THESIS
Internationalisation of Small Medium Enterprise in Indonesia:
A Lesson from Dutch Experience
Rully Nooring Safitry Suratman S1580043
University of Groningen
Faculty of Management and Organization MSc International Business and Management
Abstract
TABLE OF CONTENT
Abstract... 2 CHAPTER 1 ... 5 Introduction... 5 1.1 Background... 5 1.2 Problem Indication... 6 1.3 Research Questions... 7 1.4 Methodology... 9 1.5 Reflection... 10 CHAPTER 2 ... 13 Theoretical Background... 132.1 Small Medium Sized Enterprises... 13
2.2 Summary ... 22
CHAPTER 3 ... 24
Overview of SMEs’ Development in Indonesia and the Netherlands ... 24
3.1 SME Development in Indonesia ... 24
3.1.1 General Feature... 24
3.1.2 Support Program for SMEs’Development ... 27
3.2 SME development in the Netherlands ... 29
3.2.1 General Feature... 29
3.2.2 Support Program for SME Development... 32
3.3 SMEs in Comparison ... 34
CHAPTER 4 ... 36
The Internationalisation Process of SME ... 36
4.1 Indonesian Case ... 36
4.1.1 Exporting Activity of Main Economic Sector... 36
4.1.2 Internationalisation Process of Indonesian SMEs... 37
4.1.3 Potential Obstructive Factors... 39
4.2 The Netherlands’s case ... 40
4.2.2 Exporting activity of main economic sector... 40
4.3 Analysis of the Internationalisation Process... 44
4.4 Conclusion ... 46
CHAPTER 5 ... 47
Internal Impediments of the Benchmarking Activities... 47
5.1 Informational... 47
5.2 Functional ... 50
5.3 Marketing... 54
5.4 Analysis on the Internal Impediments ... 56
5.5 Conclusion ... 57
CHAPTER 6 ... 59
External determinants in benchmarking activities... 59
6.3 Tasks ... 68
6.4 Environmental... 73
6.5 Analysis on the external impediments ... 76
6.6 Conclusion ... 79
CHAPTER 1
Introduction
1.1 Background
SMEs (Small and Medium Enterprise) have increasingly gained its importance in the world’s business environment. SMEs have long been becoming the pillar of countries’ economies. They make up most national economy in terms of output, employment and effective use of regional resources. OECD mentioned that SMEs in the world are reported to contribute approximately 25 to 35 per cent of world export and about one fifth of small manufacturing enterprises in the world receive between 10 and 40 per cent of their turnover from cross-boarder activities (OECD, 2000). The interesting fact is that SMEs were found to contribute about 90 per cent of radical innovation in today’s business environment. Since innovation is the engine of today's business, therefore it is expected that SMEs will experience significant development on its growth. Moreover, there are many evidences that SMEs bring enormous impact on countries’ development, which become the reason of the significance of SME development. This has occurred in less developed countries as well as in the more developed countries.
Labour productivity is much higher in larger plants, with the result that, micro enterprises had some 40 per cent of employment in 1996 (Berry et al, 2001).
In relation with globalization, most firms sooner or later will have to compete internationally, including SMEs. Internationalisation is one of the most difficult choices to make because it implies numerous risks for SMEs which has already very limited in its resources. In its internationalisation process, many SMEs, which act prosperously locally, fail in foreign markets. Rapid globalisation also affects SMEs deeply. Newcomers in the emerging market economies as well as in the transition economies will have to be well-prepared to the challenges of the open market economies.
There are a lot of studies concerning the internationalisation process of SME, yet most of them are only emphasize on determining the degree of internationalisation of SME without explaining the reason behind it. Hence, there is lack of empirical study in terms of providing input for developments of SME in less develop country in order to answer globalization challenge.
In this study, I would like to determine further about the internationalisation process adopted by Indonesian firms and factors that might improve the development process by learning from the experience of Netherlands’ SMEs in the internationalisation process. This will be conducted by analysing the level of international involvement of SMEs and by determining both their internal and external impediments. Internal barriers are associated with organizational resources/ capabilities and company approach to export business, whereas external barriers originally from the home and host environment within which the firm operates (Leonidou: 2004). In doing so it is expected that benchmarking will more likely to be obtained.
1.2 Problem Indication
infrastructure and human resources are also taking place hindering the development of SMEs in developing countries and as a result further delay the internationalisation process. The internal impediments above in one hand can be lessened should the government and external parties (i.e. large enterprise and non-governmental organizations) make conducive environment for the development of SMEs. On the other hand, it can also be worsened when there is no substantial effort from the government and the external parties. Therefore, in order to compete with SMEs in the developed country, SMEs in developing countries need to know their weakness areas and to understand which strategies of internationalisation process that most suitable for them.
With the intention to provide input on SMEs’ development in the developing countries through benchmarking activity, this study concentrate on SMEs in Indonesia and the Netherlands. It based on the interesting fact that Indonesia’s SMEs have high sustainability in the turmoil condition (i.e. financial crisis) that most of them turn to international market as the local market stagnates, yet after the crisis subsided they are still facing difficulties for being internationalized (Wengel, 2006).
Data from ASEAN-EU paternalist states that only 1.2 per cent of SME in Indonesia that are entirely involved in export and only 1.9 per cent committed for partly export (ASEAN, 1997). Thus, concerning the importance of SMEs in the economy of the country and its sustainability in stiff condition, as in the case of Indonesia, it is appealing to conduct research on the internationalisation process of SMEs in Indonesia and provide input to its further development by benchmarking Dutch SMEs that are proven to be more significantly developed.
1.3 Research Questions
(1) In what way does the internationalisation process in Indonesia differ from those in The Netherlands?
The first research question is aimed to identify the degree of internationalisation involvement of Indonesian SMEs. In determining the degree of internationalisation, I use the theory of Cavusgil. In his theory, Cavusgil defines internationalisation of firms into five stages. Those are: domestic marketing, pre export stage, experimental involvement, active involvement and committed involvement (Cavusgil, 1980). Those stages of internationalisation are adopted in order to define the level of international involvement of firms.
(2) How informational, functional & marketing can explain the difference of internationalisation process of SMEs in Indonesia and the Netherlands?
In answering the second research question which related with the internal factors that might affect the international involvement, the article of Leonidou about factors that might hinder the export development of SMEs will be used. In his article he divides export barriers into two main factors, internal and external (Leonidou, 2004). However, this section will specifically emphasise on elaborating internal factor which include informational, functional and marketing. Here, internal barriers are associated with organisational resources and capabilities, and company approach to export business.
(3) What are the critical factors in terms of procedural, governmental, tasks and environmental that can be learned from the Dutch experience, which well suited with the condition of Indonesia, in order to enhance the internationalisation process in Indonesia?
