11.5.14

The Role Entrepreneurship in Indonesia’s Economy

Indonesia’s captivating economy is now the 16th world largest economy (GDP) and keeps pacing at 5.3% growth rate, according to the World Bank on March 2014. World Bank defines Indonesia as increasingly growing with positive outlook economy. Fitch and Moody’s also indicate Indonesia as a friendly investment country. Beside strong domestic & foreign investment, Indonesia’s economy is also supported by the proportion of middle class and affluent consumers (MAC) in its population. Research conducted by Boston Consulting Group stated that there is 75 millions MAC and it is predicted to double by 2020. As a result, Indonesia’s economy is boosting up and making Indonesia a niche large market.

Indonesia, however, faces great challenges. Its growth rate has been overshadowed by the East Asia & Pacific regional rate, which constantly reaches 7%. Indonesia should catch up this rate. Another challenge is its GDP per capita rise very slowly. From 2008 to 2014, it rised only 0,24%. Also when compared to neigboring countries, Indonesia’s GDP per capita is extremely low. By contract, Malaysia’s GDP per capita is $10.432, Singapore is $52.052, and Brunei $41.127. Concurrently, Indonesia’s poverty accounts for 11% of the population which is a relevant to other problems such as income gap and unemployment. Therefore, Indonesia should employ good strategy in order to develop the economy as well as to make sure that the national population benefit from the raise of the MAC. If Indonesia does not optimize this benefit, foreign countries would do.

One way to find the determinant of Indonesian economy development is to review the structure of its large GDP. Based on the figures published by State Ministry of Cooperatives and SMEs, entrepreneurial activity inclusively contributes 57% of the country’s GDP. Entrepreneurial activity includes all the business operating activity practiced by micro, small, and medium enterprises (MSMEs). Entrepreneurial activity also accounts for 99% of overall enterprises in Indonesia and provides jobs for 97% of total existing employment. Entrepreneurship plays significant role in Indonesia’s economy. Accordingly, for greater economic development, Indonesia needs to improve the entrepreneurship ecosystem.

Schumpeter, development economist, points out that the key for development is having innovative product and services, marketable to the public. Entrepreneurship and innovation are interwoven. Yet before stepping into innovation-fostering, Indonesia should consider where it stands in economic development phase. Global Entrepreneurship Monitor (GEM) 2013 Report listed Indonesia as efficiency driven economy; efficiency driven economy replaces the use of ‘developing country’ term. Whereas innovation is more likely to succeed at more advanced stage, that is innovation driven economy.

Although Indonesian government has been proactively promoting and supporting entrepreneurship in Indonesia, GEM report indicates that Indonesian government provides few support for entrepreneurship. This is perhaps caused by a misconception about entrepreneurship. Traditionally, it is believed that new entrepreneurship (start ups) improves economy. Scott Shane, winner of the Global Award for Entrepreneurship Research, denied such belief. According to his research published by Research Institute of Industrial Economics (2009), Shane says “typical start-up is not innovative, creates few jobs, and generates little wealth” and “are not the source of our economic vitality or job”. 

New business formation doesn’t improve economic growth. The truth is economic growth stimulates the new business creation, not in the other way. For instance, when an economy is improving, jobs are increasing while consequently the number of new start-ups is decreasing (Kauffman Foundation). In other words, Indonesia should take this concept in to account before moving into creating entrepreneurial policy.

Government should not be over-focusing in newly born entrepreneurs (start ups) because it is an inefficient & ineffective policy, for the example government has to allocate considerable amount of money for start-ups not to mention high records of start-ups failure. The degree in which government can consider which entrepreneurs to support should be based on its quality. This argument is also supported by GEM that the numbers of entrepreneurs does not lead to higher GDP, what counts is the growth, innovation, and infrastructure of the entrepreneurship. Therefore, government should rely on right entrepreneurship, that is development of quality ones.

Government should prioritize scaling-up existing ventures with higher potential to growth. This type of ventures (scale up) is characterized by the potential to deliver high impact. USAID defines scale-up as SMEs that posses high to moderate finance risk, limited to moderate collateral asset, with financing needs is minimum to Rp500 millions & up to Rp2-10 billions. Government can create conducive ecosystem for these scale ups by encouraging government sponsored programs, business catalyst and incubators, lower interest rate and collateral asset for financing, and promoting easiness in government-related business procedures.

As these qualified ventures grow, they generate jobs and contribute to the majority of the overall economic growth, which stimulates entrepreneurship. The success of existing ventures will absorbs talents and consequently cut unemployment. It’s back to the first concept that economic development stimulates entrepreneurship. At the same time, government should ease new entrepreneurs to enter the market and make sure their sustainability.

Another important factor is the characteristic of entrepreneurs in Indonesia. Business entities in Indonesia are majorly micro-entrepreneurs, which account for 98% of entities total number or 55 millions. Sandiaga Uno, an archetype of Indonesian entrepreneurs and also entrepreneur activist, explained that most of micro-entrepreneurs in Indonesia do not choose to be an entrepreneur. Rather, they just have no other option or by accident. This is contrast to the innovation driven economy, wherein the entrepreneurs are highly educated and deliberately choose to jump to entrepreneurship.

Scaling up potential ventures alone will not optimize the effort development of high-impact entrepreneurship. Government should also strive to lift Indonesia to become innovation driven economy. This requires government to take holistic approach to achieve economic efficiency. The Global Competitiveness Report suggest six efficiency enhancers, namely, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, and market size.

Indonesia is reputed to be a Komodo economy, characterized by resilient, buoyant, and surprisingly a giant (Boediono). Its economy consists in entrepreneurship activities. In order to achieve economic efficiency, Indonesia should prioritize scaling up potential existing entrepreneurial activity while maintaining start ups sustainability. Further, national economy can take advantage of the rising MAC and head to long-term economic prospect.

References:


Boediono, Wharton Global Alumni Forum: Indonesia, ASEAN, and the World. Concentric Circle of Growth, 2012. | Daniel Bellefleur, Zahra Murad, Patrick Tangkau (USAID). A Snapshot of Indonesian Entrepreneurship and MSME Development, 2011. | Jose Ernesto Amoros, Global Entrepreneurship Monitor 2013 Global Report, 2014. | Sandiaga Uno, Entrepreneurship in Indonesia – The Importance of Education 2011. | Ministry of Cooperatives and SME Indonesia, Perkembangan Data Usaha Mikro, Kecil, Menengah (UMKM) dan Usaha Besar (UB) Tahun 2012-2013.| The World Bank, Indonesia Economic Quarterly – Investment in Flux, March 2014. | Kim Sam Tan, Sock-Yong Phang, from Efficiency Driven to Innovation Driven Economic Growth: Perspective from Singapore, 2004. | Scott Shane, Why Encouraging More People to Become Entrepreneur is Bad Public Policy, June 2009. | Martin Hahn, The Role of the Emerging Indonesian Middle Class in Spurring Indonesian Entrepreneurship, The role of the emerging Indonesian middle class in, 2012. | Daniel Isenberg. What An Entrepreneurial Ecosystem Actually Is, 2014. | Vaisahli Rastogi, Eddy Tamboto, Dean Tong, Tunee Sinburismit, Indonesia’s Rising Middle Class and Affluent Consumers: Asia’s Next Big Opportunity | Daniel Isenberg, Ross Brown, For a Booming Economy Bet on High Growth Firms Not Small Businesses, 2014. | Indonesia Minister: We Need Four Million Entrepreneurs, 2012.

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