A new strategy of SME governance in new Indonesia era: Better or worse?

R. Deti, A.V.S. Hubeis, I. Sailah & L.M. Baga

Institut Pertanian Bogor, Bogor, Indonesia

ABSTRACT: This paper explains the new transformation of Small and Medium Enterprises (SMEs) gov­ernance in Indonesia by discussing the development of related regulations.

1 INTRODUCTION

Small and Medium Enterprises (SMEs) development is one of the popular topics to discuss in global eco­nomic development. Previous research discussing the development of Chinese SME revealed the importance of government and enterprises relations for creating conducive situation (Chen 2006). Topics of regulation and government role do not only occur in China but have emerged as significant issues in the United Kingdom (Bacon & Hoque 2005). In Poland, for instance, the discussion about SMEs comes up with the failure of government SMEs pro­gram. Development of SMEs needs structured sup­porting program from government (Klonowski 2010).

Experiences from many countries show that the transformation for SMEs governance needs govern­ment role. In this case, it will emphasize on histor­ical regulations of SMEs in Indonesia. Furthermore, a research study in Cameroon argued that SMEs development is more complex because it requires the supportive business environment.

From 1997 to 2013, the number of SMEs in Indo­nesia has increased from 39,765,110 to 57,895,721 (Badan Pusat Statistik Indonesia 2016). Growth number of SMEs drives to the complexity of SMEs governance. It comes to be more challenging because of internal and external factors (Bank Indo­nesia 2015). This article discusses human develop­ment as an internal factor and regulation as an external factor. It needs inline connection between internal and external factors. To this day, Indonesia has so many regulations to support SMEs develop­ment. However, it needs more active actions to accelerate the development, especially for human development issues.

2 INDONESIAN GOVERNMENT STRATEGIES FOR SMEs DEVELOPMENT

Government in developing countries tend to direct policies to achieve by focusing on creating occupa­tions, short-term business development, poverty alle­viation, and long-term economic growth (Azis & Rusland 2009). SMEs development is one of the government actions as transformation of economic development to help achieving the goals above. According to Indonesia’s Act 20/2008, SMEs aim to increase and expand the enterprises to develop Indo­nesia’s economic based on fair economic democracy in Indonesia.

Indonesian government has been concerned about development of SMEs since 1990s by regulating these matters as one of the actions to maintain stabil­ity of economic condition in Indonesia. This is also a continuation phase of financial crisis impact in 1998. Based on Badan Pusat Statistik report, SMEs did not have any disruption. It could survive from financial crisis in 1997 and provide workforce for unemployed people in Indonesia up to 107 million until 2012 (Bank Indonesia 2015).

Indonesia has been concerned about maintaining SMEs since the last period of New Order Era.

In Post-New Order Era, SMEs increased and sur­vived to even become more stable in financial and helped in controlling numbers of unemployment in Indonesia. Hence, SMEs have been recognized in domestic economic activities as sources of livelihood for many households, employment regeneration, and poverty alleviation (Tambunan 2007, Padachi & Lukea Bhiwajee 2016, Agyei 2018), but it is still not good enough to help increasing Indonesia GDP growth until several years after Post-New Order Era. SMEs have helped in decreasing numbers of unemployment but still weak in terms of GDP con­tribution which needs more than financial stability, such as capital, human resource, technology, and market access (Tambunan 2007).

Table 1. SMEs Contribution to Indonesian GDP.

Furthermore, government regulated SMEs into Act 20/2008 supported by Government Regulation 17/2013, contained further development for micro, small, and medium enterprises. This action can be considered as improvement regulation to enhance SMEs strategies, because regulation and policy must be dynamic and adjusted to new situation. As a result, SMEs have been shown a good pace in order to maintain economic activities and have a big hand to Indonesia GDP growth.

From the data above, we can see SMEs contribution to GDP was increasing with increased percentage of more than 5% every year. This is one of the results of government concerns toward empowerment and devel­opment of SMEs. According to Ministry of Industry Website, SMEs contribution to the number of GDP has been improved up to 60% within 5 years (KOMPAS, 2016).

