05 - LERD Cluster Economic Scale Multiplier 18-09-14

LERD:
Clustering, Economic of Scale, and

Multiplier Effects
Didik Susetyo
Guru Besar Tetap Fakultas Ekonomi Universitas Sriwijaya
3/31/23 didiksusetyo60@gmail.com 1
Hand Out
• Introduction
• LERD
• Clustering
• Economic of Scale
• Multiplier Effect
• Challenges
• Recommendation
Introduction
• Local economic resource development (LERD) dapat
diwujudkan melalui tiga pola keterkaitan yaitu
clustering, economic of scale, dan multiplier effect.
• Program-program LERD tentu mempunyai
challenges yang harus disikapi dan dikelola secara
bijak bagi kesejahteraan rakyat.
• Pemahaman dalam diklat seringkali dianggap tidak
memiliki bargaining power dalam setiap
perencanaan daerah.
What is Local Economic Development?
• Economic development is the process of

creating and sustaining wealth. We
know that it is occurring when:
– New jobs are being created
– Existing jobs are being maintained
– The standard of living is improving
Local Economic Development is
Happening when:
• the standard of living is increasing
• a “real” increase in the level of average household
income is occurring
• the “equity” of income distribution is improving
• the local tax base is keeping pace with the mounting
cost of government services
• business and industry are creating quality jobs
• the local quality of life keeps getting better
Impact
Global and national economies
Globalization
Decentralization Regional and Local

