B. SME Development

     From the point of view of developing countries, the value of SME can be analysed in both static and dynamic terms. In static terms, the value of SME is assessed according to its productivity and employment-generating. Taking into account total factors of productivity including capital, SME attains better productivity than micro-enterprise, and in terms of employment it creates better employment than large enterprise.²³ The SME contribution in providing employment has become a particular feature of developing countries, which on one side indicating the working market, that more people are empowered and encouraged to take part to make best use of possible economic factors for the community. On the other side it shows economic failure to provide people with productive jobs and forced people to pursue their part in economics with less possibility to survive. ²⁴

     According to its dynamic terms, SME is analyzed according to its potential of growth. In most cases, SME tends to grow notably, but this growth will not result in exiting the category of SME. This can explain how the size of SME is getting bigger over time, though the growth within the category is very dynamic.²⁵

     Statistic Indonesia 1998 shows the percentages of SME in Indonesia. Among 39.8 million enterprises in Indonesia, 99.8% are small enterprises and the rest 0.2 are medium and big enterprises. According to business volume, 99.85% enterprise have business volume of under 1 billion (absorbing 88.66% of labour), 0.14% occupy 1-50 billion (absorbing 10.78% of labour), and 0.01% owe 50 billion (absorbing 0.56% of labour).²⁶

     Statistics released by Ministry of Cooperative and Small-Medium Enterprise illustrate that in 2000-2003 SME sets 99.9% (equal to 38,723,987) of the total business unit of 38,725,960. This number of SME in the same years takes in 99.46% (equal to 70,407,439) labour of the total of 70,789,877. SME contributed 54.51% to the total PDB in 2000 and increased up to 56.73% in 2003. SME also took 14.87% part of the total export in 2002 and increased up to 15.43% in 2003.²⁷ Other significant contributions of SME are providing 57% supply of goods and service and 2-4% share to national development.²⁸

     It is pointed out, that though the growth of SME continues steadily; their productivity has to be analyzed separately. Investment and change in technological terms are both at the end the key of the increasing productivity. The problem is, that it is not the case for SME to increase productivity needed through foreign direct investment, technology licensing, joint ventures, access to engineering and other improvements, which are for large enterprise in developing countries not problematic.²⁹

     Other aspect of the dynamics of SME, which does not take place in bigger enterprises, is their high rate of entry and exit due their fewer requirements of formalities. At the same time this has nevertheless mounted issues on efficiency.

     Flexibility is the next point to be apprehended concerning the analyses of SME in compare with bigger enterprises. The argument has been put forward, that this point is considered as an advantage for swiftly changing market of industries and economies. This is the case as well for the sharp downturn of macroeconomics which caused collapses in some East Asian countries during the past few years, e.g the economic crisis in Indonesia during 1997 which brought impact to, among others, GDP growth, import and industrialization policy and open economy strategy, employment and labour productivity.³⁰

     Concerning manufacturing in the 1990s up until the crisis, SME has paid the cost for the growth of bigger enterprises in some industries, like in bamboo weaving and palm sugar processing.³¹ It is not the case in other industries.³²

     Concerning labour productivity is assessed in firm and industry or manufacturing level. At firm level, labour productivity increases due to the augment of capital per worker and change in technology. At industry or manufacturing level, reallocation of resources is considered as other factor contributing in boost of labour productivity. In the case of sources of technological capability of exporting SME in rattan furniture, Jepara wood furniture, and garments (three important export industries in which SME play significant roles), Berry and Levy ³³ drawn attention to several points:
         “1. private channels have been the dominant mechanism for acquiring
such capability in all three sectors;
          2. subcontracting is pervasive in all three industries and has been crucial to harnessing traditional skills for export production, especially in Jepara;
          3. employment of expatriates is an especially powerful mechanism for acquiring technological capability in the rattan and garment sectors, but this practice is concentrated disproportionately among non-pribumi entrepreneurs who have the advantage of being embedded in an extended (ethnic) community that transcends national boundaries;
          4. collective support mechanism (public sector and private association) have played only a limited role overall; they have been more important to the smaller pribumi firms but their overall value has been limited by pervasive institutional weakness.”

