Academic journal article Journal of Southeast Asian Economies

Spatial Concentration of the Informal Small and Cottage Industry in Indonesia

Academic journal article Journal of Southeast Asian Economies

Spatial Concentration of the Informal Small and Cottage Industry in Indonesia

Article excerpt

I. Introduction

Most enterprises in Indonesia are small (enterprises with five to nineteen employees) and micro enterprises (enterprises with less than five employees). According to Badan Pusat Statistik (BPS 2008), 99.99 per cent of total establishments in Indonesia in 2007 are micro-small-medium enterprises. They employ about 97.3 per cent of total employment in all establishments. Contribution of these enterprises in Indonesia's gross domestic product--in real value--is considerably important at 53.49 per cent. However, since the domestic market is the main orientation of small enterprises, their contribution in total export (non-oil) is rather small (20.02 per cent in 2007) since most of them are establishments in the industry sector.

About 53 per cent of small establishments in 2007 were farm-based establishments (BPS 2008). However, in terms of employment, non-farm enterprises are more important than small enterprises in the agriculture sector. Contribution of small non-farm establishments in total employment by small establishments is about 53 per cent. A World Bank study shows that 57 per cent of the working population in Indonesia is employed in non-farm enterprises (World Bank 2006). Moreover, the study confirmed that most of this non-farm employment is in micro and small enterprises. The Rural Investment Climate Survey (RICS), also conducted by the World Bank, found the vast majority of enterprises are micro or small firms, especially household enterprises. The Bank found households that run non-farm enterprises also tend to have better welfare than those that do not, as indicated by their income. Based on the RICS report, non-farm sector is important for poverty alleviation. The report argues, "the growth of this sector has the potential to be an important route out of poverty". Since most of small enterprises in Indonesia are informal establishments, the above discussions also indicate the important role of small-informal enterprises in the Indonesian economy, especially with regard to employment (Figure 1).

[FIGURE 1 OMITTED]

This paper chooses to address the small and cottage industry, one of the non-farm activities, especially its spatial concentration in terms of its employment. It is motivated by the fact that although scholars have studied development of small enterprises in Indonesia, the spatial issues of small enterprises across the provinces remains neglected. Meanwhile, the study of spatial concentration of the industry sector in Indonesia tends to exclude small industries that make an important contribution to employment. For instance, Sjoberg and Sjoholm (2004), which studied concentration of the Indonesian manufacturing sector between 1980 and 1996, do not include small establishments. However, they agree that exclusion of small establishments has some implications for their study, such that it may exaggerate the degree of concentration if small establishments are relatively important in rural areas.

By focusing on the informal small and cottage industry, this paper aims to contribute to adding to the understanding of the spatial aspect of Indonesian industry. This paper is also motivated by several highlights from recent studies on entrepreneurship. First, small firms have a close relation with entrepreneurship (Audretsch and Keilbach 2007). Second, the informal sector may help to create markets, increase financial resources, enhance entrepreneurship, and transform the legal, social, and economic institutions necessary for accumulation (Asea 1996, in Schneider and Klinglmair 2004). Small-scale or micro enterprises are labelled as the "upper-tier informal sector", since it shows a dynamic, productive and lucrative segment in the informal sector (Blunch, Canagarajah, and Raju 2001). Finally, entrepreneurship capital has a strategic position in the process of economic growth through its threefold impact: facilitating knowledge spillovers, increasing competition, and increasing diversity in a region (Audretsch and Keilbach 2006). …

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