Firm and Group Dynamics in the Small and Medium Enterprise Sector in Indonesia

ABSTRACT. This paper discusses the role of clusters andsubcontracting as factors in the evolution of small and mediumfirms in Indonesia during the last quarter century. It is arguedthat a number of such firms have become successful exportersof rattan furniture, wood furniture and garments on thestrength of subcontracting relationships with foreign investorsand buyers as well as agglomeration economies achieved byclustering in selected locations. Examples are provided toshow that clustered enterprises are more likely to be in theexports business and to adopt product and process innovationsas compared to more dispersed firms. Public policy supportfor fostering subcontracting links and cluster formation is alsodiscussed.

1. Introduction

Developing countries value small and mediumenterprises (SMEs) for several reasons. Viewedin static terms, the main argument is that SMEs,on average, achieve decent levels of productivity,especially of capital and all factors taken together(that is, total factor productivity), while alsogenerating relatively large amounts of employ-ment. It is thus better on the productivity frontthan micro-enterprise and better on the employ-ment-generating front than large enterprise.

In dynamic terms, the sector is viewed as beingpopulated by firms most of which have consider-able growth potential. Though the great majorityof micro-enterprises tend not to graduate frommicro to a larger size category (Liedholm andMead, 1999), many SMEs will grow significantlywithout exiting this broad size category. Otherfirms may eventually become large; this is the“seed-bed for large firms” function of SMEs.

Apart from the process of firm growth, it isimportant that SMEs achieve rising productivityover time through both investment and techno-logical change. Large enterprises in developingcountries achieve productivity increases to a greatextent simply by borrowing from the shelf oftechnologies available in the world. For SMEs asa group it is not so evident that processes such asforeign direct investment, technology licensing,joint ventures, and access to engineering and otheradvances will provide the productivity increasesneeded. As capital becomes less scarce and therange of technologies available expands in theworld, SMEs need productivity increases if theyare to maintain or increase their contribution tooverall development.

A third aspect of the dynamics of the SMEsector that distinguishes it from larger enterpriseis the high entry and exit rates. The process ofrapid turnover raises a set of issues about possibleimpacts on the economic efficiency of the sectorand about policies that may curtail such efficiencylosses as are associated with it.

Finally, it is often argued that one advantageof SMEs is their flexibility, relative at least tolarger firms. This is construed by some as a plusin industries and economies that, for whateverreason, face rapidly changing market conditions,including sharp macroeconomic downturns such

Firm and Group Dynamics in the Small and Medium Enterprise Sector in Indonesia

Small Business Economics 18: 141–161, 2002. 2002 Kluwer Academic Publishers. Printed in the Netherlands.

Albert BerryDepartment of EconomicsUniversity of Toronto150 St. George StreetToronto, OntarioM5S 1A1, Canada

Edgard RodriguezDepartment of FinanceOttawaCanada

Henry SandeeThe Free UniversityAmsterdamThe Netherlands

Albert BerryEdgard Rodriguez

Henry Sandee

as those that have bedevilled most of the countriesof East Asia over the last few years.

This paper undertakes a selective review ofevidence from Indonesia on the SME manufac-turing sector, with emphasis on these issues offirm dynamics. Section 2 reviews the role andgrowth records of the SME sector in recent times,in the context of overall economic development.Section 3 looks at selected factors affecting theproductivity, competitiveness, and survival ofIndonesian SMEs, including their involvement inclusters and subcontracting activities. Section 4takes a special look at Indonesian SMEs in themore open economy that has been evolving overthe last couple of decades. Section 5 reviewsIndonesian response to the economic crisis of thelast couple of years. Section 6 provides a discus-sion of public policy support for subcontractingand cluster formation.

2. Trends in the SME sector of Indonesia

Indonesia has achieved a strong and widelyapplauded growth and development performancesince the late 1960s, that is, until the crisis setin during 1997. Average GDP growth was 6.8percent over 1970–1997, with per capita incomerising at 4.7 percent. Industrialization proceededapace, with manufacturing output growing at anaverage of 12.4 percent per year, first under animport substituting industrialization (ISI) policyand then, since 1986, an increasingly openeconomy strategy. Since 1970 manufacturing rosefrom 10.3 percent of GDP (current prices) to 25percent in 1996, while the employment share ofthe sector rose from 7.8 percent in 1971 (WorldBank, 1980, p. 122) to 12.6 percent in 1996.1

While average labor productivity in the economyas a whole was rising at about 3.9 percent, that inmanufacturing was increasing at 7.3 percent. Therole of manufacturing products in total exportsjumped dramatically, from 4 percent in 1984 to 48percent in 1992, with the absolute level (currentdollars) having risen by 8–9 fold from 1.8 billionto 16.1 billion dollars (Hill, 1997, p. 41). Theseincluded both labor intensive products whose com-petitiveness lay in the country’s low wages andother products that relied on natural resources andspecial policy support.

Manufacturing in Indonesia remained dynamic

in the 1990s up until the crisis, which began in1997. Enabling macro and regional economicpolicies, including the development of financial,trade, and physical infrastructures, contributed tothe growth of medium and large industry. Insome industries this growth has been at theexpense of small enterprise, as in the cases ofbamboo weaving and palm sugar processing(Sandee and Rietveld, 2000). In other industriessmall firms have done well (Hill, 1996).

Structural change under growth

During the New Order period under Suharto,Indonesia experienced a rapid rise of large-scalemanufacturing. Enormous factories have becomeprominent in Jakarta, Surabaya, Medan, Bandung,and Semarang, as well as along main trunk roadsthroughout Java. To an important extent, large-scale manufacturing in Indonesia is characterizedby its concentration on labor-intensive assembly,and it is increasingly oriented toward exportmarkets. In spite of the impressive growth oflarge-scale manufacturing, the relative importanceof the small-scale sector has not declined greatly.According to Hill (1992, p. 249), the principalexplanation of the latter’s resilience is its “abilityto exploit market niches, to concentrate onactivities not characterized by economies of scale,to serve particular markets not of commercialinterest to larger firms, and to produce goods noteasily adapted to mass production technologies.”Clustering is an additional factor that may explainthe resilience of small-scale industries. A mainfeature of industrial organization in Indonesia, andin particular Java, is the tendency for small-scaleindustrial enterprises to group together by geog-raphy and by economic subsector. Clusteringoffers agglomeration economies that allow small-scale industries to participate profitably and com-petitively in wide trade networks. The resilienceof the small-scale industry sector reflects the factthat small enterprises have not been static duringIndonesia’s long period of economic growth.There is ample evidence of their technologicalupgrading as a necessary condition to “stay onboard” during the growth years (Sandee andothers, 1994; Sandee, 1995; van Diermen, 1997).

The small firm’s continuing role as the locus ofmost employment in Indonesia’s manufacturing

142 Albert Berry et al.

structure is reflected in the fact that as of 1996nearly half of all workers were found in units ofunder five workers and two-thirds in ones of under20 (Table I). About a quarter were found in estab-lishments of 100 or more workers and probablyclose to a fifth in those of over 500 workers.2

Labor productivity, however, is much greater inlarger plants with the result that though the verysmall (“household”) sector has nearly half of theemployment it probably generates only 9–10percent of output3 while plants of 100 (500) andup generate about 70 percent (46 percent) of thatoutput.4 The labor productivity gap thus appearsto be one of the largest observed among devel-oping countries (Berry and Mazumdar, 1991). Asof 1974–1975 the striking aspect of these gapsin Indonesia was not so much that betweensmall establishments (5–19 workers) and themedium/large range but that between householdworkers and everyone else.5

Other notable features of Indonesian manufac-turing are its widespread dispersion in rural areas

and the already noted prevalence of clusters,where about half of manufacturing employmentwas located according to Sandee (1995, p. 10).Clusters are important in absolute and relativeterms in most major categories. There is not muchvariance in average firm size within most clusters;usually there are two to three workers, with themain reliance on family labor. Some moredynamic clusters do use considerable paid labor.Rural industry is characterized by its instability(Klapwijk, 1997) and the low incomes it gener-ates. World Bank (1985) argues that the returnsto labor (per man hour) are substantially lower (asmuch as 70 percent) in activities outside the ricelabor market. On the basis of this somewhatunusual characteristic of the rural wage andincome structure this source concluded that therewas a labor surplus in many Javanese villages butthat there did exist mechanisms that prevent suchsurplus from bidding down the agricultural wagerate. Whatever the labor market mechanismsinvolved, rural industry is frequently associated

Firm and Group Dynamics in Indonesia 143

TABLE ISize composition of Indonesian manufacturing establishments, 1986 and 1996

Year Size of Number of Employment Percent of Average size of establishment establishments (thousands employment establishment(number of workers) of workers) (number of workers)

1986 <5 1,422,593 000,02,700.1 000052.4 000001.955–19 00,98,129 000,00,787.7 000014.9 000008.0320 and up 00,12,902 000,01,728.7 000032.7 000134.020–99 00,10,008 000,00(400.3) 0000 (7.57) 000[40.0]100 and up 0,002,894 000,,(1,328.4) 000 (25.13) 00(459.0)Total 1,533,624 000,05,286.5 000100.0 000003.45

1996 <5 2,501,585 000,04,878.1 000048.6 000001.955–19 0,228,987 000,01,831.9 000018.2 000008.020 and up 00,28,798 000,03,329.5 000033.2 000115.620–99 00,22,283 0 (891.3) (779.9) 0(8.88) (7.77) 0[40.0] [35.0]100 and up 0,006,509 (2,438.2) (2,549.6) (24.32) (25.43) (374.6) (391.7)Total 2,759,370 000,10,039,549 000100.0 000003.45

[ ] Assumed.( ) Deduced based on the assumed figures.Note: Figures are available from the 1986 and 1996 sources for the whole category of establishments with 20 or more workers.For the category 20–99 it is possible to make an approximate estimate of average size, based on the size distribution usuallyobserved. For 1986 our best estimate is 40 workers. When this estimate has been made it is then possible to deduce the averagesize of the category 100 and up, together with the rest of the figures shown in round parentheses in the 1986 panel. For 1996, theaverage size of establishments with 20 or more workers is less than in 1986; 40 would thus seem to be an upper limit estimateof the average size within the 20–99 category; if it is the true figure, then the leftward of the two estimates in round parenthesesfor the other categories where estimates are made is the implied figure. As a lower limit to likely average size within the 20–99category we have chosen 35 workers; were it the true figure then the rightward set of figures in round parentheses would hold.Source: The 1986 and 1996 industrial censuses.

with low earnings. Low-income urban dwellersseem more typically to opt for trade and services.