1.4 Methodology
This study is categorised as a descriptive comparative study because here the analysis of the internationalisation in both countries, Indonesia and the Netherlands, were conducted through comparison activities. Internal and external obstacles, that obviously hamper the successfulness of the internationalisation are analysed. Before that, it is needed to examine the internationalisation process of each country to identify the level of internationalisation. The aim of this study is to provide reflection to Indonesia in developing its SMEs, particularly in internationalisation activities and providing insight to learn from the experience of the Netherlands as the benchmark country. Analyzing internal and external impediments as mentioned earlier will elucidate SMEs in developing countries by knowing their weakness areas and understanding which strategies of internationalisation process that most suitable for them.
Questions will be answered both by collecting information from literatures and secondary data related with statistical evidence on the development of SMEs in the Netherlands and Indonesia. Data will be obtained through all of related parties from governmental until private parties in both countries. All parties that are likely to have direct or indirect implication on the development of SMEs will be observed. In the case of Indonesia, primary data will be used to analyse the internationalisation level.
The stream of this study is ordered in a consecutive way. There are three questions will be elaborated in order to give precise recommendation. The first question is aimed at providing evidence in answering the second question, and so will be with the third sub-question thereafter. Thus, the sequence of the sub-question will result in a final outcome answering the main research question.
and Medium Enterprises Republic of Indonesia (Indonesia) and EIM (The Netherlands).1 For the purpose of specific analysis of internationalisation process, this study took sample from 50 SMEs in Indonesia. Other supporting sources such as institutes or any organization dedicated for SMEs development will also be used (i.e. Small Medium Enterprise Development Centre in Indonesia (SMEDC) or the Chambers of Commerce in Indonesia and the Netherlands).
After obtaining the result of the internationalisation process, in answering the second question, literature review obtained from EIM and other internet sources such as EBSCO, in accordance with the country’s specific factors affecting internationalisation process of the two countries were conducted. Country’s specific factors that are affected are explained here through elaboration of the three aspects of domestic obstacles. The informational, functional and marketing are the main factors discussed here.
For question three, detail analysis of the development and condition of external factors of SMEs in both countries will be conducted after internal barriers are acquired. In giving further analysis from benchmarking activities, extra elaboration of country condition was performed. Similar to the second question, literatures were also obtained from EIM and other internet sources such as EBSCO. The elaboration of development and condition of SMEs is related with four factors of the environmental determinants (Kaynak, 1993). The factors included here are procedural, governmental, tasks and environmental. From here, the success story of the benchmark country can be implemented by benchmarking country since it already well suited with the country specific conditions.
1.5 Reflection
There are few things that otherwise could have been done better in this research. First of all is the access data limitation. The micro level data concerning the export and sales of Dutch enterprises is quite hard to obtain. The only available data is already analysed data obtained from EIM. Second of all, had the time constraint was not in
CHAPTER 2
Theoretical Background
2.1 Small Medium Sized Enterprises
Small Medium Enterprises (SMEs) are generally defined as firms that hire less than 100 employees (Zimmerer, 2005). However, some countries have classified different understanding of SMEs classification. In EU, for example, micro enterprises are defined as companies that hire at maximum nine employees while small enterprise accounted for hiring 10 – 49 employees. Companies that hire employees from 50 – 249 are considered to be medium size (Eshuis, 2000).
Indonesia, on the other hand, have different emphasise on the definition of SMEs. Ministry of Cooperative, Small and Medium Enterprises Republic of Indonesia (Kementrian Koperasi dan UMKM) defines SMEs into three categories (based on total assets, total sales per annum, and firm status) as follows:
1. Micro sized enterprises: have the characteristic of small scale citizenry economics and conducted in a traditional way, yet informal. Total sales for this category have at maximum 100 million Rupiah.
2. Small scale industry: have similar characteristic with micro sized enterprise which based on citizenry economics with comply with following criteria:
a. Firm that has capital at maximum 200 million Rupiah excluding land and building.
b. Firm that has total sales per annum at maximum for 1 billion Rupiah. c. Firm owned by individual, not in the form of company or branch which
become propriety or affiliated by either direct or indirect with medium or big scale of firm.
d. Firm owned by individual which either have corporate body or does not have corporate body, including cooperative.
3. Medium scale industry is citizenry economics fulfilling following criteria: a. Firm that has net capital within range of 200 million and 10 billion
e. Firm owned by individual, not in the form of company or branch which become propriety or affiliated either direct or indirect with medium or big scale of firm.
f. In the form of firm owned by individual which either have corporate body or does not have corporate body, including cooperative.
The three categories mentioned above provide the description that firm in different category have the possibility to move from one category to another based on its development and growth.
Small firms are currently becoming more acknowledged in its existence. It is now receiving more attention from many business actors and scholars. SMEs are reported to contribute 25 to 35 percent of world exports of manufacturers. Moreover, about one fifth of manufacturing SMEs receive between 10 and 40 per cent of their turnover from cross boarder activities (Andersson et al, 2004).
Considering the importance of SMEs for national economics, it is imperative to study variables and development that affect success in internationalisation process of SMEs that are progressively more competing in the global marketplace.2 Internationalisation can be critical to a firm’s long term success and the scale of expansion and risks involved are significant.
Kalantaridis demonstrated that SMEs are more flexible when numbers of internationalisation dimensions are taken into account (Kalantaridis, 2004). Moreover, he found that the confrontations of SMEs with large enterprise are increasing the internationalisation dimension. Therefore, strategic planning is important in developing and maintaining global orientation.
Determining the internationalisation process allows the researcher to verify the exact pathways of the internationalisation process of SMEs characterised within a country. Besides, there are many reasons lies behind the importance of being internationalised.
There are seven advantages that becomes the reason for the management of SMEs to go international:3
1. Demand from abroad. 2. To make growth possible.
3. Domestic market too limited. There are possibilities of erupting foreign market while domestic market being in a stagnant position. Therefore, global business acting as “countercyclical balance”.
4. Raw materials needed from abroad.
5. To make diversification of products and/ markets possible. The fact is that some companies’ products are approaching the maturity level of their life cycle, and for that reason, having product diversification or sell the product outside domestic market might bring the opportunity for the company.
6. To strengthen competitive position abroad 7. To keep abreast of development abroad
SMEs seem to have to overcome greater obstacles in this process of internationalisation as compared to their larger competitors. The discovery of foreign niche markets and the utilisation of their SMEs-specific advantages as compared to the larger corporation
The successfulness of the international activity is based on many factors. There are a lot of studies being conducted regarding this matter. One of those is study by Wijngaarden that define that the success factors of SMEs are based on five factors. The factors mentioned are: the roles of entrepreneur including his or her characteristics and attitudes, the role of information, cooperation with other institutions, company’s strategy and the type of ownership (Wijngaarden, 1997). This study, which was conducted on European SMEs, concluded that each of the factor mentioned is integrated with one and another in determining the successfulness of the internationalisation process.