economies
Mobilise Economic
Development
Opportunities
Role Players
in local
areas
Interests
Resources
Local Economic Resources Development
(LERD)
• Optimalisasi sumberdaya ekonomi lokal diyakini
dapat menjadi alternatif pengelolaan
pembangunan daerah lebih efisien dan efektif.
• Kinerja LERD dapat diukur dengan tolok ukur
clustering, economic of scale, dan multiplier
effect.
• LERD memerlukan persyaratan tertentu untuk
mencapai hakikat dari program-program
pembangunan daerah.
Key LERD Principles
• Linked to current economic realities
• People focused and mobilised social capital
• Socio-economic focus- increases income flow to
people to creates jobs and alleviate poverty
• Co-operative governance
• Alignment and coherence of policies and
programmes
• Market functioning and promote competitiveness
• Support systems for entrepreneurial institutions
e.g. SMME’s, targeted procurement
• Continued……
Key LERD Principles
• Creates opportunities for human resource
development e.g. skills development
• Building partnerships with business
community, community, NGO’s,
• Ensures sustainable economic outcomes
• Innovative and creative response
• Network, listen to and know what's
happening!
Why do local economic development?
• Create Jobs
• Raise Incomes
• Increase Tax Base
• Help Local Industries
• Stabilize the Economy
• Avoid Obsolescence
• Develop Resources
• Revitalize Community
10 Guiding principles
(Swinburn & Yatta, Africities 2006)
• Strategically planned
• Territorial approach
• Locally owned, designed and delivered
• Partnerships both for design and implementation
• Reinforced by integrated government action
• Focus on conducive local business environment
• Integrated multi-sector initiatives
• Invest in hard, soft & institutional infrastructure
• Growth & retention of local businesses & people
• Projects by all - public, private, non-government
Key Design Elements
• Purpose: To co-ordinate and integrate economic
development efforts, resources, role players
investments and institutions (internally and
externally)
• Strategy driven by municipality
– Design and implementation championed by the
municipality
– Housed within the municipality
– Emanates from the IDP
• Policy thrusts of strategy to be aligned to national
and provincial economic polices
Key Design Elements…1
• Strategy informed by competitive assessment of
local economy (demographics etc)– accurate and
updated information
• Thereby prioritizing primary, secondary and tertiary
economic sectors
• Defines the municipal economic vision and
objectives
• Identifies role players and establishes clear roles
and responsibilities
• Utilizes internal departmental relations to integrate
and align to other components of municipality
(BEE, land reform, housing etc)
Key Design Elements…2
• Specifies the type of intervention
– Establishing Partnerships
– Cluster and sub-sector cluster development (firms,
groups working together)
– Co-ordinated business support programme
– Set of special purpose vehicles
• Strategy identifies and addresses the skills gap in
communities to participate in economic
development e.g. business management skills
• Identity's the LED spatial boundary or target area
• Clear performance areas and comprehensive
monitoring and evaluation indicators
(1) Clustering
• A cluster is a geographically proximate group
of interconnected companies & associated
institution in a particular field linked by
commonalities & complementarities (Porter, 1999)
• A form of cooperation among independent firms
of the same scale that produce the
same/similar type of products & that decide to
group together for product marketing joint
purchase of raw materials, joint
manufacturing of finished products
What is a Cluster?
• Michael Porter defines clusters as “geographically
proximate groups of interconnected companies and
associated institutions in a particular field, linked by
commonalities and complementarities”.
• Clusters have become the focal point of many new
policy initiatives globally in the last few years.
• The goal is to become the most competitive and
dynamic knowledge based economy.
– Clusters are a leverage point for action, not just a
description of economic reality.
– A way to realize location-based complementarities.
Anatomy of a Cluster
Federal
Agencies
Sources of Labor
Capital Organizations
Support Industries
Workforce
Local &
Development
State Gov’t
& Training Driver Industries:
Suppliers:
Customers:
Public
Universities Infrastructure
Community
Nonprofits & Technical
Colleges
Cluster Characteristics
• Firms and institutions in a cluster share four critical
characteristics:
– Proximity; they need to be sufficiently close in space to allow
positive spill-overs and sharing of common resources to occur
– Linkages; their activities need to share a common goal, for
them to be able to benefit from proximity and interaction
– Interactions; for positive cluster effects to occur some level of
active interaction has to be present
– Critical mass; needs to be sufficient number of participants for
interactions to have a meaningful impact on performance
– Understanding these four dimensions is more important than
defining specific benchmarks for firms and institutions to be
called a cluster.
Clusters and Innovation
• Clusters allow to be more productive and innovative.
• Clusters provide a particularly fertile ground for innovations.
 Clusters reduce barriers to entry for new business creation
relative to other locations.
• Innovation occurs in non-sequential interactions of different
universities, research institutions, and companies.
– Different from traditional model where R&D centers turned
universities’ basic research into applied products and
processes.
• Clusters of Innovation: locations face to compete on innovation
and productivity.
Policy and Practice Must Change
Unprecedented challenges require innovative solutions for
creating jobs and promoting regional prosperity.
From Silos … … to Collaboration.

Economic and Industry
Policy: maintaining a
robust economy in which
innovative activity thrives
and supporting industry
development. Education
Regional Policy:
Policy: identifying
building skill
competitiv shortages
e regions and
by training
developing needs for
re-skilling
skills and
initiatives or up-
skilling and
that boost
local investing
in skill
economic
activity developme
nt
Science and technology programs.
policy: supporting
collaborative research
involving networks with
industry and stimulating
the commercialization of
research.
Identifying industry Clusters
Value chain
Linkage
Labor needs
Existing
Three
Emerging
Dimensions
Potential
Geography
Time Statewide
Regional
Successful Cluster Initiatives
(Porter)
• A shared understanding of competitiveness

and the role of clusters in competitive
advantage
• A Focus on removing obstacles and easing
constraints to cluster upgrading
• A structure that embraces all clusters in a
nation or state
• Appropriate cluster boundaries
Successful Cluster Initiatives
(cont.)
• Wide participation of cluster participants
and associated institution
• Private sector leadership
• Close attention to personal relationships
• A bias toward action
• Institutionalization
Apa itu Industri Cluster?
“Cluster adalah perkiraan

