government roles in facilitating entrepreneurial ...

USASBE_2010_Proceedings-Page0699

GOVERNMENT ROLES IN FACILITATING ENTREPRENEURIAL ACTIVITIES TO ENHANCE THE COMPETITIVENESS OF A REGION (CASE STUDY SMES IN WEST JAVA PROVINCE OF INDONESIA) Isti Raafaldini Mirzanti, Sonny Rustiadi, Salfitrie Roos Maryunani, and Dwi Larso School of Business and Management (SBM), Bandung Institute of Technology (ITB), Indonesia SBM ITB Building, Jalan Ganesha No 10 Bandung 40132 Indonesia, (6222-2531923 ext. 318) Abstract Entrepreneurship, being the engine of a nation’s economic growth (Holcombe), is closely related to the role of the nation’s government. The role here includes the government policies concerning how to enhance the new and emerging business within the country. In Indonesia’s case (West Java Province), the government has a significant role to enhance the competitiveness of a region, through the regulation for the start-up businesses in order to increase their ability to grow. The survey itself took place in several cities around West Java, Indonesia, and closely looked into nine pillars of the Regional Competitiveness Index. The results will be proposed to the regional government in developing the regulations within the West Java Province as a prototype for Indonesia in the later time. Key words: Government roles, Competitiveness Index, Entrepreneurship Policies EXECUTIVE SUMMARY Entrepreneurship is the engine of economic growth (Holcombe, 1998, p. 60). Entrepreneurship particularly creates new businesses, and jobs, by the time, competition among business will be thighter and eventually will increase productivity and will impact to economic growth. Looking to a function and impact of entrepreneurship to economic growth, there is a need to develop and support the emergence of new start-up business. Based on this concern, government has critical roles, how they can create conducive environment and competitive advantage of a region to support the emergence of entrepreneurs. Entrepreneurship policies are needed to improve the development of entrepreneurship process, although, at this point, it is not a very well-defined policy area (Stevenson and Lundstr, 2001). 85% of all regulations are problematic in terms of either legal compliance, missing points of substance, or matters of principle. This can lead to inconsistent interpretation and implementation of policy, (Local Economic Governance in Indonesia Book, 2007). Research showed that total score for West Java’s Regional Competitiveness Index has increased by 0.28 from 3.67 in 2006 to 3.95 in 2008. Meaning that on entrepreneurs’ perspective, they recognize West Java Province as a region with competitive advantages. Almost all of the pillar’s score experienced increase except for first pillar namely Institution. The score of this pillar experienced decrease 0.10 point, furthermore government needs to be more focused and give more thought to the area where the score was dropped off. On the other hand, government should still maintain what has been done well. Government should realize the characteristic of each region, because they have a specific characteristic based on their culture, education, religion and etc. Thus government has to be creative to determine the influencing factors and to create an effective policy in order to enhance the competitive advantage of a region


I.

INTRODUCTION

Over the last decades, Entrepreneurship become a popular issue relating to its impact to the economic growth. Holcombe (1998, p. 60) claims that, Entrepreneurship is the engine of economic growth. How entrepreneurship can do that ? Entrepreneurship particularly create new businesses, and jobs (more people get jobs), by the time, competition among business will be thigher and eventually will increase productivity and at the end will impact to economic growth. There are broad definitions about entrepreneurship, Glancey and McQuaid (2000) mention five definitions of entrepreneurship, while Wennekers and Thurik (1999) mention thirteen. For example, entrepreneurship could imply an economic function, as a bearer of uncertainty, a resource allocator, or an innovator. It could also refer to particular behavior, intrinsic characteristics, the creation of new organizations, or the role of an owner-manager of a company. The idea that entrepreneurship and economic growth are very closely and positively linked together has undoubtedly made its way since the early works of Schumpeter (1911), he describe it by distinguishing five cases: (1) The introduction of a new good, (2) The introduction of a new method of production, (3) The opening of a new market, (4) The conquest of a new source of supply of raw materials or half manufactured goods, (5) The carrying out of the new organization of any industry (Schumpeter, 1963 (1911), p. 66). Through his innovative activity, the Schumpeterian entrepreneur seeks to create new profit opportunities. These opportunities can result from productivity increases, in which case, their relationship to economic growth appears quite clearly. Moreover, the disequilibrium created by the entrepreneur can be propitious for additional innovations and profit opportunities. Therefore, more entrepreneurs means more growth (Dejardin M, 2000).Vosloo (1994, p. 147) suggests that the entrepreneur might be an opportunity maximizer when defining an entrepreneur “as a person who has the ability to explore the environment, identify opportunities for improvement, mobilize resources and implement action to maximize those opportunities”. This definition is very wide and would imply that every agent on the market, every firm, making a profitable business is an entrepreneur. Increasing the number of entrepreneurs will gradually give an impact to the growing of industry. An econometric study of the US telephone industry by Gort and Sung (1999) yields the conclusion that increased competition has led to greater efficiency within the industry. Gort and Sung (1999) assume that competition can affect efficiency in four ways, which are (1) greater incentive to stimulate demand, (2) higher quality of capital inputs, (3) lower monitoring costs, and (4) greater efficiency of firm-specific organizational capital as well as rivalry stimulating innovation. II. GOVERNMENT ROLES Looking to a function and impact of entrepreneurship to economic growth, there is a need to develop and support the emergence of new start-up business. Based on this concern, government has critical roles, how they can create a conducive environment and competitive advantage of a region to support the emergence of entrepreneurs. In this research, government roles encompass their effort to protect the following issues (WEF, 2006).


