Tulus Tambunan Cluster SME

8/10/2019 Tulus Tambunan Cluster SME

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138 JOURNAL OF SMALL BUSINESS MANAGEMENT

Journal of Small Business Management 2005 43(2), pp. 138154

Promoting Small and Medium Enterprises witha Clustering Approach: A Policy Experience

from Indonesiaby Tulus Tambunan

Small and medium enterprises (SMEs)1 in Indonesia are very important foremployment creation and are important sources of economic growth and foreign

currencies. It is therefore not a surprise that SMEs receive ample attention in Indone-sia. In recent years, particular attention has been paid to development of SME clus-ters. The main aim of this paper is to review government policies on SMEs with aclustering approach, in Indonesia. The paper argues that in many cases, the devel-opment policy has not been so successful. In essence, most failures can be attributedto the fact that one or more critical factors for successful SME cluster developmentwere either not existing or not addressed correctly. Neglecting cluster linkage tomarkets is one main reason for the failure. Prerequisite for successful cluster devel-opment is the clusters potential to access growing markets, either domestic or abroad.

Dr.Tambunan is lecturer in the Faculty of Economics at the University of Trisakti in Jakarta,Indonesia. He is also head of the Center for Small and Medium Enterprises and Industrial Eco-

nomic Studies at the University of Trisakti. His research focuses on small and medium enter-

prises, industrial development, poverty, and international trade.1In Indonesia, enterprises with 1 to 4 workers (not including the owner) are classified as micro

enterprises; 5 to 19 workers as small enterprises; 20 to 50 as medium enterprises; and morethan 50 workers as large enterprises.

IntroductionIndonesia values small and medium

enterprises (SMEs) for several reasons,such as their potential to create employ-ment and to generate foreign currenciesthrough export, and their potential to

grow into larger enterprises (LEs). Theseenterprises are also important as domes-tic producers of cheap import substitu-tion consumer goods especially forlow-income groups, and as supporting

industries producing components, tools,and spare parts for LEs. Moreover, whenthe Asian economic crisis hit the countryin 1997, SMEs were found to have been

weathering the crisis better than LEs,because their greater flexibility allowed

them to adjust production processesduring the crisis, although many hadbeen hit hard too. Many argue that beingless reliant on formal markets and formalcredit, SME are able to respond more


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quickly and flexibly than LEs to suddenshocks (Berry et al. 2001).

It is therefore not a surprise that SMEsreceive ample attention in Indonesia. Inrecent years, particular attention has

been paid to SME clusters that are fre-quently defined as agglomeration of

small and medium firms operating in thesame subsector in the same location.

The main aim of this paper is to reviewgovernment policies on SME develop-ment with a clustering approach, inIndonesia. This paper deals with twomain questions. First, what are the criticalsuccess factors of development of SMEclusters? Second, to what extent havethese policies contributed to the dynam-

ics of SME clusters in the country? For thispurpose, the framework of this paper isdeveloped as follows. Section II discussesthe basic concept of industry cluster. Thethird section explains main anticipated

benefits of a cluster. The fourth sectionreviews briefly the development of SMEclusters in Indonesia. The fifth sectionexplains the importance of cluster-oriented SME development policies. Thesixth section reviews briefly SME develop-ment policies with a clustering approachin Indonesia. Discussion in this sectionproceeds to the seventh section, whichidentifies main factors behind successstories and failures of such policies inIndonesia. Finally, a short summary of themain contribution of this study is given.

Basic Concept ofIndustry Cluster

Clustering is a common economicphenomenon. The United Nation Indus-trial Development Organization (UNIDO)defines a cluster as a local agglomerationof enterprises producing and selling arange of related or complementary prod-ucts within a particular industrial sectoror subsector (Richard 1996). One

example is a localized knitwear andgarment industry that includes within asmall geographical region knitting firms,cloth-finishing, dyeing, and printing

enterprises, garment producers, mer-chant buyers and exporters, and alsoproducers of specialized inputs such asthread, buttons, zips, and even possiblychemical treatment as well. However,there are also many clusters less special-ized and developed than this, for

example a local agglomeration of smallmetal working enterprises producing arange of metal products and repair serv-ices for broadly the same markets, andhaving only competitive relations witheach other (Tambunan 1997).

