RESEARCH PROPOSAL
1. Backgrounds and Relevancy of the Study
The Indonesian development actually began in 1969 and then for 30 years Indonesia was governed centralize, when almost all decisions were directed from central government in Jakarta. At that time Indonesia was one of a success example of developing countries and even said to be the next “Asian Tiger” with an economic growth of around 8-10% p.a. As the Asian crisis came in 1997, Indonesia suffered under multidimensional crisis. At that time the future of the nation is on the rocks, democratisation was newly initiated, and economic crisis had destroyed the economic fundaments. The crisis also showed a big hidden problem in the country namely unsatisfied regions demand independency.
Before the crisis the Indonesian government had paid more attention in developing few large enterprises to be the locomotive of the Indonesian economy since they created more jobs for the people. Unfortunately the large enterprises, which have got many subsidies, became fragile and could not easily adapt in the crisis. The collapse of large enterprises increased unemployment rate significantly. On the other hand, the role of small and medium scale enterprise increased especially with regard to new employment. Furthermore, many local enterprises - most of them are micro, small and medium enterprises - could take advantage from the crisis since their activity were export oriented but did not rely much on imported raw materials or on bank’s credit as their financial source.
Taking those problems and facts into consideration, in 1998 the Indonesian Parliament gave new directions of economic reforms to the government delineated in two legislative acts, namely:
- The Act of Parliament concerning the Implementation of Regional Autonomy and the Regulation, Distribution and Utilization of National Resources (Ketetapan XV/MPR/1998: tentang Penyelenggaran Otonomi Daerah; Pengaturan, Pembagian, dan Pemanfaatan Sumber Daya Nasional Yang Berkeadilan; Serta Perimbangan Keuangan Pusat dan Daerah Dalam Kerangka Negara Kesatuan Republik Indonesia);
- The Act of Parliament on Economic Democracy (Ketetapan XVI/MPR/1998: tentang Politik Ekonomi Dalam Rangka Demokrasi Ekonomi). [1]
The first legislative act is concerned with the regional autonomy. The act grants broad, clear and responsible authority to the municipalities/cities to regulate, distribute and utilize its share of national resources with an appropriate balance of funding. In accordance with the principles of democracy and with due attention to diversity, the management of local resources is to be done efficiently and effectively giving broad opportunities to small and medium enterprise as well as cooperatives. Local governments hold the authority and responsibility to manage local resources and to take care the conservation of the environment.
The act was implemented through Article no. 22/1999 about Regional Government and Article no. 25/199 about Budget Balance Between State and Municipality/City; enabled bigger capacities for Municipalities to arrange its own policies and budget. The framework of decentralisation was addressed to achieve 3 goals, which are related each other: (1) avoiding disintegration, (2) promoting democratisation, and (3) developing municipalities/cities with clear responsible and authority among the levels of government.
The second legislative act is concerned with political economy within the context of a notion of economic democracy. It gives priority to assistance for the economically weak enterprises to become self-reliant in their efforts, particularly in the use of natural resources, and to provide them with access to sources of finance. Large enterprises, state-owned enterprises, banks and financial institutions are to serve as partners to small and medium enterprises. The management and use of land and natural resources are justly and equitably to develop the capacities of small and medium enterprises, cooperatives and the wider society.
The second act was implemented as people’s economy policy emphasize in strengthening small medium scale enterprises. People’s economy (ekonomi kerakyatan) are economic activities or enterprises conducted by popular independently to superintend every economic resources which can be enterprise and authorized, called Small Medium scale Enterprises (SME).[2]
Since January 1st 2001 Indonesia has been applying decentralization policy. There were hopes in this new policy in order to promote entrepreneurship in municipality/city. Decentralisation provides better chances to local enterprise in reducing transaction cost, increasing price competitiveness, avoiding direct competition with large enterprises from Jakarta, executing local project from government or international organisations, as well as optimising local resources[3].
To take these advantages, however, local enterprises have also to adapt in this new environment as soon as possible. Nevertheless, these chances will become threats for them since in the same time they also have to face free trade era[4].
The centralization era has inherited unfair business environment for local enterprises to compete fairly in the market and to take the benefit from the chances of decentralisation era. The development and progress during the centralization era have abandoned small-scale industry, which had only taken less advantage from the various government deregulations and policies. Further, they were even weaker in facing tough competition. As the result, only small-scale industry with high efficiency could stand out in this unfavourable condition. According to a study conducted by Kaneko and Sakurai (1990) the relationship between large and medium scale industry in one side and small and micro industry in other side is very weak, and creates two kinds of unilateral in character with large and medium scale industries in upper side[5]. This shows how complicated the homework for local government is to promote the growth of small medium scale enterprises in its area as the consequence of decentralisation and people’s economy policies.