     Indonesia’s small industry ³⁴ has contributed in the boom of manufactured export boom of recent years as pointed by Hal Hill, that the absolute level of direct exports rose from US$ 137 million in 1983 to 2.1 billion in 1992 ³⁵ and as Kian Wie Thee wrote before, its share of such exports increased from 10 to 13.2 %, after reaching 17.3% in 1987. The main items for bigger industry are garments, textiles, and footwear, which altogether amount to 60%, due to the finding slot markets and the adapting costs and quality to market demand.³⁶ Subcontracting agreements have been used to export fast increasing share of SME outputs.³⁷

SME flexibility and related capacity to, for instance, weather storms, shift from product to product, expand and contract easily have become important points to answer question on how SME responded to economic crisis, which enable them to do relatively better under volatile macro conditions than big firms producing more standardized products, where reorganization of the assembly line take time.³⁸ Lower sunk costs and less frequent labour capital struggles are other sources of flexibility. Nevertheless, the issue being put forward that the first victim of macro economic crises, is worth to be considered due to several reasons. Albert Berry, Edgard Rodriguez, and Henry Sandee explain as followed:

“First, a flexible SME sector, able to adjust smoothly to severe shocks, is clearly a major plus as a country tries to mitigate the effects of those shocks and to avoid large increases on poverty. Also, even if many SME show impressive agility in general, certain types of shocks might destroy firms with good loner run potential, raising the question of what policy instruments might help to avoid that outcome. Finally, is to be expected that any given macroeconomic crisis will be affect in different ways, and that appropriate policies to support SME will vary widely according to how those firms are placed in the economy.”³⁹

In such case as Jepara furniture, the underlined problem is the weakening of local demand. It is best positioned, that industries shall export a lot or compete with imports, but at the same time are not dependent mainly on domestic demand and not competing with imports, and gaining strongly from imports of material or capital goods.⁴⁰

23. Albert Berry, Edgard Rodriguez, and Henry Sandee, “Firm and Group Dynamics in the Small and Medium Enterprise Sector in Indonesia”, in Small Business Economics, Dordrecht: February – May 2002, Vo. 18, ISS. 1-3, p. 1.

24. Carl Liedholm and Donald Mead, Small Enrerprises and Economic Development: the Dynamic Role of Micro and Small Enterprises, New York: Routledge, 1999, p. 1.

25. Albert Berry, Edgard Rodriguez, and Henry Sandee, loc.cit.

26. Adi Sasono, “Ekonomi Kerakyatan dalam Dinamika Perubahan” in http://www.unhas.ac.id/~rhiza/makalah/adisas.html

27. http://www.depkop.go.id/index.php?option=com_docman&task=view_category&Itemid=26&subcat=35&catid=67&limitstart=0&limit=35

28. Dipo Alam, Deputi Menko Prekonomian Bidang Koordinasi Perindustrian, perdagangan, Koeprasi dan UKM, Keynote Speech, Seminar tentang Program Aksi Penanggulangan Kemiskinan melalui Pemberdayaan Umum, Jakarta, 26 April 2005.

29. Albert Berry, Edgard Rodriguez, and Henry Sandee, loc.cit.

30. Ibid.

31. H. Sandee and P. Rietveld , “Innovation Adoption in Rural Industry Clusters: A Comparison of A Roof Tile and Copper Handicraft Cluster in Indonesia”, in Ami Sverrson and Meine Pieter van Dijk (eds.), Local Economies in Turmoil: The Effects of Deregulation on Small and Medium Enterprises in Transitional Economies, New York: Macmillan, 2000.

32. Hal Hill, “Manufacturing Industry”, in A. Booth (Ed.), The Oil Boom and After: Indonesia Economic Policy and Performance in the Suharto Era, New York: Oxford University Press, 1996.

33. Albert Berry and Brian Levy, “Technical, Financial and Marketing Support for Indonesia’s Small and Medium Industrial Exporters”, in Brian Levy, Albert berry and Jeffery B. Nugent (Eds.), Fulfilling the Export Potential of Small and Medioum Firms, Boston: Kluwer, 1999, p. 50.

34. Albert Berry, Edgard Rodriguez, and Henry Sandee use this term to refer establishment of 5-19 workers.

35. Hal Hill, Indonesia’s Industrial Transformation, St. Leonards, New South Wales: Allen and Unwin, 1998, p. 49.

36. Kian Wie Thee, “Industrial Structure and Small and Medium Enterprise Development in Indonesia”, Working Paper, World Bank Economic Development Institute, World Bank, Washington, D.C., 1993.

37. Albert Berry, Edgard Rodriguez, and Henry Sandee, loc.cit.

38. H. Sandee, R.K. Andadari, and S. Sulandjari, “The Impact of Indonesia’s Financial Crisis on Clustered Enterprise: A Case Study on the Jepara Furniture Cluster”, Discussion Paper,Vrije University, Amsterdam, 1998,p. 3.

39. Albert Berry, Edgard Rodriguez, and Henry Sandee, loc.cit.

40. Ibid.