BACHELOR THESIS

The Development of Small and Medium Enterprise

The Case Study of Indonesia

Submitted: -

Aditya Nugraha

Student Number: 5903874

International Economics and Finance

Faculty of Economics and Business

Supervisor: Stephen Kastoryano

INTRODUCTION
In recent years, Indonesia has been considered as one of Southeast Asia's newly
industrializing economies. Indonesia is considered part of the developing world. Even though
Indonesia's economy grew with significant speed from 1980s to 1990s, it suffered a number of
difficulties after the Asian financial crisis in 1997, which led to significant reformation. In
recent years, Indonesias economic condition has been recovering but it is difficult to say that the
problems caused by the crisis are solved completely.
One of Indonesias industries which are not much affected by the domino effect of Asian
financial crisis in 1997 is Usaha Kecil Menengah (UKM) or Small Medium Enterprise (SME).
SMEs seem to have handled the crisis better than larger enterprises, though many have
nonetheless been hit hard. SMEs are able to respond more quickly and have more flexibility than
their larger counterparts do to sudden shocks. This was because SMEs are less depending on
formal credit and formal market (Tambunan: 2005).
SMEs refer to companies whose headcount or turnover falls below certain limits. Even
though government and other multinational organizations are targeting this group for special
financial business support, there is no clear explanation for a SME either on a national scale or
international scale. For example, in the United Kingdom (UK) the Companies Act 2006
describes SMEs for the function of accounting necessities. The size of the company is seen
either from the turnover, asset and the employee number. Likewise, in Indonesia the definition
of SME is also linked to the assets, turnover, number of employees and ownership.
In Indonesia, SMEs make up more than 90 % of the total number of enterprises. The
progress of SMEs development in Indonesia has been the result of direct promotion, promotion
policies and other special programs. Most of the promotional policies for SMEs were targeted to
assist the SMEs in handling the major constraints to their growth, such as low levels of
technology and managerial skills, poor marketing, and difficulty in accessing the financial
institutions aimed at providing credit to SMEs, including subsidized credit programs, (non-
financial) business development services programs, particularly industrial extension services and
training (Asian Development Bank: 2002).
Like in many countries, SMEs in Indonesia have gained their competitive advantage
through the use of clustering development. Clustering contains various SMEs operating in the
similar or related industry strongly associated with the production of goods and services by each
company within a cluster. Government usually acts as facilitator to support clustering through
initiate help and promote SME to reach the concept of industry cluster.
This thesis reviews the development of SMEs in Indonesia. The discussion focuses on the
research questions in relation to SMEs role in supporting the economic growth in Indonesia.
The issues are, how Indonesias SMEs have been developed; and to what extent the clustering
has been applied in Indonesia in supporting the SMEs growth.
SME AND ECONOMIC GROWTH