But somehow it is difficult for central and local government of Indonesia to attract new investments and even there are many local and foreign companies closing their business in the last five years. With regard to investment activities, the research of Asian Foundation in September 2003, showed that decision to invest in Indonesia is based on 5 factors, as follows:
1. Regulation and government services
2. Socio-political factors
3. Regional economic dynamism
4. Labour and productivity
5. Physical infrastructure[6]
Those factors are ranked from the most important factor to the less important one. They indicate that the investors are more concern on the rule of the local government to establish a conducive business environment. The most common problems occur after the decentralisation policy, are double taxation, new kind of retributions and bureaucracy, which strongly influence the investment decision. Further, decentralisation policy seems to have created new “little kings” in several regions of Indonesia. In order to review the implementation of regional autonomy and the role of local governments, an Indonesian Non Government Organisations “Regional Autonomy Watch” (KPPOD), conducts and published a study on regional investment attractiveness every year. The study ranks the municipalities and cities based on their score achievement in five aforementioned factors.
2. Research Objective
The question now is how the local policies strengthen the growth of small medium scale enterprise. Certainly one cannot suggest one solution that suits for all regions.
Therefore the main questions appear is what kind of local policy is suitable in enhancing the growth of small medium scale enterprises in a region. Is it promoting collective efficiency which enabling interdependent relationship between companies, suppliers and buyers or location policy which improving the infrastructure in the region?
Other questions need to be answered are:
- Is there already collective efficiency in the region? If there is, in what kind is it?
- How are the location factors of the region
- Is there correlation between collective efficiency and the growth of small and medium scale enterprise in the region? If there is, how is it?
- Is there correlation between location factors and the growth of small and medium scale enterprise in the region? If there is, how is it?
Are there regulations of local government in order to enhance the growth of small and medium scale enterprise? If there are, what regulations are there?
3. Theoretical Background
The research is conducted based on two theoretical background; which are the Triple C Approach and the Location’s Factor Approach.
3.1 The Triple C Approach
The study of small medium scale enterprises in third Italy has given a lesson that even small medium scale enterprises can be successful and able to compete internationally. The network and cooperation is argued could overcome the disadvantages of small and medium scale enterprise in market and even create advantages in flexibility and responsiveness to compete with the large firms. This third Italy phenomenon has became on of arguments of Triple C Approach proposed by John Humphrey and Huber Schmitz (1996), which unfortunately have not proved empirically.
The collective efficiency can be reached in 3 kinds of models namely cluster, industrial district and network. Therefore the success of the collective efficiency can be obtained when the government implements appropriate policies for small medium scale enterprise, which can be summarized as the “Triple C”. The triple Cs stand for customer oriented, collective and cumulative.
Collective efficiency exists through external economies and joint actions, which increase the competitive advantage[7]. According to Alfred Marshall, external economies are external effect come up as the benefit of investments in a region and causing localisation of industrial production. Where as joint actions include cooperating among individual enterprises and associations or consortiums of groups of firms in horizontal as well as vertical linkage.
Cluster is geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities[8]. Therefore the constituents of a cluster include from upstream to downstream in the vertical chain and also forward and backward in horizontal chain, institutions and government which link and cooperate and in the same time compete each other.
Industrial district is a cluster, which develops more than specialization and divisions of labours among firms but also through the collaborations has enhanced the local production and innovation capability. Since the term of industrial district came out from the study in Italy, which excludes the role of large enterprise, so the linkage in industrial district includes only small enterprises [9].
Network occurs when the linkage, cooperation and collaboration exist among firms, which are not in the same locality.
As mentioned above, the Triple C approach is directed to promote collective efficiency through 3 kinds of programs. The first is customer-oriented program means the policy should be addressed to meet the demand of the customer of the small medium scale enterprise. The idea is when the small medium enterprise can learn more about the need of the customers they can overcome the problems of competitiveness. Such policy should include quality improvement through technical assistance.
The second program is collective approach program. That means the program should be directed at group of firms, so that could increase the relationships among firms. At the end due to the close relationship among firms the efficiency of each firm can be improved through cooperation and mutual learning. The advantage collective approach for the government is that it surely has lower transactions cost than individual approach, which suit to developing countries.
The third approach is cumulative capacity means that the policies should be aimed to upgrade the capacity of firms in order to be more independent from support from outside through inter-firm linkages and contact with the market.
3.2. The Location’s Factor Approach
Globalization brings out a new meaning of location policy (Standortpolitik), since companies have to specialize their core competence and more depend on their supplier, service provider and supporting institutions. Today regional economic dynamism becomes the main motive of investment, and economic dynamism can be achieved through regional innovation. Meanwhile innovation exists due to interactions among firms, supplier, customer and supporting institutions or organizations. This interaction makes not only local government responsible for the competitiveness of the region, but also companies, other economic (non government) actors in the regions as well as Public Private Partnership.