Opinions have been divided on the likelyimpact of economic growth on these low-incomejobs in rural industry. Rising rural incomes arelikely to generate more than proportional increasesin demand for goods and services of householdenterprises, but beyond a certain income levelpeople begin switching to the more standardizedproducts of larger firms, which are less likely tobe found in rural settings. Urbanization and theexpectation that demand would shift from theirlow-quality products has led to the prediction thatrural industry will tend to decline.

As noted, the last couple of decades have seenvery rapid growth of manufacturing output: atabout 11.3 percent per year (1975–1996), withboth employment (6.1 percent) and labor produc-tivity (4.9 percent) contributing strongly to thisoutput growth.6 Very significant changes haveoccurred in the composition of output by branchand in the share of output being exported. In thelight of such growth and change, it is perhaps sur-prising that the size structure of the sector hasshifted only marginally. The large labor produc-tivity gaps by size appear to have remained(although the lack of clearly comparable outputfigures from the 1996 manufacturing census makethis judgement somewhat speculative for theperiod since the mid-1980s)7 but not widened,implying that significant investment and techno-logical upgrading has occurred across the full sizespectrum. Employment growth has been rapid inall the size categories, and industrial concentrationhas tended to decline somewhat. Evidence onfirm-level growth is very limited, but considerabledynamism has clearly characterized certain groupsof firms.

Over the intercensal period 1974/1975–1986,the broad size structure of employment remainedvirtually unchanged. Employment grew at 5.6percent per year on average with establishmentsof under five workers retaining about 55 percentof the total labor force, based on the populationcensus definition, which focuses on the mainactivity of the person. There seems also to havebeen little change within the medium-large (M/L)group, although the data presented by Hill (1998,p. 71) show some jumpiness. Over the next inter-censal period (1986–1996), unadjusted figures

indicate that manufacturing employment wasgrowing even faster, at about 6.6 percent per year,and again only a modest change seems to haveoccurred in size structure. Table I suggests thatestablishments of over 100 workers retained their25 percent share, those of under five dropped a bitfrom 52.4 to 48.6 percent, while the middle rangefrom 5 to 99 workers gained from 22.5 percent toabout 26–27 percent.8

The failure of the larger establishments toincrease their share of total employment (assumingthese figures are roughly accurate)9 flies in theface of considerable belief that concentration hasincreased in many branches of industry andoverall. It confirms Bird’s (1999) conclusion,based on an analysis of 102 industries over 1975–1993, that there has been a long-run downwardtrend. The simple average four-firm concentrationratio declined from 64 percent to 54 percent andthe percentage of industries characterized ashighly concentrated fell from 39 percent to 28percent.

Clearly comparable figures on labor produc-tivity are not available to permit an accuratemeasure of trends since 1986. The average for allmanufacturing seems to have been about 4.5percent over this decade. Data on establishmentsreferred to as “small business” and defined (forthe manufacturing sector) as being without legalentity and/or employing fewer than 20 personsshow this group to have labor productivity aboutone-thirteenth that of the other (medium andlarge) establishments in 1996 (Saleh et al., 1999,Table VI). If the same productivity gap heldbetween plants of fewer than 20 workers and thosewith 20 and up, then labor productivity increaseover 1986–1996 for those with fewer than 20workers would have been about 2 percent per year.It seems likely, however, that the 1996 produc-tivity gap between plants of fewer than 20 workersand those with more was a bit lower (than 13 to1), in which case the labor productivity growth ofthe plants with fewer than 20 workers may havebeen as fast as 4 percent per year or even a bitmore. In any case there appears little doubt thatproductivity growth in the smaller establishmentswas substantial. Whether it matched or evenexceeded that in the M/L range cannot yet beascertained.

It is accepted that total factor productivity


(TFP) better measures the relative efficiency ofSME firms and their advances over time than doeslabor productivity. A number of studies in variouscountries have used this indicator to assess relativeefficiency across size categories.10 Unfortunately,TFP is harder to measure than is labor produc-tivity, owing to imprecision in the figures oncapital (and human capital as well). The ques-tionable quality problems of the Indonesian datahave steered some analysts away from its use.There have, nevertheless, been a few analyses ofhow TFP has changed over time in the M/L sectoras a whole, the most recent and perhaps the mostaccurate of which is Timmer’s (1999, p. 87). Hereports that TFP fluctuated without trend over1975–1983 and then rose by about 6 percent peryear over 1983–1995, for a 20-year averageincrease of 2.8 percent per year. By 1995 TFP wasat 176 percent of the 1975 level, with labor pro-ductivity at 220 percent of it. The figures indicatethat capital input accounted for 60 percent of theoutput growth over this period, labor for just 18percent, and TFP growth for 22 percent. No TFPestimates have to our knowledge been undertakenby size category of establishments. It seems likely,however, that the quite marked improvements that

have characterized the M/L sector since the mid-1980s have been shared by the smaller establish-ments in that group and perhaps by small firmsas well.

Growth of total employment results both fromcreation of new firms (minus the exit of existingones) and from the employment growth of existingfirms. Though no organized information is avail-able to permit a disaggregation between these twosources, scattered evidence illustrates the fact thatfirm growth is important. Steel (1993, p. 15) notesthat there was considerable graduation into thelarger size categories over 1975–1990. Whereas,in 1990, 63.7 percent of all M/L employment waslocated in establishments with 500 or moreworkers, only 28.8 percent of the initial yearemployment of this set of establishments wasfound in that size range.11 Hill (1998, p. 71)presents somewhat similar information for threesize categories. In 1990, whereas the 500 and upcategory accounted for 65.7 percent of total valueadded, firms created in that size range accountedonly for 41.7 percent of it (Table II). More directlyrelated to our concerns here, establishments cur-rently in the small and medium range (20–99workers) produced only 7.0 percent of valued


TABLE IISize distribution of manufacturing value added in Indonesia, by current establishment size and by initial year establishment size,

1977–1991

Current year size group (by number of workers) Initial year size group (by number of workers)

Year 20–99 100–499 500+ 20–99 100–499 500+

1977 09.0 24.2 66.8 15.9 35.8 48.21978 08.8 25.2 66.1 16.7 34.3 49.11979 08.1 25.7 66.3 18.9 36.1 45.01980 07.3 25.0 67.7 20.3 33.6 46.11981 06.6 23.8 69.6 20.9 31.9 47.21982 06.9 25.1 68.1 23.1 32.4 44.51983 06.4 23.3 70.3 23.7 30.0 46.31984 06.4 22.7 70.8 25.4 28.8 45.81985 12.0 30.3 57.6 27.3 28.6 44.21986 08.4 27.3 64.3 27.5 28.3 44.21987 07.4 27.0 65.7 25.7 29.3 45.01988 09.1 28.6 62.3 27.3 30.8 42.01989 07.6 27.4 65.0 26.0 30.7 42.31990 07.0 27.3 65.7 25.4 32.9 41.71991 25.4 36.4 38.3

“Initial year” refers to the shares of establishments based on their size distribution at the commencement of the data series (1975)or when the establishment commenced operations.Source: Hill (1997, p. 71).

added, but those created in that range produced25.4 percent. Hence, those who had graduated upfrom this size category accounted for a hefty 18.4percent of output, more than twice what firms cur-rently in the size range were producing. With thepassage of time this ratio has risen (from under 2in 1977 to 3.6 in 1990). More important, the shareof all value added by establishments of 20 workersand up that comes from those starting in the 20–99range rose from 15.9 percent in 1977 to 25.4percent in 1990.

Further evidence on the growth trajectories offirms comes from the study of SME exportersby Berry and Levy (1999). These firms weredoubtless atypically capable of growth because oftheir success in breaking into export markets andare thus better thought of as giving a feel for howfast growth can be under those circumstances. The32 rattan firms interviewed began operations withan average of 136 workers and had 377 by dateof sample in 1992, by which time their averageage was about 10 years. The 34 garment firmsstarted with an average of 218 workers and had1,109 by date of sample.12 Some of these firms hadbegun with very few workers; seven of the rattanfirms began with an average of 5.7 workers andhad expanded to an average of 270 by time ofsurvey, and eight garment firms that started withan average of 4.6 wound up with 167. Still, alower share of this Indonesian sample of exportingSMEs had started small (defined by number ofworkers) than in a comparable study of SMEexporters from Colombia (Berry and Escandon,1999, p. 173). This could be consistent with thetwo sets of firms having comparable initial levelsof capital, however, since wages are higher inColombia and the labor/capital ratio thereforelower.