A. Roles of SMEs
Many studies have been conducted that have investigated the SMEs role in the countrys
economic development. These studies have included the correlation between the size of the
SME sector and economic growth, pattern growth and policies. As shown by Wignarajas
(2003) study, SMEs are the largest group of industrial units in most developing countries and
make a significant contribution to manufacturing output and employment. SMEs also have the
potential to become a powerful engine of manufacturing export growth and upgrading in the
developing world. According to Wignaraja (2003), SME associations, governments and donors
need to translate the export potential of SMEs into a development reality (Wignaraja, Ganeshan:
2003).
The importance of governments role is also indicated in the Smallbone and Welters
(2001) study for the mature market economies, such as in the European countries. This study
showed that the Government plays important roles in maintaining the sustainability of SME
development however its role is limited to creating conditions that are conducive for the growth.
This is supported data from the survey in Belarus, Moldova and Ukraine. As Smallbone and
Welter (2001) said, that the creativity of individual and flexibility to adapt to the environments
have been dominated factors for the SMEs growth (Smallbone et.al.: (2001).
In countries where market improvement is at a higher stage, for example Poland, the role
of government would mostly be in bringing the development environment - such as legislation
and regulations - in line with European Union (EU) standards. These include helping the banking
system to adapt and encouraging the SME sector as a prospective market for a diverse range of
financial products, supporting the development of project capital funds, and building an effective
partnership with the private sector to set up an efficient support infrastructure. In any case,
Smallbone and Welter (2001) concluded that direct support measures are not the main position
for government in either case (Smallbone & Welter, 2001).
In many developing countries such as Indonesia, direct government support is necessary,
as SMEs will help countries to utilize the social benefits from bigger competition and
entrepreneurship. Pro-SME policy argues that SMEs increase competition and entrepreneurship,
as well as having external benefits on innovation, and being able to aggregate productivity
growth and economy efficiency. Also, SMEs are more productive than large firms and labor
intensive, thus SME expansion will boost employment; therefore financing SMEs may
correspond to a poverty alleviation tool. However, as the World Banks studies showed the
financial market and other institutional failures have impeded SME development (World Bank,
1994, 2002, 2004).
According to BPS (Biro Pusat Statistik/ Central Bureau of Statistics) in Indonesia, the
proportion of SME exports to total non-oil and gas exports after the Asian financial crisis varied
between 4.6 to 7.5 per cent, although a study conducted for the Asian Development Bank (ADB)
estimates that the contribution of SMEs to total exports is higher, almost 11 per cent (ADB:
2004). Since the economic crisis SMEs in Indonesia have received renewed attention, as many
of these SMEs turned out to be more resilient than the highly indebted conglomerates.
Moreover, in their study Beck, et. al (2005) investigated the relationship between SME
and GDPs growth and poverty alleviation. Beck et al. (2005) concluded that there is a positive
correlation between the SMEs and growth of GDP per capita. They drew the conclusion by
comparing the labor force in SMEs to the total manufacturing labor forces share from a sample
of 45 developing and developed countries. The data did not, however, carry the conclusion that
SMEs cause a causal impact on growth or that SMEs increase competition and entrepreneurship.
The study, however, found no proof that SMEs alleviate poverty or reduce income inequality.
Hence, the results do not provide empirical evidence for a government policy to subsidize SME