3
In relation to that study, Pleitner et al defined nineteen success factors engaged to the internationalisation process of SMEs. The factors are: quality of management, local image, worker’s skills, technology, ability to solve technical problems, product quality, after sales service, creativity, distribution & selling staff, product design & brand image, pricing policy, low cost level, market share, financial strength, customer relation, flexibility, reliability of delivery, administration and ability to modify product (Pleitner et al, 1998). Research from European SMEs found that product quality and reliability of delivery perceived to be the highest factors concerning the success of the internationalisation.
Expanding market internationally has both cost and benefit on the development of SMEs. However, the ability of SMEs in answering the globalisation challenges counted from its ability in terms of joining in international market competition. Market expansion in order to reach overseas marketplace becomes the biggest challenge. The rationalisation is that its application of internationalisation is growing differently from one country to another.
Internationalisation can be defined as the process of increasing involvement in international operation across boarder (Welch et al). The process of being internationalised is defined as “A gradual development taking place in distinct stages” (Melin, 1992).Therefore, internationalisation is a major dimension of an ongoing development and changes in terms of scope, business idea, action, orientation, organizing principles, nature of managerial work, dominating values and converging norms. Is such a way, internationalisation can be said as a part of strategy process that answers globalisation challenge as well as improving internal development.
study related to internationalisation process, they found facts that numerous strategies for internationalising operations have been identified and studied, yet the results are mixed on identifying successful and/or unsuccessful strategies. Sample selection, methodology, and the confusing effects of strategies employed simultaneously have led to these results.
Since the internationalisation process includes development stages, it is imperative to determine the degree of international involvement. There are two main empirical models mostly used in defining the internationalisation process of firms. Both of the models are based on the behavioural approach which regards internationalisation as a process. The first one is models developed by Johanson and Wiedersheim-Paul, normally called the Uppsala Internationalisation model (U-Model) (Johanson and Wiedersheim-Paul, 1975). The second one is innovation-related internationalisation models focusing on the internationalisation as an innovation for firms by Cavusgil (I-Model).
The U-Model described as a gradual acquisition, integration and use of knowledge about foreign market and operation. It depicts the process as one of organizational learning and focuses on experience that presented as a dynamic model (Otto, 1993). This model includes forces that facilitate or inhibit exporting activity, information needs and acquiring the information, foreign market selection and entry, expansion and marketing strategies. Its implementation is organized around strategic choices and organizational forms, which influenced by many factors. Many factors engaged in this model make it very difficult to test this model.
On the other hand, the I-Model export involvement operationalised by the export/sales ratio. It is thought to reflect the extent of a firm dependence on foreign market. It portrays the internationalisation process as a step by step development. It has much different explanation chain but mostly is organizational characteristics.
adoption of this model into certain type of industry, the U-Model, which unbounded to certain type of industry scale, some researchers concluded that it needs to be adapted in order to explain the internationalisation process of SMEs. This become the reason in adopting the I-Model aside to that fact that the I-Model is more bounded to study the internationalisation of small and medium sized firms.
As mentioned earlier, the decision in choosing the proper method in this study, the I-Model is chosen due to the applicability and the availability of variable needed in this study. This method taking into account five stages:
¾ Stage 1 : Domestic Marketing
Firms are only interested in the domestic market and do not export at all. They are not interested or willing to experiment with exporting as they are not capable of handling export order. The export sales ratio is 0.
¾ Stage 2 : Pre-export stage
Firms searches for information and evaluates the feasibility of undertaking export. Yet, they are still lacking of information related with cost, exchange risks, distribution etc. The export/sales ratio is at or near 0.
¾ Stage 3 :Experimental Involvement
Firms start to export on a limited basis to some psychologically close country. Therefore, physical and cultural distance is limited. The involvement of an experimental exporter is usually marginal and intermittent. The export/sales ratio varies from 0-9 percent.
¾ Stage 4 : Active Involvement
There is a systematic effort to increase sales through export to multiple countries. A suitable organization structure is in place to support these activities. The export/sales ratio varies from 10-39 percent.
¾ Stage 5 : Committed Involvement
Management constantly makes choices in allocating limited resources between domestic and foreign market. That firm depends heavily on foreign market. Many firms are engaged in licensing arrangement or direct investment. The export/sales ratio is 40 percent or more.
Zimmerer and Scarborough mentioned that there are five impediments: (1) Domestic impediment; (2) International impediment; (3) Politics impediment; (4) Business impediment; and (5) Culture impediment. However, there are only two important impediments that seem to be affecting the internationalisation process; those are domestic and international impediments. Emphasising on the domestic impediments, there are three impediments that are more likely to hinder the process namely attitude, information and financing.
Similar with the study of Zimmerer about determining impediments, Leonidou had conducted similar study on factors that might hinder the export development of SMEs. In his study, Leonidou divided the major impediment of internationalisation process into two main factors. The first factor mentioned is the internal factors that refer to the barriers associated with organisational or resources and capabilities and company’s approach to exporting. The other factor is the external factors that refer to the barriers stemming from home and host environment in which the firm operates. All of the barriers mention here is are constraints that hinder the firm’s ability to initiate, to develop, or to sustain business operation in overseas markets.
activities abroad. This is the most complex area of problem since it includes the main activities of the company.
On the other hand, external barriers that focused more on the environmental impediment are divided into four major problems. The first one is procedural barriers which have the focal point on operating aspects of transaction with foreign customers. These barriers include three items that become the major elaboration subject. The items comprise unfamiliarity in exporting procedures or documentation, problematic communication with foreign customers and slow collection of payments from abroad. The second subject of external factor is the governmental barriers which pertain to action or inaction by the home government in relation to its indigenous exporters. Here, focus is on the two major areas which are the lack of home government assistance or incentives for exporting and unfavourable home government rules and regulation. Environmental barrier is the final category of external barriers. It incorporates some barriers referring primarily to the economic, political-legal, and socio-cultural environment.
Figure 1
2.2 Summary
SMEs has proven its existence in today’s business environment. It is not only competent in maintaining its existence in micro level economics, but it also proficient in boost national economic level. As a matter of fact, SMEs has now proven to have large contribution towards world’s economics.
Therefore, it is about the time for us to really consider and aware of the development of SMEs. It is imperative to study variables and development that affect success in internationalisation of small to medium sized enterprise. Internationalisation is considered to be one of the effective ways in SMEs development. Expanding market internationally has both cost and benefit on the development of SMEs. As the result for answering internationalisation challenge in different geographical area, internationalisation is growing differently from one country to another.
