Development of SMEs in the Indonesian Economy

This paper examines the development of manufacturing SMEs (small- and
medium-scale enterprises) in Indonesia during 1986-96, using unpublished data of BPS
(Statistics Indonesia). The contribution of SMEs to total manufacturing value added
has remained relatively small, but their contribution to the Indonesian economy in terms
of employment generation is significant. The analysis suggests that, in broad terms,
SMEs can coexist with LEs (large-scale enterprises), by producing a unit of output with
less capital but more labour than LEs. Labour productivity in SMEs and LEs increased
at a similar rate during the period under study. Increase in labour productivity of SMEs
in the machinery industry was faster than in other main product sectors. SMEs in the
machinery industry also increased their TFP markedly, compared with both SMEs in
other sectors and LEs in the same sector. Overall, these results question whether
subcontracting can support the development of SMEs and improve their performance.