A. Public institutions 1. Property rights 2. Ethics and corruption - Diversion of public funds - Public trust of politicians 3. Undue influence - Judicial independence - Favoritism in decisions of government officials 4. Government inefficiency (red tape, bureaucracy and waste) - Wastefulness of government spending - Burden of government regulation 5. Security - Business costs of terrorism - Reliability of police services - Business costs of crime and violence - Organized crime B. Private institutions 1. Corporate ethics - Ethical behavior of firms 2. Corporate accountability - Efficacy of corporate boards - Protection of minority shareholders’ interests - Strength of auditing and reporting standards Government should realize the characteristic of each region, because they have a specific characteristic based on their culture, education, religion and etc. Thus local government has to be creative to determine the influencing factors and to create an effective policy in order to achieve competitive advantage of a region. III. COMPETITIVENESS The World Economic Forum defined competitiveness as collection of factors, policies and institutions which determine the level of productivity of a country and that, therefore, determine the level of prosperity that can be attained by an economy. However, productivity is also the key driver of the rates of return on investment, which, in turn, determine the aggregate growth rates of the economy. Thus, a more competitive economy is one that is likely to grow faster over the medium to long term. “More competitive economies tend to be able to produce higher levels of income for their citizens” Martin, S and Artadi (2004). Much of the work at the World Economic Forum in the area of competitiveness is aimed at shedding some light on the factors, policies, and institutions that determine the sharply different growth experiences of over 100 economies (Martin, S and Artadi, 2004). There are at least three key insights that emerge from the Forum’s work in this field:


1.

2. 3.

The factors that matter are many, and are spread over a wide range of areas. Acemoglu (2001), makes a compelling case for their central importance to the development process: “Countries with better ‘institutions,’ more secure property rights, and less distortionary policies will invest more in physical and human capital, and will use these factors more efficiently to achieve a greater level of income. FIGURE 1 shows the experience of three countries which are Argentina, Ghana, and Taiwan. These factors matter differently for different countries, depending on their stage of development. The importance of these factors changes over time, a trend enhanced by the forces of globalization (Global Competitiveness Report).

FIGURE 1. GDP Per Capita, Ppp In International Dollars

IV. ENTREPRENEURSHIP POLICY In most of the regions, Entrepreneurship policies are needed to improve the development of entrepreneurship process. In the practical reality, existing firms fading away and new firms entering the market, jobs being created and lost by the entry, exit, expansion and downsizing of firms. This has important implications for governments. To replace the lost businesses and jobs every year and to maintain growth rates in the economy, they need a constant supply of new entrepreneurs. The question is, what policies and measures are needed to create and support the emergence of these new entrepreneurs? Entrepreneurship policy is emerging as an important area of economic policy development, although, at this point, it is a not a very well-defined policy area (Stevenson and Lundstr, 2001)


More thought should be given to how to create the right environment and circumstances to motivate and stimulate individuals to become entrepreneurs. This includes ‘enabling’ policies both to help them acquire the appropriate skills and learning, and to surround them with ‘opportunity’ (i.e., access to start-up resources and supports). The three elements, Motivation, Skills and Opportunity, are the basis of Entrepreneurship Policy framework and are key to the creation of a more ‘entrepreneurial economy’, illustrated in FIGURE 2. There is a high degree of interdependence between these three elements. Stressing one area and ignoring the others will inevitably lead to sub-optimal results (Stevenson and Lundstr, 2001).