The competition of location is getting harder, and Meyer-Stamer (1999) distinguished 3 kinds of competition of location. The first one is competition between old and new location in “old” industries where the skills and knowledge of these industries have been spread. In this competition the region has less bargaining position than investors, since they can easily relocate their investment. Normally the strategy to overcome the competition will be made through “low road”, namely offering more subsidies for investors.
The second competition is occurred among regions, which already have specific local advantage. The trigger of dynamic development is local resource through self-initiative of local enterprises in building collective activity, which is also supported by the local government. The dynamic of the region attracts new investors and thus increases the bargaining power of the region.
The third one is the combination of the first and second competition, where the “old industries” are varied. The key to win the competition is the pro-active role of the regions to take measure in anticipating the changes. That means not giving the chance to the market to decide or to take control.
Location factors are qualities concerning the attractiveness of a location/region for investment decision of new and established enterprises[10]. Therefore locations policy should be addressed to established enterprises, new local enterprises and external investors. The locations factors for can be seen in following table:
Hard location factors consist of management factors, which determine the choice of a location. The instruments to strengthen these factors are:
- Financial instrument (tax incentive and subsidies)
- Improvement of infrastructure
- Increasing the quality of the employment
- Improving the quality of energy and environment
Soft location factors are un-measurable factors that determine the investment decision. In the last decades these factors became more important and today even almost so important as hard factors.
The soft locations factors can be differed into company relevant factors and personal relevant factors. The instruments to improve the soft location factors are:
- Development of location’s strategy
- Improvement of public administrations
- Stimulating and promoting co-operation among enterprises
- Promoting new enterprises
- Supporting enterprises in crisis
- Supporting export
- Establishing and strengthening universities and technology institutions.
- Image building
Not all those factors are likewise important for investor. The kind of investment and industry live cycles also portray investment decision. Therefore the chose of instruments must be taken carefully.
4. Hypothesis
The local government policies that enhance the local collective efficiency increase the growth of small medium scale enterprises.
5. Research Method
Method of the research will be a qualitative method mixed with quantitative method. Where as information will be collected in the form of:
- Primary research (questionnaire and direct interview) to collect data and information from experts, enterprises and organisations.
- Secondary research (library research and internet based research).
The primary research will be conducted in two phases. The first phase is aimed to find out the development of cluster in Indonesia after decentralisation era. Therefore 5 manufacture clusters will be chosen as sample. In this phase will be interviewed main actors in the cluster such as association of firms as well as experts.
The second phase will be conducted in 2 municipalities in Bali since the province has resemblance culture in all regions but showing different results in applying decentralisation program. The chosen municipalities are Gianyar as the successful one and Klungkung as the unsuccessful one according to the study from Autonomy Watch (KPPOD) on Regional Investment Attractiveness 2003. In this phase, owner or manager of small medium scale enterprises will be interviewed.
The result of the interviews will be developed through SPSS program in order to bring out the objectives of this research.
6. Indicators
There are 3 variables to be observed, namely business performance, collective efficiency and locational factors. The indicators for business performance are growth of sales (turn over), growth of export, growth of assets, growth of worker's number, new investment and quality of the products.
The indicators for collective efficiency are number of sub contracting, kind of sub contracting's relation, impact of sub contracting on business, number of joint operation, kind of joint operation's relation, impact of joint operation on business, number of suppliers, kind of relation to suppliers, impact of supplier on business, membership in association/organization and number of association/organisation.
The indicators for locational factors are quality of telecomunication's facility, impact of telecomunication's facility on business, quality of transportation's facility, impact of transportation's facility on business, quality of worker, impact of worker's quality on business, number of financial organizations, impact of financial organizations on business, and impact of local bureaucracy on business.
7. Partner
Partner of this research are:
- Primary partner
a. Association or organisation of firms and experts in 5 clusters in Indonesia
b. Owners or managers of small and medium scale enterprises in Gianyar and Klungkung, Bali, Indonesia. - Secondary partner
a. The government of the province of Bali
b. The government of the municipalities of Gianyar
c. The government of the municipalities of Klungkung
d. Indonesian Ministry of internal affairs in Jakarta
e. Indonesian Ministry of co-operative and small medium scale enterprises in Jakarta
f. Regional Autonomy Watch (KPPOD - Komite Pengawas Pelaksanaan Otonomi Daerah)
g. Chamber of commerce and industry of Bali Province in Denpasar
h. Indonesian expert in small and medium enterprises.
8. Time Table
The whole research starts with the preparation of the research plan in June 2004 and will be ends in July 2005.