pengelompokan geografis dari sejumlah
industri yang saling terkait kegiatannya
dan terhubungkan dalam satu komunitas
serta saling melengkapi”
(Michael Porter)
Komponen Industri Cluster
• Produk akhir (end-product) atau layanan (service) suatu
perusahaan;
• Pemasok input yang khusus, seperti komponen
permesinan/peralatan, keuangan dan laynan;
• Perusahaan terkait atau perusahaan hilirnya, seperti jalur
jaringan distribusi, pelanggan;
• Produsen produk-produk pelengkap (complementary
products);
• Penyediaan infrastruktur yang khusus;
• Pemerintah atau institutsi lainnya menyediakan program2
pelatihan khusus, pendidikan, informasi, penelitian, dan
dukungan teknis;
• Penetapan standar dan pengaruh lembaga pemerintah;
• Asosiasi perdagangan dan kelompok2 kolektif perusahaan
swasta.
Clusters dan Keunggulan Kompetitif
Productivitas
• Akses informasi yang efisien, spesialiasi dalam penyediaan
input industri, dan ketenagakerjaan, kelembagaan, dan
barang-barang publik (“public goods”)
• Mampu meraih bahan-bahan pelengkap lintas kegiatan bisnis
• Insentif yang lebih baik dan pengukuran kinerja
Innovation
• Kemampuan untuk menerima dan menanggapi peluang
inovasi
• Difusi yang cepat untuk suatu perbaikan
Clusters dan Keunggulan Kompetitif
Formasi Bisnis Baru
• Menerima peluang bisnis yang baru
• Mengurangi hambatan untuk masuk ke lingkungan
bisnis baru (termasuk menerima resiko)
Kompetisi sangat didasari oleh pengaruh eksternal /

hubungan lintas perusahaan-industri-dan lembaga
asosiasi
Insiatif Klaster yang Berhasil
• Berbagi pemahaman akan nilai kompetisi dan peran
Cluster/Klaster;
• Dipimpin sektor swasta dan dukungan partisipatif pemerintah;
• Fokus pada memindahkan hambatan dan memudahkannya
hingga terbangun peningkatan kapasitas klaster (dibandingkan
mencari subsidi atau membatasi perkembangan kompetisi);
• Menciptakan interaksi (terus menerus) seluruh klaster dalam
satu region;
• Menetapkan batas kawasan klaster yang tepat;
• Luasnya keterlibatan partisipasi cluster dan demikian pula
dengan institusi2 terkait;
• Perhatian pada hubungan personl dalam rangka memfasilitasi
peningkatan hubungan, mendorong komunikasi terbuka, dan
membangun kepercayaan;
• Mengukur penyimpangan kegiatan;
• Menginstitusionalisasikan sektor swasta.
Advantages of Economic Unions
• They allow for more efficient industries
• They have access to larger markets
• They have access to more human,
natural, and capital resources without
restrictions
• They have a greater influence on world
markets
Disadvantages to Economic Unions
• They cause some industries to close
• Certain industries become
concentrated in particular countries
while forgetting the smaller ones.
• Agribusiness is replacing the family
farm.
• There is often difficulty in agreeing on
common economic policies.
(2) Economic of Scale
• Skala Ekonomi (Economies of scale) :
Bertambahnya jumlah barang yang
diproduksi dalam suatu periode
sehingga mengakibatkan biaya
produksi per unit menjadi sangat
rendah.
Economies of Scale...
• The advantages of large scale production
that result in lower unit (average) costs
(cost per unit)
• AC = TC / Q
• Economies of scale – spreads total costs
over a greater range of output
• Internal – advantages that arise as a result of
the growth of the firm
– Technical
– Commercial
– Financial
– Managerial
– Risk Bearing
• External economies of scale – the advantages
firms can gain as a result
of the growth of the industry – normally
associated with a particular area
• Supply of skilled labour
• Reputation
• Local knowledge and skills
• Infrastructure
• Training facilities
Economies of scale…
• Definition: average costs fall with an increase in output
• Represented by the scale economy index
AC(Q)
S=
MC(Q)
• S > 1: economies of scale
• S < 1: diseconomies of scale
• S is the inverse of the elasticity of cost with respect to
output
dC(Q) dQ dC(Q) C(Q) MC(Q) 1
hC = = = =
C(Q) Q dQ Q AC(Q) S
Economies of scale and multiple products
• Definition of economies of scale with a single product