FIGURE 2. Entrepreneurship Policy Foundations

Entrepreneurship is playing an important role in their societies, not just because entrepreneurs create jobs but because at the end of the day, it is not just about business, it is about people having the freedom to express their creativity, to imprint their style on the work they do, to turn their knowledge, skills and abilities into their own businesses, to create flexibility around their life conditions and personal interests and to make employment choices over which they have more control. As governments realize the significant implications of business entry and exit and ‘churn Rates’ and the dynamism of the small business sector for innovation and growth, it will be hard for


them to ignore the need for enhanced entrepreneurship support in all the areas outlined above. The average life of a business is getting shorter, innovation is being driven at a faster rate and businesses are in the constant process of starting, expanding, contracting and disappearing. With this activity, jobs are also being created and lost. We need new businesses to replace the ones exiting for reasons of bankruptcy, retirement, marginality and lack of competitiveness, and to help create new jobs to replace the old ones. To influence a steady stream of new businesses, one has to start by influencing ‘potential entrepreneurs’ (Stevenson and Lundstr, 2001). According to Local Economic Governance in Indonesia Book, 2007 : Overall, 85% of all regulations are problematic in terms of either legal compliance, missing points of substance, or matters of principle. This can lead to inconsistent interpretation and implementation of policy. However, 13 districts, mostly from East Java and NTB, had perfect scores for the regulations sampled from those areas, while the worst districts were dispersed throughout the country. Only about 10% of regulations are clearly distortionary or problematic for economic development. Of these, the most common regulatory problems are constraints on the free movement of goods around the country and restrictions on non-local labor. V. RESEARCH METHODOLOGY This research adapted The World Economic Forum (WEF) methodology in determining The Global Competitiveness Index. The methodology based on a model developed by Jeffrey Sachs and John McArthur, called the Growth Competitiveness Index (GCI). The GCI brings together a number of complementary concepts aimed at providing a quantified framework for measuring competitiveness. This research used stratified random sampling and involved two kinds of data, which are primary and secondary data. Primary data was compiled from survey, where as secondary data was collected from literature study. Survey and Respondent The questionnaire disseminated was filled by the executives, including the business owner or top management. Samples taken were considered the representative of all industry sectors involved, geography dissemination, size and company owner. Survey conducted had collected 100 data from executive businessman spreading in the area of West Java Province, which are Bandung, Bogor, Tasikmalaya, Garut, Ciamis, Cirebon, Kuningan and Majalengka The result then compared between data from 2006 and 2008, to show the significant changes during 2 years. VI. FINDINGS AND DISCUSSION The results of this measurement will serve as a reference for decision makers and investors to gauge region's competitiveness. It may also provide insights on factors that may hinder economic growth, so that the decision makers may be better informed in making programs, future plans and policies.


As discussed earlier that primary data were by mean of survey and secondary data from sources such as Indonesian Central Statistic Bureau (Biro Pusat Statistik/BPS), government publications, and other sources. FIGURE 3 and 4 presented respondent profiles based on industry and number of employees. FIGURE 3. Respondent Profile Based On Industry

5,00%

7,50%

P ertanian & P ertambangan Manufaktur 32,50% Hotel, R es toran, Trans portas i, & K omunikas J as a L ainnya

40,00%

L ainnya

15,00%

From the above figure, we can conclude that all range of industry in West Java was covered in the survey. Majority of respondent (40%) were in Service Industry, 32.5% in Manufacturing Industry, 15% in Hotel, Restaurant, Transportation & communication Industry, 7.5% in Agriculture and Mining, and remaining 5% in other industries. FIGURE 4. Respondent Profile Based On Number Of Employee 10,81%

13,51% < 50 51-100 101-500

75,68%

According to FIGURE 4, majority of respondent came from micro and small enterprise with employee less than 50 person (75.68%), while medium and big companies with more than 50 or more than 100 employee amounting to 13.51% and 10.81% respectively.


Regional Competitiveness Index

2006

2008 Fluctuation Score (1-7) 0.28 3.95 0,13 4.07 3.03 -0,10 3.13 0,50 4.89 0,03 5.21 0,09

OVERAL SCORE Basic requirements 1st pillar: Institutions 2nd pillar: Infrastructure 3rd pillar: Macroeconomic stability 4th pillar: Health & primary education

3.67 3.94 3.13 2.63 4.86 5.12

Efficiency enhancers 5th pillar: Higher education & training 6th pillar: Goods market efficiency 7th pillar: Technological readiness

3.37 3.63 3.75 2.71

3.78 4.13 3.79 3.43

0,42 0,50 0,04 0,71

Innovation factors 8th pillar: Business sophistication 9th pillar: Innovation

3.53 3.86 3.21

4.01 4.27 3.75

0,48 0,41 0,55

TABLE 1. Comparison Of West Java’s Competitiveness Index For The Year 2006 And 2008. As we can see from TABLE 1, total score for West Java’s Regional Competitiveness Index has increased by 0.28 from 3.67 in 2006 to 3.95 in 2008. Further, in 2006 highest scores was achieved in Basic Requirements sub-index with 3.94 and lowest scores in Efficiency Enhancers sub-index with 3.37 points. Whereas in 2008 the highest score was still in Basic Requirement sub-index with 4.07 points (increase in the amount of 0.13) and lowest score change to Efficiency Enhancers with 3.78 points (increase in the amount of 0.42). The numbers shows that West Java has big potential in creating business innovation. This condition also reflects in the field where creative industry actors mostly come from West Java. If we compare West Java’s Regional Competitiveness Index with other countries surveyed by the World Economic Forum in its 2007-2008 report, West Java will be ranked in 78th among 131 countries. This also shows an increase from 2006 where it would be ranked 85th among 118 countries. It showed that respondents (micro and small businessess actors) significantly perceived positive changes regarding to the nine pillars of competitiveness index. Interesting findings from survey is that almost all of the pillar’s score experienced increase except for first pillar namely Institution. The score of this pillar experienced decrease 0.10 point. Furthermore, this research emphasized in the impact of institution’s role (government), whether government as a regulator or a policy maker. It focus on the 1st pillar, Institutions.