Since 2015, Indonesia has been concerned about the growth of ASEAN Economy Community (AEC), which are providing market access for enterprises and human resources to compete freely based on capability and skills. ASEAN countries also have been doing collaboration to reinforce competitive­ness and sustainability of SMEs, strengthened by ASEAN Strategic Action Plan for Small Medium Enterprises Development (SAP SMED) 2012-2015 and the latest are for 2016-2025. This document offered strategic goals, explanation about opportun­ities, and access for SMEs in ASEAN to expand their business and network, supported by policies and regulations applied in each country.

These strategies are still unfamiliar for SMEs people in Indonesia, whereas they just need to utilize the opportunities to expand their business to another step. Indonesia government also has been encour­aging SMEs people to expand their business through several strengthening strategies such as convenience financial facility, empowering human resources through vocational training center, and other activ­ities based on government programs and regulations.

In reality, there are still SMEs people who are ignor­ant and resistant to regulation (Bacon & Hoque 2005), which impacted on SMEs performance. For these kinds of issues, improvement related to internal factors in SMEs is needed such as human resource develop­ment because through good policies, regulations, and programs, the SMEs governance just need more con­crete actions to advance SMEs performance.

3 IMPROVING HUMAN DEVELOPMENT IN SMES

As we mentioned before, SMEs have been showing a good impact in several aspects on employment and financial stability but are still weak in terms of Indo­nesia GDP contributions.

Several studies stated that human capital attributes such as education, experience, and skill of employ­ees and managers are important to determine SMEs outcomes (Huselid 1995, Pennings et al. 1998, Geor­giadis & Pitelis 2012). Education and training are important to enhancing opportunities and quality in a job. These actions are also considered investment in human capital which can increase productivity, raise employment participation, and direct sources of innovation and competitiveness (Holzer et al. 1993, Barron et al. 1999, Conti 2004, Hunt et al. 2007). SMEs have external benefits on efficiency, innov­ation, and also increase productivity growth (Tambunan 2007). To advance SMEs growths, SMEs people, both employees and managers, have to improve their competitiveness to survive because there are great market opportunities and access avail­able, but usually SMEs are weak on human capital development. To achieve this goal, SMEs must enhance human skills of SMEs people and thereby productivity growth (Opeyemi & Victor 2017).

Productivity growth is also related to how human resources can improve and develop their individual skills to give great impacts on business. However, SMEs people do not really have access to develop their skills because training in SMEs is considered as informal approach to enhance skills with little provision and systematic approach because SMEs do not really have luxury to train employees (Kotey & Slade 2005, Beaver & Hutchings 2005).

Literatures argue that human resources aspects in SMEs are in need of training and development to create a better organizational culture (Beaver & Hutchings 2005, Padachi & Lukea Bhiwajee 2016). In a changing environment where global competition becomes more intense, human development is one of the aspects required to support SMEs (ASEAN 2015). ASEAN Strategic Plan has several desired outcomes such as enhancing productivity and human capital development (ASEAN 2015). These outcomes can be effectively done with skill development. Improving skills is one of the strategies used to create a better SMEs performance, because coherent and dedicated strategies for employ­ees can provide useful goals to work with their best efforts (Georgiadis & Pitelis 2012).

Besides requirement for hard skills, soft skills also have significant role in enhancing employees’ performance in SMEs. Soft skill development is important in order to survive in the industry and increase productivity of SMEs. In order to enhance individual performance, three factors should be improved: motivation, ability, and opportunity to participate (Armstrong 2009).

Nowadays, HRD has shifted its direction from training in general to being provided individuals to develop capability for the future of their own benefit and for the benefit of their organizations (Beaver & Hutchings 2005). Knowledge from training can be applied to overcome challenges that emerge in the market and give great influences to business, because results of education and training of the workforce in SMEs will tend to be positively related to the profit­ability of SMEs (Georgiadis & Pitelis 2012).