In its traditional form, clustering refersto the process in which geographicallyproximate producers, suppliers, buyers,and other actors develop and intensify

collaboration with mutually beneficialeffects. However, in its most advancedform, according to a widely accepteddefinition proposed by Porter (2000),a cluster is a geographically proximategroup of interconnected enterprises andassociated institutions in a particularfield, linked by commonality and com-plementarity. Under this definition, acluster may include suppliers of inputs,or extend downstream to regular buyersor exporters. It also includes governmentinstitutions, business associations,providers of business services, and agen-cies that support clustered enterprises insuch fields as product development, pro-duction process improvement, technol-ogy, marketing information (for example,on new market and designs), vocational

training, and so on.Anticipated Benefits ofa Cluster

In the era of world trade liberalizationand economic globalization, greatdemands are made on the ability of SMEsto improve their efficiency and produc-tivity and to adapt to and be flexible asregards market, product, technology,

management, and organization. As theera generates larger market opportuni-ties, individual SMEs are often unable tocapture these opportunities that require

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products with better quality and pricesand good services after sale, larger pro-duction quantities, products homo-geneous standards and regular supply.Many enterprises experience difficultiesachieving economies of scale, and theyalso constitute a significant obstacle to

internalizing functions such as training,market intelligence, logistics, and tech-nology innovation and can also preventthe achievement of a specialized andeffective interfirm division of labor, all of

which are at the very core of firmdynamism (ADB 2001).

Experiences in many European coun-tries show that clusters can be a power-ful means for overcoming the above

constraints and succeeding in an evermore competitive market environment.

Through clustering, individual enter-prises can address their current problemsrelated to their size, production process,marketing, procurement of inputs, risksassociated with demand fluctuations,and market information and can improvetheir competitive position. Through acooperation of enterprises in a cluster,they may take advantage of externaleconomies: presence of suppliers of rawmaterials, components, machinery andparts; presence of workers with sector-specific skills; and presence of work-shops that make or service the machineryand production tools. A cluster will alsoattract many traders to buy the productsand sell them to distant markets. Also,

with clustering of enterprises, it becomeseasier for government, LEs, universities,and other development supporting agen-cies to provide services. The services andfacilities would be very costly for theproviders if given to individual enter-prises in dispersed locations (Tambunan2000; Humprey and Schmitz 1995).2

Internal and External NetworksClustering creates external economies

and joint actions and increase scope. Ineffect, individual enterprises in a clustercan gain collective efficiency. Close prox-imity facilitates the establishment byenterprises in the locality of industrial

links without substantial transactioncosts or difficulties. However, these eco-nomic advantages can only be achievedif the cluster has well-developed internaland external networks. Internal networkscan be defined as business cooperationsor links among enterprises inside thecluster, which can be in various forms,for example marketing, distribution, pro-duction, procurement of materials, and

training for workers. External networksare business and other forms of relation

between enterprises inside the clusterand actors outside the cluster such asLEs, suppliers of inputs, providers of

business services, and son on (Ceglie andDini 1999) (Figure 1).

Horizontal and Vertical InterfirmCooperations

Further, internal networks or interfirmcooperations can be divided into hori-zontal and vertical cooperations. The firsttype is cooperation among SMEs occu-pying the same position in the valuechain. Through such cooperation, enter-prises can collectively achieve scaleeconomies beyond the reach of individ-ual enterprises and can obtain bulk-

purchased inputs, achieve optimal scalein the use of machinery, and pooltogether their production capacities tosatisfy large-scale orders. It also give riseto a collective learning process, whereideas are exchanged and developed andknowledge shared among individualenterprises in a collective attempt to


2Other articles on the success stories of SME clusters in West Europe include Goodmanand Bamford (1989); Piore and Sabel (1983, 1984); Pyke and Sengenberger (1992, 1991); Pyke,

Becattini, and Sengenberg (1990); Rabellotti (1995a, b, 1993); Schmitz and Musyck (1994);and Sengenberger, Loveman, and Piore (1990).