The Institution Pillar’s score of West Java is 3.13 in 2006, compare its score to other country from WEF report, West Java will be ranked in 114th among 131 countries. It explained how competitive the West Java is, and it become a critical issue when government/local government intent to develop their region.

Indicator 1st pillar: Institutions Property Right Diversion of Public Good Public trust of Politicians Judicial Independece Favoritism trust of government official Wastefulness of government spending Burden of Government regulations Business cost of terorism Reliability of police sevices Business cost of crime and violence Organized crime Ethical behaviour of firm Efficacy of coorporate boards Protection of minority shareholders interest Strength of auditing and reporting standards

2006 3.13 4,09 2,31 2,22 2,95 2,95 3,33 2,39 3,73 3,13 2,56 2,45 3,77 3,93 3,97

2008 Fluctuation 3.03 -0.10 3,88 -0,21 2,10 -0,21 2,37 0,15 2,69 -0,26 3,02 0,07 3,32 -0,01 2,83 0,44 3,55 -0,18 2,83 -0,30 2,52 -0,04 2,23 -0,22 3,65 -0,12 3,65 -0,28 3,49 -0,48

3,14

3,31

0,17

TABLE 2. Comparison Of West Java’s Competitiveness Index For The Year 2006 And 2008. The 1st pillars of Competitiveness Index, institutions, comprise of 15 factors from Property Rights up to Efficacy of Corporate Boards. Almost all factors experienced decreases, except 5 factors which include for Public Trust of Politicians, Favoritism in Decisions of Government Officials, Wastefulness of Government Spending, Burden of Government Regulation, and Efficacy of Corporate Boards that experienced improve compared to 2006. In 2006, the 4 last lowest rankings are Public trust of Politicians (2,22), Diversion of Public Funds (2,31), Burden of Government regulations (2,39), and Organized crime (2,45). It explained how businessman’s perceived regarding to this intitution pillar. In 2008, several improvements had been made, eventhough there are some factors experienced decrease except 4 factors, which are Public trust of politicians, Favoritism in decisions of government officials, Burden of government regulation, and Strength of auditing and reporting standards. The 4 last lowest rankings are Diversion of Public Good (2,10), Organized crime (2,23), Public trust of Politicians (2,37) and Business cost of crime and violence (2,52).


The findings showed that eventhough Public trust of politicians is still in low score compared to 2006 but there is an improvement, reflected by the increasing score by 0,15 point, moreover the most significance increase was on Burden of Government Regulation amounting 0,44. It seem that government had done a good steps to develop these factors. This is regarded to be a positive indication because industry has perceived that government regulation in West Java is favorable in supporting business climate in West Java. Unfortunately it did not progress in the remained factors. VII.SUGGESTION TO GOVERNMENT However, If goverment have an intention to improve and develop this region (West Java), thus they should have to set up a good strategy (policy) and be more focus on the below subject, where as: • Property Right • Diversion of Public Funds • Judicial Independece • Wastefulness of government spending • Business cost of terorism • Reliability of police sevices • Business cost of crime and violence • Organized crime • Ethical behaviour of firm • Efficacy of coorporate boards • Protection of minority shareholders interest VIII. CONCLUSION AND IMPLICATION Overall, perceptions of entrepreneurs to government performance still remain good. It was shown at competitiveness index score that was increasing from 3.67 (2006) to 3.95 (2008). Meaning that on entrepreneurs’ perspective, they recognize West Java Province as a region with competitive advantages. Although the 1st pillar (Institution) score is decreasing 0.10 point from 3.13 (2006) to 3.03 (2008), furthermore, government needs to be more focused and give more thought to the area where the score was dropped off. On the other hand, government should still maintain what has been done well (Public trust of politicians, Favoritism in decisions of government officials, Burden of Government regulations, and Strength of auditing and reporting standards). Based on entrepreneurs’ view, more competitive of a region, it would be easier to start-up and manage a business as well (production). It is government roles that should create conducive environment and competitive advantages in order to increase the economic growth of a region. Government should realize the characteristic of each region, because they have a specific characteristic based on their culture, education, religion and etc. Thus government has to be


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