Success factors engaged to internationalisation of SMEs have significant influence on the development of SMEs. Strategic planning is regarded as essential in developing and maintaining global orientation of SMEs. Internal and external factor, including entrepreneurial and environmental, is integrated in one and another in determining the successfulness of the internationalisation process.
Since internationalisation process includes development stages, it is imperative to determine the extent of international involvement. Uppsala internationalisation model and Innovation-related internationalisation models are two of the most commonly used methods in determining the internationalisation. However, in relation with SMEs and its development, innovation-related internationalisation model is proven to be the most suitable method. The I-Model export involvement elaborated by the export/ sales ratio reflects the extent of a firm dependence on foreign market. Its ability to portray the internationalisation process as a step by step development becomes the reason of its applicability in this research.
CHAPTER 3
Overview of SMEs’ Development in Indonesia and the Netherlands
This chapter provide an overview for the reader about the current condition and development of SMEs in Indonesia and the Netherlands. Before we jump to the analysis it is important that the readers are familiar with the background of SMEs development in both countries and therefore can understand where the problem lies.
3.1 SME Development in Indonesia
3.1.1 General Feature. In Indonesia, source of income are heavily dependent on the
SMEs sector. These small enterprises are concentrated in trading, foods, beverages, textiles and garments, handicrafts, wood products, and non-metallic mineral production (BPS, 2005). They operate in a highly competitive and uncertain environment and are profoundly influenced by the macroeconomic situation. In such case, a fragile business environment can harm SMEs even more than large enterprises.
SMEs in Indonesia have important role in the form of contribution on national economy. It has a considerable high role in forming and enhancing GDP even though not as high as its ability to provide job opportunity. According to the Indonesian Ministry of Cooperative, Small and Medium Enterprises, GDP segment from SMEs in 1997 accounted for 40.45 per cent. In 1998 when Indonesian economy experienced turbulence, that contribution decreased to reach only 13 per cent. Nevertheless, as the national economy gradually recovers, SMEs’ contribution on GDP has been identified to increase to the level of 45.55 per cent.
found in the agricultural sector. It is recorded that approximately 43,221,829 companies are categorized as SMEs in 2004. On the contrary, there were lesser company classified as big enterprises which only accounted for 2248 in 2004.
Table 1
Number of Economic Actors Based on Industry Scale
Industry Scale 2003 2004
Small enterprises 42.475.756 43.158.468
Medium-sized enterprises 59.580 63.361
Small and medium enterprises 42.535.336 43.221.829
Big enterprises 2.169 2.248
Source: Statistic of SME, Ministry of Cooperative, Small and Medium Enterprise Republic of Indonesia
Based on the industry scale classification, economic actors for small enterprises are far more than those of medium sized. Ministry of Cooperative, Small and Medium Enterprises Republic of Indonesia reported that small-sized enterprises in Indonesia is estimated around 43 million but for medium sized enterprise only for 63,361 in 2004. However, the growth of economic actors under medium-sized enterprise classification is far more than small-sized enterprise (figure 1).
Figure 2
Growth of economic actor based on industry scale Growth of Economic Actors Based on Industry
Scale 0 1 2 3 4 5 6 7 Small Enterprises Medium-sized Enterprises Big Enterprises Small and Medium Enterprises Percentage
Source: Statistic of SME, Ministry of Cooperative, Small and Medium Enterprise Republic of Indonesia
played a significant role in the economy of this fifth-largest population country in the world. From more than 40 million enterprises, 99.99 per cent are SMEs and only 0.01 per cent is large corporation. Millions of people are active in this productive sector and SMEs employ 99.45 per cent of people in the private sector. Employment in SMEs’ sectors experience a considerably high growth in recent years. It is reported that the growth in employment in SMEs increases approximately 3.19 per cent from 2002 – 2003. This progress is considered to be high compared to the number of employment absorbed by large enterprise which had declining number.
Table 2
Number of Labour Absorbed by Different Industrial Scale in Indonesia Enterprises 2002 2003 2004 Growth 2002 – 2004 Small 68.275.636 71.099.307 70.919.385 3,73% Medium 8.271.993 8.304.889 8.147.479 -1,53% Subtotal 76.547.629 79.404.196 79.066.864 3,19% Large enterprise 423.733 415.292 402.902 -5,17%
Source: Statistic of SME, Ministry of Cooperative, Small and Medium Enterprise Republic of Indonesia
Most of Indonesian SMEs are characterised by their traditional production processes that are passed down from one generation to the following generation. They are mostly regionally dispersed, and are mostly located in the rural areas. By then, family-owned company become the notable characteristic of Indonesian SME. As the result, the ownership’s characteristics influence the way of management conducting their main activities in the company such as production and marketing (Indarti and Langenberg, ). Both of the main activities were conducted by the management using the same pattern as adopted by their predecessor.
One report by the World Bank reveals that the majority of 2,500 Indonesian small business owners in six districts surveyed for the report said that they were unable to develop their businesses. They cited poor roads, unreliable electricity supplies, and limited access to credit and markets as their main impediments. Unfavourable policies on the movement of goods and labour are among the main problems small businesses in Indonesia that mostly located in rural area (CGI, 2002).
3.1.2 Support Program for SMEs’Development. Despite the often stated government concern about SMEs development, during the old regime, SMEs were actually not considered a vital part of the economy. Rather than viewing SMEs as important economic actors and an important part of a vibrant economy, many Indonesian policy-makers viewed them primarily as a social group, which needed assistance based on welfare or equity considerations rather than efficiency considerations (Hill, 1997). These welfare or equity considerations were based on the not quite correct perception that the SME, specifically the small enterprises, were owned and run by indigenous Indonesians, who were equated with the economically weak groups in society.
Because of the different definitions of the agencies in charge of implementing SME promotion programs, it is nearly impossible to assess the real impact of the SME programs. Too broad definitions of what constitute SMEs are not useful for policy purposes, as they do not distinguish between subgroups of SMEs which may have different characteristics and which may require different policy interventions.
programs for SMEs included special credit programs, including subsidised credit programs, (non-financial) business development services programs, particularly industrial extension services and training, and the above-mentioned reservation of selected sectors or sub-sectors to small enterprises (ADB, 2000).
Since the economic crisis, SMEs in Indonesia have received renewed attention, many of these SMEs turned out to be more robust than the highly indebted conglomerates. For instance, many SMEs rely on local inputs rather than expensive foreign inputs and as a result they are able to survive the crisis better than those conglomerates. Even quite a few of them were able to turn to export markets to take advantage of the steep depreciation of the Rupiah (Wengel and Rodriguez, 2006).