development to accelerate growth for reducing poverty.
It is noted that Beck et al.s (2005) study only observed cross-country regressions and as
a result did not trace the experience of every single country in depth. For example, of the 45
countries, the study covered only data from four Asian countries (Japan, Korea, China and
Thailand). Thus, the outcome of the study may not represent newly developed countries in South
East Asia. Also, the individual countries may have different experiences from the aggregate
outcome.

B. SMEs Growth Pattern

One of the parameters used in measuring a success in business is firm growth; the
methodology should also be applicable for SMEs. The objectives include attaining economies of
scale or at least to be able stay on a business in the environment of growing competition. For
example, Weinzimmer (1998) has used change in the firms takeover and in the number of
employees to measure the growth (Weinzimmer: 1998). According to North and Smallbone
(1993) and also Storey, et. al. (1987) these measures can be correlated in the small companies
(North & Smallbone: 1993; Storey et al.: 1987), but not in capital intensive companies
(Weinzimmer: 1998).
SMEs development or growth may be viewed from two paradigms. The first paradigm,
which is considered as classical theories on SMEs development, believes that the SMEs
advantages would be not last. In the end, Large Enterprises (LE) will eventually dominate the
business (Anderson: 1982). Anderson (1982) believes that the economic share of SMEs in terms
of their numbers, shares in GDP, employment, and output will decline.
In contrast to the classical paradigm, the modern paradigm suggests that SMEs can
grow faster than LEs with the process of development. This is due to the fact that globalization
has forced industrial restructuring, i.e. global production has undergone a transformation from
mass production to non-mass production and product specialization, and the latter requires
skilled workers, state of the art technology and flexible machinery (Liedholm, 2002).
Many studies support Liedholms (2002) thesis, which investigated SMEs growth in
Africa and South America, and illustrated that location is an important factor for growth. He
found that SMEs would grow faster in urban and commercial areas, compared to those in rural
areas. As stated by Liedholm (2002), there is a positive correlation between increased income
and the SMEs growth (Liedholm, 2002).
In the Indonesian case, Tambunan (2008) has conducted a study using statistical data for
the period 1994 2006, as published by Indonesias Central Bureau of Statistics. The regression
analysis showed that Indonesias SMEs have grown both in terms of the number of units and
outputs. Tambunan (2008) stated that in order to stay or grow in business SMEs must be able to
meet conditions; namely SMEs can create a niche market, their activities cover a large portion of
the population, and they have linkages with large enterprises. Creating a niche market is an
important business strategy in order that SMEs do not compete directly with the LEs. According
to Tambunan (2008), SME activities have been found to be the source of income for many
people, so SMEs may be considered as poverty alleviation (Tambunan, 2008).
Based on his findings, Tambunan (2008) concluded that the development of Indonesias
SMEs has followed the modern thesis. The SMEs will continue to grow; in fact, many SMEs
have been found to be the source of invention and innovation, and have high efficiency
(Tambunan, 2008). Furthermore, as stated by Storey (1994) and quoted by Tambunan (2008),
there are three factors that influence the growth rate of SMEs, namely the environment and
access to resources of the entrepreneur(s), the firms condition, and the business strategy. They
must be considered in designing a policy, so the SMEs may grow to support the national
economy. In the case of Indonesia, it may involve improving the ability to identify markets and
improve management (Tambunan, 2008).

