Asia-Pacific Trade Economists’ Conference

Trade-Led Growth in Times of Crisis

Facilitating Small and Medium Enterprises

in International Trade (Export): The Case of Indonesia

Session 8: Trade Facilitation Author: Tulus Tambunan

Center for Industry, SME & Business Competition Studies University of Trisakti, Indonesia

This paper is being posted without formal editing. The opinions, figures, and estimates set forth in this paper are

the responsibility of the authors and should not be considered as reflecting the views or carrying the endorsement

of the United Nations.

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FACILITATING SMALL AND MEDIUM ENTERPRISES IN INTERNATIONAL TRADE (EXPORT): THE CASE OF INDONESIA Session: ‘Behind the border’ trade facilitation

Tulus T.H. Tambunan Institute: Center for Industry, SME & Business Competition Studies, University of Trisakti Address: Building S 5th Floor No 22 Kampus A, Jl Kyai Tapa No.1 Grogol Jakarta 11440

Telp.: 62-21-7375365 (HP: 08161882185)

Abstract

It is often stated in the literature that the future prospect of small and medium enterprises (SMEs) in

developing countries, including Indonesia, would depend much on whether they can survive in the long run,

in the course of economic modernization and trade liberalization. More specifically, it depends on whether

their products can compete with goods produced by large enterprises (LEs), not only in domestic markets but

also in export markets, and their ability to export also depends much on existing trade facilitation.

Based on secondary data and a review of key literature, this paper examines the current situation of trade

facilitation (TF) and the access of SMEs to TF in Indonesia. More specifically, this paper addresses four

questions: (1) How has been the improvement of TF in Indonesia? (2) How important are SMEs in export and what

are their main constraints to participate in export? (3) What is the main mode adopted by export oriented-SMEs? (4)

What is the role of government in facilitating participation of SMEs in export activities?

The paper shows a number of important facts. First, although the government of Indonesia has been doing

many actions to improve TF to reduce domestic transaction costs and hence to increase the movement of

goods and services from or to or within the country, Indonesia is still facing problems with many elements of

TF, including customs procedures, trade regulations, and infrastructure. In these particular areas, the process

of improvement is rather slow. Second, Indonesian SMEs in export activities are still weak compared to large

enterprises (LEs). The majority of export-oriented SMEs in the country do not export directly, but indirectly

via intermediaries such as traders, exporting companies, or trading houses, or through subcontracting

arrangements with LEs. Third, though empirical evidence is still limited, SMEs, especially those located in rural

areas, have less access to existing TF than LEs do. As shown before, many exported-oriented SMEs do export

indirectly. In other word, doing direct export is difficult and costly for many of the export-oriented SMEs. This is

most likely due to, among other factors, their limited access to TF. Also, many elements of TF are not yet well-

improved, especially in rural areas, and means for SMEs more burden due to their limited capital than for LEs.

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1. Introduction

1.1 Background

In Southeast Asian countries, or ASEAN, small-and medium-sized enterprises (SMEs) have a crucial role to

play because of their potential contributions to employment creation, especially young and less educated

people and women; improvement of income distribution, poverty alleviation, development and growth of

manufactured exports, rural social and economic development, and development of entrepreneurship,

especially among women and in rural areas.

In Indonesia, SMEs in very important because of their unique characteristics, which include the followings:

(1) their number is huge, and especially small-sized enterprises (SEs) and, the smallest, the most traditional or

primitive and the lowest income generated activities within SMEs, namely micro enterprises (MIEs) are

scattered widely throughout the rural areas and therefore they may have a special ‘local’ significance for the

rural economic development and social transformation; (2) as being populated largely by firms that have

considerable employment growth potential (since SMEs (especially SEs and MIEs are labor intensive

enterprises, their development or growth can be included as an important element of policy to create

employment and to generate income; (3) not only that the majority of SMEs in Indonesia are located in rural

(even isolated) areas, this category of enterprises ais also mainly agriculturally based activities, processing

agricultural commodities. Therefore, government efforts to support the development of rural SMEs are also an

indirect way to promote the agricultural sector; (4) SMEs use technologies that are in a general sense more

‘appropriate’ as compared to advanced and expensive technologies used by large enterprises (LEs) to factor

proportions and local conditions in developing countries, i.e. many raw materials are locally available but capital

and human resource with high skills are very limited, especially in rural areas; and (5) despite heavy

competitions from LEs and imported goods, many SMEs in Indonesia are able to expand their domestic market

share significantly. Therefore, SMEs, especially medium enterprises (MEs) are regarded enterprises having the

‘seedbed LEs’ function.

It is often stated in the literature that the future prospect of SMEs in developing countries, including

Indonesia, would depend much on whether they can survive in the long run, in the course of economic

modernization and trade liberalization. More specifically, it depends on whether their products can compete

with goods produced by LEs (including multinational companies/MNCs)), not only in domestic markets but

also in export markets, and their ability to export also depends much on existing trade facilitation.

1.2 Objective

This paper examines the current situation of TF and the access of SMEs to TF in Indonesia. More specifically,

this paper addresses four questions: (1) How has been the improvement of TF? (2) How important are SMEs in

export and what are their main constraints to participate in export? (3) What is the main mode adopted by export

oriented-SMEs? (4) What is the role of government in facilitating participation of SMEs in export activities?

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1.3 Methodology

This paper adopts three approaches of analysis, namely: (i) a descriptive analysis of secondary data; (ii) a survey

of key literature on the current state of TF in Indonesia; and a primary data analysis. The secondary data on

SMEs used in this study are from the National Agency of Statistics (BPS). The primary data are from a survey

of 39 export oriented SMEs in the wood furniture industry in Central Java.

