Academic journal article Journal of Small Business Management

Promoting Small and Medium Enterprises with a Clustering Approach: A Policy Experience from Indonesia

Academic journal article Journal of Small Business Management

Promoting Small and Medium Enterprises with a Clustering Approach: A Policy Experience from Indonesia

Article excerpt

Small and medium enterprises (SMEs) (1) in Indonesia are very important for employment creation and are important sources of economic growth and foreign currencies. It is therefore not a surprise that SMEs receive ample attention in Indonesia. In recent years, particular attention has been paid to development of SME clusters. The main aim of this paper is to review government policies on SMEs with a clustering approach, in Indonesia. The paper argues that in many cases, the development policy has not been so successful. In essence, most failures can be attributed to the fact that one or more critical factors for successful SME cluster development were either not existing or not addressed correctly. Neglecting cluster linkage to markets is one main reason for the failure. Prerequisite for successful cluster development is the cluster's potential to access growing markets, either domestic or abroad.

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Introduction

Indonesia values small and medium enterprises (SMEs) for several reasons, such as their potential to create employment and to generate foreign currencies through export, and their potential to grow into larger enterprises (LEs). These enterprises are also important as domestic producers of cheap import substitution consumer goods especially for low-income groups, and as supporting industries producing components, tools, and spare parts for LEs. Moreover, when the Asian economic crisis hit the country in 1997, SMEs were found to have been weathering the crisis better than LEs, because their greater flexibility allowed them to adjust production processes during the crisis, although many had been hit hard too. Many argue that being less reliant on formal markets and formal credit, SME are able to respond more quickly and flexibly than LEs to sudden shocks (Berry et al. 2001).

It is therefore not a surprise that SMEs receive ample attention in Indonesia. In recent years, particular attention has been paid to SME clusters that are frequently defined as agglomeration of small and medium firms operating in the same subsector in the same location.

The main aim of this paper is to review government policies on SME development with a clustering approach, in Indonesia. This paper deals with two main questions. First, what are the critical success factors of development of SME clusters? Second, to what extent have these policies contributed to the dynamics of SME clusters in the country? For this purpose, the framework of this paper is developed as follows. Section II discusses the basic concept of industry cluster. The third section explains main anticipated benefits of a cluster. The fourth section reviews briefly the development of SME clusters in Indonesia. The fifth section explains the importance of cluster-oriented SME development policies. The sixth section reviews briefly SME development policies with a clustering approach in Indonesia. Discussion in this section proceeds to the seventh section, which identifies main factors behind success stories and failures of such policies in Indonesia. Finally, a short summary of the main contribution of this study is given.

Basic Concept of Industry Cluster

Clustering is a common economic phenomenon. The United Nation Industrial Development Organization (UNIDO) defines a cluster as a local agglomeration of enterprises producing and selling a range of related or complementary products within a particular industrial sector or subsector (Richard 1996). One example is a localized knitwear and garment industry that includes within a small geographical region knitting firms, cloth-finishing, dyeing, and printing enterprises, garment producers, merchant buyers and exporters, and also producers of specialized inputs such as thread, buttons, zips, and even possibly chemical treatment as well. However, there are also many clusters less specialized and developed than this, for example a local agglomeration of small metal working enterprises producing a range of metal products and repair services for broadly the same markets, and having only competitive relations with each other (Tambunan 1997). …

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