GOVERNMENT POLICY TO ENHANCE MSMEs CAPACITY IN COPING WITH FIERCER FOREIGN COMPETITION RESULTING FROM TRADE LIBERALISATION: THE STORY FROM INDONESIA

Tulus T.H. Tambunan

Center for Industry, SMEs and Business Competition Studies, Trisakti University, Jakarta,

Indonesia

THE MAIN ISSUES: • CAN INDONESIAN MSMEs SURVIVE UNDER

GLOBALIZATION/TRADE LIBERALIZATION?• WHAT ARE THEIR MAIN CONSTRAINTS TO

COPE WITH FIERCER FOREIGN COMPETITION IN BOTH DOMESTIC AND FOREIGN MARKETS?

• WHAT THE INDONESIAN GOVERNMENT HAS BEEN DOING IN SUPPORTING THEM?

Part 1: THE CURENT STATE OF MSMEs’ DEVELOPMENT

The main characteristics of MSMEs:• MSMEs are the majority in number of enterprises and

employment creation• The majority of MSMEs are MIEs• They are concentrated in agriculture, though it varies

by subcategory• They are yet so strong in manufacturing industry• In the manufacturing industry, they are mainly in low

technology based industries and subcontracting between MSMEs and LEs are still weak

Total enterprises by size category, Indonesia,

2000 2003 2005 2007 2009 MIEs & SEs

39,705 43,372.9 47,006.9 47,720.3 52,723.5

MEs 78.8 87.4 95.9 120.3 41.1 LEs 5.7 6.5 6.8 4.5 4.7 Total 39,789.7 43,466.8 47,109.6 49,845.0 52,769.3

Total Employment by Size Category and Sector in Indonesia, 2008 (workers) Sector MIEs SEs MEs LEs Total Agriculture Mining Manufacture Elect, gas & water Construction Trade, hotel & rest. Transport & comm. Finance, rent & service Services Total

41,749,303 591,120

7,853,435 51,583

576,783 22,168,835

3,496,493 2,063,747 5,096,412

83,647,711

66,780 28,762

1,145,066 19,917

137,555 1,672,351

145,336 313,921 462,683

3,992,371

643,981 21,581

1,464,915 31,036 51,757

472,876 111,854 279,877 178,311

3,256,188

229,571 78,847

1,898,674 54,233 31,016

179,895 98,191

156,064 49,723

2,776,214

42,689,635 720,310

12,362,090 156,769 797,111

24,493,957 3,851,874 2,813,609 5,787,129

93,672,484

GDP by Size of Enterprise, Indonesia (Rp trillion) Sector Size of

enterprises GDP share (%) at

constant prices (2000)

2006 2007 2008 Agriculture MSME

LE 14.00 0.60

14.26 0.57

13.65 0.58

Mining

MSME LE

1.02 7.01

1.15 7.20

1.09 7.54

Manufacture MSME LE

6.99 19.85

7.81 19.29

8.62 19.30

Elect, gas & water supply

MSME LE

0.06 0.60

0.06 0.63

0.06 0.69

Construction

MSME LE

4.04 2.04

4.39 2.06

2.48 4.07

Trade, hotel & restaurant

MSME LE

17.00 0.65

16.60 0.66

17.44 0.74

Transport & communication.

MSME LE

3.32 3.45

3.29 3.89

3.43 4.89

Finance, rent & service

MSME LE

7.20 3.32

5.96 3.25

6.33 3.62

Other services MSME 4.86 4.92 5.23

Part II: MSMEs’ EXPORT PERFORMANCE AND COMPETITIVENESS

The Main Characteristics:

• Though export of Indonesian MSMEs increases annually, rhe majority of MSMEs are domestic market oriented.

• The majority of exporting MSMEs only export some proportion of their total output.

• Exports of Indonesian MSMEs are traditionally in low technology-based products.

• The majority of exporting MSMEs do export indirectly through trading companies or subcontracting with export-oriented LEs.

• No evidence that some Indonesian MSMEs are engaged in regional/global value chains/production networks.

• Low level of competitiveness (e.g. productivity, efficiency, and quality of products)

Share of MSMEs’ contributions in total exports, 1990-2006

Economies Average share (percentage)

China 60 Taipei, China

56

India 40 Thailand 40 Pakistan 25 Vietnam 20

Indonesia 17 Singapore 16 Malaysia 15

Export of Indonesian MSMEs, 2006-2008 (in US$ million)

Year

Non-oil and gas exports MIEs SEs MEs LEs Total

2006 1,347.7 2,936.5 7,910.8 65,623.2 77,818.3 2007 1,502.5 3,466.2 9,332.6 75,000.0 89,201.2 2008 2,024.7 4,414.8 11,936.4 91,509.1 109,885.0 2009 1,597.3 4,093.3 12,337.7 87,870.6 105,898.9

Top Ten manufactured exports of Indonesian MSMEs, 2009-2010

No

Product

2009 January-June 2010

Volume Value Volume Value 1 Manufactured palm / palm oil 20,737.9 12,924.9 8,068.0 6,124.2 2 Textile 1,757.4 9,245.1 963.0 5,295.7 3 Iron steel, machinery and

automotive 2,829.3 8,701.1 1,504.7 5,242.4

4 Rubber-based products 2,506.8 5,020.2 1,404.2 4,415.3 5 Electronics 339.8 7,899.6 179.6 4,320.9 6 Manufactured copper, tin, etc. 508.1 5,241.5 262.7 3,002.8 7 Pulp and paper 6,530.9 4,272.4 3,318.2 2,718.4 8 Wood products 3,184.2 3,441 2,250.0 2,262.7 9 Basic metal 4,003.7 3,168.3 2,305.7 2,245.7