1.4 Structure of the Paper

The paper is organized in five sections, including Section 1, introduction. Section 2 evaluates the current state

of TF in Indonesia with regards to various important measures. Section 3 presents the current development of

SMEs, including in export activities, their ways of doing exports and their major constraints. Section 4

discusses the existing government measures in facilitating SMEs participation in exports. The final section

presents concluding remarks.

2. The Current State of Trade Facilitation in Indonesia

As explained in Grainger (2009), TF is the simplification, harmonisation, standardisation and modernisation

of trade procedures. It seeks to reduce trade transaction costs at the interface between business (i.e. exporters

and importers) and government and is an agenda item within many customs related activities. These include

WTO trade round negotiations, supply chain security initiatives, development and capacity building programs,

as well as many customs modernisation programs. The United Nations Centre for Trade Facilitation and

Electronic Business (UN/CEFACT) defines TF as the simplification, standardization and harmonization of

procedures and associated information flows required to move goods from seller to buyer and to make

payment (OECD 2003). In UN/CEFACT and UNCTAD (2002), it is stated that TF covers: trade procedures,

customs and regulatory bodies, provisions for official control procedures applicable to import, export and

transit including: general arrangements, customs controls, official documentation, health and safety, financial

securities, and transshipment, provisions relating to transport and transport equipment, including: air

transport; sea transport; and multimodal transport, provisions relating to the movement of persons, provisions

relating to the management of dangerous goods, provisions relating to payment procedures, provisions

relating to the use of information and communication technologies, provisions relating to the commercial

practices and the use of international standards, and legal aspects of TF.

While, TF under GATT Articles V, VIII and X is the followings (Grainger (2009): (1) TF

recommendations under Article V: accept commercial documents (e.g. invoice and transport documents)

instead of mandating formal regulatory declarations; set simple and clear procedures for identifying

consignments; ensure non-discrimination of goods; use of international agreements; and, a commitment to

regulatory cooperation; (2) additional TF recommendations under Article VIII: regulatory fees ought not

exceed expenses; standardization and simplification of customs and trade documents; coordinated intervention

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and convergence of regulatory controls; simplification of governing trade procedures; the single window

concept; use of risk management techniques; use of information technology; common data models; time

guidelines for border clearance; and adherence to international customs conventions; and (3) additional TF

recommendations under Article X: accessible publication of procedures and requirements; active provision of

information; procedures for advance and binding rulings; fair and efficient appeal and tribunal procedures;

and use of memoranda of understanding between regulatory bodies and traders.

While TF frequently refers to all measures that can be taken to facilitate and ease trade flows, according to

Damuri (2006), there is no standard formal definition of TF. In a broader sense of the term, as explained in

Damuri (2006), trade facilitation can be defined as any action intended to reduce transaction costs which

affect the international movement of goods, services, investments and people. In this sense, the term covers all

types of non-tariff measures to trade such as technical standard, sanitary and phytosanitary (SPS) and

environmental-related regulation, as well as other domestic business climate related regulations and all types

of infrastructure issues. In a narrow sense, the scope of trade facilitation is generally limited to customs

procedures and related formalities involved in the movement of goods (page 7).

However, Grainger (2009) argues that, no matter what the internationally adopted definition is, the

implementation of TF principles is fraught with obstacles. Obstacles may include conflicting interests,

institutional limitations and lack of knowledge. In Indonesia, the last two obstacles are obvious. These

obstacles are especially very serious for SMEs. Grainger argues that policy makers and business owners stand

to gain from more substantiated research aimed at deepening their understanding of cross-border operations,

its inherent dynamics, stakeholder interests and institutional limitations. Currently such knowledge is seldom

found in one place.

All the above mentioned items considered as TF affect transaction or trade costs and hence trade volume.

There are several measurements/indicators often used to estimate the quality of TF in a country. Theoretically,

there is a negative correlation between the level of development of TF and the transaction/trade costs, or a

positive correlation between the quality of TF and trade volume.1Canada/New Zealand Joint APEC

Symposium on private sector development with the topic on ease of doing business on 9-10 May, Montreal

2005, Canada concludes that there is a strong positive link between the quality of an economy’s regulatory

environment and its economic performance, and, with respect to SMEs, a poorly constructed regulatory

environment imposes a disproportionate burden on SMEs, because they find it more difficult to cope with

difficult and complex regulation.

1 There are enough studies which show that improvement on TF could lead to substantial economic gains or trade expansion. Among the studies is by Wilson, Mann, and Otsuki (2003), who suggest that raising capacity in broad measures related TF, such as customs, regulations and infrastructure across whole countries, could increase world trade...

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The measurements include the logistics performance index (LPI), the ease of doing business (EDB), total

transportation costs to abroad as a percentage of total import value. The LPI reflects the overall perception of

a country’s logistics based on over 1,000 responses to a survey of logistics performance which can be

evaluated in selected key subcategories. These subcategories may include: efficiency of customs and other

border procedures, quality of transport and information technology (IT) infrastructures, international and

domestic transportation costs, ease of shipments and logistics competence, and tracking ability and timeliness

of shipments. The value of the index ranges from 1 to 5, with a higher score representing a better

performance.

The EDB, initiated by the World Bank, is about trading across borders subcategory rank which represents

a country’s TF capabilities based on six indicators: number of documents for import/export, time (in days) for

import/export, cost (US$ per container) to import/export. A higher rank is associated with a more favorable

environment for trading across borders.

