The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010
Policy Analysis and Design of Small and Medium Enterprises for Development Program Agus Mansur † 1and Joko Sulistio 2 Industrial Engineering Department Universitas Islam Indonesia Indonesia Email:
[email protected] [email protected]
Abstract - The era of free trade among South East Asian and China is begin and formally ensued in January 2010 by the ACFTA forum. Most businessmen in Indonesia are worried of this agreement, because they think Indonesian industries are not well prepared. Many industries in Indonesia, especially those in rural area, threaten to collapse because they already have a difficult situation due to the global crisis in 2009. The decreasing of demand in several outplay industries push them to close the business. And the beginning of free trade era will worsen this condition if there are no comprehensive action both in government and industries. This paper have two objectives, firstly is to analyze existing policies pertinent with small and medium enterprises. Secondly is to design policies that will significantly expedite the development Small and Medium enterprise (SMEs). The discussion starts with analyzing current conditions and answering these questions; what are the characteristics of rural industries, what are the factors that lead them to progress and what are the threats they occur. Then what are the existing policies issued by central government and local government regarding small and medium enterprises. The analysis will use a system dynamics approach that was found by Jay W Forrester. Researcher around the world often uses this methodology to analyze complex systems due to the ability of this methodology to model causal interactions occurs in such systems. By the end of the discussion this paper will propose an action plan consist of redesigning the existing policies or propose several new policies if it is considered necessary. Keywords: policy analysis, development, small and medium enterprises, system dynamics.
1. INTRODUCTION Indonesia's macro-economic conditions throughout 2004 until 2008 have not been stable. In 2004 economic growth reached only 5.03%. In 2005, economic growth has increased slightly to 5.69% and went down again in 2006 to 5.50%. Although the macro economy in 2007, Indonesia showed a good growth of 6.28%, but at the end of 2008 it back down to 6.06%. It is caused by the decreasing purchasing power which is reflected by the decrease in the inflation rate of Indonesia. Nevertheless the growth in the business field of manufacturing industry showed a trend of increase from
________________________________________ † : Corresponding Author
year 2004 up to 2008 and this business field is always the biggest contributor to growth from year to year. Potential of this business field to continue to be the motor of economic growth has obstacles and challenges that need to be faced. For that to Chamber of Commerce and Industry (KADIN) to develop plans that are strategic and the tactical to anticipate obstacles and challenges. The strategic foundations of the industrial development of Indonesia by the Chamber of Commerce are (KADIN, 2007);
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010 Table 1: GDP in Industrial Classification 2005-2006 (%)
2004
2005
Year 2006
1. Agriculture, Livestock, Forestry and Fishery 2. Mining and Quarrying 3. Manufacturing Industry 4. Electricity, Gas and Water 5. Construction 6. Trade, Hotel & Restaurant 7. Transportation and Communication 8. Financial, Real Estate and Company Service 9. Services
14,34 8,94 28,07 1,03 6,59 16,05 6,20 8,47 10,32
13,13 11,14 27,41 0,96 7,03 15,56 6,51 8,31 9,96
12,97 10,98 27,54 0,91 7,52 15,02 6,93 8,06 10,07
13,72 11,15 27,05 0,88 7,72 14,99 6,69 7,73 10,08
14,46 10,92 27,89 0,82 8,48 13,97 6,31 7,43 9,73
Gross Domestic Product
5.03
5.69
5.50
6.28
6.06
Classification
1.1. 2030 National Industry Vision Within the next 25 years on the basis of a democratic political system and a direct election of the president and vice president every five years, Republic of Indonesia will be an Advanced Industrial State, a prosperous nation in justice through; a. Design engineering, manufacturing and sales network of the National Industrial products, mainly by producing goods and services of superior quality that will compete with other countries products. b. Raising the power of processing industries for natural resources with guaranteed quality of processed products, both within the framework of sustainable food self-sufficiency and for export markets. c. Revival of creation and creativity in engineering and design people of Indonesia, so that national industrial base and national cultural traditions can grow back through high quality product that is loved and used in their daily lives as life style. 1.2. 2010 National Industry Roadmap The 25-year long-term goal is achieved in stages through the construction of a five-year term. In the first five years until the year 2010, national industrial development should be encouraged as soon as possible to achieve; a. Economic growth above 7% b. Increasing Investment Attractiveness and Economic Competitiveness of Nations c. Employment Creation and Reduction of Poverty 1.3. National Industrial Blueprint Blueprint for the development of Indonesian industrial sector is translated into tactical steps that consist of a group
2007
2008
of interrelated fields as follow; a. Infrastructure b. Employment c. Funding d. Commerce e. Indonesia Incorporated f. SME Empowerment g. Technology h. Good Governance As seen in point f, SMEs have a fairly large portion of the attention of the Chamber of Commerce. This is not without reason, because the existence of SMEs in the year 2007 reached 49.84 million units. In addition to the MSME sector also proved to withstand the economic crisis that hit Indonesia in the late 1990s and both in the mid-2000s.