3. Productivity growth and the role of clusters,subcontracting, and “strategic alliances”

Labor productivity at the firm level rises owingto increased capital per worker and to technolog-ical change. At the level of the industry or ofmanufacturing an additional factor usually tendingto raise labor productivity is the reallocationof resources toward higher productivity groupsof firms. TFP rises as a result of technologicalchange and this reallocation of resources to more

productive firms (i.e., to just two of the threefactors that explain rising labor productivity).

Raising productivity by technological upgrad-ing (in the broadest sense to include not just bettermachinery but also improvements in workplaceorganization, inventory handling, product design,etc.) is achieved through a variety of mechanisms.It is accepted that most small firms will be lessable to handle this process successfully on theirown than will larger ones. Accordingly, muchattention has been given to the possible roles ofsubcontracting and clustering as arrangements thatmake such advances more easily accessible tosmall firms, and to collective support systems,including those of the public sector and of privateassociations. The Japanese experience is viewedas the paradigm for the importance of subcon-tracting in creating the conditions for a majorSME role in a strong and internationally compet-itive manufacturing sector. Italy’s export-orientedclusters have become a model for the role ofclusters in competitive export activities. These twophenomena are of course not limited to exportsettings, though they may have their most impres-sive manifestations there.

Indonesia’s clusters and exports

What are the sources of rising productivity inIndonesia’s SMEs? As was discussed, the evidencesuggests that although absolute levels of labor pro-ductivity in most SMEs remain quite low13 levelshave been rising significantly over the last coupleof decades. Probably productivity has risen at ratesnot far from those of the larger firms for which thedata referred to above clearly confirm substantialimprovements.

There are no general data on the sources of pro-ductivity gains of SMEs or their relative impor-tance in Indonesia. But some suggestions doemerge from the few studies available. In theiranalysis of sources of technological capability forexporting SMEs in rattan furniture, Jepara woodfurniture, and garments (three important exportindustries in which SMEs play significant roles),Berry and Levy (1999, p. 50) highlight severalpoints:

1. Private channels have been the dominant mech-anisms for acquiring such capability in all threesectors.


2. Subcontracting is pervasive in all three indus-tries and has been crucial to harnessing tradi-tional skills for export production, especially inJepara.

3. Employment of expatriates is an especiallypowerful mechanism for acquiring technolog-ical capability in the rattan and garment sectors,but this practice is concentrated disproportion-ately among non-pribumi entrepreneurs whohave the advantage of being embedded in anextended (ethnic) community that transcendsnational boundaries.

4. Collective support mechanisms (public sectorand private associations) have played only alimited role overall; they have been moreimportant to the smaller pribumi firms but theiroverall value has been limited by pervasiveinstitutional weaknesses.

These case studies illustrate the range of mech-anisms at work in the process of technologyupgrading. Much of it involves ideas coming fromthe outside, but on-the-job learning by bothemployees and the entrepreneur are rated veryhighly as well (Berry and Levy, 1999, pp. 51,59).14 A considerable shifting of relevant skillsamong firms also occurs when employees arehired from one to another.

Foreign buyers are the most important singlesource of outside technological support in all threeindustries (true also of marketing). This reflectsboth the importance of strong mutual interest inraising productivity for this process to be suc-cessful and the fact that the buyer’s product pref-erences and specifications have implications forthe technological capability that a firm needs.Expatriate employees were second most importantin rattan and garments, two industries in whichthere had been dynamic activity in the East Asiaregion for some time before Indonesia’s suddenemergence as a significant producer.15 As wasnoted, however, their importance was muchgreater to non-pribumi entrepreneurs than to thepribumis. Equipment suppliers were moderatelyuseful, especially to the (few) pribumi entrepre-neurs in the garment sector. Similar firms providedconsiderable information in the garment industry,especially to the pribumi entrepreneurs, and thetechnical literature mattered to a fair number offirms.

On the other side of the ledger, private consul-tants were of limited importance, as were thepublic sector providers, the industry associations,and the “foster parents.”16 This said, however, thefact that none of these last sources is by itselfwidely cited as important to firms’ technologicaladvances does not mean that they are unimpor-tant when taken together. Different sources matterto different firms, so each is cited by a few firms,and their total significance may be greater thanmight at first appear. Moreover, collective sources(public and private nonprofit) have clearly beenmore important to firms that started smaller andto those run by pribumi entrepreneurs. The lattersuggests that rather than concluding that suchsources are not necessary, ways should be foundto make them better in the future than in the past.17

Doing so requires recognition of what such col-lective sources can do best and how they can bestdo it. It is important that collective providers nottry to do too much, nor to replace private mecha-nisms when these have real potential.

The authors point to the merits of “light touch”public support/intervention, which focuses onbringing private actors together, facilitating theircontacts, and the like. One of the best examplesof this, most directly relevant to the marketingneeds of the surveyed rattan SMEs but alsosurprisingly relevant to technological learning, issupport for fairs, both in-country and abroad(where it involves subsidizing trips to those fairs).Private consultants appear destined to play only amarginal role for the foreseeable future, althoughhere too this is not grounds for writing them off,but simply for keeping their limited potential rolein perspective.

Unfortunately, it is not possible to say to whatdegree the above findings on sources of techno-logical advance in SMEs in three exporting indus-tries can be generalized to the majority that haveweaker or no links to exporting. The role offoreign buyers would of course be absent andthe benefits and density of subcontracting veryprobably less. We suspect that technologicalimprovement is on average slower in the domesticmarket-oriented SMEs18 because these importantsources of technology are weak and because theachievement of export capacity is likely to requirea higher-than-average level of performance. Butwe believe that most of the same sources of gains


are at work in the broader universe of firms aswell, that their relative importance is probablyrather similar, and that the policy conclusionsreached on the basis of the study of exportingSMEs is also more generally applicable.

Subcontracting has played a central role in thesuccessful integration of SMEs into dynamic man-ufacturing sectors in countries such as Japan andKorea, where it has been a major vehicle for theachievement of rising and eventually high levelsof productivity in those firms. This role is clearlyless in Indonesia at this time, but at the same timenot inconsiderable. The issue is how its role willevolve in future. Its prevalence in the exportingSMEs studied by Berry and Levy (1999, pp.53–55) is encouraging. Three quarters of rattanfurniture exporters were subcontracting principals,with half of these subcontracting completeorders and 80 percent specific tasks. Quality main-tenance involves technical assistance to the sub-contractors. One function of in-house capacityamong Jepara exporters is to demonstrate qualitycontrol and to spin off new capable subcontrac-tors. Subcontracting is encouraged by large exportorders, fluctuating orders, and the risks associatedwith a heavy investment by a single firm in suchcircumstances, as well as by the lower costs thatsubcontractors can often achieve. Kinship, friend-ship, or former business contacts also encouragesubcontracting.

Meanwhile, the striking importance of clustersof small firms in Indonesia, in both rural and urbanareas, suggests that membership in a cluster has asignificant influence on a firm’s productivity.19

The general literature on clusters has focused onsources of static productivity gains, such aseconomies of scale in purchase of raw materialsor machinery, sale of output, or spread of riskassociated with demand fluctuations.20 Morerecently, it has also taken account of the dynamicadvantages of this structure, as with sharing inR&D expenditures, diffusion/sharing of informa-tion on new designs, processes, products, etc.(Sverisson, 1993; Schmitz, 1995). Klapwijk (1997,p. 167) argues that a conducive socio-culturalmilieu sustaining trust and reciprocity, an activeinvolvement of traders, and strong government ini-tiative at the local level may be at work in centralJava to render rural industrial clusters (RICs) afertile seedbed for technological change and thus

a positive factor in rural industrialization. Someclusters reflect collaboration among a number ofextended families that have a long history of coop-eration and coexistence.

The main difference between clustered and dis-persed rural industry in Indonesia21 is that the clus-tered industry is primarily oriented to marketsoutside its own community (Poot and others, 1990,p. 194). Products are on average less perishable orlocal-taste specific. Examples in Indonesia arebatik; leather and products (including footwear);some food processing activities (e.g., coconut,sugar); wood working (e.g., carving), bamboo andrattan; bricks and tiles; pottery and some metalproducts, such as agricultural tools; and ironwares.

Technological change is more likely when theclusters are linked to urban or internationalmarkets. Klapwijk (1997) suggests that only thoseRICs that specialize in the production of discreteproducts in small batches to customers’ orders arelikely to survive in the long run. This limits theprospects to such sectors as clothing, footwear,mechanical engineering, and furniture, with a highneed for flexibility at the shop floor and whereeconomies of scope do not inhibit the division oftasks among several enterprises. Though manyrural clusters will not survive as developmentmoves along, there are interesting examples ofsuccessful upgrading, finding of new marketniches, etc. Subcontracting arrangements oftenlink such rural industries to nearby urban or eveninternational markets (Weijland, 1994). Section 4below provides some details on the cases ofwooden furniture from Jepara and garments fromBali.

There is increasing empirical evidence thatsmall firms that are parts of clusters are in a betterposition to adopt innovations when compared withtheir dispersed counterparts. Sandee’s (1995) studyof five roof tile clusters in central Java province(the heartland of small-scale cottage industry(SSCI) in the country) illustrates several of theelements at work. Through the 1980s the demandfor roof tiles increasingly shifted toward urbanareas, where customers pay more attention toquality. This meant that upgrading was importantto retain or increase demand. As a result, someclusters have stagnated and others have grownthrough a process of technological change or adap-


tation that encompasses changes in processes ofproduction, in patterns of interfirm cooperation, inemployment conditions, and in the marketing ofnew output.