Total transport costs as a percentage of total import value can be distinguished between total freight costs

and air freight costs. The first one reflects the ratio of total freight charges and insurance costs to the net value

of merchandise goods imports. In the case of Indonesia’ imports, this is calculated at the origin of Indonesian

ports and is reported as a percentage of Indonesia’s total import value. This includes all shipments through air,

maritime and land freights but excludes domestic transportation costs between cities. The second indicator, by

definition, reflects the ratio of total air freight charges and insurance costs to the net value of merchandise

goods imports. In the Indonesian case, this is calculated at the origin of Indonesia’s gateways, and is reported

as a percentage of total imports. The average air freight rate reflects the costs of transport from the Indonesian

main ports to the foreign countries at the Indonesian customs procedure.

Until now, among the Asia-Pacific Economic Corporation (APEC) countries, Indonesia always reveals in

the World Bank’s Doing Business annual report as a country with low quality of TF. For instance, based on

Doing Business 2006, Indonesia, together with South Korea and China, are countries in the region with too

many procedures to start a business (Figure 1). Even Indonesia is the worst country with respect to time to

start a business, as it consumes 151 days, compared to only 2 days in Australia (Figure 2). Indonesia is also

the most expensive country with respect to cost to start a business, as it spends more than 100 per cent of

income per capita, compared to only 0.2 per cent in New Zealand (Figure 3).

Other important component of doing business is dealing with respect to trading across borders (exports

and imports). This World Bank’s Doing Business report compiles procedural requirements for trading a

standardized shipment of goods. Every official procedure, including time, signatures and documents, for

importing and exporting the goods is recorded, starting from the final contractual agreement between the two

parties and ending on delivery of the goods. For importing the goods, the procedures measured range from

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the vessel’s arrival at the port of entry to the shipment’s delivery at the factory warehouse. For exporting the

goods, the procedures measured range from the packing of the goods at the factory to their departure from the

port of exit.

Figure 1:Procedures to Start a Business, 2006

Note: * * Australia, Canada and New Zealand have the least procedures globally. Source: World Bank (2006b).

Figure 2:Time to Start a Business (days), 2006

Note: * * Australia offers the least time globally. Source: World Bank (2006b).

The report shows that in Indonesia, it needs 30 days to import, compared to only 8 days in Singapore

(Figure 4), and 25 days to export, compared to 8 days in New Zealand (Figure 5). In Indonesia, it needs 6

signatures to import, compared to only 1 signature in Canada (Figure 6), and 3 signatures to export, compared

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to 2 signatures in Singapore, New Zealand, Canada and Australia (Figure 7). With respect to documents, for

import in Indonesia there are 10 documents required, compared to only 5 in the United States, or 6 in

Singapore (Figure 8), and for export, Indonesia has 7 documents, compared to 5 in countries such as Japan,

Australia, South Korea, New Zealand, Singapore, and Papua New Guinea (Figure 9).

Figure 3: Cost to Start a Business (% of income per capita), 2006

Source: World Bank (2006b).

Figure 4: Time for Import (days), 2006.

Source: World Bank (2006b).

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Figure 5: Time for Export (days), 2006

Source: World Bank (2006b).

Figure 6: Signatures for Import, 2006

Note: * Canada has the fewest signatures to import globally. Source: World Bank (2006b).

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Figure 7: Signatures for Export, 2006

Source: World Bank (2006b).

Figure 8: Documents for Import, 2006

Source: World Bank (2006b).

Figure 9: Documents for Export, 2006

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Source: World Bank (2006b).

The World Bank’s Doing Business 2009 covering 181 economies shows that the Indonesian rank has

improved slightly from 39 in 2008 declined to 37 in 2009. More details are given in Table 1 regarding three

main items, i.e. documents, costs and time required.

Table 1: Indonesian Position in Trading Across Borders versus Doing Business 2009 Indcator Indonesia Asia-Pacific OECD

Documents for export (number) Time for export (days) Cost to export (US$ per container) Documents for import (number) Time for import (days) Cost to import (US$ per container)

5 21 704 6 27 660

6.7 23.3 902.3 7.1 24.5 948.5

4.5 10.7

1,069.1 5.1 11.4

1,132.7 Source: World Bank (2009).

Numerous restrictions in harbor and physical facility have been one of the main factors to enlarge the

costs of exported products. Although the tariff of using Indonesian harbor/port is relatively low but almost all

exports from Indonesia transshipped through Singapore or Malaysia due to lack of efficiency in Indonesia’s

harbor/port. According to the analysis related to the efficiency of Indonesia’s harbor, namely Jakarta

International Container Terminal, JICT), as the main terminal in Tanjung Priok which is the biggest terminal

throughout Indonesia is in fact the most inefficient Terminal in the South East Asia. Judging from the

productivity side (as in total container to be loaded in one hour) and the cost/unit side (cost to lift a container

measuring 40 foot high in an hour) then JICT in Tanjung Priok is again the most inefficient terminal

comparing to other harbor in South East Asian, such as Singapore and Port Klang in Malaysia (Ray, 2003).

This Ray’s finding is supported by Shepherd and Wilson’s (2008) review on recent progress and indicators

of trade facilitation in member countries of the Association of Southeast Asian Nations. Using Global

Competitiveness Report issued by the World Economic Forum (WEF), they examine quality of port and air

transport infrastructures, extent of irregular payments for export/import licenses, and quality of internet

service provider (ISP) competition in the region for the period 2001-2006. As shown in next two figures,

within ASEAN, Singapore is consistently ranked very highly for its port infrastructure, while Malaysia and

Thailand appear to have improved slightly over time. The remaining countries for which we have data have

remained approximately stable, with the possible exception of Indonesia, which discloses a worsening trend.