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Figure 1An Illustration of Internal Networks Inside and External

Networks of a Cluster

External networks

Cluster

Firm A Firm B

Internal networks

Large enterprises

Banks & other

financialinstitutions

Suppliers of

inputs

Providers of

business services

University

Training/ R&D

institutions

Central and local

government

Other

supporting

institutions

improve product quality, upgrade tech-nology, and move to more profitablemarket segments. The second type iscooperation among SMEs along the valuechain. With this, an enterprise can spe-cialize in its core business and subcon-tracts other related works to otherenterprises in the cluster (A in Figure 2).However, in many cases, it has beenfound that many individual enterprises

have vertical cooperations with LEsoutside the cluster through subcontract-ing systems (B in Figure 2). Thus, inmany cases, the vertical cooperationconsists of both internal and externalnetworks.

SME Clustersin Indonesia

After discussing the anticipated bene-

fits of a cluster in Section III, the authorwill now review the development of SMEclusters in Indonesia. The main aim ofthis section is to answer the following

questions: do all existing clusters dowell? If not, why do some clustersperform well, while others do not orstagnate? What are the main characteris-tics of a bad-performing or stagnatedclusters? The review of the performanceof SME clusters in Indonesia is based onselected important studies that are avail-able so far.

SME clusters can be found in all

provinces, and most of them are locatedin rural areas. The clusters were estab-lished naturally as traditional activities oflocal communities whose production ofspecific products have long been pro-ceeding. Based on comparative advan-tages of the products they make, at least

with respect to the abundance of localraw materials and workers who havespecial skills in making such products,

many of these clusters have a largepotential to grow. Take for example theclusters of batik producers that have long

been existence in various districts in Java


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(for example, Yogyakarta, Pekalongan,Cirebon, Surakarta, and Tasikmalaya).

Various studies show the importanceof clustering not only for the develop-ment of SMEs in the clusters, but also for

the development of villages/towns inIndonesia. Smyth (1992, 1990) describedhow clustering of rattan furniture pro-ducers has absorbed an entire village in

Tegal Wangi, West Java, and creatednumerous satellite small-scale industrialactivities in neighboring hamlets. Schillerand Martin-Schiller (1997) also providedthe same evidence from wood furnitureproducers in Jepara in Central Java. The

growth of this cluster in the 1980s hadtransformed the town into a thrivingcommercial center with a five-mileavenue of furniture showrooms and fac-tories, modern hotels, new commercial

banks, supermarkets, telephone and faxstalls, and European restaurants.3

The above evidence may suggest thatclustering is indeed important for thedevelopment of SMEs as well as theregion. However, some remarks should

be made. Sato (2000), for example, saw

little evidence of positive effects of clus-tering, as she found no interfirm spe-cialization of work processes and no

joint actions (which are important ingre-dient for a cluster to grow) among theenterprise inside the clusters studied. Itis also hard to find SMEs in clusters inIndonesia that have production linkagesthrough subcontracting systems with LEs(Supratikno 2002b). Data from Central

Bureau of Statistics in 2001 show thatmore than 90 percent of SMEs in Indone-sia do not have such linkages with LEs.

As shown in Table 1, according totheir level of development, clusters inIndonesia can be classified into fourtypes, each with its own characteristics


Figure 2An Illustration of Vertical Interfirm Cooperations

or Large enterprises:

finalizing and marketing

A B

Firms A: making semi-

finished product

Firm B: finalizing

Firm C: packing and

marketing

Firm: making

semi-finishedproduct or certain

components

3More empirical studies shown in Soemardjan (1992); Klapwijk (1997); Weijland (1999,

1994); Sandee (1996, 1995, 1994); Sandee and Weijland (1989); Sandee et al. (1994); VanDierman (1997); Tambunan (2000, 1998a, 1998b, 1994); Tambunan and Keddie (1998);

Glasmeier (1990); van Velzen (1990a, b, c); Sadhyadharma et al. (1988); Supratikno (2002a);Knorringa (1998); and Knorringa and Weijland (1993).