The range of experiences has been wide. In twocases (Mayong Lor and Klepu) the process wasdemand driven. The buyers, agents from urbanbuilding material shops, largely took care of thefinancial, technical, and marketing sides of theadoption and competed with each other to do so,a reflection of the expanding urban demand forpress tiles. The pioneer adopters of the hand-presstechnology were young males who had used itelsewhere in rural Java. Since its introduction inthe early 1970s, virtually all of the producers inthese clusters have adopted the technology(Sandee, 1995, p. 170).22 Female producers,however, had very little chance to do so. Theirfirms were usually taken over by men as the tech-nological shift proceeded. Access to credit was ageneral constraint on adoption and was felt espe-cially acutely by female producers. The fact thatinnovation adoption requires a more intensiveinvolvement of both producers and workersmay also militate against women, given theirother (household) responsibilities (Sandee, 1995,p. 179).

In producer-driven clusters such asKaranggeneng, networks of producers are at theheart of the process of technology upgrading.Producers organize to finance new equipment,share indivisible capital, and gain access to newmarkets. In buyer-driven clusters, collaborationamong producers and traders obviates the need toform such producer networks. Urban buildingmaterial shops play a key role in assuring demandbut also provide loans for purchase of presses andrenting out mixers. In both cases, innovationtrickles down among an increasing number of pro-ducers. Diffusion is stimulated by the growinginvolvement of suppliers, “while the governmentprincipally contributes by improving the environ-ment” (Sandee, 1995, p. 170). In the producer-driven clusters, pioneer adopters remain the mostimportant actors by stimulating innovationadoption by those producers whom they can trustand control, especially relatives. Urban buildingmaterial shops get involved through establishingrelationships with the pioneer adopters.

Sandee also studied two clusters where institu-

tional support was the driving force behindadoption. The success of Karanggeneng motivatedthe government to intervene in these other clusters,and its involvement was more direct since the pro-ducers and buyers had not yet demonstrated thedegree of interest shown in Kananggenerg. Theseinstitution-driven innovation processes sufferedfrom too little involvement by other actors; andwhen government support dried up, the innova-tions came to a standstill. The process has beenhampered by difficulties in gaining access topress-tile markets, so adopters have tended to stickwith traditional tiles and much of their press-tilecapacity is under-utilized (Sandee, 1995, p. 171).Sandee concludes that the government has focusedtoo much on the supply side of the innovationadoption process while underestimating the needto link clusters to more dynamic markets prior tothe introduction of such change.

In all the cases Sandee studied, the governmenthas contributed to innovation by improving theenvironment for tile production. Governmentassistance programs tend to be oriented to the pro-vision of technical and financial assistance tosingle enterprises. This may be cost effective inclusters where initial impacts trickle down but oth-erwise less so. Most rural tile producers only knowabout alternative technologies in general terms,but not in enough detail to have a good feel forthe benefit/cost ratio of upgrading. Rural clusterswould benefit from regular but simple trainingprograms by the government in which the sharingof information on the more advanced technologiesfigures prominently. Perhaps assistance programsshould operate through longer-run links withselected producers rather than as in the presentone-shot system. More general policies, such asthose in the credit area, also affect market condi-tions. The larger tile firms have favorable accessto the KYUK program, and smaller rural firmswould benefit from the abolition of such prefer-ential treatment because these smaller firms typi-cally lack the credit needed to establish or expandtheir business (Sandee, 1995, p. 180). And thecentral role of buyers and others in adoption raisesseldom-considered policy options.


4. Export success of Indonesian SMEs

As economies turn outward it becomes moreimportant for any group of firms to be able to gainexport markets or to compete effectively withimports that no longer have to jump high protec-tionist fences. It has been widely accepted thatfor SMEs to succeed on the export front (how theydo in competing with imports must be judged dif-ferently) SMEs must have some way to lowertransactions costs, which tend to have an impor-tant fixed cost component. Subcontracting is oneroute, whether with larger scale manufacturers orwith commercial intermediaries. Berry and Levy(1999) reported that it was common amongmedium-sized exporters in rattan, Jepara furniture,and garments.

The second recognized route is by reaping theadvantages of clustering. All studies show thatexport-oriented small clusters operate in buyer-driven commodity chains requiring continuousupgrading and adaptability, which in turn requiresa professional interaction on tailor-made productspecifications between buyers and producers(Knorringa, 1998). The buyers provide an effec-tive “assistance package.”

Van Diermen (1997) and Cole (1998) show howsmall enterprises penetrate export markets viabuyer-driven trade networks, in the cases of Jepara(carved wooden furniture, see Appendix 1) andBali (garments, see Appendix 2). In both casesthere are brokers, agents, and traders that functionas intermediaries between international buyers andsmall-scale producers. Foreigners have played animportant role in modernizing the Jepara furnitureindustry and linking it to global markets (Schillerand Martin-Schiller, 1997), as well as in the caseof Bali garments.

Indonesia’s small industry (establishments of5–19 workers) seems to have shared nicely in themanufactured export boom of recent years. Theabsolute level of direct exports rose from US$137million in 1983 to 2.1 billion in 1992 (Hill, 1998,p. 49), and its share of such exports increasedfrom 10 to 13.2 percent, after reaching 17.3percent in 1987. As with larger industry, the mainitems are garments, textiles, and footwear, togetheraccounting for 60 percent. This growth has beenachieved substantially by finding niche marketsand adapting costs and quality to market demand

(Thee, 1993). A significant and no doubt rapidlyincreasing share of SME output has been exportedindirectly through subcontracting arrangements.

5. Response to crisis

Indonesia has suffered a severe economic setbackover the last couple of years, with GDP falling bysome 13–15 percent in 1998 alone. How has theSME sector responded? What does its response tellus about the sector and its potential? What policyinstruments are pertinent to this situation?

It has often been argued that one of the advan-tages of many SMEs is their flexibility, and relatedcapacity to, for instance, weather storms, shiftfrom product to product, expand and contracteasily. SMEs may therefore be expected to dorelatively better under volatile macro conditionsthan large firms producing more standardizedproducts, where reorganizations of the assemblyline take time (Sandee et al., 1998, p. 3). Sunkcosts are lower in smaller firms and labor-capitalstruggles are less frequent, another source of flex-ibility. At the same time it is often argued thatSMEs are the first victims of macro-economiccrises such as this one. The issue is important forseveral reasons. First, a flexible SME sector, ableto adjust smoothly to severe shocks, is clearly amajor plus as a country tries to mitigate the effectsof those shocks and to avoid large increases inpoverty. Also, even if many SMEs show impres-sive agility in general, certain types of shocksmight destroy firms with good longer run poten-tial, raising the question of what policy instru-ments might help to avoid that outcome. Finally,it is to be expected that any given macroeconomiccrisis will affect different SMEs in different ways,and that appropriate policies to support SMEs willvary widely according to how those firms areplaced in the economy.

When the recent crisis in Indonesia led to amajor devaluation, it raised the potential prof-itability of exporting industries such as Jeparafurniture, while many domestically oriented indus-tries were under strain owing to weakening localdemand. Best placed are industries that export alot or compete with imports and at the same timedo not rely heavily on raw material imports orimported machinery and equipment. Jepara is sucha case. Worst off are those relying on domestic


demand and not competing with imports (whichthe devaluation will help to cut out) but drawingheavily on imports of material or capital goods.

These various effects are apparent in Indonesia.van Diermen and others (1998, p. 32) report thatsome SME groups such as Jepara and the tradi-tional barik cloth weaving industry in Central Javahave been doing well. Nails, latches, and doorbolts are now produced locally rather thanimported as before, in spite of the quality disad-vantage vis-à-vis the imports. In some export casessome of the potential benefits to the Indonesianfirms are negotiated away by foreign buyers.While the currency devalued by 60 percent in realterms (80 percent in nominal terms) the textile andgarment industries’ international buyers haveinsisted on discounts of 20–40 percent, so therupiah price increases are less than might beexpected (van Diermen and others, 1998, p. 24).Also foreign banks’ unwillingness to acceptIndonesian banks’ letters of credit has reduced thebenefits to exporters (van Diermen and others,1998, p. 40). At the negative end of the spectrumis the demise of tahu producers in West Java andsmall clove cigarette (kretek) producers in CentralJava, in both cases caused by a steep rise in theprice of inputs. Another example of small-scaleenterprises in distress are those garment producers(often operating in subcontracting networks) whodepend on a steady flow of imported cloth andother raw materials.

There is no doubt that SMEs have fared verydifferently according to the sector. Unfortunately,though considerable evidence has been built up ontrends in selected industries, on the broaderquestion of how well the SME sector as a wholehas been able to defend itself and maintain itsincome levels against the effects of the crisis, onecan only guess at this point. Susenas surveysprovide useful data on employment trends, but thecountry’s statistical apparatus is not up to the taskof identifying short-run earnings trends in thecottage and small-scale sectors. Earnings levelscan only be reasonably well gauged when aneconomic census (or sometimes a populationcensus) is done. There is nonetheless a widespreadimpression that small-scale enterprises have beenweathering the crisis better than larger companies(Cameron, 1999). Two distinct interpretations ofthe resilience of small-scale firms in the current

period of economic distress have been highlighted.First, a recent paper by Jellinek and Rustanto(1999) argues that there has been an unprece-dented upsurge of the small-scale sector, with neweconomic opportunities in blacksmith communi-ties, for furniture makers, fishing, agriculturaltools, brick and tile making, and small-scalevending activities. They report that cottage indus-tries almost completely destroyed over the past 20years are finding it hard to keep up with the neworders. They judge that the economic crisis offersrenewed opportunities to a small-scale sector thatwas gradually losing ground during the NewOrder. In this view, a policy correction, mainlythrough the depreciation of the rupiah, has createdgrowth prospects for “communal-capitalistsystems currently being created by the peoplethemselves.” A second view is that many small-scale enterprises have been performing well inrecent decades, even though they often faced con-siderable discrimination, especially relative to theopportunities enjoyed by the conglomerates (Poot,1997). Being less reliant on formal markets andformal credit funds, small-scale enterprises areable to respond quicker and more flexibly tosudden shocks than can their larger counterparts.

