This publication presents the OECD country review of small and medium-sized enterprise (SME) and entrepreneurship policy in Indonesia. The report is part of the series of OECD Studies on SMEs and Entrepreneurship undertaken by the OECD Centre for Entrepreneurship, SMEs, Regions and Cities. In addition to Indonesia, country reviews have covered Canada, Israel, Italy, Kazakhstan, Mexico, Poland, the Russian Federation and Thailand.

Indonesia is the largest economy of Southeast Asia (the 16th largest worldwide) and has experienced sustained rates of growth over the last ten years. The government of Indonesia recognises SMEs as key drivers of economic growth and social inclusion, and has enshrined SMEs as a policy priority through a national Micro, Small and Medium Enterprise (MSME) Law and a Ministry specifically devoted to SMEs (i.e. the Ministry of Co-operatives and SMEs). SMEs also feature prominently in the main government development strategies, such as the five-year National Medium-Term Development Plan that sets out the development priorities of the executive in office.

Indonesia has a large number of small and medium-sized enterprises (SMEs). In 2014, according to data from the Ministry of Co-operatives and SMEs which include the agricultural sector and follow a turnover and asset-based SME definition, there were 59.3 million enterprises: 98.75% were micro-enterprises, 1.15% were small enterprises and 0.1% were medium-sized enterprises.

This chapter first presents information on the structure of the Indonesian SME sector and its performance in terms of productivity, export, investment and innovation. Second, it offers an overview of entrepreneurial attitudes, entrepreneurship performance and business ownership in Indonesia. The chapter shows that the average Indonesian SME is small by international standards, but that there has been a recent consolidation by which larger SMEs (e.g. medium-sized firms) have come to account for a larger share of total employment and total investment. However, Indonesian SMEs continue to be poorly integrated in global markets and do not undertake much R&D or other forms of innovation. Entrepreneurial attitudes are generally positive in Indonesian society, but risk aversion is still high and contributes, together with other factors, to low entrepreneurial activity (i.e. the act of being in the process of creating a business). On the other hand, business ownership is widespread and one of the contributing factors to the small size of Indonesian SMEs.

This chapter assesses the business environment for SMEs and entrepreneurship in Indonesia and, in particular, macroeconomic conditions, labour market regulations, the level of skills in the labour force, product market regulations, taxation affecting small business development, access to finance conditions, the innovation system and the ability of Indonesia to attract foreign investments. Indonesia’s macroeconomic conditions are healthy and supportive of business growth, small business taxation is light, and access to finance for SMEs has been enhanced by a series of regulatory reforms, including the requirement on state-owned and commercial banks to devote at least 20% of their business loans to SMEs. On the downside, there are signs of skills shortages in the labour market, the business license and permit system is still fairly complex despite recent improvements, and the national innovation system should be further developed. Stronger SME development policies, however, are likely to require an enlargement of the national tax base by bringing more companies into the formal sector and by improving efficiency in tax administration.

This chapter describes and assesses the legal and policy framework underpinning SME and entrepreneurship development in Indonesia, including existing mechanisms for policy formulation and policy implementation. The chapter shows that SME development is a policy priority in Indonesia, enshrined in Law 20/2008 (also known as the MSME Law) and in the National Medium-Term Development Plan that drives Indonesian development policies in each five-year legislation period. As a result, many ministries implement programmes for SMEs and entrepreneurs. This is generally good for the strengthening of domestic SMEs, but also raises co-ordination challenges and, on occasion, results in some programmes lacking sufficient scale. The chapter suggests that the draft of an SME Strategy and the establishment of an SME Inter-Ministerial Council could add clarity to the SME policy framework and strengthen policy co-ordination. Similarly, an SME policy portfolio analysis would help the government to understand whether SME policy spending is balanced and meets government priorities.

This chapter describes and assesses national programmes in support of SMEs and entrepreneurship in Indonesia, covering the following thematic policy areas: access to finance, innovation, internationalisation, workforce training, entrepreneurship education, social entrepreneurship, target groups and public procurement. Indonesia’s flagship programme for SMEs is the People’s Business Credit Programme (Kredit Usaha Rakyat, KUR), a large-scale microcredit instrument that combines a loan guarantee with an interest rate subsidy. Incubators and e-commerce have also been prioritised through the development of two government roadmap strategies, while support to SME internationalisation remains relatively limited in scope and scale, in part because of the limited involvement of Indonesian SMEs in export activity. Both entrepreneurship and management training (outside the education system) and entrepreneurship education (within the education system) are relatively common, while existing initiatives targeting specific population groups such as youth and women are relatively small in scale.

This chapter presents information on the local dimension of SME and entrepreneurship policy in Indonesia. It includes information on geographical differences in economic and SME activity, the role of local governments in SME policy, existing mechanisms for the tailoring of national policies to the local context, and mechanisms to ensure policy co-ordination among different levels of government. Indonesia features large local variations in wealth, the business environment, SME and entrepreneurship activity, and enterprise access to strategic resources, which reflect the large size of the population and the geographical expanse of the country. A large-scale devolution of powers in the early 2000s has given significant SME policy functions to local governments, which has helped provide the necessary flexibility to target national policies to the local context. Nonetheless, appropriate tailoring of national policies to local business needs and effective policy co-ordination across levels of government are on occasion impaired by the large number of government institutions involved in SME policy and by uneven policy capacities at the local level.

This chapter assesses the system of business development services (BDS) in Indonesia. It presents information on the demand for such services by small businesses, describes the evolution and current offer of BDS in Indonesia, and analyses in detail the recent initiative of the Integrated Business Services Centres for Co-operatives and SMEs (PLUT-KUMKM Centres). There are currently a large number of BDS programmes run by different ministries in Indonesia. The Ministry of Co-operatives and SMEs is working to improve the standardisation of BDS and to consolidate the supply of BDS nationwide through the PLUT-KUMKM Centres. This initiative can help rationalise the offer of government-supported BDS, especially if it succeeds in building further synergies with other existing similar programmes.