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(Sandee and ter Wingel 2002). The firsttype of cluster dominated clusters inIndonesia, indicating that the process ofclustering in the country is still at aninfant stage. Altenburg and Mayer-Stamer(1999) refer to such clusters as survivalclusters of micro enterprises. The secondtype developed rapidly in terms of skill

improvement, technological upgrading,and successful penetration of domesticand export markets. Typical examplesare such as roof tiles clusters, metal

casting clusters, shuttle-cock clusters,shoe clusters, and brass-handicraft clus-ters. In these clusters, some enterprisesstart to influence the development tra-

jectory of the clusters, and some enter-prises produce for export throughmiddlemen or traders or trading housesfrom outside the clusters. Examples of

the third type are textile weaving clustersin Majalaya and Pekalongan, furnitureclusters in Jepara, wig and hair acces-sories clusters in Purbalingga, and hand-

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Table 1Different Types of Cluster in Indonesia

Type Characteristics

1. Artisinal Mainly micro enterprises; low productivity and wage; stagnated

(no market expansion, increased investment and production,improved production methods, and management, organizationand production development; local market (low-incomeconsumers) oriented; used primitive or obsolete tools andequipment; many producers are illiterate and passive inmarketing (producers have no idea about their market); therole of middlemen/traders is dominant (producers are fullydependent on middlemen or trader for marketing); low degreeof interfirm co-operation and specialization (no vertical co-operations among enterprises); no external networks with

supporting organizations.2. Active Used higher skilled workers and better technology; supplied

national and export markets; active in marketing; the degree ofinternal as well as external networks is high.

3. Dynamic Trade networks overseas are extensive; internal heterogeneitywithin clusters in terms of size, technology, and served marketis more pronounced; leading/pioneering firms played a decisiverole.

4. Advanced The degree of interfirm specialization and cooperation is high;business networks between enterprises with suppliers of raw

materials, components, equipment and other inputs, providersof business services, traders, distributors, and banks are welldeveloped; cooperation with local, regional, or even nationalgovernment, as well as with specialized training and researchinstitutions such as universities is good; many firms are export-oriented (mainly through trading houses or exportingcompanies).


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icraft clusters in Kasongan. One of themost striking features of this type may bethe decisive role of leading/pioneeringfirms, usually larger and faster growingfirms, to manage a large and differenti-ated set of relationships with firms and

institutions within and outside clusters.Some leading firms have utilized cutting-edge technologies in production. Exam-ples are clove cigarette clusters in Kudus,tea-processing clusters in Slawi, andtourism clusters in Bali. In the case ofclove cigarette clusters in Kudus, theirproducts are able to outperform productsfrom Philip Morris and BAT. Similarly,tea-processing cluster in Slawi, led by a

big company named Sostro, has grownto become the market leader in theIndonesian soft drink market, leavinggiant Coca Cola behind (Supratikno

2002a). Some other leading firms inactive and dynamic clusters are pre-sented in Table 2.

Interestingly, in some cases, such as infurniture clusters in Jepara and handi-craft clusters in Kasongan, there are con-

siderable direct investments made byforeign immigrants4 (Supratikno 2002a).

Clusters of the fourth type are moredeveloped and become more complex instructure than those in the third type.Schmitz and Nadvi (1999) provide someexamples of advanced export-orientedclusters in developing countries includ-ing shoe manufacturing in Brazil, India,and Mexico; surgical instruments in

Pakistan; garments in Peru; and furniturein Indonesia (Jepara).5

Moreover, advanced clusters oftenoverlap and interlink with other clusters


Table 2Leading Firms in Some Active and Dynamic Clusters

Cluster Location Leading Firms

1. Wig and Hair Accessories Purbalingga (Central Java) PTa Royal Korindah,

PT Indo Kores2. Handicrafts Kasongan and Sleman PT Out of Asia

(Yogyakarta)3. Textile Weaving Pekalongan (Central Java) PT Pismatex4. Furniture Jepara (Central Java) Duta Jepara, Grista

Mulya, Satin Abadi5. Brass Handicrafts Juwana (Central Java) Krisna, Samarinda6. Roof Tile Kebumen (Central Java) Mas Sokka

a

A limited corporation.Source: Supratikno 2002a.

