Firm and Group Dynamics in the Small and Medium Enterprise Sector in Indonesia

This paper discusses the role of clusters and subcontracting as factors in the evolution of small and medium firms in Indonesia during the last quarter century. It is argued that a number of such firms have become successful exporters of rattan furniture, wood furniture and garments on the strength of subcontracting relationships with foreign investors and buyers as well as agglomeration economies achieved by clustering in selected locations. Examples are provided to show that clustered enterprises are more likely to be in the exports business and to adopt product and process innovations as compared to more dispersed firms. Public policy support for fostering subcontracting links and cluster formation is also discussed.     

SME Export Performance in Indonesia After the Crisis

Firms in export-oriented sectors with more exporters and more foreign investment, or firms with more access/use of credit, tend to export a higher share of their output, whether they are small or large. The latter points out that the benefits of size-neutral policies that improve the overall business and foreign investment climate and secure access to formal credit for all enterprises produce benefits for the entire economy. Small firms with higher use of machinery and higher use of domestic inputs displayed a higher likelihood to increase the share of their output exported. SMEs show rising productivity with access and use of appropriate production inputs. Decades of protective size-specific policies, such as the reservation scheme for SMEs still in place in Indonesia’s manufacturing may have distorted, more than supported, adoption of appropriate technologies among SMEs. These policies may need to be revisited and refocused on more size-neutral policies such as improved access to collateral or reduced cost of business registration and licensing.     

SMALL AND MEDIUM ENTERPRISE DYNAMICS IN INDONESIA

This paper discusses the development of small and medium enterprises (SMEs) in Indonesia before and during the crisis. It argues that SME productivity has risen substantially, at rates not far from those of larger firms. Case studies indicate that various mechanisms are at work, such as technology diffusion through foreign buyers and subcontracting. The prevalence of SME clusters suggests that they benefit small and medium enterprise development. SMEs are found to have been weathering the crisis better than larger companies, though many have been hit hard too. Being less reliant on formal markets and formal credit, SMEs are able to respond more quickly and flexibly than their larger counterparts to sudden shocks. The paper argues that, rather than providing direct assistance to smaller firms, government should concentrate on creating a business environment conducive to small and medium business growth, and promoting provision of business development services by the private sector.     

PRODUCTIVITY AND FIRM DYNAMICS: CREATIVE DESTRUCTION IN INDONESIAN MANUFACTURING, 1994–2000

This paper examines the entry and exit, and the labour productivity, of Indonesian manufacturing firms with 20 workers or more, using a firm-level panel dataset constructed for the years 1994–2000. Overall change in manufacturing labour productivity reached 27.2%—an average growth of 3.5% per annum—between 1994 and 2000, a period that includes the 1997–98 Asian financial crisis, which hit Indonesia hard. Vibrant firm dynamics characterised this period, in which about 10% of manufacturing enterprises were renewed in any one year. By 2000, one-third of all enterprises in existence in 1994 had closed, but the number of enterprises that closed was lower than the number that entered and survived up to the year 2000. The replacement of exiting firms with newly entering firms contributed significantly to increases in overall labour productivity. Regulatory reform in support of this process should lead to gains in productive employment for Indonesian workers.     

Technical Efficiency Indicators in a Philippine Manufacturing Sector

This paper uses the stochastic production frontier approach to investigate the relationship between size and technical efficiency in the Philippines textile industry. Results show that technical efficiency increases with size, thus weakening the case for SME targeted policies. Moreover, both exports and government interventions are positively associated with efficiency, although the link between government support and technical efficiency is somewhat weaker.