2. MSMEs MSMEs definition or classification is stated in public act no 20/2008 as follow; MSMEs is the economic activity undertaken by individuals or households as well as a business organization to produce goods or services to be traded commercially and has a total asset value less than 50 million IDR for micro enterprises, between 50 and 500 million IDR for medium enterprises, and between 500 million IDR to 10 billion IDR for medium enterprises excluded land and building. The number of MSMEs in 2007-2008 has increase by 2.88% from 49,824,123 units in 2007 to 51,257,537 units in 2008. In 2007, MSMEs contribute 56.23% of national GDP or 2,105.14 trillion IDR. And in 2008, MSMEs contribution to national GDP shows an increase of 504.23 trillion IDR or 23.95 % from the year 2007. It contributes 55.56% of
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010 national GDP or 2,609.36 trillion IDR. The importance of MSMEs in national economy is also shown by its contribution to national employment. MSMEs absorb 96.95% of total employment in 2007. And in 2008, MSMEs absorb 97.04% of total employment or increase by 2.43% from 2007. It also contributes 52.99% of total national investment in 2007 and increase by 38.88% in 2008(BPS, 2009). It’s obvious that MSMEs in Indonesia plays an important role in national economy. Nevertheless, the attention of Indonesian government is showing otherwise. One of the indicators is the budget for the Ministry of Cooperatives and SMEs. In 2008 its budget is 1.09 trillion IDR, and decrease to 749 billion IDR in 2009. It’s even worse in 2010; the government only provides 733 billion IDR of the national budget for the Ministry of Cooperatives and SMEs. By that amount, the government can only provide 16,000 IDR/ MSME for assistance fund (Ekonomi: Bataviase, 2010). The objective of this paper is to discuss a preliminary stage in constructing a holistic model for MSMEs development using system dynamics methodology. This stage is called conceptualization.
3. PREVIOUS RESEARCH 3.1. Research on MSMEs Development in Indonesia Previous studies have been conducted to provide models as an attempt to give a significant contribution in developing MSMEs in Indonesia. (Syarif, 2008) focus on the weakness of MSMEs in accessing information, related to poor promotional action for MSME’s products. Promotion could be done by various efforts such as exposition, business contact, trade mission, business centre, trading house and other activities. Promotion has a real influence towards increasing sales turnover, profit, absorption of man power. The impacts of quality value of various types of promotion which are analyzed consecutively are: 1) Trading Board; 2) Business Gathering; 3) Exhibition; and 4) Trade Mission. Several free variables which have real influence on the success of promotion are: a) Promotion organizer; b) Cost of promotion; c) Type and quality of commodity; and d) Location or site of promotion; e) Time of promotion; f) Total of commodity competitor promoted. Some problems often arise and decrease the effectiveness of promotion are: a) Partial planning (un-coordinated); b) Conformity of the location and the product to be promoted specifically which are related to the demand on the commodity to be promoted; c) Implementation time and the characteristic of the commodity and the fluctuation of demand on the commodity concerned. To develop Trading Board, it needs socialization of the benefit of the promotional program into the regions, and Trading Board in many places.
(Purnama, Suharyanti, & Bawono, 2007) tried to map the network and supply chain of MSMEs in Yogyakarta province. The conclusions are (1). Based on the relationship of MSME-Suppliers; Most of the delivery materials carried out alternately between SMEs and their suppliers based on MSME delivery agreements and other material are always performed by suppliers. (2). Based on customer relationships with MSMEs; The MSMEs craft pursuing a strategy of make-to-order (MTO), but there are some who combine them with the strategy of make-to-stock (MTS). (3). Based on MSMEs relationships with various agencies; Most MSMEs never build a network with government agencies like the Department or Department of Industry, Trade and Cooperatives, and / or with various associations MSMEs. 3.2. Research on System Dynamic Modeling in MSMEs Development The system dynamics methodology is rarely used in MSMEs development modeling. Previous studies in system dynamic modeling in MSMEs development are provided by (Haroon & Wahba, 2002) and (Kameyama, 2001). (Haroon & Wahba, 2002) Studies objectives are to develop a tool to monitor the SMEs’ business short-term transient response to non-stationary conditions. Also to help developing business tactics and action plans. The chosen platform is a system dynamics model to provide simulation ability under different scenarios. The model is formulated in a generic way with the ability to define business attributes through set of model variables. The model is built using five basic sub-models: financial, human resources, operational, risk and environmental.