That pattern is approximately the same for air transport infrastructure, although the movements involved are

even less clear than in the case of ports.

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Figure 10: Quality of port infrastructure, 2000-2006, version Global Competitiveness Report (WEF)

Source: Shepherd and Wilson (2008).

Figure 11: Quality of air transport infrastructure, 2000-2006, version Global Competitiveness Report (WEF)

Source: Shepherd and Wilson (2008).

In terms of the extent of irregular payments for import/export licenses (Figure 12), we observe that

Malaysia and Thailand would appear to have improved slightly over the sample period. Other countries have

remained much the same, with the possible exception of Indonesia. It seems, once again, to be on a

downwards trend. As was the case for infrastructure, Singapore is well ahead of the other ASEAN member

countries on this criterion.

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Figure 12: Extent of irregular payments for export/import licenses, 2000-2006, version Global

Competitiveness Report (WEF)

Source: Shepherd and Wilson (2008).

With respect to the quality of competition in the ISP (Figure 13) discloses more homogeneous

performance than was the case for the other indicators. At the end of the sample period (2006), all ASEAN

member countries except Vietnam show a slight improvement.

Manning (2005) examined barriers to the cross-border flow of goods in the original ASEAN-5. He finds

that although Indonesia is now a largely open economy, as indicated by its formal trade regime, there are

major barriers to the cross-border flow of goods. Its shipping services are slow and expensive by best-practice

regional standards. Its customs arrangements similarly under-perform, and are characterized by widespread

corruption. Also, much services trade is highly regulated: Indonesia has the most restrictive foreign

employment regulations among the original ASEAN-5.

Probably the most recent and comprehensive study on TF in Indonesia is by Damuri in 2006. His findings

may suggest that, although, in relation to GATT Article X, most government agencies including the

Department of Industry and Trade have launched various efforts to disseminate trade-related regulations and

procedures, the process has not gone smoothly. He finds that there is no specific guideline for publication of

relevant regulations and, more problematically, policy towards dissemination is sporadic. New regulations are

not communicated well to stakeholders, especially to SMEs located in rural areas, while no formal mechanism

is available that allow entrepreneurs or traders to provide comments and suggestions regarding trade rules and

regulations. From his survey, it reveals that measures regarding publication of relevant regulations are of

highest priority for TF improvement. Another utmost concern related to Article X is the need for certainty and

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uniformity in how trade procedures are implemented, which relates to the improvement of the integrity of

officials.

Figure 13: Quality of ISP competition, 2001-2006, version Global Competitiveness Report (WEF)

Source: Shepherd and Wilson (2008).

From his own evaluation, Damuri (2006) found that the Indonesian government has done many actions,

especially since the 1997/98 economic crisis, to improve TF in the country. All the reforms and

implementation of measures related to improvement of trade procedures have brought significant

improvements to the business and trade environment. However, he argues that various actions are still needed

to facilitate trade activities further. Based on a 2005 JICA study on trade related procedures, he found that for

the time required for imported goods to obtain release permission from arrival, Indonesia is still behind other

countries in facilitating trade. As shown in Table 2, “lead time” required for imported goods to obtain release

permission in Indonesia in comparison to several developed countries. While it takes only 1 day in average to

obtain release permission in Singapore, it takes on average 5.5 days to carry out similar procedures in the

Tanjung Priok port of Jakarta. Even for goods entitled to the green channel, the time required is still two times

longer than that in developed countries.

According to Damuri (2006), one of the main obstacles in performing trade activities in Indonesia is that

there are many agencies involved in the process, while coordination is quite limited. Businessmen or traders

need to collect various approvals and documents from several different offices before they could obtain

import clearance. The current automation and modernization of customs procedures offered moderate solution

to this problem. At the moment, the system only connects banks, tax offices and the treasury. The proposed

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development of a single window facility is expected to improve coordination between relevant agencies and

further simplify trade procedures.

Table 2: Lead Time Required to Obtain Release Permission No Nation Lead Time (days) 1 2 3 4 5

Indonesia: -Port of Tanjung Priok (average) -Green Channel - Red Channel Japan Germany USA Singapore

5.5 3.6 6.5 3.1 2.0 2.0 1.0

Source: Table 1 in Damuri (2006).

Damuri (2006) conducted his own field research which focuses on discussions and interviews with relevant

government agencies and stakeholders in TF. The field research includes a survey by personal and telephone

interviews with associations of exporters and importers, other relevant business associations, and 25 firms (in

all sizes) in Jakarta and Surabaya. The questionnaire includes one general question to capture overall

evaluation on the implementation of trade related procedures and regulations; whether they are improving,

similar or worsening in recent years (say last 5 years). Most of the respondents state that implementation of

trade related procedures are improving, while the rest do not see significant changes during the time (Table 3).