C. SMEs Roles in Indonesia

Indonesias SMEs are regionally diverse and mostly located in the rural areas thereby
they have the potential to exert a favorable influence on rural and regional development and on
the income distribution of SMEs in Indonesia. SMEs are focused in agriculture, followed by
trade and accommodation, and the manufacturing industry. The manufacturing sector is involved
mostly in simple traditional activities such as furniture, textiles, garments, footwear and
consumption goods. The number of SMEs engaging in the production of tools, machineries and
spare parts (for automotive) are quite limited (Soetrisno, 2005).
The development of viable and efficient SMEs in Indonesia is hampered by several
constraints that are different for each region, sector or individual SMEs within a sector. The main
constraints that are common to all SMEs include, lack of capital, difficulties in procuring raw
materials, and the marketing and distribution of the products. These are aggravated by the
constraints of frequent changes of laws and regulations, and it is time consuming and costly to
obtain the required licenses due to bureaucratic procedures and high transportation costs.
As in many developing countries, SMEs are very important in Indonesias economy.
Data from Indonesias Central Bureau of Statistics shows that there are 41 million small
economic units in Indonesias overall economy, 60,000 medium-sized enterprises and more than
2,000 large enterprises. In 2001 the number of SMEs as compared to the number of enterprises
had increased to reach 99.9%. In the same year, the percentage of manpower absorbed by the
SMEs reached 99.4% of total manpower. Also, its contribution to the GDP was 59.3 % (Sri
Adinimgsih).
It is worth noting that since the economic crisis, SMEs in Indonesia have received
renewed attention, as many of these SMEs turned out to be more resilient than the highly
indebted conglomerates. The ADB (2001) study has also shown that in the recovery of the
Indonesian economy after the Asian economic crisis in 1997-1998, SMEs displayed particular
resilience. SMEs have been established to handle the crisis well and grow at a faster pace than
the rest of the economy, as a number of them turned to exports due to the favorable exchange
rate. Following the crisis SME exports grew by 3.6% in 1998 and 5.8% in 1999. In contrast,
exports by large exporters declined by 0.8% in 1998 and by 7.5% in 1999. Small firms (those
with fewer than 100 workers) had a higher export growth than larger firms between 1996 and
2000, and their share of total exports doubled. However, their contribution to exports continues
to be modest (2.8% in 1996 and up to 4.1% in 2000) (ADB, 2001). Furthermore, a study
conducted for the ADB in 2004 estimated that the contribution of SMEs to total exports had
increased almost 11% (ADB, 2004).
As Tambunan (2008), stated there are linkages between the SMEs and Indonesias
macroeconomic. Many SMEs are mainly in the agricultural sector, which spread widely over the
rural areas. The indigenous/local people own them and they represent over 90% of the labor
force; they are also the main source for employment. Most of the workers are women, young
people below high school age or non-university graduates. Also, most SMEs are financed by
personal savings and produce mainly consumer goods for local markets and for low-income
consumers therefore they are less dependent on imports (Tambunan, 2008).
Also, many people established their own business because of poverty (Tambunan: 2004).
Furthermore, SMEs tend to have a more flexible organization; therefore they are quicker in
making decision than large enterprises. SMEs can also, through their exports, play a role in
improving the balance of payments (Urata, 2000).
INDUSTRY CLUSTERING IN SME DEVELOPMENT