We now turn to a brief review of availableevidence on this issue. The second view of the pre-crisis period appears much more consistent withthe statistics reviewed above. Nonetheless, bothmay offer insights into the events of the crisisperiod itself. Among recent studies of the impactof the crisis Hill (1999) reports that the manufac-turing sector has contracted at about the economy-wide average (–15 percent) since its outbreak,though there are differences between export-oriented and local market activities. He concludesthat every sector has shed labor, with the excep-tion of agriculture, and that the biggest decline hasoccurred in manufacturing.23 Both Hill andCameron (1999) feel that small-scale enterprisesare weathering the crisis better than larger com-panies, because they are less reliant on formalmarkets and less reliant on now far more costlyborrowed funds.

Various surveys have attempted to measure thesocial and economic impact of the crisis, focusingespecially on how it has affected poverty, educa-tion, and health (Wetterberg et al., 1999; Poppeleet al., 1999; Cameron, 1999). They generally


report that urban areas have been hit harder thanrural ones. They also report that both the urbanand rural areas of Java have been hit hard relativeto other regions, the impact on rural areas beingrelated to the relatively high density of urban-rurallinkages on Java as a consequence of which urbaneconomic distress trickles down to rural areas. Thesurveys estimate also that unemployment rates for1998 were up to some 6 percent, substantiallybelow earlier forecasts of massive unemploymentflowing from such a major economic downturn.This suggests that workers who have lost their jobsin the formal sector have been able to find alter-native (possibly part-time) employment in theinformal sector.

The most general statistical evidence on trendsin the labor market comes from the large annualSusenas survey (corresponding to the month ofJanuary, in the middle of the rainy season whenagricultural activity is likely to be most promi-nent). Comparison of the figures for 1995, 1997,and 1998 shows little change in the structure ofemployment by job position.24 The “paid workers”category continued to dominate manufacturingemployment (of persons 10 and up) with abouttwo-thirds of the total, including both the so-calledformal and informal branches of manufacturing.This category gained a couple of points at theexpense of the unpaid worker category.25 Self-employment of people who run their ownbusiness, with or without workers, has remainedvirtually constant at a quarter of the total.However, between 1997 and 1998, those withtheir own business but no workers moved up acouple of points while those with temporary orunpaid workers dropped the same amount,possibly reflecting the effects of shrinking busi-nesses. This latter shift was apparent both in urbanand in rural areas, and has characterized theeconomy as a whole, not just manufacturing. Sincesome self-employment trade and service activi-ties have a “last resort” character, it is likely thatthe adjustment process has involved a shift intothese.

A few surveys have focused more specificallyon the impacts of the crisis on SMEs. The AkatigaFoundation of Bandung monitored the perfor-mance of 800 small-scale entrepreneurs in fourprovinces during 1997–1998, reporting that 28percent of the producers showed improved per-

formance while the remainder lost or saw no sig-nificant change. Export-oriented small firms didbetter than domestic counterparts. Moreover,small-scale enterprises in Java suffered more thanon other islands of the archipelago and those inurban areas more than their rural counterparts. Thesurvey identified various coping strategies bysmall-scale entrepreneurs to deal with economicadversity, including working at lower profitmargins and lowering labor costs (AkatigaFoundation, 1999). The study reports also that thesocial safety net programs of the Indonesian gov-ernment have given rise to an upsurge of micro-enterprises, especially in sectors characterized bylow entry barriers.

Musa’s (Musa and Priatna, 1998) survey onaccess to credit for small and medium enterprisesduring the crisis, based on a sample of some 300firms in eight provinces and various sectors,reports that self-finance has remained the mainsource of funds for investment and workingcapital. More than 75 percent of small firms werefully reliant on their own funds to finance businessactivities and fewer than 13 percent had access toformal finance, with the number declining slightlysince the outbreak of the crisis.26 The limitedexposure of small-scale business activities toborrowed funds from the formal sector is pre-sumably one of the factors explaining theresilience of these activities during the currentperiod of economic distress. The main copingmechanisms of the sampled firms include the useof cheaper inputs to replace expensive (imported)materials and the downsizing of the labor force.Of respondents, 80 percent have seen theirbusiness shrink (though only 21 percent reportlaying off workers); in 12 percent of cases itstayed constant and 8 percent have achieved anincrease, the latter occurring mainly in thoseactivities that export and have limited need forimported materials.

Timberg (1999, p. 12) also concludes that theoverall immediate effect of the monetary crisis onSMEs and the financial institutions that serve themhas been relatively mild. However, he feels thatsome of the ensuing changes in financial institu-tions might have stronger negative effects, in par-ticular the increased conservatism of lenders andthe enhanced role of the foreign bank owners whohave less feel for Indonesian SMEs. Accordingly,


he recommends consideration of some measuresto counter those changes.

Scattered evidence from surveys undertakenby the Ministry of Cooperatives and Small andMedium Enterprise Development27 taken togetherwith the cited Susenas data and with basiceconomic logic leave little doubt that the SMEsector has on balance felt some negative impactfrom the crisis. The crisis creates pressure forfirms to adopt adjustment strategies to cut costsand to redirect output to new market opportunitieswhenever possible. The Susenas evidence to theeffect that there have been no major changesin the structure of manufacturing employmentsuggest only modest job loss in small-scale firms.Either most firms have been able to cope withoutmajor reductions in their workforce or the creationof new firms has offset such reduction. Of course,the picture may become different if economicrecovery does not come soon, and more drasticadjustment strategies may be needed.

A look at specific industries helps to identifythe range of effects from the crisis. There isevidence of rapid growth and employment gener-ation in the small-scale furniture industry, espe-cially in Jepara but also in North Sulawesi (Sandeeet al., 1998; Jellinek and Rustanto, 1999; AkatigaFoundation, 1999). This industry exemplifies aneconomic activity that uses domestic inputs andhas plenty of export potential. Large and smallfirms in the furniture industry are developing long-term linkages to overcome the present insecureenvironment. Foreign actors play an important roleas intermediary between domestic productionnetworks and international buyers and also con-tribute to easing the credit constraint caused by thecollapse of the Indonesian banking system. Policyhas contributed positively to the transition throughthe development of the provincial harbor toaccommodate container transport, the simplifiedprocedures for foreign investors, and the improvedfacilities for clearing exports. As for the impact ofthe recent events on the smaller enterprises, someof those already engaged in exporting (usuallyindirectly) are being pressured by contractors andlarge firms to sign long-term contracts; some maybecome disguised wage labor. The fast growth hasproduced greater standardization and a stricterdivision of labor and tasks among firms. Prior tothe crisis the small firms had access to various

trade networks. Sandee wonders whether thesechanges will diminish the overall flexibility of theindustry and have a negative effect on regularquality upgrading, which has been the norm in thepast and will remain very needed in future.

The experience in the construction materialssector contrasts considerably with that of furni-ture, as befits its nontradable character. Wiradi(1998) reports that brick making in certain villagesin West Java has collapsed as a consequence of thesubstantial decline in urban building activities.Sandee (1998), however, found that tile and brickmakers in specific villages of Central Java main-tained pre-crisis production levels through agradual replacement of urban markets by ruralones. This replacement was fuelled by the rela-tively good condition of farmers in the area and thechanneling of funds from the social safety net pro-grams into rural building activities (Sandee, 1999).

Another small-scale manufacturing activity thathas suffered much from the crisis is copper hand-icrafts (Sandee, 1998). Producers in a mountainvillage in Central Java were known for theirmodern designs that were popular throughoutJava, especially in the urban areas. They occa-sionally export, but their trade networks remainembryonic. The industry is partially dependenton imported inputs and has suffered much fromthe substantial price increases. The shrinkage ofurban demand has forced many firms to downsize.However, recently production has recoveredslightly owing to increased rural demand, leadingto a production shift back to traditional productssuch as those kitchen utensils that are popular inrural areas. These products have a much higherlocal content than do the modern designs. Theoutbreak of the crisis has not thus far enabled pro-ducers to develop export networks.

Evidence on the resilience and successfuladjustment of some types of small-scale enter-prises suggests the importance of clusters. Forinstance, the furniture, roof tile, cloth weaving,and metal casting industries are all examples ofagglomerations of firms that operate in the samesubsector. In all these cases, clusters consist ofboth small and large firms that compete and col-laborate. Joint action and external economiesappear to be key factors that explain the successfuladjustments of the small-scale firms in suchclusters.


6. Public policy support for subcontractingand clusters

The main agent for SME promotion is the Ministryof Industry. Up to early 1994 most programswere formulated, monitored, and executed by theDirectorate General of Small Industries. The direc-torate in Jakarta handles policy formation, admin-istration, and training of the provincial andregency offices of the ministry. These officers,attached to all Kabupaten (regencies) in thecountry, are responsible for the execution andmonitoring of the programs. Many extensionworkers are experts in the field of small businessdevelopment and are well aware of the specificconstraints and prospects for local small enter-prise, though frequently without the resources todeliver assistance in accord with their ideas. Thecombination of its being free to the client and theenormous size of the nationwide target group28

means that this technical (nonfinancial) assistancemust be provided at relatively low average cost.Some extension workers have also played a suc-cessful intermediate role in linking small firms tolarger businesses or to the banking sector.