During interviews, several traders mentioned their appreciation for the recent reform program from the

Directorate General of Customs. 2

Table 3: Most Problematic Areas of Trade Related Procedures Percentage of the respondents seeing the area Areas Most problematic Second most

problematic Third most problematic

Obtaining an import license Tariff classification Submission of documents for clearance Identification of origin of the goods Fees and penalties payment Customs valuation Technical or sanitary requirements Inspection and release of goods

11.1 16.7 0.0 0.0 22.2 27.8 5.6 16.7

0.0 11.1 5.6 0.0 27.8 11.1 16.7 27.8

5.6 16.7 11.1 5.6 16.7 16.7 5.6 22.2

Source: Damuri (2006) By using a gravity model and with selected industries in a number of ASEAN countries (i.e Indonesia,

Malaysia, Singapore, Thailand, and the Philippines) for the period 2001-2005, Hakim’s (2007) simulation

reveals that trade reduction or harmonization, accompanied by simplification, harmonisation, standardisation

and modernisation of trade procedures and improvement in other TF will increase regional competitiveness

and hence trade volume between regions within ASEAN. However, he observed that many works still need to

be done with regard to TF in Indonesia, particularly custom procedures which are still low in bureaucratic

efficiency.

2 See further Damuri (2006).

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To sum up, it can be hypothesized that that the above described environment has an excessive bias against

SME’s. Unfortunately, no evidence is available to prove that since no studies have ever been made to examine

such problem.

3. The Current Export Development and Main Constraints of SMEs

3.1 Export Development

In some Southeast Asian (or ASEAN) developing countries especially Indonesia, Thailand, Malaysia and

Singapore, SMEs, particularly in the manufacturing industry have also been playing an important role in

export, although the degree of SMEs’ export involvement varies by country (Table 4). However, not all

exported-oriented SMEs export directly without intermediaries. Most of them do indirectly through trading

companies, traders or via subcontracting arrangements with LEs. Wattanapruttipaisan (2005) estimates that

direct contribution made by SMEs to total export values in the region is not more than 20 per cent. This

estimate is also supported by a 2002 report from APEC on development of SMEs in the region. According to

this report (APEC, 2002) which shows that SMEs contributed less than 30 per cent of direct exports on

average. With the assumption that many, or probably, most of the export-oriented SMEs in ASEAN do not

export directly, SMEs in the region were thus under-represented in the international economy relative to their

role in the domestic economy. If indirect export is also taken into account, according to the report, SMEs’

contribution could be much larger than this 30 per cent. Especially in the manufacturing industry SMEs in the

region often make up a significant part of the value chain, or supply chain, and may thus not be included in

the direct exports.

Table 4: Share of SME exports in Total Exports in Selected ASEAN Countries, 2000 and beyond Country Share (%)

Vietnam 20 Singapore 16

Malaysia 15 Indonesia 17.72 Thailand 29.10

Philippines 16.81

Source: Tambunan (2009).

The variety is strongly related to differences between countries in many aspects which can be categorized

in two groups: supply-side factors and demand-side factors. The supply-side factors are domestic factors

which determine the supply or production capacity of exported-oriented SMEs. The factor include the level of

economic development; infrastructures and facilities that are needed for promoting export development;

government policies; especially towards export promotion and particularly in supporting export-oriented

SMEs; and of course the level of SMEs development, especially with respect to human resource and

technology endowment. The demand-side factors are foreign factors in importing/demanding countries which

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may include real income per capita and competition from other firms producing similar products in the

importing countries.

In Indonesia, exports from SMEs continue to grow from year to year. In 2000, total exports of SMEs

amounted to Rp75,448.6 billion and increased by more than 50 per cent to Rp.122,311 billion (or 14,103

million US$) in 2006 and increased further by almost 16.8% to Rp 142,822 (16,697 US$) in 2007. However,

their share in the country’s total export is always smaller than that of their larger counterparts. In 1990, the

SMEs’ contribution to the total export (not including oil and gas) was around 11.1 per cent, and increased to

around 20 per cent, compared to LEs at around 79 per cent, in 2006 or 2007. Within the group, MEs are much

stronger than SEs. In 1990, MEs’ share in total non-oil and gas exports was 8.9 per cent compared to 2.2 per

cent of SEs, and in 2007 the ratio is 15.04 per cent to 4.98 per cent (Table 5).

Table 5: Export of Indonesian SMEs, 2006-2007 Non-oil and gas Export Year Unit

SEs MEs SMEs LEs Total 2006

2007

Rp billion US$ million

%

Rp billion US$ million

%

30,365 3,501 5.00

35,508 4,129

4.98

91,946 10,602 15.15

107,314 12,479 15.04

122,311 14,103 20.15

142,822 16,607 20.02

484,775 55,896

79.85

570,594 66,349

79.98

607,086 69,998 100.00

713,416 82,957 100.00

Source: BPS (Berita Resmi Statistik, No. 28/05/Th XI, 30 Mei 2008).

Majority of Indonesian SMEs’ export came from the manufacturing industry (Table 6). However, the

share of SMEs in the total exports of manufacturing industry is much smaller than that of their larger

counterparts. Many researchers who doing many studies on SMEs in Indonesia, such as Hill (1996, 2001) and

Tambunan (2006b) argue that although the yearly average of SMEs’ contribution in Indonesia’s total

manufacturing export is relatively small as compared to that of their larger counterparts they had played an

important role in the manufacturing export boom in the 1980s and 1990s. While, others such as Thee (1993)

and ADB (2002) conclude that from the point of view of technology and adaptability, SME exports in the

manufacturing industry have grown substantially by finding niche markets and adapting costs and quality to

market demand.

Within SMEs, the share of MEs in manufacturing exports (not shown in the table) as a percentage of their

total exports in three sectors (agriculture, manufacturing and mining) is much higher than that of SEs,

indicating that MEs exported manufactured goods more than their smaller counterparts did. This significant

gap may suggest that in the manufacturing industry, the ability of MEs to export is higher than that of SEs.