A. Clustering Concept
Industry clustering is becoming a common feature in todays economy, and is described
as the geographic deliberation of interrelated businesses or firms operating in the same sector.
While the definition may vary from country to country, in general, clusters can be defined as a
geographic concentration of organized businesses, including suppliers, manufactures and other
supporting industries, and its purpose is to increase the productivity of each company within the
cluster, so their product can compete in national and international markets. Clustering contains
various SMEs operating in similar or related industries strongly associated with each other to
produce goods and services. Government usually acts as facilitator to support clustering
through initiate help and promote SMEs to reach the concept of industry cluster.
The concept of cluster development provides a means to structure the business
environment and facilitate more effective interactions between stakeholders, including private
sector firms and agencies in the public sector, that are integral to innovative systems.
Accordingly, industrial clustering and networking can be of great importance to SMEs operating
in environments that are industrial and where the infrastructures are underdeveloped. The role
that industrial clusters have in strengthening competitiveness has been generally accepted. Many
countries are making efforts to create new industrial clusters and improve their performance.
Clusters offer SMEs, at the very least, external economic advantages, including economies of
scale and of scope.
Historically, clusters began in traditional industries. In the United Kingdom, for instance,
the clustering phenomenon dates back in the industrial revolution (cotton industry) (Kuah, 2002).
Today, business clusters have become of central importance in competitive strategy. Many
economic policy makers have recognized the strategic importance of clusters in economy
development planning.
Michael E Porter introduced the concept of industrial clustering in 1990 in his book
entitled Competitive Advantages of Nations (Porter, 1990). Porter identified industry clustering
as a geographically proximate group of businesses and related institutions in a particular field,
associated by commonalities and complementarities. The goals of clustering are dependent on
the general importance of firms and are characteristic of collaboration within clusters
(Sureephong et al., 2006). Based on this definition, clustering includes both suppliers of
resources, manufacturing and sales.
Furthermore, according to Porter (1990), there are two types of cluster, namely vertical
and horizontal clusters. While the vertical clusters are essentially supply chains, the horizontal
clusters use technology or labor skills, or require similar natural resources. As quoted by
Sureephong et al. (2006), Porter (1990) claimed that the competition between rival firms has
driven cluster development. In order to stay ahead in the competition, the firm must be
innovative in improving and creating new technologies for the benefit for customers. Vertical
clustering occurs when new technology is applied, which in turn will require labor skills
(Sureephong et al., 2006).
Many studies have reported the success of cluster development in many regions,
including Indonesia. By clustering, the SMEs benefit as they can share information on the
product and market size. Common clusters consist of small enterprises that produce for nearby
markets. Collaboration within the cluster will play an important role, as the majority of clusters
consist of small enterprises that produce for similar products and for nearby markets. As stated
by Sandee et al. (2002), in Indonesia SME clusters have been spread out over several villages
and have created jobs for many people. Their wage systems are rather flexible and can be
adjusted whenever the demand is low (Sandee et al., 2002).
Cluster development provides benefits to the members of the cluster through
collaboration. Hence, supporting collaboration within a cluster plays a very important role in the
development of a cluster (Rosenfield, 1997). For example, an industrial cluster will be formed
around an anchor firm, in the manufacturing industry this is the company that will assemble the
parts and components that will be supplied by other firms, such as the automobile industry
clusters in Detroit (USA), Japan, and Guangzhou (China). This is shown in Kuchikis (2007)
study for automobile clustering in Guangzhou (China), in which he showed that in the
automobile manufacturing industry, a cluster will be formed around the automobile
manufacturing plant, and the firms that supply the automobiles parts and components will move
into an industrial zone where the automobile manufacturing company is located. This geographic
concentration of industries will help the economic growth in the region (Kuchiki, 2007).
B. Clusters Competitive Advantage
Many studies have been written and reported on the critical success factors and benefits
of clustering. For instance, a cluster may gain advantage through cooperation among the SMEs
in a cluster; they may take the advantage of external economies, such as the supply of raw
materials and specific skilled workers. In Indonesia, a cluster has attracted many traders from
overseas to buy the products and to export to their home market. The clustering would facilitate
the access for the government and other industries to provide services (Tambunan: 1997).
Given the above background, the obvious question would be as to what would be the
benefit of locating in the cluster. For assessing relative competitive strength of a nation or
country, Porter proposed a diamond model (Porter: 1990). Porter used a diamond shaped
diagram as the foundation of framework to show the determinants (conditions) of national
advantage. According to Porter (1990), a country becomes competitive if four conditions are
satisfied and these are:
Production Factors required for a given industry, e.g. skilled labor, land, natural
resources, technology resources, capital resources and infrastructure.
Demand Factors concerning the extent and nature of demand inside the nation (product or
service). The nature of the differences could be productivity or the scale of production.
Related and Support Industries Factors, including the existence of external economies
such as existence of international competitive advantage of other industries in the domestic
country that support the industry in question.
Corporate Strategy, Structure and Rivalry Factors, namely the circumstances in the home
and international markets.
Figure 1 is a diagram showing the Porters Diamond Model for the Competitive
Advantage of Nations (Porter: 1990). While it sounds similar to standard economy theory, these
key factors of production or specialization are not inherited. Instead they are created by
innovation and supported by investment. Porter argues (1990) that a nation can create new
advanced factor endowments such as skilled labor, a strong technology and knowledge base,
government support and culture. The diamond shape shows the countrys requirement to
establish their industries.
 Figure 1