The size of the target group has resulted in apattern of “one-shot services” to small firms, withlittle possibility of providing follow-up, given themany firms that have not received any assistanceat all. The typical assistance package consists ofa one or two day training course on such topicsas entrepreneurship, bookkeeping, marketing, andmanagement. Most of the programs do not have aclear budget and are dependent for their resourceson the creativeness of the staff at the various levelsin raising funds from the private sector, banks orother sources (including foreign nongovernmentalorganizations (NGO)) (Sandee, 1995, p. 153). Thissituation implies the absence of a clear budget bywhich plans can be translated into concreteprojects. Over the years, most departments havebeen able to secure some foreign funding forspecific programs and projects that made itpossible to formulate assistance packages encom-passing more than one-shot interventions and brieftraining courses. Such foreign donor sponsoredinterventions have been the exception. Foreigndonors concentrate their efforts on the trainingprograms of the Ministry, so the scope of its activ-ities varies over time.

The two main foci of the Ministry’s efforts arethe linking of small industries to larger private andstate firms and the provision of support to clusters.One of the main aims of the first type of programsis to ease the marketing constraints faced by smallindustries (e.g., by inducing large firms to set upsubcontracting linkages under which the smallfirms supply inputs through putting-out systems).It also involves the use of some profits ofstate enterprises to provide financial assistance todevelop linkages between small and large firms.These programs aimed at networking assume thatthe principal growth constraint for small-scaleindustries is their limited access to markets. Theministry also supports the participation of smallfirms in national and international trade fairs withtrips being financed by large firms.

The second main activity of the ministry is aspecific project (BIPIK) designed for clusteredsmall industry (sentra industri), set up withforeign sponsorship in the late 1970s andtaken over fully by the government in the 1980s.Cluster formation is an explicit aim of the BIKIPprogram (Klapwijk, 1997, p. 65). Enterprises inthe sentra are encouraged to form cooperatives.The Indonesian government has long recognizedthe importance of agglomerations of small-scaleindustrial enterprises operating in the same sub-sector, and there is awareness that such clustersmay be highly effective entry points for the pro-vision of assistance, reaching a large number ofproducers at low costs through targeted interven-tions. The cluster development program gives highpriority to stimulating innovation. It is believedthat, without process and product innovations, themajority of small industry clusters will not be ableto adjust to structural changes in the dynamicIndonesian economic environment. The programconsists of courses provided by extension workersand the introduction of new equipment to demon-strate to the producers the advantages of techno-logical change. Occasionally, new equipment isdonated to certain producers at the end of thecourse in the hope that they will learn to use it andthat there will be others who purchase it them-selves. The program’s budget is limited; typically,approximately US$1000 per cluster is available fortraining and donation of equipment. Similar to theother forms of assistance, it is nonrecurring, giventhe fact that so many clusters have not yet received


any assistance. Sandee and others (1994) esti-mated that in 1993 some 28 percent of the 4,250clusters in the province of Central Java hadreceived assistance so far. Like all such programs,this one has suffered in its implementation froma lack of finance and of qualified personnel.Klapwijk (1997, p. 65) reports that the extensionofficers generally have little technical or businessexperience, and training or other technical facili-ties have been largely provided according to thedirection of central planners, rather than havingbeen adapted to local needs (Sandee and others,1994). Where it can collaborate with other entitiesthe BIPIK can achieve more.

There is surprisingly little insight into the effec-tiveness of the different programs, but a generalimpression that they have not matched the overallchallenge. Participation rates of small enterprisesin those government programs present in CentralJava are low: 6.6 percent for the subcontractingprogram, which links small firms to large gov-ernment and private firms, and 3.8 percent for thecited BIPIK training program, which focuses onclusters (Sandee, 1995, p. 155). Most programstarget a certain number of small producers toreceive assistance. Thus the share of clustersreached is much higher than that of firms. As of1991, BIPIK’s participation in support of theclusters in various industries ranged from under20 percent for food processing and handicrafts to80 percent for metal-working, whose clusters areoften linked to large firms through subcontracting(Sandee, 1995, p. 160). Textiles/leather are alsohigh at 50 percent, reflecting the fact that theyfeature prominently in the country’s export diver-sification strategy. BIPIK gives priority to clusterswith real business opportunities, and, since it doesnot do separate business opportunities assessmentsfor each cluster, it tends to repeat successes wherepossible. This strategy is implicit in its targets forcoverage of clusters each year and its modestbudget. Given the objective of wide coveragethere is virtually no opportunity to return to pre-viously attended clusters. Training within a clusteris directed at dynamic male producers (correlatedwith size), who are presumably expected to diffusewhat they learn. Projects are aimed at producersand not at the other actors in the production ormarketing chain.

The success and effectiveness of the assistance

programs is typically measured by whether theannual outreach targets have been achieved,though the growth of the small enterprise sectorin terms of number of units and of employment isviewed as an indicator that service provision isbearing fruit. Quality is often deficient, and manysessions seem to involve a lot of theory and notmuch on the actual running of the business. On theother hand, programs sponsored by foreign NGOsare usually well enough funded, are tailored to theneeds of the target groups and better monitored,and generally include attention to marketingissues and a credit component. Though theseprograms are presumably more successful in termsof benefits per client firm, they are relativelyexpensive. There is need for nationwide programs,which means the key is to strengthen the existingones.

On the basis of his visits to and time spent withextension officers Klapwijk (1997, p. 68) con-cludes that, though problems of funds and com-petence remain, the local extension offices of theministry have become the prime nodes of theimplementation of the package of programs aimedat small industry promotion and that the ministrydoes act as an intermediary among the othernumerous parties involved. Formal enterprises aredealt with individually and cottage clustersthrough the sentra, while dispersed cottage enter-prise is left out. Officers mediate with banks andwith large enterprises, engage in marketing, etc.For banks trying to meet their obligations, thelocal extension office is the natural starting point.The same is true for the cottage group looking forany particular service. In some sentra the officershave been directly responsible for the cluster byintroducing new industries as alternatives to theearlier more marginal activities. In all of the sentravisited, attempts had been made to form coopera-tives or at least entrepreneur’s associations. Theeffort has been successful in only a few cases, aswhere a cooperative started to alleviate povertydeveloped into a putting-out system. More gener-ally the BIPAK programs probably do have theeffect of raising awareness of the benefits of col-laboration. In many cases the co-ops are dormant,usually because they do not fulfil clear needs ofthe group (Klapwijk, 1997, p. 71).

Some degree of interfirm cooperation betweenentrepreneurs occurred in most of the sentra


visited. Sometimes the cooperation was dense,often involving order sharing and subcontractingand sometimes a degree of specialization amongfirms. BIPIK has sometimes used “motivators,”dynamic producers from certain clusters. In theroof tile case these motivators were invited toJakarta to learn about new production techniquesand marketing strategies. Often an expert from theprivate sector is hired as tutor. Occasionally BIPIKhas established a technical service center in acluster, where producers can get access to expen-sive and heavy machinery (Sandee, 1995, p. 160).(Appendix 3 provides additional information onthe Cluster Development Program in Indonesia.)

Appendix 1: The case of Jepara: An exampleof a large cluster

Jepara is a very large cluster, employing over 40,000 perma-nent workers in more than 2,000 small enterprises and 100large and medium ones scattered across 80 villages (Sandeeand others, 1998, p. 3). About 30 percent of the value addedis directed toward the domestic market, mainly supplied bysmall and medium producers where the technology is rela-tively basic. This is a craft industry little changed over theyears and occupies 70 percent of the cluster’s workforce.Domestic demand has risen rapidly since the mid-1980s.Producers can now more often produce for stock withoutbearing the risk of changing consumer tastes (Sandee andothers, 1998, p. 4). The export industry benefited from theimprovement of the provincial harbor in Semarang, whichfacilitated door-to-door container transports, from improvedcredit facilities, and from greater participation of foreigntraders and producers in the industry. A major breakthroughwas participation in a trade fair in Bali in 1989.

Jakarta-based furniture producers used to buy Jepara’s fur-niture. They have gradually been replaced by professionalintermediaries who place large orders for sale in the west. Afew foreign companies have taken up production in the clusterto better control quality. Most foreigners are active as partnersof Indonesians, and this partnership permits a legal way toget around tax problems that frustrate foreign firms. The top10 firms control 50 percent of exports, so this segment is muchmore concentrated than the domestic one. Foreigners mayaccount for as much as 25 percent of exports. The industry isknown for its rapid and successful imitation of product linesthat are popular in the west. Jepara’s exports are aimed at thelow-income segment of the markets in the countries to whichthey go, and competition is rising from China, Vietnam, andCambodia.

Small firms are mainly subcontractors. They get advancepayments to finance production. There are now multi-layeredsubcontracting relationships in the cluster, and it has largenumbers of mobile skilled craftsmen who offer services tothe highest bidder and have in recent years been overwhelm-ingly employed by joint ventures or foreign firms that offer

the highest wages. Over 1989–1996, when the number ofenterprises went up by 3.5 times or so, average size jumpedfrom 12.4 to 15 workers. Registered foreigners rose from 20to 154, and others are unregistered. Value per cubic meteralmost doubled, indicating an increase in average quality.

Regional and local government agencies have created anincreasingly enabling environment through various infra-structure projects, harbor improvements, and one-stop facili-ties to curtail bureaucratic delays. The regional governmenthas promoted participation of producers in trade fairs, espe-cially helpful to exports. A specific academy has been createdwhere technical and management training is provided. Basictechnical skills and general lessons on the regional furnitureindustry have been introduced into the primary curriculum.29

Government agencies and NGOs have played a limited rolein providing technical assistance to the industry, and most ofthe technical assistance has come from private channels.