The successive post-Soeharto governments confirmed their commitment to support a more rapid development of SMEs. However, because of the lack of success of past SME promotion programs, a number of policy-makers including officials in the Department of Industry, Indonesian academic economists, experts in the multilateral and bilateral aid organizations, and foreign foundations engaged in SME development, stated after the crisis that these preferential and protectionist programs were ineffective in nurturing viable SMEs. ‘Welfare-oriented’ SME programs implemented by the old regime should be replaced by the market-oriented.
3.2 SME development in the Netherlands
3.2.1 General Feature. SMEs sectors provide an important contribution to the quality of society and shape the level of regional local facilities level like no other. Also, many new forms of service and countless technical and environmentally-friendly innovations are developed in this dynamic sector. The SMEs sectors are therefore receiving more and more of the economic, social and political recognition that it deserves. It is the SMEs sectors that add gloss and an extra dimension to modern-day entrepreneurship in the Netherlands. And above all, SME sectors are the economy's most important jobs motor. It is estimated that in 1999, SMEs in the Netherlands contributed 31.6 per cent to the national economy’s Domestic Product, while large firms contribute 36 per cent and other enterprises (public sector, agriculture and mining) contribute 33 per cent. The turnover of the SME sector is 449, 5 billion euro which is in excess of 50 per cent of the turnover of the entire business community. However, in the private sector; SMEs generate more than 45 per cent of Domestic Product.4
In the Netherlands almost all enterprises are SMEs, where more than 95 per cent of firms in this country are categorised as SMEs. The amounts of Dutch SMEs are reported to be 485,000 numbers of enterprises in 1997 (Eshuis, 2000). It currently covers a total of 560,000 companies in 2005. The Growth Potential Entrepreneurial Activity Index shows that the tendency is to increase from year 2002-2004, even though it happens to decrease in year 2003. Still, the overall inspections of entrepreneurial activity, which also reflect the growth of SMEs, give the impression to increase. It provides the evidence that SMEs in Netherlands is being in an established position.
Figure 3
Growth Potential Entrepreneurial Activity Index in the Netherlands
0 0,5 1 1,5 2 2,5 year P e rcent a g e 2002 2003 2004
Source: EIM online database
About half of the Dutch adults who set up a new business or own and manage a young firm are active in the services sector. More often than not, motives put forward for starting a business are ‘being independent’, as well as 'accepting a challenge'. Necessity-based motives are hardly heard in the Netherlands. This can be the reason behind existing fact that SME in Netherlands accounts more than half of total employment in the private sector.
Table 3
Number of Employment in SMEs – the Netherlands (2001 – 2004) Year 1-4 employees 5-9 employees 10-19 employees 20-49 employees 50-99 employees Total Amount Amount Amount Amount Amount Amount 2001 247740 52950 28300 20850 7035 356875 2002 230160 42715 29090 21095 6975 330035 2003 223680 43630 29555 21385 7105 325355 2004 223680 44170 29340 20485 6910 324585 Source: EIM, online database.
largest, employ around 48,000 employees, and medium scale industries (55 – 99 employees) remain in similar amount around 7000 employee per year.
SMEs sectors provide employment for 2.52 million people, which represent 60 per cent of the total number of jobs in the entire business community (MKB Nederland, 2006). The breakdown by sector is as follows:
• commercial services 24% • retail 13% • industry 13% • care 12% • wholesale 11% • construction 10% • car/repair 9% • catering 8%
Most of the SMEs in the Netherlands are also characterised as family-owned companies. Regarding the share of family businesses in the SME sector, some estimates are even as high as 80 per cent. When the first-generation businesses are excluded, 22 per cent of Dutch SMEs can be qualified as family businesses. Table 3 illustrates the absolute numbers of family businesses that follow out of the shares identified.
Table 4
Number of Family Business in the Netherlands Broad definition
(65 per cent family businesses)
Narrow definition (22 per cent family businesses)
1-9 employees 164,691 55,742
10–99 employees 30,628 10,366
Total 195,319 66,108
Source: EIM (2000), Kleinschalig Ondernemen (based on CBS1); EIM (2000), MKB-Beleidspanel.5
5
The table illustrates that, in the Netherlands, there are almost 200,000 family businesses among SMEs with personnel. When first-generation businesses are excluded, about 66,000 enterprises may be qualified as family businesses.
Figure4
The impact of family business
Source: Source: EIM (2000), MKB-Beleidspanel.
The panel data from EIM shows that mainly entrepreneurs consider their business to be a family business based on fact that only family members work in the business (37%) (Hulshoff, 2001). Thus, it shows that in a way, family ownership which becomes the major characteristic of Dutch SME will have an impact on every company action.
3.2.2 Support Program for SME Development. The Dutch government operates under the principle that good preparation and good guidance for potential and new entrepreneurs will improve survival and growth rates. Their goal has been to improve the efficiency and penetration of preliminary counselling and to tailor services to persons who need more assistance, e.g., the unemployed, ethnic entrepreneurs and high-technology entrepreneurs. The Chambers of Commerce, with local presence and partly financed by businesses itself, have been given the legal power to provide general information to businesses and to act as the registrar for the registration of new businesses
and the self-employed. They produce brochures, organize information sessions for new entrepreneurs and have a website where entrepreneurs can ask questions (www.kvk.nl). Special centres have been set up to work with high-growth entrepreneurs and techno-starters and there are local advice points for new entrepreneurs targeted mainly to identified groups such as women (Mama Cash), ethnic minorities (Stason), and benefit recipients (Enterprise and IMK-intermediair). Nevertheless, the national government is no longer having direct involvement in providing the counselling, training, and advice or business information to entrepreneurs. This role has been almost completely transferred to the regional and local level based on the understanding that many of the problems encountered by entrepreneurs are related to business locations, local market issues and a lack of networks. Therefore, the Dutch Ministry of Economic Affairs has allocated budget to encourage municipalities and provinces (within the framework of the ‘big cities’ policy) to stimulate entrepreneurship in their regions by simplifying regulations, improving business services, eliminating impediments in the regulatory framework, and promoting a favourable local economic climate. This includes effective business location policy, co-ordination of information and advice and local initiatives in the areas of SME financing and entrepreneurship education.
3.3 SMEs in Comparison
The above explanation shows the current development of SMEs in both sample countries, Indonesia and the Netherlands. Major comparison for the development of SMEs in both countries describe that growth of SMEs in terms of entrepreneurial activities is increasing. Moreover when it compared with large enterprise, SMEs has proven to have significant development.
It gives explanation that SMEs in Indonesia and Netherlands have noteworthy role in the economy. In both countries, SMEs have similar characteristics in their industry structure. Family business constructs most of the industrial structure within the country. It has automatically significant impact on the managerial system of the company which then affecting the development of SMEs itself. The decision making style influenced by family member usually affected by the tradition that undertaken by generations in the family. In most of the cases, influence of tradition on the decision making style is mostly occurring in company of developing countries. Nevertheless, there is still possibility that companies in developed countries still have family tradition that influence their decision making style.
