Science and Technology Policy and Strategy For Establishing

ST Business Program :The Indonesia’s SME Perspective

 By :  

Noer Soetrisno

A b s t r a c t

Small Enterprises as the main player of Indonesian Economy and main provider of employment of nearly 89% of total employment, however its share in GDP accounted for 41% only. The mediun enterprises that been expected to play as effective link between small and big enterprises only contributing limited role in employment (10.55%) and value added (16%). Indonesia’s definition of SMEs is broad in scope and base on sales and assets. The main problem of SMEs in Indonesia is extremely low productivity compared with big enterprises, particularly in agriculture that occupied the biggest number of small enterprises. The role of science and technology is very important, however its should suitable to local condition, serve the cluster of industry and link the SMEs with the rest of the economy and the world market. Furthermore linkage with financial support, both bank and non bank financial institution, especially Shariah financial institutions, will make science and technology to be an effective instrument in promoting SMEs. The success of promotion of SMEs will create long term sustainable economic growth in greater participation of people and more equitable results

SCIENCE AND TECHNOLOGY POLICY AND STRATEGY

FOR ESTABLISHING AND DEVELOPING S&T-BASED BUSINESS PROGRAM:

THE INDONESIA'S SME PERSPECTIVE

By: Noer Soetrisno

INTRODUCTION

      1. Indonesian economy sustainability is essentially supported by numerous small cover (SE), since they occupied 99.85 % business establishment in this country and provide nearly 90% of total employment absorption in recent years. However it should be notified that they contribute only about 41% of Gross Domestic Product. Therefore the issue of small business development is critically important from economic as well as socio political perspectives. Over many years the promotion of small business has been marginalized because of its small contribution to the achievement of high economic growth, where were heavily rely on big enterprise (BE) as conglomerates. The existence of such unfair treatment should be eased and new approach toward greater attention on small businesses should become priority for the future.

     2. The importance of small and medium enterprises (SME) has been recognized in many regional and international fora, and the APEC forum for Ministers responsible on SME has noted the strategic position of SME being the future engine of growth. The role of medium enterprise (ME) sometimes quite unique, because of its position as an intermediary between BE and SE. ME can provide sub-contract and  services to SE, while she can also play as sub-contractor to BE. Although the contribution of ME to employment (0.50%) and GDP (18%) are relatively small compared to SE but it is important in maintaining the link of SE with the modern sector. Therefore it is a necessary for the Islamic world to pay attention of SME, since most of economies in the Islamic Country also dominated by small businesses.

      3. In Indonesia, the definition of SME is different with commonly applied in other country, because our definition of SME includes also the agricultural sector. Therefore the number establishment of SE is recorded more than 36 million units or nearly 63% of total enterprise. The agricultural sector poses significant role because of its functions not contributed to GDP formation but provides social and cultural values and the maintenance of environment. Since agricultural activities greatly rely on the utilization of natural resources, any effort to promote agricultural growth should consider the importance of availability of technology that appropriate to the need of rural sector. In the mean time the environmental aspect could impartially important in the region where population density is extremely high like in the case of Java and small islands in Indonesia.

THE ROLE OF SMEs IN THE INDONESIAN ECONOMY

      4. The importance of SMEs in the Indonesian economy can be analyzed through several aspects of its role. Historically the Indonesian economy heritage with typical dualistic economy that was generated during the past hundred years of colonization. There are two type of economy running the daily business, the first is the subsistem economy and it is also known as the economy of common people and the second is modern enclave plantation and industry which is oriented toward commercial and export market. Although market system has been part of the history of Indonesian economic development for long period but the character of dualistic remain there until to day. The traditional sector has known as the economy of common people occupied majority of economic unit, however many of them are informal and household sector, while some of them has become commercially oriented business unit as small business or small enterprise. The role of SMEs therefore can be seen from its role in structure of business establishment, value added creation, provision of employment, share in export and its linkages with the rest of the economy.

      5. In terms of establishment SMEs, small  business particularly become majority of business unit in the economy. SMEs are the main player in the economy which commonly measured in terms of number of enterprises, employment and output or value added creation. In Indonesia the number of SMEs is recorded more than 36.7 million unit, which about 2.6 million unit enterprises engage in the manufacturing sector. In terms of employment the SMEs contributed about 99.45% of total employment, therefore very important in the living of the people. However, when we compared their shares in Gross Domestic Product it is accounted for less than 60% only. Unlike in many developed countries such as Japan and Italy their shares in GDP also very significant.