Appendix 2. The case of Bali’s exports

Bali has several export industries based on strategic businessalliances, including garments, silver jewelery, wood carving,quilting, leather products, bamboo furniture, ceramics, stonecarving, and textiles (Cole, 1998, p. 257). All of the exportindustries compete internationally on the basis of highlyflexible small-batch production, quick turnaround times, anda capacity for rapid adjustment to new designs. The ability todevelop new designs and methods that have no roots intraditional Balinese culture shows in every case.

A number of positive social characteristics are of specialinterest. (1) Most production is based on thousands of ruralvillage work groups and small/micro enterprises networkedthrough small and medium scale assembly/finishing firms. (2)There has been a rapid growth of indigenous entrepreneurship,especially in the assembly/finishing firms. (3) Capital forexpansion is largely self-financed through retained earnings,while until the 1990s working capital was largely covered bydown-payments from foreign buyers. (4) There have been nospecific government subsidies or protection; that is, the suc-cesses were neither planned nor anticipated by government.With the provincial government focusing on agriculture andtourism, the initial stages of this development went all butunnoticed by the state (Cole, 1998, p. 258).30

Garments are a typical case, including the fact that thereare no roots in local indigenous craft production. Productionactivity started around 1975 and hit a peak at aroundUS$160–185 million around 1994. The success was built onsimple foot-treadle sewing machines and part-time seasonalrural village labor.

It was necessary to compete for quotas with largerIndonesian producers with advanced technologies and basedin the main centers. There was a sharp rise in unit values from$1 around 1982 to $3 per kilogram around 1986, reflectingrapid quality and design improvements. Achieving this in acontext where there were many new entrants each year con-stituted an impressive performance.

Initial conditions appeared far from propitious. Labor wascheap, but the Balinese were averse to factory work (they stillare) and had no garment-making skills. Labor laws made it


difficult to employ more than 40–50 workers on one site (Cole,1998, p. 262). There was no modern management, no experi-ence in international markets, capital was scarce, and therewere few paved roads and little running water or electricity.One important plus was the new international airport.

Nearly all the experts were convinced that not only didBali have no future in manufacturing, but also that encour-agement of anything other than traditional crafts would destroythe island’s cultural heritage and thus undermine the sustain-ability of tourism. It did have a handful of “Balinized Chinese”with experience in the tourist retail trade, a group of low-budget tourists living for extended periods in Bali, the nearbyairport, and an untapped market for cheap beach wear inAustralia. The situation had a fair amount in common with theJepara case, though of course the latter was built on skills.

Old Javanese sarongs and embroidered kebaya (traditionalblouses) were popular with tourists. Some retailers started col-lecting these used items and then began producing low qualityfacsimiles in small traditional tailor shops. Foreign buyersinduced an expansion of output by down payments, gifts ofmachines, etc. Then the Australian entrepreneurs and theirlocal counterparts copied new-wave designs. Quality controlwas still minimal. The mushrooming demand led to a putting-out system, which evolved into a set of full-scale subcon-tracting networks. Skilled tailors were in short supply, andmany of the new recruits were young women who wouldreturn to their villages after a stint. Producers enticed thesewomen to continue to work in their villages and providedmachines. Clusters of workers grew up around these trainedwomen. The local representative of the ministry of tradeplayed an important role in streamlining the processing ofsmall-batch exports. What took 5–7 days in Surabaya took just24 hours here. And the governor of Bali decided, on the adviceof this representative, not to close down the Australian entre-preneurs after getting complaints that they were illegallyengaging in business. This gave a degree of freedom tooperate, unheard of at that time elsewhere in Indonesia.

Over time the foreigners moved out of day-to-day involve-ment and into more purely managerial roles. Returns for thedozen or so mainly foreign entrepreneurs who innovated wereenormous, but they took much risk and suffered severely inthe 1980 recession (they were unaware of business cycles)while trying to shield their local producers from its effects.The rather shocked local producers were still heavily depen-dent on individual alliances with foreigners for productionassistance and access to foreign markets. But they were readyfor a new set of foreign buyers with a more sophisticated setof business, production, and design skills. Many of these wereAmerican tourists looking for entrepreneurial opportunities.

Higher value designs required much precisely targeted con-sultation tailored to a firm’s needs. These new “buyer-con-sultants” were willing to work for months with the producerfirms, attracted by high returns and the pleasant setting of Bali,though there were high risks because before any sales couldbe closed the full up-front costs had to be borne. Few for-eigners had more than a couple of good years in a row beforea bad one or a collapse, while the producers could steadilyimprove their scale and production efficiencies with minimalrisks.

Despite the heavy involvement of the buyers, rejection

rates at the last stage were still in the 20–30 percent range,tolerable because the rejects could be dumped on the localmarket.31 When a firm’s skills outgrew the first buyer-con-sultant it often moved up to a higher value one. Many inno-vative designs and techniques were pioneered during thisperiod. New buyer-consultants with higher valued designspoured in as the reputation improved.

“Knocking off” the design innovations of competitorsbecame a serious problem. Among the various responses tothis problem was the use of distant work groups to help keepthe new design a secret. By the mid-1980s the ability to handledispersed production made it possible to move into East Javawith its virtually unlimited labor supply. This dispersionimproved the income distribution implications of the industry.As the Chinese entrepreneurs relied more on the putting-outsystem, they had to depend on go-betweens, middle managerswho were almost always pribumis. When orders exceededdemand, rather than go to a competitor the firm would typi-cally pass orders to these intermediaries, and sometimes thebuyer-consultant would offer to help them to set up their ownmanufacturing operations. As a result the share of value-addedgenerated by pribumi entrepreneurs rose from almost nothingin 1977 to nearly 50 percent in 1987.

A group of linked industries eventually took off as well,with the foreign buyers again involved in advising (Cole,1998, p. 267). The packer-shippers were one such importantindustry. They were expert at cutting through the Indonesianbureaucracy and eventually the thorny problem of U.S. andEuropean import restrictions.

Around the mid-1980s the first expansion phase peteredout, and a different growth process took its place. The returnsto buyer consultants, which had apparently been quite high,were squeezed at this time (Cole, 1998, p. 270). The imme-diate cause of the exit of many American buyer-consultants in1985 was the new set of immigration officials and the bribesthey sought. Though these officials were transferred the nextyear, considerable damage had been done. Possibly materialquality problems also started to limit this growth process. Thelarge textile producers in Bandung and Jakarta respondedpoorly to the needs of the Bali exporting sector. Their greaterattention to the needs of the large Java garment exporters ledto some spill-over benefits in the form of a greater variety andbetter quality of textiles. The Bali industry had some accessto imports, though this was limited by tariffs and the nonop-erability of the duty-drawback system for small firms: highbureaucratic costs, delayed and short-changed refunds, andlack of public knowledge about it.

With no more exciting new designs paving the way, theretail prices of Bali items in importing countries began to fall,but order volumes were increasing and discount retailers werein the act (Cole, 1998, p. 272). Quality control now eroded,and the Bali garments acquired a reputation for poor quality.Large buyers began to insist on release of letters of creditpayments on arrival and inspection in the importing countryrather than at point of shipment as before. Several Bali-basedproducers tried to shift to large factory production to controlquality decline and address bigger orders. But this did not leadto a new cycle of rising unit values, probably because of theincrease in unit costs related to more expensive machinery,capital investment in construction, and a permanent labor force


that could not be laid off seasonally. The shift toward a largerbatch low information limited service industry was reflectedin the fact that by the early 1990s Bali was increasingly incompetition with other low wage countries (China, Vietnam,and the Philippines) and large factory producers in Indonesia.Whether the dispersed production system would allow anotherwave of innovation as the base for a new growth phase isunclear. The experience of Italy seems to demonstrate that itis not a total obstacle.

Another dynamic cluster has been the coppersmiths inDesa Tumang, where firms with more than 50 workers co-exist with numerous household enterprises (Sandee andRietveld, 2000). The firms with more than 50 workers usefaxes to communicate with national and international cus-tomers and call on the household enterprises when ordersexceed their capacity. The household enterprises produce basicutensils for sale at local markets (i.e., a different marketsegment from the large ones). Though operating in differentmarket segments, their simultaneous presence leads to effi-ciency gains. But the majority of clusters here are dormant orembryonic, located in rural areas, producing items for poorrural consumers. There is virtually no paid labor and few syn-ergies because most operate independently. Sometimes firmscluster for proximity to a resource or to cut transaction costsof buyers, though most of these items are not of much interestto urban traders.32

Appendix 3. Cluster development program inIndonesia

A survey undertaken by Sandee and others (1994) to assessthe effectiveness of the cluster development program foundthat assistance is relevant and helpful in the case of dynamicclusters. Such clusters evince a demand for technical and alsofinancial assistance to accommodate growth processes thathave been put on track by producers and buyers. Thus tradersfrequently requested that producers in a woven cloth clustershift to new designs in high demand. Such sales prospectsstimulated producers to participate in training courses orga-nized by the cluster development program of the ministry.

Such successes notwithstanding, the reviews by Sandeeand others (1994) and Sandee (1998) found that the clusterdevelopment program was not effective in bringing about tech-nological change in the majority of clusters in Indonesia. Thismajority can be labeled “dormant” or “embryonic” and arelocated in rural areas and produce basic products for poor localconsumers but of little interest to urban traders. These clustersconsist of so-called cottage enterprises, where the averagenumber of workers per enterprise does not exceed five, andpaid workers are virtually absent. The clusters are “pocketsof poverty” with limited collaboration among firms. Currentassistance programs, which consist of supply-side measures,are not effective in promoting small enterprise developmentin embryonic clusters. Interestingly, these clusters arepresently very much the focal point of broadened assistanceprograms in Indonesia that aim at poverty alleviation. Poorrural industry clusters are considered effective entry points fornew programs.