Geographical and economical factors also have considerable impact on the development of SMEs. From geographical viewpoint, SMEs in Netherlands and Indonesia possess significant differences. SME in Indonesia are mostly located and developed in rural area, while in the Netherlands they are often found in urban region. This is, in any way, has big influence on the development of SMEs itself since intensive supporting program will face difficulties in its distribution. Economical factor in Indonesia can also be the other factor disturbing the development of SMEs. Compared with SMEs in the Netherlands, which happen to be in a developed country, Indonesian SME faces more complex problems.
between developed and developing countries, such as sector structure and the institutional framework will need to be taken into consideration.
Table 5
General comparison of SMEs development Broad definition
(65 per cent family businesses)
Narrow definition (22 per cent family businesses)
1-9 employees 164,691 55,742
10–99 employees 30,628 10,366
CHAPTER 4
The Internationalisation Process of SME
Based on the importance of internationalisation, it is vital to measure the stage of internationalisation of SMEs within a country. This chapter aimed at providing more evidence on the internationalisation process of SMEs in Indonesia and the Netherlands in terms of export activities. In more specific, elaboration of the internationalisation process will be conducted in this chapter. The reason to limit the evaluation of internationalisation of SMsE only from its export activities is due to characteristic of SME in Indonesia. SMEs in Indonesia mainly consist of traditional firms which have difficulties in capital and marketing (ASEAN – EU Parternariat, 1997). Therefore, internationalisation is hardly to be their expansion strategy. Export, as a result, perceived as the most active method used for internationalisation activity. Consequently, in this chapter, internationalisation will only be discussed within export activity.
4.1 Indonesian Case
4.1.1 Exporting Activity of Main Economic Sector. Export growth of SMEs in Indonesia has insignificant difference compared to large enterprise. According to statistic from Indonesian Ministry of Cooperative, Small and Medium Enterprise, the growth of export value of SMEs in 2003-2004 is 18.92 per cent. On the other hand, large enterprises are registered to have export value of 18.99 per cent.
-12.69 per cent). However, the total export activities of Indonesian SMEs accounted for $2152.6949 USD, which increased in 2004 to $ 2566.6816 USD.
Figure 5
Percentage Growth of Export Performance 2003-2004 Percentage Growth of Export
Performance 2003-2004 -20 -10 0 10 20 30 40
Agriculture Mining Manufacturing
Economic Sector Percentage
Source: Statistic of SME, Ministry of Cooperative, Small and Medium Enterprise Republic of Indonesia
Export goods from manufacturing sector in Indonesia shows the tendency to increase in some sectors. The sectors involved are mostly dominated by the producers of low technology products (Tambunan, 2003). The types of product includes are especially in the forms of textiles, leathers, woods, and corks. On the other hand, chemical product shows falling demand during year 1970-1994.
Figure 5
Internationalisation process of Indonesian SME
0 5 10 15 20 25 30 35 2001 2002 2003 2004 2005 stage 1&2 stage 3 stage 4 stage 5
rom the outcome of the analysis of export activity in Indonesian SMEs, it is found that
his phenomenon of course goes beyond the expectation that Indonesian SME is more
Table 6
Export Ratio per Entrepreneur
Year Export ratio per year for
F
the export commitment of entrepreneurs is more likely to increase. It can be seen that the tendency of export participation in stage 5 is higher while commitment to market the product domestically like that in stage 1 and 2 is decreasing.
T
likely to have less international involvement. There are a lot of reasons behind the increasing number of export commitment in Indonesian SME. One of which is the type of industry. The type of industry of the sample companies are mostly categorised as the furniture and handicraft industry. Furniture and handicraft, considered as SMEs’ products are largely exported. As the result, the demand of those product are quiet low in the domestic market, therefore, the commitment of going international is higher. Therefore, they are not going through form one stage to another.
Export/sales ratio per year
each entrepreneur
2001 1,668.93% 33.38%
2003 2,614.06% 52.28%
2004 2,509.96% 50.20%
2005 1,920.37% 38.41%
∑ 217.24%
[ 42.45%
However, if we see from the rate of export activity per entrepreneur, the ratio of
the result adopted in a graph, it will be seen that picture of export ratio per entrepreneur
4.1.3 Potential Obstructive Factors
ential, the development of export SMEs in
2) normally passive, waiting for buyer and easily satisfied 3) an resources, moreover in terms of knowledge regarding
4) quota.
ther products/ international involvement is not considered as big enough. Table 4 shows that the trend of average export/ sales ratio in each year from 2001 – 2005 has the tendency to increase. If
will fluctuate. It increases from year 2001 to 2002 (33.38%, 42.97%, 52.28%), but decreases in following year (50.20% and 38.41%). The average export ratio in the late five years (2001-2005) is relatively small as it accounts for 43.45%, which still below 50%.
Although having relatively high export pot
Indonesia is relatively low and fluctuated. It indicates various obstructive factors such as: 1) Limited access for overseas market as a result from limited information source
from and to the market. SMEs entrepreneurs are with the resulted earn. Limited ability of hum
export import activity and language barrier. Most of them are having difficulties to communicate in foreign language especially in English.
Limited assets and capital that become barriers in fulfilling
6) Entrepreneurs got used to small scale business which relatively secure and easy to manage.
7) Government regulation created to support SME export have not been properly implemented and still being done in an ad hoc manner.
8) Its production activities are still considered to be high costs that make it less competitive, except for handicraft product.6
4.2 The Netherlands’s case
4.2.2 Exporting activity of main economic sector. The Netherlands is categorised as one of the biggest exporter countries in the world. It is actively involved in both export of goods and services. The Netherlands placed in the ninth seats concerning the export of goods and in the eighth with respect to the export of services.
Table 7
Top-ten of Main Exporters of Goods and Services in the World, in per cents of the Total World Export, 2002
Exporter of
goods percentage
Exporter of
services percentage United States 10,7 United States 17,4
Germany 9,5 United Kingdom 7,8
Japan 6,5 Germany 6,3
France 5,1 France 5,5
China 5 Japan 4,1
United Kingdom 4,3 Spain 4
Canada 3,9 Italy 3,8
Italy 3,9 The Netherlands 3,4
The Netherlands 3,8 Hongkong, China 2,9
Belgium 3,3 China 2,5
Source: EIM, 2004 based on WTO, International Trade Statistics 2003.
Dutch SMEs is mostly characterised by conducting import activities compared to export. There are four types of internationalisation of Dutch SME. The first one is import activity
which accounted for 26 per cent of the total SME and export activity for 18 per cent. The other two would be foreign direct investment (FDI) and international cooperation which accounted for 2 per cent and 9 per cent respectively.