      6. In addition to the three main role SMEs also play pivotal role in promotion of local economy and local community which very important in promoting regional equality in economic development. SMEs has also proven to be the market creator and innovation to the economy both at local and national levels. The innovation of SMEs generated from its flexibility to the changes and sensitivity to the need and capacity of the market. They are flexible and responsive, therefore very creative and innovative in responding the market, particularly in the handicraft, furniture and garment industry. The innovation also found to be a result of dynamic linkages between enterprises, particularly interaction between the traditional and the modern sectors. The latter has not quite substantial progress in Indonesia partly due to weak linkages between the big businesses and the rest of the players.  

      7. Although SMEs poses very strategic position in the living of most Indonesian people, they are facing complex problem of low productivity as expressed in their contribution to national production. With regard to the effort to promote increased productivity, the role of science and technology is critically important and become main determinant in improving the structure of national output in accordance with the structure of business establishment and the contribution to the provision of employment. The problem of structural imbalances only can be corrected, when the gap of  productivity between big businesses and small businesses can be narrowed down.  

        8. The agricultural sector is very critical in improving the status of SMEs because the largest number of SB is in agricultural sector with a very low productivity in terms of value added creation. In addition it is also facing declining role in GDP, therefore it will rampant to the existence of poverty when transformation of employment from agricultural sector move in a slow phase. The problem of low value added per unit of land or labour is also partly related to structural problem of land ownership and there dependant on food sector which is expected to face continued declining terms of trade with other sector. Small land ownership is the main obstacles to the commercialization of food sector in Indonesia, particularly in the densely populated are of Java, Bali and other small islands.

      9. The importance of SMEs also related to the activities of SMEs in production and distribution are closely related to supply the need of majority of the people. The structure of value added contributed by small business has exceed 40% to total national output, which are dominated by three sectors namely agriculture 38%, manufacturing industry 11% and trading and services 32% out total value added of small business. Small business, particularly micro businesses also considered as economy of common people which heavily dependent on primary activities with low value added, while the post harvest and manufacture has not been prime concern of small business. The slow structural transformation also related to the fact that medium businesses as the middle class having limited role. In fact the medium business is very important in dinamising the small business and could create  linkage with big business.

      10.  The evidence of low contribution of SMEs to export is actually due to the lack of marketing network. The main contributor to the export of non-oil product is mostly originated from manufacturing products produced by SMEs. The non-oil export shared about 80% in 1999 consists of textile and textile products, transport equipment, food and beverages and wood and wood products, while the rest contributed less significant amount. To some extend because of lack capability in market access and capital most of SMEs can not gain from higher value added segment of activities such as finishing of furniture and handicraft products. In the future improving the role of SMEs in export should be oriented toward improving efficient marketing network.

      11. Through out the earlier part, its can be pointed out that SMEs is very important in maintaining the future sustenance of stable economic growth in Indonesia. It is also critical to the maintenance of stable socio-political condition, since its closely related to the employment and people welfare. Therefore the negligence to the improvement of SMEs position in the economy will affect the reoccurrence of social instability as a result an intolerable inequality and rising social jealousy.

 SCIENCE AND TECHNOLOGY IN PRODUCTIVITY IMPROVEMENT

      12. Up to the year of 1999, disparity in labour productivity between SMEs and Big Enterprise remained persists and exists in all sectors of the economy. In addition there are strong differences in productivity across the sector of the economy and to some extend also across the region. Structural differences in productivity should become prime concern to regional development in bringing the local economy more productive and avoid the sectoral trapped which produce poverty due to inefficient allocation of resources. Science and technology factors is one of the important aspect but it will not solve the problem if the funding mechanism not been addressed accordingly.

     13. The average productivity per worker small enterprises in all sectors of the economy are less than 5% of big enterprises. In the meantime the medium enterprise shows higher productivity but still below 5% of big business except in the sector of trade-hotel-retaurant (9.38%) and agriculture with a significant different of 25.94%. On the national average the gap of productivity per worker in SMEs sectors very intolerable, since its only about 0.58% and 1.97% for small and big enterprises compared with productivity yielded by big enterprises. In the agricultural sector  which has the lower productivity is dominated by food crops that share about 52% of total agricultural value added. With regard to agricultural sector should addressed separately, since it is the only sector with low productivity below national average (40.14% of national average) and heavily influenced by structural factors (see table 1).

      14.  As mentioned above the agricultural sector is dominated by food crops agriculture and more critically dominated by rice production. Rice as staple food also heavily influenced by political consideration rather than rational considerations. The usual argument for depending rice farming at the cost of rural sector is always associated with food security. In fact Indonesia has variety of food, particularly source of carbohydrate, and Indonesia has always rely on foreign source of rice supply during the shortage. Indonesia has the capacity to depend the national interest on securing rice supply through cooperative project with other developing country, since Indonesia potentially can produced fertilizer and make contractual arrangement in rice purchase or import priority with neighbouring country. Accordingly, its the important to look at food security issue beyond national boundary, but at the transition period we look at regional perspective such as ASEAN where rice is the common staple food. While Indonesia can further relax the intervention on rice production and diversify into more high value crops.

