MSMEs do export indirectly through trading companies or subcontracting with export-oriented LEs.
• No evidence that some Indonesian MSMEs are engaged in regional/global value chains/production networks.
• Low level of competitiveness (e.g. productivity, efficiency, and quality of products)
Share of MSMEs’ contributions in total exports, 1990-2006
Economies Average share (percentage)
China 60 Taipei, China
56
India 40 Thailand 40 Pakistan 25 Vietnam 20
Indonesia 17 Singapore 16 Malaysia 15
Export of Indonesian MSMEs, 2006-2008 (in US$ million)
Year
Non-oil and gas exports MIEs SEs MEs LEs Total
2006 1,347.7 2,936.5 7,910.8 65,623.2 77,818.3 2007 1,502.5 3,466.2 9,332.6 75,000.0 89,201.2 2008 2,024.7 4,414.8 11,936.4 91,509.1 109,885.0 2009 1,597.3 4,093.3 12,337.7 87,870.6 105,898.9
Top Ten manufactured exports of Indonesian MSMEs, 2009-2010
No
Product
2009 January-June 2010
Volume Value Volume Value 1 Manufactured palm / palm oil 20,737.9 12,924.9 8,068.0 6,124.2 2 Textile 1,757.4 9,245.1 963.0 5,295.7 3 Iron steel, machinery and
automotive 2,829.3 8,701.1 1,504.7 5,242.4
4 Rubber-based products 2,506.8 5,020.2 1,404.2 4,415.3 5 Electronics 339.8 7,899.6 179.6 4,320.9 6 Manufactured copper, tin, etc. 508.1 5,241.5 262.7 3,002.8 7 Pulp and paper 6,530.9 4,272.4 3,318.2 2,718.4 8 Wood products 3,184.2 3,441 2,250.0 2,262.7 9 Basic metal 4,003.7 3,168.3 2,305.7 2,245.7
10 Food and beverages 1,612.8 2,569.3 789.8 1,463.0
Development of Indonesian MSMEs’ exports for TPT, 2000-2006
Year Volume (billion
kg)
Value (billion
US$) 2000 1.8 8.4 2001 1.7 7.7 2002 1.8 6.9 2003 1.6 7.1 2004 1.6 7.7 2005 1.8 8.6 2006 1.9 9.4
MSME Competitiveness in Selected APEC Economies
0 1 2 3 4 5 6 7 8 9
Hongkong-China
USA
Chinese Taipei
Australia
Canada
Singapore
Malaysia
Japan
Thailand
Philippines
Korea
China
Indonesia
Labor Productivity of Enterprises by Size in Indonesia (Rp/worker)
Average Income per Worker in MIEs, SEs and MEs in Indonesia, 2006 (000 rupiah)
Part III: MSMEs’ MAIN CONSTRAINTS
Number of MIEs and SEs in the manufacturing industry by main obstacles, 2003
SEs MIEs Total Have no serious obstacles 46,485 627,650 674,135 Have serious obstacles: 192,097 1,862,468 2,054,565 Lack or high prices of raw materials 20,362 400,915 421,277 Marketing difficulties 77,175 552,231 629,406 Lack of capital 71,001 643,628 714,629 Transportation / distribution obstacles 5,027 49,918 54,945 High price or short supply of energy 4,605 50,815 55,420 High labor cost 2,335 14,315 16,650 Other key constraints 11,592 150,646 162,238 Total 238,582 2,490,118 2,728,700
Part IV: MAIN CHANNELS THAT TRADE LIBERALIZATION AFFECTS INDONESIAN MSMEs
Four main ways in which international trade liberalization affects SMEs
(a) (b)
(c) (e)
(d)
(f)
Domestic output market
Import Export market Domestic MSMEs
Domestic input market
Part V: GOVERNMENT POLICYV.1 MSMEs Policy
The current official guidance for the MSME policy in Indonesia is stated in the so-called Strategic Plan (Renstra) 2010-2014 from the State Ministry for Cooperative and SME. Regarding MSMEs, the Plan has a number of strategic targets, which are the followings:
1) To increase the role of MSMEs in the national economy by increasing:
(a)productivity 5% on average per year; (b)contribution to GDP 6% per year, (c)employment creation 5% per year, (d)investment 10% per year, and (e)export 15% per year;
2)To increase the capacity of MSMEs by (a)increasing the number of MSMEs entrepreneurs in attending
training programs organized by the Ministry (or other stakeholders),
(b)organizing many entrepreneurship trainings for potential entrepreneurs/new graduated men and women,
(c) increasing the number of place for skill practice in education institutes in rural areas,
(d)increasing the number of training programs for MSMEs, (e)providing more models of international best practices, (f) increasing the number of MSMEs using information and
communication and other appropriate technologies, and (g)promoting/supporting business partnerships between MSMEs
and LEs as well as among MSMEs.
3) To increase the competitivenss of MSMEs by (a) expanding the domestic use of products produced by local MSMEs, (b) maintaining at least 65% domestic market share of local MSMEs in retail
businesses, and ((c) increasing export of MSMEs up to the level of minimum 20% share in Indonesia’s
total non-oil and gas exports per year.
4) To expand marketing of local MSMEs’ products by (a) expanding existing trading houses and developing new ones in all provinces in the
country, (b) improving quality of facilities supporting production and marketing of MSMEs, (c) increasing promotion activities of MSMEs’ products, (d) increasing the number and quality of modern retail shops of MSMEs, and (e) strengthening marketing of MSMEs’ products in clusters in all locations, including
in backward/isolated and bordering areas, in the country.
5) To provide MSMEs with full access to financing and financial guaranteeing by
(a)providing credit schemes which are relatively cheap, accessible for all MSMEs and quick in process,
(b)(b) increasing the number and quality of banks and other non-bank financial institutions.
6) To establish an enabling or conducive business environment for MSMEs by
(a)simplifying all regulations and bureaucratic procedures, (b)making and implementing policies, regulations and
constitutions which are pro-capacity building of MSMEs, and(c)harmonizing all MSMEs development programs from all
different government departments and agencies.
7) to increase new MSME entrepreneurs up to 5,000 men in the coming few years through
(a) entrepreneurship education/training in universities and other education institutions, and
(b) expanding venture capital providers.
V.2 Key Executing Government Departments and Non-Department Agencies
State Ministry for Cooperative and SME• Ministry of Industry• Ministry of Trade• Ministry of Research and Technology• National Development Planning Agency• Central Bank• Ministry of Manpower
Part VI CONCLUSION• virtually no evidence to suggest that MSMEs in general in Indonesia
have been negatively affected by trade liberalization (e.g.no evidence that the collapse of many local MSMEs has happened significantly because of imports).
• Government has been doing many efforts to support capacity building in MSMEs, but not so much emphasis has been given to development of technology or innovation; credit schemes component of MSMEs development policies has been given too much attention.
• It is likely that as long as Indonesian MSMEs, especially MIEs and SEs still have their own market segments, i.e. supplying cheap consumer goods to low to middle income groups, and poverty in Indonesia is still present, MSMEs will keep exist or even grow despite the increasing competition pressures from imports.