The disparities can be explained by the differences in several factors such as access to capital and market

information, skills, promotion facilities, and external networks. MEs are in a better position than SEs vis-á-vis

all these factors, which are crucial in determining whether a firm can be successful in the export business.

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These factors also determine the ability of a firm, or in this case, SMEs, to at least survive in the era of trade

liberalization.

Table 6: Export of Indonesian SMEs by Sector, 2006-2007 SME LE Sector Value % Value %

Total %

Agriculture Mining Industry Total

13,998 1,717

127,107

142,822

9.8 1.2 89.0

100.00

1,231 99,827

469,536

570,594

0.2 17.5 82.3

100.00

15,228 101,545 596,643

713,416

2.1 14.2 83.7

100.00

Source: BPS (Berita Resmi Statistik, No. 28/05/Th XI, 30 Mei 2008).

May be for exported-oriented SMEs produced on a contract basis for goods with internationally known

brand names, such as electronics and footwear, trade liberalization may not cause a serious problem for them,

since these SMEs have all resources for quality improvements given or technically assisted by the foreign

companies having those brand names. Also, those exported-oriented SMEs do not have to worry much about

how to market their products, because the products already have international marketing managed from

outside Indonesia.

In Indonesia, the majority of SMEs involved in export activities do not export directly, but indirectly via

intermediaries such as traders or trading houses, exporting companies, or, as in electronic and machinery

industries, through subcontracting arrangements with LEs. National data for MIEs and SEs in the 1990s show,

for instance that, with respect to the number of enterprises, the share of MIEs and SEs exporting directly was only

0.19 per cent, while the share of those enterprises exporting indirectly was 99.81 per cent. In terms of export

value, the share of SEs and MIEs exporting directly and indirectly was 0.98 and 99.02 per cent, respectively.

Based on his own field survey on SMEs in a variety of industrial groups, Urata (2000) provides a rather different

figure, i.e. the majority of his respondents did export by themselves, while only a few of them use intermediaries.

In this system of export adopted by many SMEs, the enterprises manufactured semi-final products and then

finalized by LEs. For instance, in food processing industries, processing raw materials into ready-made foods

takes place in SMEs and packaging in LEs (Tambunan, 2006b). The relatively low representative of Indonesian

SMEs compared to their larger counterparts in export reflects the fact that a significant part of SME exports

simply go unrecorded because, as discussed before, they take place through international trade networks or

subcontracting linkages with intermediaries as mentioned above. These agencies usually collect products from

or give orders to, regularly or irregularly, SMEs. They also play an important role in many aspects of

business, including in deciding designs, prices, technologies, and timing of production. Such SME are

involved in so-called buyer–driven commodity chains. This system has, however, one serious disadvantage; it

makes the subcontracted SMEs become too much dependent on the intermediaries, and, hence, they cannot

explore or expand their market independently. The system also hampers their own initiative to do innovations.

18

Of SMEs which export directly, however, not all do so through shipments to overseas markets, but they

sell their products to foreign tourists who visit their villages or workshops. They are called ‘buyers market’-

oriented SMEs. Dierman (1997), Knorringa (1998), Cole (1998a,b) and Sandee et al. (2000) show that in

certain sub-sectors most export-oriented SMEs in clusters operate in buyer-driven commodity chains. Their

studies show how SMEs penetrate global markets via buyer-driven trade networks with cases of furniture and

garments in Jakarta, garments in Bali, and carved wooden furniture in Jepara (Central Java). The studies also

show clearly that foreigners who came to Indonesia as tourists and visited the furniture cluster in Jepara or

clusters of garments SMEs in Bali have played an important role in modernizing the production method and

quality of products in these clusters and linking them to international markets.

Also, not all of SMEs involved in export activities are fully export oriented, as many of them export only

small portions of their total production. As an example, by the end of 1990s SEs and MIEs that exported 80

per cent or more of their total production were less than 50 per cent of total exporting firms. The number

increased to about 68 per cent in 2004. The percentage increase, however, varies between SEs and MIEs. In

SEs, the ratio increased slightly, whereas in MIE the growth was very significant. There are two main reasons

for not being fully export oriented. First, selling domestically is easier and cheaper than exporting globally.

Second, most SME consider domestic market as always the main target for their production. Moreover,

domestic market is more stable than global market and thus gives more market security.

Other important characteristics of export-oriented SMEs in Indonesia are the followings: (1) exports from

SMEs are mainly middle to low technology embodied goods; (2) exports-oriented SMEs are concentrated in

labor-intensive industries where low wages are important to enhance the comparative competitive position of

foreign markets; and (3) they are mainly found in clusters, mostly in Java. With respect to this last

characteristic, it is well documented that SMEs in many industries such as furniture, garments, and basic

machinery are primarily located in agglomerations of producers. Foreigners have played an important role in

modernizing many SME clusters and linking them to global markets.

3.2 Access of SMEs to Trade Facilitation

There are at least two main reasons why many export-oriented SMEs in Indonesia could not conduct export

activities directly. First, there is financial problem because most SME, especially SEs and MIEs lack of capital to

pay all costs involved with export activities is limited; while, on the other hand, not easy for them to get enough

support from banks or other formal financing institutions. Second, there are institutional and business constraints

that SMEs cannot solve because (i) they do not have direct access to export market or no access to information on

export market opportunities and requirements; (ii) they are not able to adjust to rapid changes in export market;

(iii) there is high risk in payment and shipment; (iii) payment is delayed, which small exporters/producers can not

19

endure as they need daily cash flow very badly; (iv) there is higher cost involved in direct export activities by

SMEs; and (v) and no access to TF.