     15. In terms of physical productivity and cost of production rice production in Indonesia is comparably low, hence poses its comparative advantages. The fundamental problem in the food sector of Indonesia is that traditional small family farming unit do not have capability to support average family living as attained in other sectors. The surplus of rice farming actually has a very high percentage of more 65% (1984-1998), while the agriculture sector as a whole reach 82%  in 1998. If compared to the surplus attained by the manufacturing sector only about 27.5% of total value added, the proportion of surplus in agriculture has reach a very high proportion. It is reasonable, since unpaid family labour accounted for 30.62% in 1999 which has declined from 42.32% in 1986.

      16. Since agriculture product facing a  long run declining real terms of trade, therefore there should a change in the paradigm of the development of subsitence farming in Indonesia, particularly in Java as a growing rural-urban type of society with high population density. Nowadays technology being applied in food crops agricultural sub-sector of Java has become commercially oriented, nevertheless they are tend to concentrate to the less risky segment of activities rather than solving the farmer's need. The moving rice milling and post harvest service unit is a unique example of the dynamic of SMEs in responding the need for invention to serve the market, however it is still far from the said situation to the area in other part of Indonesia.

      17. The structural problem of Java's agricultural sector required to revise the development paradigm. The new approach of agribusiness is fine, but Java required not just the methodology of running the business. Further there is a need to change the paradigm, particularly when recent change on the trend of farmer's freedom, independency of banking system and the implementation of autonomy of local government. The new paradigm thought to be suitable to meet the future challenge of the country if reorienting from "improving physical productivity" to "increasing business density" of any single unit of farming in terms of labour or hectare of land. This strategy will allow  the rural sector increased absorption capacity to the surplus capital created by rural sector, hence the growth imbalance between rural and urban can be reduced.

      18. With regard to agriculture the increased presence of industrial sector with high productivity is important, where the agricultural product processing industries need to be developed to increase their added value. This will lead to the process of rural industrialization. The nature of manufacturing industry in Indonesia quite scattered in near urban area. The warning on the declining productivity also pointed out by Urata (2000), that there is a real danger the economic growth of Indonesia will face a dead end due to declining international competitiveness unless the evolution of its industrial structure successfully completed.

      19. In general the low productivity of SMEs is commonly associated with weakness in access to market and technology which in turn incapable to access to the financing sector. In the past three decades the industrialisation process and technology support were biased in favour of big industry. The agriculture, particularly plantation and fisheries sub sectors were the example, the only exception is the rice post harvest sector only. Therefore the importance of science and technology in promoting SMEs in Indonesia is to improve value added per worker to avoid further widening productivity gap between SE, ME and BE. The role of technology in the present situation should not be limited to the need to support production to increase productivity, but it should also be able to solve the marketing problem through information technology. Looking at from the said perspective the role of technology in empowering the SMEs will cover a wide areas ranging from supply of technology, provision of expertise in selection of available technology in the market and develop support to SMEs to enable them access to the market and limited resources.

      20. In searching for new paradigm of the role of science and technology in industrialisation we can recalled the view expressed by Mitra (1995) as follow:

      It is recognised that the critical difference between people trying to industrialise today and those of previous times is the huge stock of technical and scientific knowledge that now exists. But the current stock of knowledge in industrialised countries has very largely evolved to meet the needs and values of these countries, particularly those needs that are backed by purchasing power. The direction of technical change is driven by wealth, it is labour saving and it is predominantly suited to temperate climate zones and it increasingly relies on the availability of particular inputs.

 The view of Mitra remainded us on the important of developing own science based in developing country to develop and select available technology suitable with geographic and climatical condition as well as adaptable within local culture.

      21. In industrialisation process the role clustering industry also found to be very important. Many centres for rural small industry mostly reveal within a boundary of strong cluster of specific industry. This because of cluster can provide dynamic linkage in invention and innovation to respond the need of the market and provide a speed dissemination of new technology. Since small industry characterised by the existence of many actors, therefore dissemination of new technology is important to bring the new product meet the need (volume) demanded by the market. The existence of cluster of attract the support industry such as banking, transport and other services to operate in viable condition.

     22. To support SMEs Indonesia has developed a number science and technology based services unit such as business incubator, business consultant, university community development institute, people economy's post, technology centre, ST shops etc. Many of them are successful in assisting SMEs, but it not sufficient yet to meet the number of SMEs in Indonesia, therefore in the future the priority should addressed, especially to those create high value added.