4 NEW STRATEGY: FINANCIAL LIFE SKILL TRAINING

Many strategies regulated by Indonesia government tend to improve SMEs performance. However, in Indo­nesian case, improving SMEs performance is beyond the role of regulations. In fact, it also requires skilled labors. Hence, for better transformation of SMEs gov­ernance, it needs a new strategy to improve their skills. A literature review also showed that fragile financial life skill of labor will affect the productivity. For getting known about what kind of labor might be needed by SMEs, we had done Labor Market Assessment (LMA) in West Java Province.

As we mentioned before, West Java had been chosen because of its high population number. The number of micro enterprises (MIEs) in West Java Province is around 24,669 (Dinas Koperasi dan Usaha Kecil Provinsi Jawa Barat, 2017). Specific areas selected for doing LMA are Bandung, Indra- mayu, Tasikmalaya, and Sukabumi. This research conducted quantitative survey and qualitative in­depth interview. It involved 169 entrepreneurs from SMEs for quantitative survey. For Focus Group Dis­cussion (FGD), it involved 16 government institu­tions and 146 entrepreneurs.

LMA result showed that there is a gap in labor soft skills so that SMEs might need upgrading labor soft skills such as technical knowledge, managing personal financial, accounting, computerizing, and communication. Figure 1 emphasizes 7 biggest gap soft skill assessments in West Java Province.

Figure 1. LMA for Gap in Soft Skill.

Furthermore, those data showed that we have to make some strategies to improve labors’ soft skills. Technical knowledge might need some training from each SME because it would be different for each. It depends on the type of SME industries. However, in general, all of SMEs labor needs personal financial soft skill. As we discussed before, personal financial problems might decrease labor productivity so that it

Figure 2. Labor debt.

is necessary to be more concerned about personal financial labor.

LMA showed that only 7.4% of SMEs labors are stable with personal financial state. Around 92.6% labors have credits in different sources. The highest number is labors with debt in office. As SMEs are nothing but small and medium enterprises, this also in one way means that the financial situation will also be in small or medium level. If many labors borrow money from office, it would drive to unstable financial condition for SMEs. Hence, we have to put more con­cerns to the personal financial labor issues.

This research aims to promote a new strategy for SMEs development in terms of personal financial life skill. SMEs need employees who could manage personal finance so that they would be productive employees in terms of enhancing SMEs perform­ance. Indonesian government needs action to improve the performance because at some points, SMEs have been assumed as risky institution (Nunoo & Andoh 2012). Therefore, it needs some improvements to encourage trust for SMEs. One of the strategies that might be effective is financial life skill training for labors.

In this case, we also tried to do a survey on SMEs entrepreneurs about considering the need to imple­ment financial life skill training. We want to make sure that whether it is needed for labors only or also for employers. The result of survey showed that 93.9% for SMEs entrepreneurs expect about having this kind of training for themselves. They consider joining it because they realize that it is an important training for their businesses to develop. In this survey, most of the SMEs entrepreneurs are man­aging company’s finance by their own.

Furthermore, 73.9% of them are having some credits from difference sources. It shows that finan­cial literacy is one of popular discussions in the case of SMEs. This research has also found that 53.3% of SMEs entrepreneurs had been joining soft skill train­ing; this shows that they seem interested for having this kind of training. Hence, they argue that SMEs entrepreneurs are supposed to have financial life skill training not only for labors but also for the entrepreneurs and employers.

From some surveys, we assume that Indonesia might need an action to improve SMEs performance. We need governance transformation of SMEs, which is supposed to be more concerned with financial life skill. Regulations are important, but we could not deny that human resource development is also a crucial issue in SMEs. As we already discussed, SMEs give a signifi­cant impact for economy development in Indonesia.

3 CONCLUSIONS

Indonesia has various strategies for improving SMEs governance, one of which is making regulation. Fur­thermore, it is getting better year by year. By regulat­ing some public policies, it has been proven that Indonesia starts to be concerned with SMEs develop­ment. However, in this case, we could not ignore the importance of human resources. For improving SMEs performance, skilled labors or employees are required. Hence, personal training would be needed to get them. This research suggests a new strategy, which puts some attention of upgrading financial life skills of labors. By collecting some data from obser­vation, interview, and survey, we have found that personal financial skill is one of the human develop­ment issues in terms of improving SMEs performance.

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