4Foreign immigrants who established production facilities have contributed significantly to the

clusters dynamics. They are clearly in advantageous position vis--vis local producers in theclusters, as these foreign immigrants have better accesses to market, technology, and financ-

ing sources (Supratikno 2002a).

5See also earlier studies/papers by Schmitz (1995a, 1995b, 1992, 1990, 1982). Other stories oncluster development in less developed countries are given in Ceglie and Dini (1999); Van Dijk

(1995); Van Dijk and Rabellotti (1997); Swaminathan and Jeyaranjan (1994); Nadvi (1995);Nadvi and Schmitz (1994); and Pedersen, Sverrisson, and van Dijk (1994).


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in the same region. Such cluster agglom-erations, or often-called industrial dis-tricts (the Italian term), form the mostcomplex form of clustering, where dif-ferent sectors or subsectors mutuallydepend on and benefit from each other.Prominent examples of cluster agglom-

erations include north-central Italy(tourism, food industry, fashion industry,furniture industry, machinery industry),southern Germany (vehicle, electronics,machinery, and software industries) andGreater London (banking, insurance,software, publishing, film and music,tourism, fashion industry, advertising,

business services). In Indonesia, oneexample of a cluster agglomeration is the

YogyakartaSolo area with its tourism,furniture and interior decoration, metalprocessing, leather goods, and textile/clothing clusters, which all mutually

benefit each other.

The Importance ofCluster-Oriented SMEDevelopment Policies

From a public policy perspective, SMEdevelopment policies with a clusteringapproach is important because it is moreeffective and more efficient for govern-ment to provide technical and manage-ment supports, training, and generalfacilities, such as large machinery for rawmaterial drying and processing into half-finished goods, to a group of firms

located in one place than to individualfirms in dispersed locations. It is alsoeasier for local universities/research anddevelopment institutions to provide tech-nical or training supports, local banks toprovide loans, and LEs to conduct sub-contracting networks with firms locatedin one cluster. The participation of theseinstitutions in promoting SMEs is cer-tainly very helpful for the government in

implementing its SME cluster develop-ment policies. The government canencourage their participation by givingthem fiscal or other forms of incentive.

Such institutions do not generallyoperate on pure free-market competi-tive principles. Nevertheless, they have

been found in many countries to activelyparticipate in and contribute to marketand product development among theSMEs, as well as in training, technical

development, and financing. It is nor-mally found that some (not necessarilyall) of such institutions were strong indynamic clusters, and they contributedsignificantly to the clusters growth anddevelopment.

So, with the support of these institu-tions, and given the potential collective

benefits of a cluster (see section on ben-efits of a cluster), the chance for success

of SME development policies with a clus-tering approach is higher than policiestargeting individual firms in dispersedareas.

An illustration of government policiesfor SME cluster development is presentedin Figure 3. Based on Porters (1998,2000) thesis on local clusters in a globaleconomy, the development of a clusterdepends on four main factors: (1) contextfor firm strategy and rivalry inside thecluster; (2) demand conditions; (3)related and supporting industries; and(4) factor conditions. So, SME develop-ment policies with a clustering approachconsist of direct policies toward cluster(for example, provision of technicaldevelopment and management training,and general facilities such as large

machinery for raw material drying andprocessing into half-finished goods), andindirect policies through supportingthese four factors.

With respect to the first factor, thegovernment should eliminate barriersto local competition, attract investment(both foreign and domestic) in andaround the supported cluster, promoteexport of the clusters products, and

organize relevant local governmentbodies around the cluster.With respect tothe second factor, the government shouldcreate streamlined, pro-innovation regu-

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latory standards affecting the cluster to(1) reduce regulatory uncertainty; (2)stimulate early adoption; and (3) encour-age innovation in product as well as pro-duction process. In addition to improvingdemand conditions for the clusters prod-ucts, the government should also sponsorindependent testing, product certifica-tion, and rating services. Also, the gov-ernment should act as a sophisticated

buyer of the clusters products. In sup-porting SME clusters through developing

related and supporting industries, thegovernment should sponsor forums tobring together cluster participants, createa business friendly environment to attractsuppliers and service providers fromother locations, and establish cluster-oriented free-trade zones, industrialparks, or supplier parks.

