ADB SME DEVELOPMENT TA

BACKGROUND REPORT

EVALUATION OF SME TRADE AND EXPOERT PROMOTION IN INDONESIA

HENRY SANDEE BUDDY IBRAHIM

APRIL 2002

Published by: ADB Technical Assistance

SME Development

State Ministry for Cooperatives & SME

Jalan H.R. Rasuna Said Kav.3

Jakarta 12940

Tel: ++62 21 520 15 40

Fax: ++62 21 527 94 82

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I. TABLE OF CONTENT

I. TABLE OF CONTENT.............................................................................................. I

II. TABLE OF ABBREVIATIONS ............................................................................... III

III. TABLE OF FIGURES .............................................................................................IV

IV. TABLE OF REFERENCES .....................................................................................V

V. EXECUTIVE SUMMARY ........................................................................................VI

VI. EXECUTIVE SUMMARY BAHASA INDONESIA.................................................VIII

1 BACKGROUND.......................................................................................................1

1.1 Overview of SME exports ........................................................................................1

1.2 Presence of SMEs in Export Activity........................................................................3

1.3 Overview of Indonesias exports in 1st Quarter 2002 ...............................................4

1.4 Notes on SME exporter constraints in access to credit ...........................................5

2 GOVERNMENT SUPPORT FOR SME EXPORTS .................................................6

2.1 National Agency for Export Development (NAFED) ................................................6

2.2 SME exports promotion by other Directorate Generals within the Ministry of Industry and Trade...................................................................................................9

2.3 SME export promotion by the Ministry for Cooperatives and SME / MOCSME.....10

2.4 BKPM / Investment Coordinating Agency..............................................................11

2.5 Assessment of Government SME export promotion efforts...................................12

3 PRIVATE SECTOR INITIATIVES TO PROMOTE SME EXPORTS .....................13

3.1 SME exports: the traditional view .........................................................................13

3.2 SME exports through trade networks.....................................................................13

3.2.1 Trading House: Key access for SME to international markets ............................13

3.2.2 Example of business networks for SME export...................................................15

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4 GAPS IN CURRENT PROVISION OF SUPPORT AND SERVICES FOR SME EXPORTS..............................................................................................................18

5 CONCLUSIONS AND RECOMMENDATIONS .....................................................20

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II. TABLE OF ABBREVIATIONS

ADB Asian Development Bank

AICE Association of Indonesian Coffee Exporters

BDS Business Development Services

BPPT Agency for Technology Research and Application

DG Directorate General

IETC Indonesian Export Training Center

ITPC

ITC

Indonesian Trade Promotion Center

International Trade Center, Geneva

ISO International Standard Organization

JICA Japan International Cooperation Agency

KADIN Kamar Dagang & Industri Indonesia CCI / Chamber of Commerce & Industry

MOA Ministry of Agriculture

MOIT Ministry of Industry and Trade

MOMF Ministry of Maritime and Fisheries

MORT Ministry of Research and Technology

NAFED National Agency for Export Development

R&D Research and Development

SMOCSME State Ministry of Cooperatives and Small-Medium Enterprises

TA Technical Assistance

UPT Unit Pelayanan Terpadu (One Stop Services)

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III. TABLE OF FIGURES

Figure 1: Composition of Non-Oil and Gas Exports, 2000................................................2 Figure 2: Exports by Firm Size, Indonesia, 2000 ..............................................................4

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IV. TABLE OF REFERENCES

Author Title Buddy Ibrahim Chamber of Commerce & Industry (KADIN) and

Associations February 2002

Kantor Menteri Negara Koperasi & Usaha Kecil Menengah

Ekspor Barang Usaha Kecil, Menengah, dan Besar 1997-1999

Rice, R & Abdullah

A Comparison of Small and Medium/Large Indonesian Manufacturing Enterprises from 1986 and 1996, Partnership for Economic Growth Project, USAID, Jakarta, 2000 (mimeo)

Sandee, H., P. Rietvield, H. Supratikno, and P. Yuwono

Promoting Small-scale and Cottage Industries in Indonesia. An Impact analysis for Central Java, Bulletin of Indonesian Economic Studies, 1994. Vol. 30 No. 3 pp. 115-142

Urata, Shujiro

Policy Recommendation for SME Promotion in Republic of Indonesia, July, 2000

World Bank

Indonesia: From Crises to Opportunity (non-oil and gas total export), 1999

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V. EXECUTIVE SUMMARY

This background paper discusses and evaluates Indonesian experiences in promoting exports by small and medium-scale enterprises (SME). Attention is paid to both government policies and programs to promote SME exports as well as private sector initiatives.

The main findings of this background paper are:

1. Government-funded programs focus on short-term targets. Government agencies are already happy when they manage to ensure that a SME producer gets an export order. Of course, this is important but, however, it is much more important to develop programs to ensure that SME will have long-term access to export markets. The latter requires also that attention should be paid to quality control, consistency in production volumes and timely delivery of products not only once but also continuously.

2. Most SME exports come from clusters and reach foreign markets through strong involvement of foreign buyers. This offers interesting opportunities for government agencies. Programs do not have to be focused on individual firms but can be effectively focused on clusters of small firms.

3. Current support activities concentrate on promoting and upgrading export capacities of individual firms. NAFED programs are relatively well rated by the SME producers that have participated in its promotional activities. However, there is no attention paid to integrating national and local (cluster-based) associations into SME export promotion programs and activities. The report's case studies on Associations and Mitra Ventura suggest that there are effective non-governmental Indonesian intermediaries that are successfully linking and matching SME to international markets. They offer both market information and business development services simultaneously. Working through and with associations and other non-governmental intermediaries could enhance outreach, effectiveness and sustainability of public interventions. Such a focus would also encourage networking among firms, support joint marketing efforts and be beneficial for the development of complementary industries.

4. The report highlights the importance of bundled services. It may not be sufficient to offer only information on business opportunities, as being successful on export requires much more. Current export promotion policies, however, lack an integrated perspective that considers R&D, export finance, infrastructure and human resource development, as well as standardization and certification policies as cornerstones of sustainable export promotion. Such an integrated perspective would require intensified cooperation and coordination of relevant public and private actors, and call for restructuring and refocusing the support provided by various government agencies

5. There is considerable overlap between the export promotion efforts of various ministries and departments. Many public programs appear to have been copied from MOIT and NAFED with regard to both structure and contents. The overlap concerns both export promotion (trade fairs, exhibitions, websites, etc.) and specific trade promotion services to upgrade the capacities of (potential) SME exporters. Overlaps and duplication among line ministries and agencies are creating inefficiencies and wastage of state budgets.

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6. The general impression of the report and data analysis is that due to these weaknesses, SME export promotion so far has not been very successful.

It is therefore recommended that:

(1) Export promotion should be embedded into a wider policy framework of cluster development, investment promotion and R&D support. Respective strategies should be prepared by stakeholder forums combining relevant public and private sector stakeholders, coordinated by 'Sectoral Focal Points' to be created within MoIT.

(2) The rationale for having four agencies promoting Indonesia overseas, namely NAFED / ITPC, MOCSME, BKPM (National Investment Coordination Board) and the Tourism Promotion Board, should be reviewed. A closer integration of the a/m agencies would facilitate interaction with Indonesian embassies abroad, as well as reduce