AC(Q) C(Q)
S= =
MC(Q) Q.MC(Q)
• Definition of economies of scale with multiple products
C(Q1,Q2,…,Qn)
S=
MC1Q1 + MC2Q2 + … + MCnQn
• This is by analogy to the single product case
– relies on the implicit assumption that output proportions are fixed
– so we are looking at ray average costs in using this definition
The example once again
C(Q1, Q2) = 10 + 25Q1 + 30Q2 - 3Q1Q2/2
MC1 = 25 - 3Q2/2 ; MC2 = 30 - 3Q1/2
Substitute into the definition of S:
C(Q1,Q2,…,Qn)
S=
MC1Q1 + MC2Q2 + … + MCnQn
10 + 25Q1 + 30Q2 - 3Q1Q2/2
=
25Q1 - 3Q1Q2/2 + 30Q2 - 3Q1Q2/2
It should be obvious in this case that S > 1
This cost function exhibits global economies of scale
Skala ekonomi
• Economies of scale/diseconomies of scale
• Increasing returns to scale/constant returns

to scale/decreasing returns to scale
• Terkait dengan kapasitas produksi firm (Q)

bukan jumlah output firm (q)
Skala ekonomi…
• Biaya = average cost bukan total cost
– tentu firm besar, biaya totalnya > firm kecil
• Teknologi (fungsi produksi) yang berbeda

– padat modal vs. padat tenaga (karya)
– biaya2 tetap
• Perbandingan teknologi dengan output
What is the economics basis for
big or small firms?
• Economies of Scale
• Diseconomies of Scale
That just describes how costs vary over

different plant or store sizes. The next
few slides explain that.
Economies of Scale
• Economies of Scale, if they exist, are
found on the Long Run Average Total
Cost Curve of any firm.
– A firm with a LRATC like this shows
Economies of Scale. See next slide.
As plant size increases, average
total cost falls because are
producing more efficiently.
Economies of Scale Long Run Average
Total Cost Curve
Cost
LRATC
Bowl shape
means can
increase output
with small
increases in cost
Quantity-supplied as plant
size increases. over large
number of plant
sizes.
Diseconomies of Scale
• Diseconomies of Scale, if they exist, are found

on the LRATC of any firm.
– A firm with a LRATC like this shows
Diseconomies of Scale. See next slide. As
plant size increases, average total cost
increases because are producing less
efficiently.
Diseconomies of Scale and Long Run
Average Total Cost Curve
LRATC
Cost V shape means
that increasing
costs are
encountered
quickly as plant
size increases.
Quantity-supplied as plant
size increases.
Constant economies of scale
Cost
SRATC1
SRATC2
LRATC
Q1 Q2 Q
Increasing economies of scale
Cost
SRATC1
SRATC2
LRATC
Q1 Q2 Q
Decreasing economies of scale
Cost
SRATC2
SRATC1 LRATC
3/31/23 Q1 didiksusetyo60@gmail.com Q2 Q 47
(3) Multiplier Effect
• Dampak pelipatgandaan (multiplier) kegiatan
ekonomi dapat diukur dengan terjadinya naik-
turunnya pengeluaran, beban pajak, dan
anggaran berimbang.
• Implikasi dari pesatnya pembangunan daerah
akan mendorong penumbuhan kegiatan
ekonomi lainnya, terutama meningkatkan
pertumbuhan ekonomi, kesempatan kerja, dan
perbaikan kualitas pendapatan masyarakat.
The Multiplier Effect…
 Government purchases are said to
have a multiplier effect on aggregate
demand.
 Each dollar spent by the government
can raise the aggregate demand for
goods and services by more than a
dollar.
The Multiplier Effect...
Price
Level 2. …but the multiplier effect can amplify
the shift in aggregate demand.
$20 billion
AD3
1. An increase in government
AD2
purchases of $20 billion
initially increases aggregate Aggregate demand, AD1
demand by $20 billion…
0
3/31/23 didiksusetyo60@gmail.com
Quantity 50
of Output
A Formula for the Spending Multiplier
 The formula for the multiplier is:
Multiplier = 1/(1 - MPC)
 An important number in this formula is the
marginal propensity to consume (MPC).
 It is the fraction of extra income that a
household consumes rather than saves.
A Formula for the Spending Multiplier
 If the MPC is 3/4, then the multiplier will