Finally, SME cluster development poli-cies through improving factor condition

should include efforts to create special-ized education and training programs;establish local university research effortsin the cluster-related technologies,

support cluster-specific information gath-ering and compilation; and improve spe-cialized transportation, communications,and other infrastructure required by thecluster.

So, it is obvious that this approach isalso very important from a regional eco-nomic development policy perspective.

As illustrated in Figure 3, development ofclusters in a region supported by policies

with a clustering approach will alsopromote development of related and

supporting industries, industrial or sup-pliers parks, business developmentservices, training facilities, local researchand development activities, financialinstitutions, infrastructure, and free-trade zones in that region. It will alsoattract investment in that region fromabroad or from other regions within thecountry. The development of clusters canalso be an effective way of promoting

rural economic development, as well-performing SME clusters will generatetrickle down effects on other local eco-nomic activities, through their direct as


Figure 3An Illustration of Government Policies for

Cluster Development

Regional Economic Development

Development of

SME clusters

Context for

firm strategy

and rivalry

Demand

conditions

Related &

supporting

industries

Factor (input)

conditions

Government policies


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well as indirect production and incomelinkages (see some evidence discussed inSection IV).

SME ClusterDevelopment Policies

in IndonesiaGovernment efforts to develop SMEclusters in Indonesia can be traced backto the late 1970s with the introduction ofa national program called BIPIK by theMinistry of Industry. This program basi-cally focused on promoting selected clus-ters showing some dynamism or havinggood market potentials. Main tools com-prised training, donation of equipment to

selected producers that had participatedin training programs, provision of aspecial credit scheme to support acqui-sition of new machinery by clusteredenterprises, and, most importantly, thesetting up of common services facilities,

which include technical service units(UPTs). Each UPT provides machineryand equipment that can be used by allenterprises in the supported clusters(Sandee and van Hulsen 2000).

Before the 1997 crisis, there weremany complementary activities (underother government programs) to theBIPIK program. They included subsi-dized visits of producers to trade fairs,programs for linking universities andresearch/service centers to SMEs, andprograms for developing subcontracting

linkages between LEs and SMEs. Thegovernment had also created a partner-ship system under the so-called Foster-Parent Scheme between SMEs andstate-owned enterprises such as the stateelectricity company (PLN) and the stateoil company (Pertamina).

Also, the government had made con-siderable investment into transport andcommunication infrastructure and facili-ties such as small industrial estates and

business incubators in a number of keyclusters (ADB 2001).

Up to the mid-1990s (before the

crisis), the number of SME clusters inindustries that had received support fromthe government totaled 9,022 clusters(Table 3). However, not all of these clus-ters have shown good performance,despite government support. Many of theclusters in certain industries andprovinces had stagnated during the crisisperiod (19981999). To a certain extent,this different performance was related to

different internal conditions (forexample, the availability of technology,capital, skills, and raw materials) as wellas external conditions (for example,market opportunities and governmenteconomic policies) faced by clusters indifferent industries and provinces. Insome industries, output markets have

been distorted by monopolistic or othercartel practices by big companies or bygovernment policies such as export taxor regulations on import of raw materi-als in favor of big enterprises or foreigndirect investment firms.6

Recently, policy interest in SME clus-ters in Indonesia has grown consider-ably. Both the Ministry of Industry and

Trade and the State Ministry for Cooper-atives and Small Enterprise Development

have strengthened their programs for thedevelopment of clusters. Internationalagencies, such as the Asian Develop-ment Bank (ADB), Japan InternationalDevelopment Agency (JICA), and theInternational Labour Organization, havepromoted SME cluster development in

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6It can also be expected that the performance of clusters where the medium enterprises are

dominant is better than that of clusters where the small or micro enterprises predominate. Itis because medium enterprises are in better position than their smaller counterparts in almost

all important respects, including having better access to technology, capital, skilled managerand workers, and information.