[1] www.adb.org/Documents/Reports/Fire_Prevention_Drought_Mgt/ chap_03.pdf, June 2, 2004
[2] Marzuki, Penerapan Sistem Ekonomi Kerakyatan Dalam Kerangka Paradigma Pembangunan Kemandirian Local, www.pascaunhas.net/jurnal_pdf/vol_1_1/MARZUK~1.pdf, June 2, 2004
[3] Kalla, M. Jusuf, Pengusaha dan Otonomi Daerah, Bulletin Kadin, no. 16, September 1999
[4] Tambunan, Tulus T.H, Usaha Kecil dan Menengah di Indonesia: Beberapa Isu Penting, Penerbit Salemba Empat, Jakarta: 2002
[5] Basri, Faisal H, Manufacturing Industry in the National Economy: Position of Small Scale Business, Small Business in the Indonesian Economy, M. Dawam Rahardjo (Ed.), The Ministry of Cooperatives and Small Enterprises, Jakarta: 1994
[6] Satriyo, Hana A, Adi Abidin, Hari Kusdaryanto, Indonesia Rapid Decentralization Appraisal (IRDA): Third Report, The Asian Development Bank, Jakarta: 2003
[7] Schmitz, Hubert, Collective Efficiency and Increasing Returns. In: Cambridge Journal of Economics, Vol. 23 1999
[8] Porter, Michael E., Cluster and Competition. New Agendas for Companies, Governments, and Institutions. In: Porter, Michael E., On Competition. Boston, MA: Harvard Business School Publishing, 1998
[9] Humphrey, John and Hubert Schmitz, The Triple C Approach to Local Industry Policy in World Development, Vol. 24, no. 12, pp. 1859-1877, 1996
[10] Meyer-Stamer, Jörg, Lokale und Regionale Standortpolitik – Konzepte und Instrumente jenseit Von Industriepolitik und traditioneller Wirtschaftsförderung, INEF – Report 39, Duisburg, 1999
REFERENCES
Basri, Faisal H, Manufacturing Industry in the National Economy: Position of Small Scale Business, In: Small Business in the Indonesian Economy, M. Dawam Rahardjo (Ed.), The Ministry of Cooperatives and Small Enterprises, Jakarta: 1994
Elsner, Wolfram, A Simple Theory of Cooperative Industrial Policy. Model Building and Practical Experience. In: Industrial Policies After 2000, Wolfram Elsner and John Groenewegen (Ed.), Kluwer Academic, Boston, 2002
Groenewegen, John, Introduction: Industrial Policy; Issues, Theories and Instruments. In : Industrial Policies After 2000, Wolfram Elsner and John Groenewegen (Ed.), Kluwer Academic, Boston, 2002
Humphrey, John and Hubert Schmitz, The Triple C Approach to Local Industry Policy, in World Development, Vol. 24, no. 12, pp. 1859-1877, 1996
Humphrey, John and Hubert Schmitz, Principles for Promoting Clusters & Networks of SMEs, in UNIDO Small Medium Enterprises Programme, October 1995
www.adb.org/Documents/Reports/Fire_Prevention_Drought_Mgt/ chap_03.pdf, June 2, 2002
Kalla, M. Jusuf, Pengusaha dan Otonomi Daerah, Bulletin Kadin, no. 16, September 1999
KPPOD, Hasil Pemeringkatan Daya Tarik Investasi 134 Kabupaten/Kota Tahun 2001, in http://www.kppod.org/region/ratingfinalcolor.pdf
KPPOD, Hasil Pemeringkatan Daya Tarik Investasi 134 Kabupaten/Kota Tahun 2002, in http://www.kppod.org/region/u-web.pdf
Marzuki, Penerapan Sistem Ekonomi Kerakyatan Dalam Kerangka Paradigma Pembangunan Kemandirian Local, www.pascaunhas.net/jurnal_pdf/vol_1_1/MARZUK~1.pdf, June 2, 2004
Meyer-Stamer, Jörg, Lokale und Regionale Standortpolitik – Konzepte und Instrumente jenseit Von Industriepolitik und traditioneller Wirtschaftsförderung, INEF – Report 39, Duisburg, 1999
Meyer-Stamer, Jörg, Was ist Meso?, INEF – Report 55, Duisburg 2001
Porter, Michael E., Cluster and Competition. New Agendas for Companies, Governments, and Institutions. In: Porter, Michael E., On Competition, Boston, MA: Harvard Business School Publishing, 1998
Satriyo, Hana A, Adi Abidin, Hari Kusdaryanto, Indonesia Rapid Decentralization Appraisal (IRDA): Third Report, The Asian Development Bank, Jakarta: 2003
Schmitz, Hubert, Collective Efficiency and Increasing Returns. In: Cambridge Journal of Economics, Vol. 23 1999
Tambunan, Tulus T.H, Usaha Kecil dan Menengah di Indonesia: Beberapa Isu Penting, Penerbit Salemba Empat, Jakarta: 2002