With respect to the latter problem, unfortunately no national data are available which can show whether

existing TF in Indonesia has an excessive bias against SMEs, or in favour of LEs, or how serious is the problem

facing export-oriented SME in get access to existing TF. However, a survey of 39 export-oriented SMEs in the

wood furniture industry in Central Java conducted in August 2009 may give some idea about the problem. During

the survey, the respondents were requested to mention which form of TF is considered as the main problem in

doing export. The finding shows the following six forms of TF mentioned by the respondents, though different

individuals (or groups of individuals) have different perceptions about the degree of the problem with respect to

each of the items as shown in Table 7.

Table 7: Form of TF as the main problem faced by the respondents Respondents (N=39) Form of TF

Number % of the total Custom regulations and cost involved, Shipment, Documents required for export, Environment, health and safety regulations, Harbor facilities and cost involved Trade financing (letter of credit and/or trade credit) Total

7 2 4 3 2 21

39

Source: field survey

Based on this finding, however, one cannot conclude that such items of TF have a bias against SMEs. The

finding can only indicate that among those items, lack of access to trade financing reveals as the most problem for

the majority of the respondents. This finding is interesting due to the fact that many banks in Indonesia have been

doing many efforts to facilitate SMEs in trade. Not only private commercial banks such as Bank International

Indonesia and Standard Chartered Bank, but also several state-owned banks such as Bank Mandiri, BRI, BNI

and Bank Ekspor-Impor Indonesia provide trade facilities to SMEs. The trade facilities include loan for

working capital, investment credit, letter of credit (L/C), foreign exchange line, bank guarantee, shipping

guarantee, business management account –international trade (current account with interest and integrated

trade facility), Loans Against Trust Receipt (LATR) , Inward Bills Collection (IBC), Invoice Financing for

Suppliers (purchase) , Credit Bills Negotiation (CBN) Clean and Discrepant , Pre-Export Financing , Export

Bills Collection (EBC), etc.

According to some officials in Bank Ekspor-Impor Indonesia and BNI interviewed for this study, the

finding may not come as a fully surprise, because, there are many reasons why many export-oriented SMEs

still have difficulties to get access to trade financing facilities the banks provided. First, many SMEs

(especially MIEs and SEs) do not know that such facilities exist (this is information problem). Second, many

SMEs (especially SEs and MIEs) do not have knowledge on how to apply for such facilities (this has to do

20

with education). Third, it has to do with informality of their doing business. Many MIEs and SEs are in the

informal sector with no well developed structure of organization and good management. Banks cannot serve

this kind of enterprises/activities.

One important point from discussion with the officials is that they do not make a different between SMEs

and LEs. In other words, there is no bias against SMEs or to any enterprises. As long as all requirements are

met, every firm will be served.

A recent study from Rahardhan, et al. (2008) may also gives some clue about the issue being studied.

They examine the impact of ASEAN trade facilitation on trade volume of main important commodities from

East Java. For the purpose, they have conducted in-depth interviews with exporters from all sizes and some

key officials. The findings from the interviews show that from the own opinion perspective of the

respondents, the most important trade facilities are the followings. With respect to tariff barriers, the

respondents see that removing all problems related to custom procedure, tariff differences in line with

declining MFN tariff, administration procedures in filling all required forms, and information on the Common

Effective Preferential Tariff (CEPT) scheme have the most important effects. With respect to non-tariff

barriers, the elimination of problems related to import license, regulations on specific technical requirements,

costs of various extra taxes, including tax of foreign exchange transactions, import license, and many others,

and procedure of custom clearance

4. Government Efforts

Especially since the 1997/98 Asian financial crisis, the Indonesian government has shown a serious effort to

improve TF in the country. As a member of APEC, Indonesia has committed to take several actions under the

APEC TF framework, which has an objective to reduce transactions costs through introduction of TF

measures. Indonesia has also been actively involved in various initiatives to improve trade-related procedures

under ASEAN’s Customs Procedures agreement. As with other ASEAN member countries, Indonesia agreed

to carry out various efforts in order to harmonize trade procedures under the program called ASEAN Policy

and Implementation Work Program (PIWP). Furthermore, Indonesia and other ASEAN member countries are

in the process of creation of an ASEAN Single Window. As a WTO member, Indonesia acknowledged

various attempts to facilitate trade under the General Agreement on Tariffs and Trade (GATT), and, so the

Indonesian government has introduced a number of programs in order to improve trade facilitation measures

related to GATT Article VIII.

Particularly with respect to custom procedures, Indonesian custom has been modernized based on the

concept of compliance-focused facilitation. Significant improvement of customs procedure system has been

introduced since the end of 1997 when online declaration (Electronic Data Interchange or EDI) system for

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import services was launched for the first time. To simplify and harmonize customs procedures, Indonesian

Customs also always adjusts its system as suggested by International organization such as WCO, WTO,

ASEAN and by international for a such as APEC and ASEM.

Specifically for SMEs, also after the 1997/98 Asian crisis, in line with the national and regional economic

development effort, Indonesia government has introduced many measures to increase the export capacity of

SMEs. One measure is the improvement of the capacity and the performance of its related agency, the

National Agency for Export Development NAFED. The agency was established in 1971, and since then it has

a long experience in assisting thousands of companies, large and small, to sell their products in world markets.

NAFED maintains a comprehensive database of thousands of companies and its main task and functions are

to: (a.) formulate policies and establish guidelines for encouraging and supporting the expansion of non-oil &

gas exports; (b). provide information services and technical advisory services for export development; (c)

coordinate and implement export promotion; and (d). expand the range of export products and markets.