Note that the Porters (1990) theory can be considered as a management framework to
identify competitive advantage. The tool should be taught as a tool for analyzing the countrys
competitive weakness and strength, as part of the process to create value. The use of Porters
Diamond Model for the competitive advantage of clusters offers a model that can help
understand the comparative position of a cluster in global competition. As Kuchiki (2007) said,
Porters Diamond Model may also be applicable to cluster development (Kuchiki, 2007).
In his study for the automobile industry in Guangzhou (China), Kuchiki developed a flow
chart approach to industrial cluster policy, based on Porters Diamond Model. According to
Kuchiki (2007), there are a number of main components that are important in the establishment
of a cluster, namely the establishment of an industrial zone to be followed by building the
capacity and inviting the anchor firms (see Figure 2). The capacity building involves
infrastructure and living conditions, institutions and human resources (Kuchiki, 2007).
The flow chart model will obviously be different for each segment of industry. For
example, the cluster for Information Technology (IT) should be close to universities, which may
be supported with research. Also, as shown in Guangzhou (China), in order to be effective the
industrial cluster policy would require partnership between the central and municipal
government (Kuchiki, 2007). As illustrated below, this is applicable in the case of Indonesia.
 Figure 2
Kuchikis Flow Chart Model

C. Development of SMEs Cluster in Indonesia

In Indonesia the SMEs clustering development dates back as early as 1970. It includes
the technological development and establishment of special zones; the latter includes among
others establishment of Lokasi Industri Kecil or LIK (Small Industry Zone) and the Export
Processing Zone. In Indonesia, the Ministry of Trade defines a cluster as a location of
concentration of similar SME businesses. These firms in the cluster have basically the same
market therefore they are competing for the same product or services.
Most of Indonesias SME clusters have started from the local economy and culture, and
have grown spontaneously without government support or intervention (Weijland, 1999). The
supporting factors include the infrastructures, skilled labor, raw material, and market demand.
Some clusters have indeed been brought about by creative innovation, networking and trust. In
some agro-based industries, such as dairy industry and fishery, the cluster has also been
developed through cooperation (Soetrisno, N: 2005).
SME clusters can be found in every province in Indonesia, and the majority of clusters
can be typified as dormant clusters located in rural areas. Many of these clusters consist of micro
or very small enterprises and use traditional technology, which they inherited from their parents.
For example, one of the clusters using traditional technology are the clusters of batik producers
in various regions in Java (Yogyakarta, Pekalongan and Surakarta in Central Java and Cirebon
and Tasikmalaya in West Java). Other clustering includes the rattan furniture producers in Tegal
Wangi (West Java), wood furniture producers in Jepara (Central Java), wig and hair accessories
clusters in Purbalingga (Central Java), and handicraft clusters in Kasongan (Yogyakarta). In
some places, the clustering has created small-scale industrial activities in part of the town, and
the clusters growth has transformed that part of the town into a new commercial center
(Tambunan, 2005).
More than 58% of the SME clusters are in Java, Bali and Nusa Tenggara. In terms of
technology, about 78% of the clusters are applying low level or traditional technology,
particularly in the food, beverage and tobacco industries. Clusters that are still using traditional
techniques to produce items of low quality are found in a number of villages in Boyolali (Central
Java), which are only able to provide the neighborhood market and nearby areas (Sadyadharma
et al., 1988; Sandee et al., 1994). Also, there are SME clusters producing shoes in a number of
villages in West Java (Tambunan, 1994) and producing leather bags in Yogyakarta (Tambunan
and Keddie, 1998). As Soetrisno (2005) said, many of the clusters are at an early stage of
development and are considerably small (Soetrisno, 2005).
Supratiknos (2002) study showed that some firms have utilized cutting edge
technologies. In fact, the clove cigarette cluster products in Kudus have outperformed the
products from large enterprises, such as Phillips Morris and British American Tobacco (BAT)
for the cigarette. In the soft drink market, the Teh Botol Sosro (produced by a tea-processing
cluster in Slawi, Central Java) has become the market leader, outperforming Coca Cola
(Supratikno, 2002).
Furthermore, from Indonesias Central Bureau of Statistics or BPS (2001) data, one may
see that more than 90% of SMEs in Indonesia do not have linkages with Large Enterprises.
Some SME clusters are found to be much more dynamic as shown by the employment growth,