Figure7
Percentage of Internationalised SMEs by size class, 2004-Netherlands
Figure 4 shows comparison between micro-small and medium sized enterprise based on their size class. It shows that most firms that categorized in medium sized enterprise have been more active in export activity compare to those in micro level. However, as it has been mentioned before, international activity in the Netherlands are more in terms of importing on the contrary to exporting. The figure confirms that there is more importing activity of Dutch SME as opposed to exporting activity.
Figure 8
As figure 4 shows, export activity of Dutch SME is below the rate of import activities. However, as compared to other industry, manufacturing accounted to have largest percentage of export activities although it is still below import percentage. Transport and trade follow just after manufacturing industry for the percentage of export activities. The share of importing SMEs is highest in trade and manufacturing. Manufacturing and transport have relatively the highest share of SME that cooperate with foreign enterprises. To summarise, the internationalisation of Dutch SME takes place mainly in manufacturing, trade and transport.
Table 8
Export total industry to size class, 2003 company size (number of
employees) export volume x 1 mln € quote % export Development (%) compare to previous year
2-9 1.446 13 -3,2 10-19 2.069 19 0,2 20-49 4.994 25 0,4 50-99 10.305 41 -1,9 SME (2-99) 18.815 28 -1,2 LE (>99) 58.918 57 -1,3 total 77.733 46 -1,2
Source: Hessels & Baker (2003)
For the whole analysis of Dutch SMEs, it can be seen that the overall industrial SMEs for the first time since 1996 has been declined in 20037. The fall occurs especially in the electronic industry and mostly at transportation industry. It is possible that the reduction of export in these companies also have relationship with the larger companies which having more and more activities result in further reclining move. Since SMEs are frequently performed as subcontractor in this country, this has been the necessary consequences for them.
The total direct Dutch industrial export has grown in 2004, with 4 per cent with respect to 2003 (Hessels et al, 2005). The export of the industrial SME grew over this period for 5.1 per cent. The export of the SME grew especially in the chemical industry and metal basis. The direct export service has increased in 2004, by 3.7 per cent with respect to 2003; the wholesale trade is in 2004 2.7 per cent, more will export than in 2003.
Table 9
SME’s sales from export activity Year Small-enterprise (x 1 mln euro) Medium-sized enterprise (x 1 mln euro) Total SME (x 1 mln euro) 2003 21.719 42.005 63.725 2004 22.038 44.039 66.077 2005 22.637 46.259 68.896
Source: BLISS Rekeningen database, 2006
Following the depreciation of export growth in 2002-2003, the subsequent year has seems to increase. In 2003, it was recorded that the export activity volume amounted for SMEs about EUR 18.815 and large enterprise for EUR 58.918. This condition was reported to be declining period of all economic sector, SMEs and large enterprise. Fortunately, this condition is not occurring in longer period of time. Starting 2004, the total export activity of SMEs has increase 3.5 percent from the previous year reaching EUR 63.725. And it is getting practically increasing in next following year until 2005 for about EUR 68.986. The growth of export activity from 2003 – 2005 has significantly increase for about 7.5 per cent.
4.3 Analysis of the Internationalisation Process
This chapter shows that relatively a lot of information available concerning export being done by SMEs in Indonesia and the Netherlands. Statistic data from year 2003 shows the USD 24.055 as the reflection of export activity in the Netherlands is considerably higher than that of Indonesia, which accounts only for USD 2152.6949. This becomes the reason for Indonesia to learn form Dutch experience in terms of export activity. Moreover that Netherlands become one of the biggest exporter countries in the world.
The elaboration of export activity using Cavusgil’s method reveals that Indonesian SMEs tend to progress through stages. Even though the evidence is not showing any significant progress but still the tendency to move from one stage to another, especially from stage 1 to 2, is subsist. However, the method will show different result when it applied in different types of industry. It is due to the fact that each type of industry has their characteristics and attractiveness. As mention earlier, the sample of this study is mostly consist of furniture and handicraft company that largely exported and internationally attractive for global market. Consequently, the stage 5 is considered far higher than any other stages.
The overall elaboration practically revealed that Indonesian entrepreneur possessing export potential that can be developing further. However, because of many factors hindering the process, the further development of SME is more likely to be unstable or fluctuate and having relatively small slope.
Indonesian entrepreneurs, in other way, still categorized as subsistent firm since their main goal is to survive and fulfil domestic demand. This has become the reason of relatively low export ratio of Indonesian SMEs which only accounted for 43.45 per cent at the average.
nascent entrepreneur still probing in entering the market, its export ratio considered to be fluctuated. Therefore, it makes the average ratio relatively small.
There are several reasons implicating the low average export ratio from nascent entrepreneurial activity. The first motive is that beginner exporter has not been able to control export market. This appears as the automatic result since any beginner would found themselves hard to smoothly involve in new market. Consequently, the ability to control the market turns out to be low than those who has been previously involved. Second reason is difficulties in handling constraints related with export activities. Experienced exported would have more familiarity in handling constrains that might occur in export activities as they more common with the situation and environment. However, the most important factor which still hard to carry out by nascent entrepreneur is the way of fulfilling export requirements.
In the case of Netherlands, there is a tight interrelationship among industries that normally occurs in the form of LEs-SMEs relationship. This close relationship usually characterised by subcontracting bond. Interrelationship among industries in one way can encourage to further development of industrial growth. However, collapse in one industry can have a domino effect to the other industry. In 2003, for example, the declining of export activity of SME in Netherlands takes place as a result from the deterioration of larger enterprise. However, that is just one small example of disadvantages of the LE-SME bond. In most of the cases, including the Netherlands, this activity has been proven to have larger impact on the development of SME.
The main objective of Dutch SME in conducting the internationalisation is to achieve an increase in company’s growth. However, this process can be hindered by the high cost associated in internationalisation, coupled with bottleneck that occurs from the existing law and regulation.
4.4 Conclusion
Dutch SMEs perceived internationalisation in a broader manner as compare to Indonesian SMEs. Although there is evidence that internationalisation is increasing in Indonesian SMEs yet the average of international involvement remains low. Dutch SMEs, on the other hand, mostly considers heavily on international cooperation as part of internationalisation. 18 per cent of Dutch SMEs conducted their internationalisation process in the form of export. In this case, manufacturing, transportation and wholesale businesses are the main driver of internationalisation by SMEs. Even though the marketing concentration put more emphasize on the domestic market, SMEs’ activity on export in Netherlands is greater than Indonesia.