 STRATEGY FOR  DEVELOPMENT IN INDONESIA

      23. The foundation of making competitive industry is via improvement of level playing field, therefore the macro economic policy should oriented toward the creation of efficient market system. One important contribution made by the reform government during 1998-1999 was the enactment three basic law  namely: (i). Law on Anti Monopoly and unfair competition; (ii). Laws on independency of Bank Indonesia; and (iii). Law on autonomy. Prior to the enactment of three above mentioned laws, there were many laws has been enacted and has oriented toward preparing international competition, however it was not effective since the influence of national policy on micro level very dominant. Therefore the future direction of ST-Based SMEs development should be based on local comparative advantage while at the time maintain the international competitiveness.

      24. Cluster industry must be promoted in accordance with the need of processing the existing efficient raw material producing areas and availability of human resources for certain industry such as handicraft. In resource based industry the cluster should also consider the future development of the higher degree industry. The absence of such thinking will end up with  incompetitive processing industry. The necessary support services will follow, because to day access on communication to district areas has found no difficulty.   

      25. The direction investment in the near future will be oriented to support SMEs both in the existing scale or upgrading them into a modern big businesses owned collectively through cooperatives. Therefore the role of science and technology is  providing assistance to SMEs in selection of suitable technology for their needs. The centre for technology development should avail their strenght in providing information on technology to SMEs insurounding area. In the future Technology Park can be developed on priority based in line with the need of the nearest cluster.

      26. The existing business development service can be expanded to meet the need of the existing SMEs and supporting the process of decentralization toward more decision given to the local government at district level. At district level there will be greater demand for asistant for technology application suitable to the local needs. The minimum support required will be in the field provision of existing technology both at the market and at research centre. However it should bear in mind that technology that available in the market are coming from domestic and international sources, hence there is a need to test the suitability with local needs.

      27. In responding the challenge of opening the economy through several regional trade area arrangement the IT development pole should be addressed. This will enable the SMEs in real sector benefited from expanding economy. IT must be introduced in many aspects of SMEs business for the benefit of both producer and consumer. Otherwise the surpluses will drain away from the community those poses resources.

     28. In the field of financial support the future policy will be oriented toward implementation of full commercial banking mechanism. Therefore the financial institution will specialised to serve different group of customer. (i). The commercial bank general (Commercial) and specific (Rural credit Bank known asBPR) serves the customer those can meets the the banking requirement both conventional and shariah banking. (2). The Non Bank Financial Institutions serve the needs of SMEs in accordance with their type of transaction and investment ranging from venture capita up guarantee scheme. And (3). Community based mikro credit in the form of Credit Cooperative or credit section of general purpose cooperatives as well as group lending to serve the their members through their respective cooperative organisation. The government will provide administrative subsidy to the experienced financial institution in providing technical support to SMEs to meet the requirement of the banking system. Therefore there will be an opportunity to set a cooperation between ST Based institutions with the Bank/FI's Technical Support Centre to optimise the utilisation of the fund. In the future there are should be an integration between management and technological support together with source of funding through the bank in SME development.

      29. ST-Based program for SMEs must known widely as SME - Technology,  be designed to support the development of local economy, therefore it should be suitable to local condition but remain intack with the effort of increasing competitiveness of SMEs in the global competition.

 CONCLUDING NOTE

     30. Small and Medium Enterprise are the main player in the Indonesian economy while serving as the biggest provider of employment to the country. SMEs also the key to the maintenance of longterm sustainable economic growth, therefore the gap in labour productivity between SMEs and BE should be narrowed down. The role of ST-Based Programs to support SMEs is critical to improving productivity and competitive strenght in the future. The establishment of ST-Based support should also be made available to local enterprise to develop their local comparative advantage while improving their international competitive strenght as part of the process toward autonomy of local government. Therefore newly introduced technology should be suitable to the local condition.

Footnotes :

Jay Mitra ;        Stake holder relationship and science park economic regeneration in an

                        Innovative milieu, in Mouricco Guedes & Piero Formica, The Economic of  Science Parks IASP, Rio de Janeiro, Brazil 1996.

Shujiro Urata ;  Policy Recommendation for SME Pramotion in The Republic of Indonesia,  Repart of Study team under JICA program, July 2000.

Tabel 1 : Labour Productivity of (in million rupiah) Business Actor By Sector in 1999

Source  : CBS

 (       ) : Comparative Index to Big Enterprises (Row 1-10)

  * :      The Bracket applied for comparative index to national average, relative to national aggregate productivity   per worker. (Column 6)