4. SYSTEM DYNAMICS System Dynamics was first introduced by Jay Wright Forrester from Massachusetts Institute of Technology, Cambridge, Massachusetts, USA in 1956. At first, the SD is used to solve problems of business systems / business. But along with its development, elementary widely used for various social issues, economics, management, and physical systems. The background of SD came from three primary disciplines, namely the traditional management of the social, feedback theory or cybernetics, and computer simulation. Advantages of the most prominent of the System Dynamics approach include the following: a. SD is able to fulfill a set of system requirements and managerial issues to shape modeling framework. b. SD capable combines traditional management with management science to obtain more information and the approaches and solve problems more effectively. c. SD uses the power of human beings think and overcome their weaknesses by dividing the work
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010
d.
between managers and technology. Generating input structure is being done by managers conducted by computer simulation. SD uses several different sources of information: a written mental and numerical data in order to better contain and representative model.
SD model can make feedback for decision-makers about the least possible conflict of a series of policies by simulating and analyzing system behavior on different assumptions. 4.1. The Methodology In spite of wide range of application in system dynamics, most system dynamics models are created in five
phases. The phases are as follow: a. Problem structuring b. Causal loop modeling c. Dynamic modeling d. Scenario planning and modeling e. Implementation and organizational Learning This phase does not required to be undertaken; it depends on the issues or problems that have generated the system enquiry (Maani & Cavana, 2000). This paper will construct a conceptual model in purpose to have a better understanding upon the MSMEs dynamics and to discover policies that will improve system behavior. Thus, it will sufficient enough to take the first and the second phase of the methodology. 4.2. Problem Structuring In this phase, the situation or issue at hand is defined and the scope and boundaries of the study are identified. It consists of the following steps: a. Identify problems area or policy issues. This step requires clear objectives. b. Collect preliminary information and data, including historical media reports, statistical records, policy documents, and previous studies. This phase is mention in the earlier section of this paper. The next section will be the discussion of modeling and analysis. 4.3. Causal Loop Modeling Causal Loop Diagram (CLD) is a tool for revealing the causal relationship among set of variables (or factors) operating in system (Maani & Cavana, 2000). The Basic elements of CLD are variables (factors) and arrows (links). CLD is also a diagram showing the pattern of changes in variables and polarity. Polarity is divided into two types, positive and negative. Positive polarity indicates the influence of the next component of comparable value. The negative polarity will be inversely affected. This paper use
CLD to conceptualize the SD model.
5. THE DISCUSSION 5.1. Model boundary and key variables According to (Hafsah, 2004), the problems in SMEs development are rooted in the internal factors: a. Lack of capital b. Limited Human Resources Capabilities c. Weak Networking Not to mention the external influences from: a. The un-conducive business climate b. Limited infrastructure c. Regional autonomy implication d. Free trade area implication The findings are consistent with (Setyobudi, 2007). MSMEs are facing: a. Classical problems such as capital, formality, human resources, product development and market access. b. Advance problems such as the export market that haven’t been well penetrate. Lack of capability to fulfill the market needs in their product design. Legal issue such as paten and contract. c. Intermediate problems such as managerial problems, collateral issue and entrepreneurship. Thus the model is built using market share, capacity building and technology content as key variables. 5.2. Market Share The market share is influence by sales made by MSMEs and networking as endogenous variable. Market share is also influence by market size variable from macroeconomic condition consider as exogenous variable.
Figure 1: Market Share Sub Model The market share sub models contain a positive polarity. MSMEs will allocate more funds to marketing activities in advertisement, exhibitions and other marketing activities
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010 that will result an increase of costumer trust and followed by sales made by MSMEs. These sales will increase MSMEs market share and ant the end will increase MSMEs profit. 5.3. Capacity Building & Technology Content
Figure 3: Investment in Technology
Figure 2: Capacity Building & Technology Content The other key variables are capacity building and technology content. As seen in figure 2 there are four polarities in this sub model. First is HR exp variables, when MSMEs allocate their funds to support an incentive system, then the human resources will have enough motivation that will lead to organizational productivity. Then, the productivity gained by MSMEs will increase costumer trust to MSMEs. Afterwards, as seen in market share sub model, it will enlarge the market share and finally increase MSMEs profits. The second and third polarity is capacity building. It also start will the MSMEs strategy to allocate their fund in HR exp, the larger their funds allocated in HR Exp will increase MSMEs capabilities to train their human resources and conduct more research to increase their skill and knowledge. Afterwards, the organizational productivity also increase and it will continue to costumer trust, market share, profit and end up in capacity building variable. The forth polarity shows in technology content in their process improvement to provide services and goods. The process improvement will lead an increase in organizational productivity and then costumer trust, market share, profit and so on. Another variable that influence technology content is the MSMEs strategy to make investment in technology. The diagram is shown in figure 3. When MSMEs wants to increase their technology content in order to increase their productivity, they have two choices. First is to self financed and second to have the third party to finance their investment decision. As shown in figure 3, this sub model have two polarities, the firs is in profit, assets, collateral, indirect finance, interest and profit
again. The investment decision that involve third party as the investor, require MSMEs to pay an interest at certain rate. This will reduce the MSMEs profits at the same rate. This polarity is a negative polarity or a balancing polarity. The second polarity is a positive polarity that involves profit, asset, and self finance, investment in technological content, technology content, organizational productivity, costumer trust, sales, market share and profit. 5.4. Government Policy
Figure 4: Government Policy MSMEs are, in a way, threatened by the free trade agreements that Indonesians government signs or will sign in the future. But this is also an opportunities for MSMEs to enter the export market. The key is to endorse MSMEs to gain higher productivity and efficiency. Looking at the model in this paper, the government ought to make some policy regarding the situation above.