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the country. Both the ADB and JICA havecommissioned studies on best practices

in SME cluster development and sup-ported pilot projects aimed at formulat-ing effective policy support packages(Sandee, Isdijoso, and Sulandjari 2002).

Indonesian SuccessStories and Failures ofCluster DevelopmentPoliciesSome Success Stories

In view of the complexity of clusterdevelopment processes and the widerange of instruments applied, it is hardlypossible to determine policy contributionto successful cluster development inIndonesia. Nevertheless, public interven-tion is likely to have contributed to anumber of success stories such as thedevelopment of the wooden furniturecluster in Jepara (Central Java), which

is among the largest clusters in thecountry. A comprehensive develop-ment package, including for example,technical upgrading through the provi-sion of a common service facility, exporttraining, and investment into improve-ment of the regional infrastructure (con-tainer facilities, roads, telephone), helpedthe cluster to gradually develop exportmarkets. Similar effects were broughtforward by creating a small industrialestate combined with a common servicefacility for wood processing, a jointshowroom, and trade fair participationsupport in Sukoharjo, near Surabaya(East Java). The area is now a leadingexporter of wooden, rattan, and metalfurniture.

There are, however, other factors that

have significantly contributed to theaforementioned success stories: (1)strong local sector associations; (2) longexposure to foreign tastes broughtforward by international tourism; (3) aconsiderable medium-scale direct invest-ment by western immigrants married toIndonesians; and (4) a strong role oftrading houses in brokering and organ-izing exports. In particular, exports seem

to benefit from some trading houses tra-ditional connections to China, which isone of the worlds largest markets forfurniture.


Table 3Number of Government

Supported SME Clusters byProvinces in Indonesia,

1995

Province Total Unit

D.I. Aceh 192North Sumatera 636

West Sumatera 313Riau 180

Jambi 83Bengkulu 107South Sumatera 175

Lampung 108DKI Jakarta 127

West Java 921Central Java 970D.I. Yogyakarta 520East Java 1,204South Kalimantan 313

West Kalimantan 121Central Kalimantan 151East Kalimantan 215

Bali 677West Nusa Tenggara 275East Nusa Tenggara 238South Sulawesi 538North Sulawesi 253Southeast Sulawesi 83Central Sulawesi 172Maluku 257Irian Jaya 110East Timor 101

Indonesia 9,022

Source: BAPIK, Ministry of Industry,1995.


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Overall, the relevance of public inter-vention has to be seen in light of the factthat two large and successful clusters forleather goods and traditional handicraftsin the Yogyakarta area (Central Java)have developed virtually without publicintervention. The clusters initial driving

force was demand from internationaltourists visiting Yogyakarta. In the early1990s, trading houses started to purchasepart of the clusters production for saleto large retail chains in Jakarta and forexports, mainly to Southeast and East

Asia.

Some FailuresIn many cases, cluster development

policies in Indonesia have not been suc-cessful. In essence, most failures can beattributed to the fact that one or morecritical success factors for successfulcluster development were either notexisting or not addressed correctly.Neglecting existing and potential marketlinkages of clusters is one reason for thefailure. Prerequisite for successful clusterdevelopment is the clusters potential toaccess growing markets. However,

because of policymaking that is too cen-tralized and oriented on standardizedinstruments rather than on a diagnosis ofeach clusters specific potential and con-straints, the clusters existing and poten-tial market linkage was often neglectedin project design.

For example, in the mid-1990s a series

of smaller government programs fortechnical upgrading of a small-scalecoconut oil cluster were implementednear Polmas in South Sulawesi. However,the town was in deep economic crisis:the small local port was losing more andmore transit business to the larger portsof Pare Pare and Makassar. Almost exclu-sively oriented toward supplying localstreet stalls and restaurants, the cluster

faced a strong decrease in demand.Accordingly, it hardly reacted to the gov-ernments technical upgrading programs.Given the abundance of coconut in the

area, a search for a medium-scaleinvestor who would have opened uplinks to growing urban markets forexample, in Makassar, Banjarmasin, orSurabaya, and developed links to smallercluster enterprises would probably have

been a more appropriate strategy.