10 Food and beverages 1,612.8 2,569.3 789.8 1,463.0

Development of Indonesian MSMEs’ exports for TPT, 2000-2006

Year Volume (billion

kg)

Value (billion

US$) 2000 1.8 8.4 2001 1.7 7.7 2002 1.8 6.9 2003 1.6 7.1 2004 1.6 7.7 2005 1.8 8.6 2006 1.9 9.4

MSME Competitiveness in Selected APEC Economies

0 1 2 3 4 5 6 7 8 9

Hongkong-China

USA

Chinese Taipei

Australia

Canada

Singapore

Malaysia

Japan

Thailand

Philippines

Korea

China

Indonesia

Labor Productivity of Enterprises by Size in Indonesia (Rp/worker)

Average Income per Worker in MIEs, SEs and MEs in Indonesia, 2006 (000 rupiah)

Part III: MSMEs’ MAIN CONSTRAINTS

Number of MIEs and SEs in the manufacturing industry by main obstacles, 2003

SEs MIEs Total Have no serious obstacles 46,485 627,650 674,135 Have serious obstacles: 192,097 1,862,468 2,054,565 Lack or high prices of raw materials 20,362 400,915 421,277 Marketing difficulties 77,175 552,231 629,406 Lack of capital 71,001 643,628 714,629 Transportation / distribution obstacles 5,027 49,918 54,945 High price or short supply of energy 4,605 50,815 55,420 High labor cost 2,335 14,315 16,650 Other key constraints 11,592 150,646 162,238 Total 238,582 2,490,118 2,728,700

Part IV: MAIN CHANNELS THAT TRADE LIBERALIZATION AFFECTS INDONESIAN MSMEs

Four main ways in which international trade liberalization affects SMEs

(a) (b)

(c) (e)

(d)

(f)

Domestic output market

Import Export market Domestic MSMEs

Domestic input market

Part V: GOVERNMENT POLICYV.1 MSMEs Policy

The current official guidance for the MSME policy in Indonesia is stated in the so-called Strategic Plan (Renstra) 2010-2014 from the State Ministry for Cooperative and SME. Regarding MSMEs, the Plan has a number of strategic targets, which are the followings:

1) To increase the role of MSMEs in the national economy by increasing:

(a)productivity 5% on average per year; (b)contribution to GDP 6% per year, (c)employment creation 5% per year, (d)investment 10% per year, and (e)export 15% per year;

2)To increase the capacity of MSMEs by (a)increasing the number of MSMEs entrepreneurs in attending

training programs organized by the Ministry (or other stakeholders),

(b)organizing many entrepreneurship trainings for potential entrepreneurs/new graduated men and women,

(c) increasing the number of place for skill practice in education institutes in rural areas,

(d)increasing the number of training programs for MSMEs, (e)providing more models of international best practices, (f) increasing the number of MSMEs using information and

communication and other appropriate technologies, and (g)promoting/supporting business partnerships between MSMEs

and LEs as well as among MSMEs.

3) To increase the competitivenss of MSMEs by (a) expanding the domestic use of products produced by local MSMEs, (b) maintaining at least 65% domestic market share of local MSMEs in retail

businesses, and ((c) increasing export of MSMEs up to the level of minimum 20% share in Indonesia’s

total non-oil and gas exports per year.

4) To expand marketing of local MSMEs’ products by (a) expanding existing trading houses and developing new ones in all provinces in the

country, (b) improving quality of facilities supporting production and marketing of MSMEs, (c) increasing promotion activities of MSMEs’ products, (d) increasing the number and quality of modern retail shops of MSMEs, and (e) strengthening marketing of MSMEs’ products in clusters in all locations, including

in backward/isolated and bordering areas, in the country.

5) To provide MSMEs with full access to financing and financial guaranteeing by

(a)providing credit schemes which are relatively cheap, accessible for all MSMEs and quick in process,

(b)(b) increasing the number and quality of banks and other non-bank financial institutions.

6) To establish an enabling or conducive business environment for MSMEs by

(a)simplifying all regulations and bureaucratic procedures, (b)making and implementing policies, regulations and

constitutions which are pro-capacity building of MSMEs, and(c)harmonizing all MSMEs development programs from all

different government departments and agencies.

7) to increase new MSME entrepreneurs up to 5,000 men in the coming few years through

(a) entrepreneurship education/training in universities and other education institutions, and

(b) expanding venture capital providers.

V.2 Key Executing Government Departments and Non-Department Agencies

State Ministry for Cooperative and SME• Ministry of Industry• Ministry of Trade• Ministry of Research and Technology• National Development Planning Agency• Central Bank• Ministry of Manpower

Part VI CONCLUSION• virtually no evidence to suggest that MSMEs in general in Indonesia

have been negatively affected by trade liberalization (e.g.no evidence that the collapse of many local MSMEs has happened significantly because of imports).

• Government has been doing many efforts to support capacity building in MSMEs, but not so much emphasis has been given to development of technology or innovation; credit schemes component of MSMEs development policies has been given too much attention.

• It is likely that as long as Indonesian MSMEs, especially MIEs and SEs still have their own market segments, i.e. supplying cheap consumer goods to low to middle income groups, and poverty in Indonesia is still present, MSMEs will keep exist or even grow despite the increasing competition pressures from imports.