Client: Ministry of National Development Planning of the Republic of Indonesia
SMEs are important in ASEAN Integration process. It is reflected by how ASEAN put SME development as one of the important elements of establishing an equitable economic development in ASEAN, known as the third pillar of ASEAN Economic Community. To achieve competitive ASEAN SMEs, ASEAN established the 2004-2014 SME Blueprint, which set the ASEAN policies to develop competitive ASEAN SMEs. The blueprint was followed by the 2010-2015 ASEAN Strategic Action Plan SME Development, which outlined specific activities to implement ASEAN SME policies.
Similarly, SMEs are also very important in Indonesia. With micro enterprises as the largest proportion of enterprises in Indonesia, about 98.74% of total populations in 2014, the discussion on SME landscape and policies should also include micro enterprises. For Indonesia context, in discussing SMEs, we often refer to MSMEs (Micro, Small and Medium Enterprises) rather than SMEs. MSMEs contributed about 57.6% of GDP in 2013, 30.3% of which were from micro enterprises, 12.8% were from small enterprises and 14.5% were from medium scale enterprises. MSMEs absorbed 96.7% of total employment in 2014, 87 % of which (about 105 million workers) are employed by micro enterprises. In terms of the number of enterprises, MSMEs are about 99%. Large firms largely drove exports, 84.32% of exports were from large enterprises, and 11.54 % were from medium enterprises. Small and micro firms contributed about 4%.
In terms of policies, MSMEs are also strategically important in Indonesia. Indonesia enacted a law on Small Enterprises in 1995 to provide legal basis for small enterprises development policies. The law was revised in 2008 to include micro and medium enterprises. Indonesia has a designated ministry responsible for MSMEs development who coordinate MSMEs policies across government institutions including regional governments. However, based on the ERIA’s SME policy scorecard, Indonesia’s SME policy scored only 4.1 out of 6.0. Apparently, there is much room for improvement in terms of policies for SME in Indonesia.
With AEC about to launch, ERIA and ISEAS jointly conducted studies across 10 ASEAN to evaluate SMEs participation in AEC in early 2015 including Indonesia. This study, part of ERIA and ISEAS studies, aims at examining the extent and nature of Indonesia’s SMEs participation in ASEAN economic integration based on a survey of 200 SMEs with more than 10 employees/workers in the manufacturing sector. The survey was conducted in three major locations, Jakarta greater area, Bandung greater area, and Surabaya greater area. We interviewed firms in 9 out of 22 main industries where SMEs existed the most: (1) 52 firms producing food products; (2) 20 producing beverages; (3) 71 firms producing wearing apparel; (4) 14 firms producing footwear; (5) 14 firms producing wood and of products of wood and cork; (6) 21 firms manufacturing furniture; (7) 3 firms producing computer, electronic and optical products; (8) 4 firms producing electronics; (9) 1 firms manufacturing motor, vehicle products. The respondents comprise 51% small, 30.5% medium and 18.5% large enterprises. Among the respondents, 65 firms engaged in exports, with 30 of them exporting to ASEAN. Meanwhile 48 firms engaged in imports, with 13 firms importing from ASEAN.
We ask a wide range of questions in the survey. Specifically on AEC, we asked whether respondents know about AEC. The survey shows that 79% of respondents know about AEC. However, only 18% of them know about ASEAN Blueprint for SMEs. We also found that in the large firms category, a larger proportion of firms know about AEC, i.e., 86%. We also asked respondents their opinions on the impact of AEC on their business. We found that 39% of respondents think AEC will increase domestic sales and the other 15% see a decrease. In terms of export sales, 39% of respondents expect their export to increase in contrast to only 3% see a decrease. In terms of cost, a large number of respondents, about 42.5% have no ideas on how AEC impacts their import cost. Concerning their profits, 45% of the respondents feel optimistic that their profits will increase, in contrast to 13% see a decline. On competition in the local market, 63% of respondents expect AEC will encourage competition in the domestic market. On competition in foreign market, 46.5% of respondents believe AEC will increase competition in foreign market. On access to intermediate outputs, 41% of respondents expect AEC will increase access to intermediate outputs.
How will AEC affect the respondent's business? The largest proportion of the respondents considers the effect through lower import duty (42% of respondents), lower export tariffs (47% of respondents), better custom procedures (42% of respondents), better standard regulations (49.5% of respondents) and recognition of professional qualifications, (46% of respondents).
From our survey, we also found that 45% of respondents, who were actively exporting and importing, established business relations with companies in the region. On the contrary, there was less than 1 percent evidence of non-exporting/importing respondents that have business relations with ASEAN partners. These findings complement the vision of ASEAN governments to form an integrated ASEAN economy.
We also found that foreign owned companies are more active in establishing business relations in the region. From our survey, we found 60 percent of foreign owned and actively trading firms established business relations with partners around the region. On the contrary, the non-foreign owned firms were less likely to establish business relations in the region, as the survey found that 58 percent of actively trading respondents without foreign ownership did not have business relations in the region. This evidence supports the initiative to promote foreign direct investment in the development of regional economic integration.
Whether integration through the formation of an Economic Community would bring impact to trade activities in the region is one of the important questions for ASEAN. Tariffs have been lowered in the region for many years and come to complete zero level in 2016 with the starting of AEC. However, in order to utilize the provision, firms must complete the administration process related to FTA. Our survey found a larger percentage for firms that did not utilize FTA forms (63 percent) compared to firms that apply the forms (37 percent) even though they were all actively exporting. Meanwhile, those that were not aware of AEC had the same percentage whether going to use FTA forms or not (50:50).
Among the many reasons that could cause this issue, our survey recorded some of them, i.e. very low trade volume, lack of knowledge to utilize FTA, difficulty to get certificate of origin, tariff preference from FTA too small and unable to fulfill ROO requirements. Our survey found the most dominant reason was the lack of knowledge in using FTA forms.
We also applied Probit models that were developed on dependent variables of whether the firm conducted export and import or not, and independent factors that could promote exporting or importing activities. We found a significant impact of FTA on export activities. Establishment of FTA gives positive impact to the probability of firms in conducting export activities. Predictive margins showed 62.5 percent of export probability caused by FTA. In other words, the FTA could really encourage firms to export their products. From the export model, we also found significant impact of business relation with ASEAN counterparts and awareness of AEC to probability of exporting.
FTA was giving a significant impact to the probability of firms to import products. In econometric analysis for import data, there was a significant positive relation between FTA and probability of import. However, FTA’s impact was lesser than in the export model. Import probability increased by 50.3 percent due to the existence of FTA. Other than that, the information technology and business relations with ASEAN firms were also significantly associated with higher imports.
Our econometric analysis also tried to examine factors that could encourage the usage of FTA forms. We applied the Probit method on dependent variables of dummy FTA form usage and several independent variables. The result showed that company size and export activities were significantly impacting FTA form usage. The larger the firms the bigger the chance they will utilize the FTA forms. Similarly, the larger the proportion of export from their production the bigger the change utilizing FTA forms. Therefore, we could conclude that usage of FTA would increase following the development of business entities resulting from regional integration.