Table 10
Summary on the Internationalization Process of SMEs
factors Indonesia The Netherlands
Perceived of the
internationalization Export activity International cooperation Average of the international
involvement low high
CHAPTER 5
Internal Impediments of the Benchmarking Activities
After determining the internationalisation stage adopted by Indonesia and Netherlands, as the benchmark, this step is to explain the result. By placing country specific factors as the determinant instruments, the explanation of the process can be more detail since it departs specific upon country’s factor. There are several country specific factors that might influence the internationalisation of firms. Nevertheless, only two main impediments seem to have major impact as internal and external impediments (Leonidou, 2004). To be more specific in determining the main impediment, the first task is to know the internal barrier faced by the company. One way to do this is by excavating major factor occurred that might affect export activities. Internal barriers, to some extent, can be explained through elaborating three factors namely informational, functional and marketing system.
5.1 Informational
This impediment refers to problems in identifying, selecting and contacting international markets due to information inefficiencies.
Most of SMEs in Indonesia do not fully realise the importance of market information in running their business. One of the most common problems for SMEs is the lack of access to market information. Market information such as type of products needed by market, how big the market, when the products needed and how to deliver the products seem to be neglected (Rudjito, 2003). If the entrepreneurs do not know what they need, it would be hard for other party to provide necessary information.
management, which usually operate business based on traditional inherited system, never count it important to provide such technologies while their only limited capital.
Table 11
Communication utilization
fixed wire line 2000 2001 2002 2003 2004
fixed wire line connection 7.668.007 8.041.674 8.400.662 9.558.752 11.667.927
density (connection per 100
inhabitant) 3,07 3,25 3,45 3,54 4,11
Source: Telkom Indonesia annual report
This fact is also supported by data from Indonesian Information and Communication Company (Telkom) which disclose that the utilisation of communication tools is still low in Indonesia. Although the rate have tendency to increase in recent years, the density of connection per 100 citizens only reach for 4,11 in year 2004, which still below 5,00. For a country like Indonesia, 11.667.927 connection hardly can be considered as fulfilling the communication needs for approximately 245,452,739 populations of this country (CIA World Factbook, 2006). The connectivity of telephone system can be considered as fair in this country. Internet connection for instance, is another communication and information exchange device that seems to be less utilised in this country. There are only 18 million people of total population that can be recognised as continuous internet users in Indonesia (CIA World Factbook, 2006). This condition can be explained as less familiarity from the people about the internet, thus the utilisation of this device is barely perceived as common appliance for information exchange. People in rural area, including most of Indonesian entrepreneurs, can hardly enjoy this infrastructure.
Indonesian SMEs also has weakness in bargaining power especially in dealing with big buyers. Even if they understand the market, they sometimes find difficulties in raw material supply, both in the availability and price (Rudjito, 2003).
Education, at some point, has significant relationship with business success (Indarti and Langenberg, ). This is supported by previous study which revealed that majority of Indonesian entrepreneurs was junior high graduate. In short, this can be the reason of the occurring problems in identifying, selecting and contacting international markets.
On the other hand, easy access of know-how and technology is one of the common factor determining the high degree of SMEs internationalisation in the Netherlands (Hessels, 2005). This becomes the motives for export, import and international cooperation. Entrepreneurs in Netherlands have already considered the importance of internet and other communication devices in determining company’s success. Moreover, this condition is supported by the fact that infrastructure for information access has already been largely provided.
Internet has become the most commonly use of communication device in the Netherlands. In 2004, reported around 10,806,328 of Dutch population that becomes active internet users. Mobile phones, placed in the second part as the most frequently utilised communication device. There are about 14.8 million people in Netherlands which become the active user of mobile phones. Compare to internet and mobile phone users, landline connection has proven to be less utilised by the people; it only counts for around 7.861 connections in the Netherlands. Therefore, it can be said that from the total population of the Netherlands (16,491,461), most of them are already aware and familiar in utilizing the communication and information devices including Dutch entrepreneurs (CIA World Factbook, 2006).
Dutch entrepreneurs typically have more skills and knowledge to start up a business (Bosma and Wennekers, 2004).
5.2 Functional
Functional barriers are related to the inefficiencies of the various enterprise functions. It can be in terms of production and financing system.
The distribution of credit is one of the major problems in SME development in Indonesia. In most cases, the implementation of credit stipulation is quite strict, especially for small and medium sized enterprise. Credit stipulation is mostly concern with collateral necessity. The ability of SMEs to provide specific requirement for credit allowance is rather low. This is due to the condition of SMEs itself which obviously posses limited resources.
.
Some study reveals that most of Indonesian entrepreneurs are favouring self finance. More than 56 per cent of total SMEs in Indonesia are relying on personal saving and family investment as their capital sources. Bank loans, on the other hand, were used only by less than 13 per cent of the total SMEs8. This condition proves that strict bank credit allowance somehow hinders large number of SMEs in Indonesia to utilise it.
From the banking sector point of view, financing SMEs may be very difficult. This is not surprising since some problems may arise beyond the capability of banks to handle such business environment which is not conducive or systematically ill in the financial sector. There is also legal issue in enforcing contract or business issue to obtain and enforce loan collaterals (Rudjito, 2003). Furthermore, banks usually regard lending to SMEs is a high risk and unprofitable business due to:
¾ Unavailability of accurate, reliable information on enterprises financial condition and performance
¾ Unconvinced and weak business plan
¾ Weakness in SMEs management, market links, governance, and information technology.
¾ Weakness in banks staff including loan officers are not sufficiently trained in lending to SMEs
¾ Bank’s weaknesses in identifying the characteristics of SMEs
¾ Weaknesses of the banks in adopting appropriate lending technologies and operation system that will enable them to realize this market potential and to lend profitably to small business
¾ The availability of other investing tools which give opportunity to the banks to have lower risk investment such as holding government paper
¾ Higher overhead cost due to a high number of customers with smaller loan size. Access to capital is not the only constraint for SMEs to grow, but it is considered an important problem in developing SMEs. From year 2001 until 2005 the amount of credit in billion Rupiah used to finance SME’s activities has risen 36 per cent from 61.160 to 85.181 billion Rupiah (BI, 2005). However, as compared to the overall credit given to whole industry in Indonesia, the amount given to SMEs sector is not more than 20 per cent from the total credit being given out. This number can be considered as small, and although there is an increasing number of credit
utilisation by SMEs entrepreneurs, those number is still far for sufficiently financing the whole SMEs in Indonesia in regards to its development. Moreover, there is still tendency from many people who are unacquainted with the process of credit loan applications in banks that makes them fearful to do so.
Table 12
Outstanding of Small Scale Credits in Rupiah and Foreign Currency of Commercial Banks
2001 2002 2003 2004 2005
Total industry 307,594 365,41 437,943 553,548 689,663
SME 61,160 60,834 72,647 85,191 96,580