be:
Multiplier = 1/(1 - 3/4) = 4
 In this case, a $20 billion increase in
government spending generates $80 billion
of increased demand for goods and
services.
The Multiplier effect...
• Process by which any change in a
component of AD results in greater final
change in real GDP
• The size of the multiplier is determined

by the size of the leakages from the
circular flow of income
The Spending Multiplier effect
• Any increase in spending will result in an
even larger increase in GDP due to the
fact that every dollar spent is spent again
multiple times.
• Any money spent is someone else’s
income and therefore subject to
spending.
The Spending Multiplier effect...
• The limiting factor is savings.
• For every additional dollar spent a portion of it
will be saved (the MPS).
• The multiplier is the reciprocal of the MPS or
1/MPS.
• The larger the MPC (the smaller the MPS) the
larger the multiplier will be.
Spending Multiplier = 1/MPS
MPC 1/MPS = M
.90 1/.10 = 10
.80 1/.20 = 5
.75 1/.25 = 4
.60 1/.40 = 2.5
.50 1/.50 = 2
The Tax Multiplier effect
• A change in taxes also has a
multiplied effect, but the tax
multiplier is smaller than the
spending multiplier.
The Tax Multiplier effect
• Tax Multiplier (note: it’s negative because
tax increases reduce spending)
-MPC -MPC
/1-MPC or /MPS
• If there is a tax-CUT, then the multiplier is

+, because there is now more money in
the circular flow
Tax Multiplier = -MPC/MPS
MPC MPC/MPS = M
.90 -MPC/.10 = -9
.80 -MPC/.20 = -4
.75 -MPC/.25 = -3
.60 -MPC/.40 = -1.5
.50 -MPC/.50 = -1
The Balanced Budget Multiplier
• When government spending increases are
matched with equal size increases in taxes, the
change ends up being = to the change in
government spending
• Why?
• 1/MPS + -MPC/MPS = 1- MPC/MPS = MPS/MPS = 1
• The balanced budget multiplier always = 1
Challenges
• Implementasi LERD menghadapi beberapa
tantangan dan memiliki peluang besar dalam
mempercepat pembangunan daerah.
• LERD dengan tolok ukur klaster, skala
ekonomi, dan dampak multiplier dapat
diwujudkan dengan kegiatan-kegiatan yang
produktif, kreatif, inovatif, dan kompetitif.
Peluang investasi dalam LERD
• Perbaikan ‘mind set’ birokrat
• Proses perizinan yang sederhana, cepat, dan
tepat
• Insentif yang tidak contraproduktif
• Perbaikan kualitas infrastruktur
• Minimalisasi sengketa lahan
• Partisipasi pengusaha lokal
• Sinergi kebijakan lokal, regional, & nasional
Infrastructure Support
Development
Business Development Utilities, Special Property Development