Available evidence suggests, however, that broadening

supply-side measures have not been very effective in fosteringsmall enterprise development. There is a need to developstrategies that aim at linking producers in dormant or embry-onic clusters to markets. Visits to buyers, retailers and whole-salers, and markets and fairs may be useful to establish newtrade networks that are outlets for new products.

The experience in Indonesia of one of the authors (Sandee)points to the importance of increasing the mobility of pro-ducers in dormant clusters. Purchasing a car with limited fundsallows producers from several clusters to become aware ofnew business opportunities elsewhere. Such insights may sig-nificantly increase the impact of technical and financial assis-tance to be provided after producers are aware of the existenceand convinced of the accessibility of more rewarding tradenetworks.

A major challenge for advocates of the introduction ofbusiness development services in Indonesia will be the designand provision of sustainable services to these dormant clusters.The clusters are the centre of the state’s pembinaan strategyand the core of the people’s economy. Government assistancewill be there for years to come, and it is highly relevant toassess whether it is possible to render it more effective.

Notes1 Based on adjusted population census figures for 1971(World Bank, 1980, p. 122) and data from ILO (1997, p. 126)for 1996.2 Judging from the distribution of employment in the mediumand large establishments as reported for example by Steel(1993).3 Berry and Mazumdar (1991, p. 49) report a household shareof 11 percent for 1986 and 6.8 percent for the small category(5–19 workers).4 Based on an estimate of a bit over 80 percent from plantsof 20 workers and up and the 1985 breakdown by size amongplants in that range provided by Hill (1997, p. 71).5 The labor productivity per man day gap of nearly 5:1,according to some estimates, between workers in plants of fiveto nine workers and household workers must be interpretedwith care, however. Possibly days worked are misleading forthis group. But the data leave little doubt that the gap is big.6 Employment growth estimates are approximations, giventhe problems involved in measuring employment in the cottagesector. Here we use the 5.6 percent per year estimate reportedby Hill (1997, p. 48) for the intercensal period 1975–1986 andthe census numbers themselves to estimate the growth over1986–1996 (Table I).7 Nothing can yet be said about productivity on the basis ofthe 1996 census since no value added figures have been pub-lished at time of writing.8 The average number of workers per establishment increasedonly very marginally from 3.4 to 3.6 workers. Unless theaverage number of workers fell in one or both of the house-hold and the small categories, it must have fallen in thelarge/medium category, from 134 in 1986 to just 111 in 1996.There are some arguments to suggest that average size wouldhave fallen in each category rather than only in thelarge/medium one, since employment was growing very fast


so there must have been a great number of new firms. By usingthe census figures on firms without legal entity, we can seethat the average for those with less than five workers was 1.95.We would expect that the inclusion of the few very small firmswith legal entity would increase this figure very marginally,perhaps to as much as 2. Thus a very low number here doesnot seem possible and 2 seems in the appropriate range. The1986 figure was also 1.95 (Table I). By using also the sameaverage for the 5–19 establishments leaves us with the con-clusion that the average size of those with 20 workers and upfell considerably over this decade, from about 134 to about116. Assuming the same average of 40 for the 20–99 category(a guess in both years) the average of the 100 and up categorywould fall from 459 in 1986 to just 375 in 1996. If the averageof the 20–99 category had fallen to 35 by 1996 (which seemsextreme), then the top category would still have fallen to 392.Note that this contrasts with what one would have expectedon the basis of Steel’s (1993) estimates for the first part ofthis period, more precisely for 1985–1990, during whichperiod he believed that this category (5–99 workers) was theslowest growing. Possibly the early 1990s were very differentfrom the late 1980s, or possibly his estimates were off basefor the latter period. He interprets his high estimate of growthin household sector employment as related in part to a struc-tural shift from rural self-employment to urban wage employ-ment, which drives the increasing share of manufacturingemployment which is paid, noting that the substantial growthof household employment is contrary to speculation that it isin decline.9 Note that Hill’s estimate of total employment in 1986 was6.11 million, contrasted with the census figure of 5.29 million.If the upward adjustment based on the population censusfigures for 1996 is smaller than in 1986, then the growth ratewill have been less than the 6.6 percent just cited.10 Given the high turnover and the pattern of change at thefirm level among SMEs, any static comparisons among suchfirms or between them and other groups such as micro-enter-prise and large enterprise must be interpreted with caution. Itis to be expected that there will be a wide range of produc-tivity and efficiency levels among SMEs in most industriesat most points of time. Some are recently created and are stilloperating at modest efficiency levels. Some will never succeedand will soon exit. Others are very efficient and may begrowing fast as a result. In industries where most firms areeither small or medium at creation, comparisons of averageefficiency between the SME sector and the large enterprisesector must be interpreted with great care.11 Steel (1993, p. 18) also provides upward and downwardgraduation rates of firms over 10 years by size at creation.These reveal significant movement in both directions. Formost size categories the likelihood of graduating upward isnot too different from that of moving to a lower category,except for the top one, which by definition has only downwardmovement. These figures alone do not permit any assessmentof whether the “representative” establishment shrinks orgrows. They probably tend to understate the net upwardmovement.12 Unpublished data from the surveys.13 Whether this is also true for TFP is much harder to say.14 All statistical results from this study are based on firms’

responses to a questionnaire designed to elicit their views onthe relative importance of various sources of technologicalcapability. 15 In both cases the rapid growth of output and exports fromIndonesia has been the result of market interventions. Priorto the mid-1980s raw rattan was exported to Taiwan and thePhilippines, the main rattan furniture producers. The take-offin Indonesia followed the banning of such exports. In the caseof garments the fact that neighboring countries had fulfilledtheir quotas under the Multifibre Agreement and were suf-fering rising wages made Indonesia an interesting supplyplatform.16 An Indonesian plan referred to in Section 6.17 Collective sources of technological advance are moreimportant in other countries that have dealt successfully withthe institutional challenges to making them effective.18 This view is consistent with the results reported bySjoholm (1999), though his results are not by themselves per-suasive given the methodological limitations of the study.19 Note that subcontracting and clustering are not mutuallyexclusive; a good deal of the former can go on in the contextof the latter. We separate them in the discussion here partlybecause they are different phenomena and partly because theliterature tends to focus on one or the other.20 There appears to be a considerable gap in gross outputbetween cottage enterprises in clusters and those not so located(70 percent overall), especially in textiles. However, the dif-ferential varies widely by industry (it is negative in a coupleof cases) and could be due to differences in average numberof workers or in the products produced as well as to produc-tivity gains associated with clustering (Klapwijk, 1997, pp.61–62). The data are not comparable between rural industrialclusters (RICs) and all cottage industry, since RICs sometimesinclude large enterprises in the cluster. Still, the low averageestablishment sizes suggest that the bulk of workers are inquite small establishments.21 Klapwijk (1997) defines RIC as having at least five indus-trial enterprises, producing similar goods and located in a ruralarea or small town, with the enterprise average size under fiveworkers. This contrasts with the use of the term to refer tothe shift of large and medium industry from urban to ruralsettings, based in part on the thinking of the InternationalLabor Office about rural industrialization in developed coun-tries.22 As several authors have pointed out, traders may be sodominant that individual producers do not have much to sayabout the process (Cawthorne, 1995; Knorringa, 1996). 23 Susenas data report a smaller decline in manufacturingemployment but we are not in a position to assess the com-parability of the figures used.24 At time of writing we did not have data on structure ofemployment by sector. Total manufacturing employment wasrecorded at 377,959 (1995), 376,048 (1997), and 373,158(1998) persons, respectively. As the number of observedhouseholds went up slightly throughout the period 1995–1998,this may indicate that manufacturing employment in Indonesiahas actually declined since the outbreak of the crisis.25 It may be that these survey findings covering 1997–1998are still too early and that more substantial shifts will bevisible only in later years.


26 As expected, financing has become more difficult thanbefore, with a sharp decrease in loans from outside parties.Suppliers have stopped giving a grace period. The averageloans outstanding for these firms have fallen from Rp. 65Mbefore the crisis to 26.5M as of March 1998, as previous loansare repaid and no new ones are available; 36 percent of respon-dents have been late with an instalment. Before the crisis theratio of collateral to loan averaged 100–200 percent; now itis over 200 percent. 27 See Tambunan (1999).28 The Ministry of Industry’s definition of small enterprise,which includes about 95 percent of all enterprises, involvesownership by an Indonesian and a total asset value notexceeding Rp 600M, excluding land and buildings. This con-trasts with the Central Statistical Office’s definition of 5–19workers for small and under five workers for cottage. Manyfirms with up to 100 workers and some with more do notexceed the Ministry’s capital limit (Sandee and Rietveld2000).29 Hill (personal communication), however, questionswhether the state monopoly on wood supply has been favor-able for a sustainable exploitation of forests; rather, hesuspects that serious problems of input supply may be justaround the corner. The constant harassment of foreigners inthe cluster by the authorities may also redound negatively evento the welfare of Indonesians.30 When, in the mid-1980s, the Ministry of Industry providedsome sporadic assistance in the form of worker training, theimpact was negligible because the total effort was smallrelative to the size of the industry by that time. In any case,it did not address the real challenge, which was new flows ofhigh quality information.31 Whereas the lower quality Jepra furniture is sold in thedomestic market, the Bali garment rejects tend to go to thetourist market.32 On the limited efficiency gains, see Nadvi and Schmitz(1994) and Weijland (1994).

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Firm and Group Dynamics in the Small and Medium Enterprise Sector in Indonesia

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