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.