growing market and use of advanced technology. Many of these clusters have expanded their
market, including for export. This has been responsible for the phenomena shown earlier where
Indonesias SMEs have been unaffected by the domino effect of the Asian monetary crisis
(Supratikno, 2002).
Many case studies also showed that a substantial number of jobs have been created by the
SME clusters, which are spread out over a number of countries. Some of these SME clusters
have access to foreign markets, which would require improved quality through standardization
and quality control. The current trend is that many skilled jobs tend to be outsourced, so the
anchor firms may concentrate on product finishing (Sandee et al., 2004).
 To sum up, Indonesias SMEs and cluster development has followed the modern theories
perspective, which says that SMEs have two important roles to accelerate economic growth
through their GDP growth and to reduce poverty through creating employment and income.
There is a positive correlation between SMEs output growth and economic growth, although the
SMEs are still dominated by traditional products and for domestic markets. The output growth
may be originated from growth in the number of establishments, workers, productivity or a
combination of those three sources.
On the other hand, the studies also showed that SME clustering in Indonesia is dominated
by latent clustering characteristics, typified by stagnation, a low degree of actor interaction and a
lack of access to external networks and markets. Indonesias SMEs are confronted with issues of
innovativeness, competitiveness, market expansion, and networking (Tambunan, 2005).
Indonesias SMEs and clusters need to develop capacity building measures such as
productivity, quality, and quantity. Also, cluster linkage to markets is a prerequisite for
successful cluster development, which would increase the clusters prospects in increasing their
market, both domestic and overseas. The role of technological improvement is critical.
Substantial investment would be required to apply technological change and the government may
provide access to such technology (Tambunan, 2004).
Subsequently, one of the obvious questions would be to find the mechanisms of
Indonesias SMEs clustering and how the industrial clusters would assist in innovation.
Applying Porters Diamond Model and giving the four conditions within a cluster, one can see
the importance of the Government in Indonesias role in SME growth through its power to set up
policy measures to a given industry cluster in line with its Strength, Weakness, Opportunities and
Threat (SWOT). For Indonesia, this includes determining the proper policy including setting up
the priority.
As many studies showed, the Government of Indonesia has essentially provided various
programs to support the growth of SMEs and SME clusters. The governments policies include
providing special SME credit schemes, the development of infrastructure and creating a business
friendly environment, subsidized credit accompanied by appropriate public policies to ease the
SMEs in marketing their output and buying their raw materials, and small scale industry estate
(Tambunan, 2008).
 The experiences in many countries show that an industrial cluster cannot be developed
purely from a policy framework without existing fundamental industrial interconnections in the
market systems. Efforts and cooperation from the private sector is crucial to have optimum
results. With these fundamentals, the policy of cluster development and implementation
activities could be successfully delivered, with roles and responsibilities of the government as the
concept initiator and implementation champion, and the private sector as fostering cluster
development and determining initiatives through which clusters can be further developed.
CONCLUSIONS
The preceding discussion can be summarized as follows, Firstly, the SME plays an
important role in Indonesias economic development. The SME is also an embryo for big
business, as most big businesses start from SMEs. Since SMEs are often exposed to unstable
market conditions, they are sensitive to such change. However, SMEs have been handling the
crisis better than larger enterprises, as they are able to respond more quickly and have more
flexibility in handling the sudden shocks. While the Government of Indonesia has clear policies
and strategies to support SME development, many specific support programs are needed to help
these SMEs overcome the hurdles and major obstacles to their growth.
Secondly, the development of viable and efficient SMEs in Indonesia that have been
based on the SMEs clustering concept, have faced several constraints, which are different
between region, between sectors, between individual companies within sector, and between rural
and urban areas. SMEs are sitting in a complex and dynamic environment, and to promote their
growth the Government of Indonesia has been actively in setting policies. These include
fostering the market condition and access to information, technology, financing, products and
human resources, quality, and competition.















