Efforts to stimulate growth in the Indonesian economy took a key step forward in February, with the introduction of new measures aimed at increasing foreign direct investment (FDI) and supporting the country’s small and medium-sized enterprises (SMEs).
Alongside plans to remove another 35 subsectors from the negative investment list – including high-value e-commerce and some road infrastructure – the government has set aside key segments of the economy for smaller local businesses and partnerships.
Despite these protections, however, Indonesia’s SMEs are likely to face an increasingly competitive market as regional integration gains momentum.
Bid to boost FDI
Under the current liberalisation drive, a total of 19 subsectors have been reserved for small-scale firms and cooperatives, and 62 areas of business will only be accessible to international investors if they partner with a local SME.
In addition, the overhaul significantly raises the project value threshold for 39 segments of the construction sector reserved for local SMEs from Rp1bn ($75,500) to Rp50bn ($3.8m), which is expected to broaden the scope of opportunities available to local players.
Juniman, chief economist of Maybank Indonesia, said the revisions reflected the government’s development priorities and plans for boosting economic growth.
“The idea behind this revision is to improve investment and protect the growth of SMEs,” he told media in February.
Nonetheless, boosting FDI and supporting SMEs is often a fine balance for Indonesia.
With a market of 240m potential consumers, the country is facing significant competition from its peers at a time when the launch of the ASEAN Economic Community (AEC) is driving regional integration forward.
Finance and tech hurdles
Other government initiatives are also working to address barriers to SME growth, such as limited access to finance, which is frequently cited as a problem for smaller firms that lack sufficient collateral for loans.
Under the Kredit Usaha Rakyat (KUR) scheme, a government programme aimed at nurturing small business growth, the Ministry of Finance provides insurance for 70% of loans given to SMEs, with banks taking on the remaining 30% of the risk.
In 2014 the six participating national banks provided more than 11.3m SMEs with a combined Rp146.3trn ($11.2bn) of funding under the KUR programme. A total of 26 regional lenders have also signed up to the initiative.
Smaller businesses also face a gap in terms of technology and training. According to a recent report by Deloitte, published in August, just over one-third of Indonesian SMEs are offline, while another 37% have only basic online capabilities.
Given the strong correlation between online engagement and international competitiveness, developing stronger internet skills and increasing broadband among the SME economy will likely be key to fostering regionally competitive entities.
The Deloitte study found that offline SMEs could boost revenue by up to Rp140m ($10,700) per year by acquiring advanced internet capabilities; on a wider scale this could increase Indonesia’s GDP growth by as much as two percentage points per annum.
This could help Indonesia reach its target of becoming a middle-income country by 2025.
Building support structures
With regional integration gaining pace after the launch of the AEC in December – which will see 10 economies converge into a common market with GDP in excess of $2.7trn – analysts have highlighted the need for Indonesia’s smaller businesses to focus on increasing their knowledge in areas such as ASEAN product standardisation and export-import procedures.
Speaking in November, Rosan Perkasa Roeslani, now-chairman of the Indonesian Chamber of Commerce, highlighted the important part played by smaller businesses in Indonesia’s economy.
“We [need to] develop and support ‘local champions’ – excellent local products and brands that can be a mainstay and enter the global market,” he told media.
While SMEs play a vital role in the Indonesian economy, contributing close to 58% of GDP and employing more than 97% of workers, according to the International Council for Small Business, this is not reflected in terms of their participation in global production networks, as direct or indirect exporters.
According to a 2012 report by the Asian Development Bank, just 6.3% of Indonesian firms were active in these networks, compared to 21.4% in Vietnam and 46.2% in Malaysia. The segment’s share of non-hydrocarbons exports has also seen a gradual decline, from 20.2% in 2003 to 16% in 2014.
There are signs that a drive to prepare Indonesian SMEs for a more global stage is gathering strength, led by initiatives such as the AEC Centre in Jakarta.
Inaugurated by the Ministry of Trade (MoT) in late September, the centre provides business consultation and advocacy to help prepare Indonesian companies for market integration. The centre can, for example, suggest targeted export markets to local companies, Bachrul Chairi, director-general for international trade cooperation at the MoT, told media, supporting the broader goal of increasing intra-ASEAN trade.