NAFED does not focus explicitly on SME and, in principle, it offers it services to all Indonesian companies.

However, in reality its most prominent customers are SME that are active on export markets since LEs have

developed their own strategies and networks to promote their products on international markets. NAFED has

developed an export information network through their website http://bppei.com.that provides information on

market opportunities and methods of penetration for Indonesian exporters. Indonesian firms can get free

access at present though there are plans to introduce fees for the use of this service. It gets also information on

fairs and exhibitions through Indonesian Embassies and for the year 2002, NAFED has already prepared a full

scheme of domestic and overseas trade fairs, including seminars and workshops for exchange of trade

information. The agency finances the stands and their construction for SME entrepreneurs participating in

international trade fairs except for tickets and accommodation, paid by the entrepreneurs themselves. So far,

NAFED finances the participation of individual entrepreneurs and not of representatives or sector

associations of SME.

Through NAFED, Ministry of Industry and Ministry of Trade (in that time it was the Ministry of Industry

and Trade), the government has also initiated to cooperate with provincial governments and Japanese

government through Japan International Cooperation Agency (JICA) under the project The Capacity Building

of the Regional Export Training and Promotion Center to establish Regional Export Training and Promotion

Center (RETPC).The establishment of RETPC is to facilitate business community, especially SMEs, to

increase their competence in international markets, by participating in training and export trade promotion.

NAFED or RETPC provides training programs of three months for entrepreneurs on the management of

export and import business and it is specialized in garments and wooden furniture merchandising. It also

22

offers shorter training programs on topics such as export procedures and payment terms, product quality

control, participation in trade fairs and exhibitions, and international business communication.

In the past few years the Ministry of Trade has also introduced several measures to in order to increase

export, especially from SMEs, through reductions in port charges, dissemination of information on export

procedures and financing in eleven provinces, guidance on quality management systems for SMEs in various

regions, and assistance with production equipment for SMEs/associations in thirteen provinces. The Ministry

of Trade also provided export training, assisted in leasing exhibition space for SME exporters in ten

provinces, and distributed information on export opportunities to SME exporters in eight provinces.

Technical assistance on product adaptation and design, covering ten major products, was also made available

to companies in eighteen regions.

Information on the potential of market products and market opportunities is disseminated by the Ministry

of Trade regularly to the business community in Indonesia and overseas through the Export News, analysis of

market indicators, and market surveys published in print and electronic media. To promote domestic products

and build larger export markets, the Ministry of Trade, and in some occasions cooperate with the Ministry of

Cooperative and SMEs, provide supports for selected SMEs to participate in foreign exhibitions

The Ministry of Trade has also opened overseas trade representative offices and Indonesian Trade

Promotion Centers (ITPC) in a number of foreign countries in support of building greater market access and

promoting Indonesian products. Further measures include capacity building and training for officials and

improved interagency cooperation. To facilitate cross-border trade, marketing points have been established

Skow (Papua), Entikong (West Kalimantan), and Tarakan (East Kalimantan).

Another ministry which has been actively facilitating SME in export activities is the Ministry of

Cooperative and SMEs. The Ministry has its own deputy for SME export promotion. Since 2002, the focus of

its activities in facilitating SMEs in export is the followings: (a) expanding export markets of SMEs by

developing trade missions and exhibitions; (b) developing an information system and publication on export

markets; (c) developing franchising in the context of ASEAN cooperation; (d) developing cooperation

between SME and Trans National Corporations; (e) developing business networking through industry

clusters; and (f) developing partnership models export-oriented SME.

5. Conclusions

The paper shows a number of important facts. First, as Indonesia’s serious commitment to WTO and ASEAN

Free Trade Area (AFTA) agreements, the Indonesia government has been implementing many concrete

actions to improving TF. Indonesia needs that in order to increase the movement of goods and services not

only between Indonesia and the rest of the world but also within the country (between provinces or districts

23

within provinces). However, Indonesia is still facing problems with many elements of TF, including customs

procedures, trade regulations, and infrastructure. In these particular areas, the process of improvement is

rather slow.

Second, Indonesian SMEs in export activities are still generally weak, not only in comparison to their

larger counterparts but also to SME in advanced countries. The majority of export-oriented SMEs in the

country do not export directly, but indirectly via intermediaries such as traders, exporting companies, or

trading houses, or through subcontracting arrangements with large enterprises (LEs) in which SMEs

manufactured semi-final products and then finalized by LEs (for instance, in food industries, processing raw

materials into ready-made foods takes place in SMEs and packaging in LEs).

Third, though empirical evidence is still limited, SMEs, especially those located in rural areas, have less

access to existing TF than LEs do. As shown before, many exported-oriented SMEs do export indirectly. In other

word, doing direct export is difficult and costly for many of the export-oriented SMEs. This is most likely due to,

among other factors, their limited access to TF. Also, many elements of TF are not yet well-improved, especially

in rural areas, and it means for SMEs more burden due to their limited capital and knowledge on doing export

than for LEs.

Fourth, the Indonesian government has initiated many measures to facilitate SMEs in export. Two key

ministries have been actively involved in this initiation, i.e. the Ministry of Trade and the Ministry of Cooperative

and SMEs. However, the effectiveness of these facilitations on SME’s export activities still needs to be

examined. Based on experiences with other government SME development programs, it can be hypothesized that

despite such ministries’ efforts, many export potential SMEs may not get access to such facilitates due to lack of

information and location problem.

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