BIBLIOGRAPHY

Anderson, Dennis (1982), Small-Scale Industry in Developing Countries: A Discussion of the

Issues, World Development, 10(11), 913-48
Asian Development Bank (2001), Best Practice in Developing Industry Clusters and Business
Networks, ADB SME Development TA, Policy Paper No.8, Jakarta: Kantor Menteri
Negara Urusan Koperasi dan UKM.
_________ (2002) Report and Recommendation on Proposed Plan and Technical Assstance
Grant to the Republic of Indonesia for the Small and Medium Enterprise Export
Development Project, RRP: INO 34113.
_________ (2004) Special Evaluation Study of Small and Medium Enterprise Policies and
Operations, Manila, http://www.adbi.org/files/2006. 03.d46. private.sector.dev. ind.pdf.
Beck, T, Demirg-Kunt, A, & Levine, R, (2005), SMEs, Growth and Poverty, Journal of
Economic Growth, Volume 10, Number 3, http://www.econ.brown.edu/
fac/ross_levine/publication/forthcoming/forth_jeg_3rl_sme%20growth%20poverty.pdf
Kuah, Adrian T.H., Cluster Theory and Practice: Advantage for the Small Business Locating in
a Vibrant Cluster, Journal of Research in Marketing and Entrepreneurship: Volume 4,
Issue 3, 2002.
Kuchiki, Akifumi (2007), The Flowchart Model of Cluster Policy: The Automobile Industry
Cluster in China, Discussion Paper No. 100.2007.5, Institute of Developing Economies,
http://hdl.handle.net/2344/550
Liedholm, Carl, Small Firm Dynamics: Evidence from Africa and Latin America, Small Business
Economics, 2002.
North, D and Smallbone, D, (1993), Employment Generation and Small Business Growth in
Different Geographical Environments. The 16th National Small Firms Policy and
Research Conference. Nottingham, England.
Pradorn Sureephong, Nopasit Chakpitak, Yacine Ouzrout, Gilles Neubert and Abdelaziz Bouras
(2006), Knowledge Management System for Cluster Development in Small and Medium
Enterprises, International Conference on Software, Knowledge, Information
Management and Applications (SKIMA), Chiang Mai, Thailand.
Porter, M. E., (1990) Competitive Advantage of Nations., New York: Free Press.
Rosenfield, S.A., (1997), Bringing business clusters into the mainstream of economic
development, European Planning Studies, Vol. 5-1:3-23, 1997.
Sadyadharma, K, Ngandji, Supardan, and Sandee H. (1998), Industry Pedesaan: Studi Kasus di
Empat Desa di Kabupaten Boyolali (Rural industry Case study of 4 villages in Boyolali
District), Research Series No.11, Faculty of Economics, University of Satya Wacana,
Salatiga.
Sandee, H., P. Rietveld, H. Supratikno and P. Yuwono (1994), Promoting Small-scale and
CottageIindustries in Indonesia: An Impact Analysis for Central Java, Bulletin of
Indonesian Economic
Sandee, H., Isdijoso, B. & Sulandari, S., SME Clusters in Indonesia (2002): An analysis of
growth dynamics and employment conditions, Report to the International Labour
Organization, http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---
ilojakarta/documents/publication/wcms_123971.pdf,
Smallbone, D and Welter, F, (2001), The Role of Government in SME Development in Transition
Economies, International Small Business Journal.
Soetrisno, N, (2005) SME Clustering Strategy in Indonesia: An Integrated Development
Supports, UNCTAD: Proceedings of Four Expert Meetings.
Sri Adiningsih, Regulasi Dalam Revitalisasi Usaha Kecil dan Menengah di Indonesia, http://
www.lfip.org/english/pdf/bali-seminar/Regulasi%20dalam%20revitalisasi%20-
%20sri%20 adiningsih.pdf.
Storey, D. & K. Keasey & R. Watson & P. Wynarczyk (1987). The performance of small firms:
profits, jobs and failures. London: Croom Helm.
Supratikno, H. (2002), The Development of SME Clusters in Indonesia, paper presented at the
ASEAN Roundtable on Entrepreneurship and Small and Medium-Sized Enterprises
(SMEs) in Southeast Asias Economic Development, ISEAS, Singapore,
Tambunan, T.H. (1994), The Role of Small-Scale Industries in Rural Economic Development,
Amsterdam: Thesis Publishers.
_________, (1997), Development of Small and Medium Industry Clusters in Indonesia: UNIDO
Office, Jakarta.
_________ and James Keddie (1998), Draft Cluster Diagnosis and Action Plan Yogyakarta Area
Leather Goods Cluster, Study Report, February, Jakarta: UNIDO
_________, (2004) Development of Small and Medium Enterprise Clusters in Indonesia: A
Review. The Institute for Economic Studies, Research and Development, Indonesia
Chamber of Commerce and Industry (LP3E-Kadin Indonesia).
_________ (2005), Promoting Small and Medium Enterprises with a Clustering Approach: A
Policy Experience from Indonesia, Journal of Small Business Management.
_________ (2005), Development of SMEs in Indonesia from the Asia-Pacific Perspective,
Jakarta: LPFE-University of Trisakti.
_________ (2008), SME Development in Indonesia: Do Economic Growth and Government
Supports Matter?, Working Paper, University of Trisakti.
Urata, Shujiro (2000), Policy Recommendation for SME Promotion in The Republic of
Indonesia, Report of the JICA Senior Advisor to the Coordinating Minister of the
Economy, Finance and Industry, Japan International Coordination Agency, Tokyo,
http://www.adbi.org/ files/2006. 03.d46. private.sector.dev.ind.pdf.
Weinzimmer, L, Nystrom P and Freeman, S (1998), Measuring organizational growth: issues,
consequences and guidelines. Journal of Management 24 (2), 235-262.
Weijland, H. (1999) Microenterprise clusters in rural Indonesia: Industrial seedbed and policy
target, World Development, 27.
Wignaraja, Ganeshan (2003), Promoting SME Exports from Developing Countries, Maxwell
Stamp PLC.
World Bank (1994). Can Intervention Work? The Role of Government in SME Success.
Washington, DC: World Bank.
World Bank (2002). Review of Small Business Activities. Washington, DC: World Bank.
World Bank (2004). Review of Small Business Activities. Washington, DC: World Bank.