Neglecting or even eroding SMEspotential self-help organization is also areason for the failure. Strong and activeself-help organizations of cluster mem-

bers facilitate collective learning, andprocesses of strategic orientation canplay an important role in developing newmarkets and supply channels. Theyare indispensable for implementing ad-

vanced cluster development strategies

comprising collective branding, stan-dardization and distribution, collectiveinterest representation against monop-sonistic client structure, or enforcementof quality standards on input suppliers.

A specific case in point are thecommon service facilities (CSFs). Wheninstalled, the facilities provided a focalpoint for cluster members and stimulatedcooperative spirit and learning. However,instead of gradually involving self-helporganizations/co-operatives and compa-nies in the management and financing ofthe CSFs as a means to strengthen intra-cluster linkages, and also to build own-ership, the facilities remained undergovernment management and budget. Asmost CSFs charged only small fees, if any,and budget constraints led to drastic

declines in government funding, equip-ment became outdated fairly rapidly andservice levels could not be maintained.Over time, many, if not most, CSFs havelost their relevance as service providersand are now in a desolate physical andfinancial state.

Limited support from local govern-ment or private organizations is anotherreason for the failure. Most local gov-

ernments seem to be aware of specificconstraints of clusters in their areas thatare often related to insufficient transport,telecommunication, or electricity infra-

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structure. Anecdotic evidence suggeststhat local officials were prepared to flex-ibly extend support whenever possible,for example, by assisting producers infinding an appropriate location for salesstaff on an interregional road, or byproviding enterprises without terrestrial

telephone connection with a hand phoneon personal credit. However, lack of

budget autonomy severely restricts localgovernments abilities for appropriateand hands-on support in, for example,repairing defects in a trunk road con-necting producers to the main road.Unfortunately, decentralization has so farstopped at the district level and has notsignificantly enhanced autonomy and

action potential of those territorial unitsthat are closest to smaller clusters,namely the Kecamatan (district) and/orthe desa (village).

With respect to limited support fromprivate organizations, it has been foundthat not all private organizations areinterested in establishing business net-

works with clusters, especially those pro-ducing only for local or supplyingstagnated markets (artisinal type ofclusters). Another reason is simply thatthe clusters are located in isolated rural/

backward regions that are far away frompotential supporting private agenciessuch as banks and training institutes oruniversities.

Summary of Main

Contributions ofthe Study

This study has three main contribu-tions. First, the study has found that,according to their level of development,there are three types of clusters inIndonesia. The first one is called artisi-nal cluster, which dominated clusters inIndonesia, indicating that the process of

clustering in the country is still at aninfant stage. This type of cluster displaysmany characteristics of the informalsector, with level of productivity and

wages being much lower than those ofclusters dominated by SMEs. The secondtype is called active clusters, whichhave developed rapidly in terms of skillsimprovement, technological upgrading,and successful penetration of domesticand export markets. The third type is

modern or advanced cluster in whichmany active clusters are more developedand become more complex in structure.

Second, the study has demonstratedthat SME development policies with aclustering approach are important froma public policy perspective. This strategymakes it more effective and more effi-cient for government to provide techni-cal assistance and general facilities to a

group of firms in one place than to indi-vidual firms in dispersed locations. Also,from a regional economic developmentpolicy perspective, this approach isimportant, as development of a cluster ina region will also promote developmentof other local sectors in that region, andhence economic growth of the region.

Third, the study has found that inmany cases, cluster development policiesin Indonesia have not been successful. Inessence, most failures can be attributedto (1) neglecting cluster linkage tomarkets; (2) neglecting or even erodingSMEs self-organization potential; and (3)limited support from local governmentand private organizations.

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Documents

Tulus Tambunan Cluster SME