Coalition Building Purpose Dist., Recruiting
EDCs, City/County Govt,
Ports Ports
, ADO’s ADO’s,
Business
EDC’s,
Community,
Access to Capital
Business Climate Quality Revolving/
Chambers, Technical Assistance
of Life Micro-Loan
Electeds, Arts and Funds, Banks,
Culture Angels, VC’s
Organizaions Government
Higher Ed, High (Federal, State,
Schools Cities, and Funding
Workforce Voc. Schools Tribal) Business Climate
Development
Conv & Visitor Housing, Health EDD’s, SBDC’s
Bureaus, Care, Non-
Downtowns profits/
Community Business Development
Tourism
Action Program Coalition Building
Community Development
Challenges of LERD
• Lack of national policy and strategy
coherence
• Functional specialization and
uncoordinated actions
• Lack of dedicated LERD institutions
• Shortage of LERD capacity and skills
• Lack of clear roles and responsibilities
• Competitiveness of local areas and IDP’s
Challenges of LERD…cont
• Poor financial position of municipalities
• Poor access to accurate information
• Ineffective monitoring and evaluation
• Project based - survivalist such as
brickmaking, poultry farming,
hydroponics
• Consultant driven to address capacity
problems
Recommendation
• Program LERD dapat diimplementasikan dengan
clustering, economic of scale, & multiplier effect.
• Pola klaster dapat mendorong efisiensi dan
efektivitas produksi unggulan daerah.
• Pola skala ekonomi dapat meningkatkan daya saing
produksi lokal untuk memenuhi kebutuhan domestik
dan ekspor.
• Dampak pelipatgandaan kegiatan ekonomi akan
mendorong pertumbuhan ekonomi, kesempatan
kerja, dan pendapatan masyarakat.
Curriculum Vitae
Nama lengkap : Prof. Dr. H. Didik Susetyo, S.E., M.Si.
NIP : 196007101987031003
Tempat/tanggal lahir : Magetan, 10 Juli 1960
Agama : Islam
Pangkat/golongan : Pembina Utama/IV.c.
Jabatan fungsional : Guru Besar Tetap pada Fakultas Ekonomi Universitas Sriwijaya
Alamat kantor : 1. FE Unsri Kampus Indralaya-30662 Ogan Ilir Telp 62-711-580964; 580231
2. Jl. Srijaya Negara Kampus Unsri Bukit Besar Palembang Telp. 0711-376606
Alamat rumah : Bukit Sejahtera DJ-08 RT.76/RW.22 Palembang-30139; Telp (0711) 440901;
Flexy (0711) 7016842 HP 08127840422; Email: didiksusetyo@yahoo.com
Riwayat Pendidikan:
1. SMAN-3 Palembang Tahun 1980 di Palembang
2. Strata-1 (Sarjana Ekonomi, S.E.) Fakultas Ekonomi Universitas Sriwijaya tahun 1986 di Palembang
3. Strata-2 (Magister Sains, M.Si.) pada Program Pascasarjana Universitas Padjadjaran 1998 di Bandung
4. Strata-3 (Doktor Ilmu Ekonomi, Dr.) pada PPs. Universitas Padjadjaran tahun 2003/2004 di Bandung
5. Profesor atau Guru Besar Universitas Sriwijaya tmt. 1 Februari 2010, pengukuhan Senin 25 Mei 2010
Kursus-kursus:
1. Kursus Regional Economics di NCDS-Australian National University Canberra, Australia tahun 1992
2. Trainning/Workshop on ICT for Quality Improvement of Graduate Study , SEAMOLEC, Dikti, dan PPs Unsri di
Palembang, April 2006.

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LERD:

Clustering, Economic of Scale, and

• Economic development is the process of

Decentralization Regional and Local

From Silos … … to Collaboration.

• A shared understanding of competitiveness

“Cluster adalah perkiraan

Kompetisi sangat didasari oleh pengaruh eksternal /

• Definition of economies of scale with a single product

• Increasing returns to scale/constant returns

• Terkait dengan kapasitas produksi firm (Q)

• Teknologi (fungsi produksi) yang berbeda

• Perbandingan teknologi dengan output

That just describes how costs vary over

• Diseconomies of Scale, if they exist, are found

 If the MPC is 3/4, then the multiplier will

• The size of the multiplier is determined

• If there is a tax-CUT, then the multiplier is

Business Development Utilities, Special Property Development

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