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010 a.
b.
c.
d. e.
Actively promote MSMEs products and companies in abroad. This action will increase the performance of advertisement and exhibition of MSMEs, especially for MSMEs in rural area. Develop an information system that will allow public to access any information regarding MSMEs. These include research report and other information. This action will add technological content in MSMEs services, thus will increase organizational productivity and profit at the end of the cycle. Actively involved in MSME’s human resources development by conducting training and consultation services. Provide incentives such as tax holiday and certain custom and fee’s rate for strategic items. Coordinate with central bank to give alternatives in providing fund for MSME’s technological investment especially for the collateral needed by the banks to give MSME’s a credit.
6. CONCLUSION Most MSMEs in Indonesia have common problems, due to external and internal causes, thus government should take some policy to safe MSME’s. This research have conclusion as follow: a. The common problems faced by MSMEs in Indonesia are related with small market share, lack of human resources capacity and low technology content in theirs products and services. b. Indonesia government recommended to protect and develop MSMEs with actively promote MSMEs products and companies in abroad, provide incentives, develop a sharing information system, conducting training and consultation services, and create financial breakthrough to support MSMEs capitalization.
REFERENCES BPS. (2009). Small and Medium Entreprises Statistic 2007-2008. Jakarta: BPS. Ekonomi: Bataviase. (2010, July 29). Retrieved July 31, 2010, from Bataviase: http://bataviase.co.id/node/317593 Hafsah, M. J. (2004). Upaya Pengembangan Usaha kecil dan Menengah (UKM). Infokop , pp. 40-44. Haroon, M. I., & Wahba, K. (2002). A Generic Tool Based on System Dynamics Approach to Assess SME Business Stability and Help Designing Business Tactics and Action Plans within Transient, Non-Stationary Conditions. 20th System Dynamics Conference. Palermo: System Dynamics Society. KADIN. (2007). Principals of Rapimnas 2007. Jakarta: KADIN. Kameyama, S. (2001). Model for SME Sector
Development. The19th International Conference of The System Dynamics Society. Atlanta: System Dynamics Society. Maani, K. E., & Cavana, R. Y. (2000). System Thinking and Modelling. Auckland, New Zealand: Pearson Education New Zealand Limited. Purnama, L. I., Suharyanti, Y., & Bawono, B. (2007). Pemetaan Model Jejaring Usaha Mikro Kecil dan Menengah di Daerah Istimewa Yogyakarta. Jurnal Teknologi Industri , 245-260. Setyobudi, A. (2007, August). Peran Sera bank Indonesia dalam Pengambangan Usaha Mikro, Kecil dan Menengah (UMKM). Buletin Hukum Perbankan dan Kebanksentralan , pp. 29-35. Syarif, T. (2008, September 17). Kajian: Ministry of Cooperative and SME. Retrieved July 30, 2010, from smecda: http://www.smecda.com/kajian/get8.asp?id=471 AUTHOR BIOGRAPHIES Agus Mansur is a Lecturer at the Department of Industrial Engineering, Faculty of Industrial Technology, Name of Institution, and Country. He received his master degree in Industrial Management at UNSW, Australia in 2002. His teaching and research interests include supply chain management, knowledge management, modeling, data mining and operations research. He can be reached at Joko Sulistio is a Lecturer in Departement of Industrial Engineering, Faculty of Industrial Technology, Islamic University of Indonesia, Indonesia. He received his master degree in Economics Science at Gadjah Mada University, Indonesia in 2009. His teaching and research interest include data mining, system dynamics, modeling and simulation. He can be reached at
