Hometown Investment Trust Fund Implementation Approach in Indonesia

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Beside the issue with access to finance, Indonesia’s SMEs also face the other major constraint, which is lack of innovation and business knowledge. Therefore, it will be desirable to develop a Hometown Investment Trust Fund (HIT) implementation approach that can also overcome this problem. There are two implementation models that will be discussed; the first one is to incorporate universities as the business operator of the HIT and the second is to utilize the role of cooperative for developing HIT to reach the SMEs in rural area.

Incorporating Universities as The Business Operator of HIT

The basic argument about this approach is the universities will provide knowledge and guideline through their business incubation center to the SMEs. Business knowledge is crucial because it will determine the successful execution and the growth of their business. By acquiring an adequate level of knowledge, SMEs can obtain a strategic advantage to enhance their business productivity, understand the market, differentiate their products, and expand their market base. Without this strategic advantage, the potential investors will not eager to invest in the SMEs because they are unsure that the SMEs can survive in the market even after receiving their investment.

The initiative to enhance the growth of SMEs has become one of the universities’ focuses toward becoming entrepreneurial university. One of the common strategy to achieve that is through developing business incubation center to assist SMEs for developing their business, and up until now there are 82 major universities in Indonesia that have a center for SMEs development or business incubation center.

The framework of this model starts with the investor’s access to the list of SMEs project database in the website (see figure 1). In this website the investor can check all of the information about the SMEs and their projects, such as the company profile, detail of the project and potential yield of the project. The website also acts as the investment platform where the investors can invest their money directly through the website to the projects that suit their interest, just like in a crowd funding online platform (e.g. kickstarter.com). In this model, the main sales channel for HIT will be through the website, however there will be further sales channel development through bank, post office and cooperative.

The universities play a big role in this model, because they will be the business operator of the HIT. The main activities of the universities in this model are building an online investment platform for the HIT, promoting HIT to the potential investors, valuating the SMEs project to minimize the risk as well as to foresee the potential of each SMEs’ projects, providing development package (knowledge, guidance and consultancy) to the SMEs, and do the monitoring and auditing of the SMEs.

Figure 1. Universities – HIT Framework Diagram

There will be some advantages by implementing HIT through the universities’ business incubation, such as:

1. The universities have a lot of experts (e.g. professors and researchers) that are capable of developing and also guiding the SMEs to grow their business. These experts from the universities will become the SMEs’ mentor and consultant, and it will be a great benefit for the SMEs
2. Many potential students that can become consultants for the SMEs (either under a pro-bono scheme project consultant or as an intern).
3. This model also allows the students to learn directly from the SMEs key players, so that they will be motivated to become entrepreneur, hence it can increase the growth of SMEs in Indonesia.
4. Gaining better trust from the investor, since the universities have already gained credibility through public exposure as well as because of the experts inside the universities.

Rural Development Strategy Through the Integration of HIT and Cooperative

Cooperative has played an important role to the development of rural areas in Indonesia. There is a government organization that manages all of the cooperatives in Indonesia and it is called Induk KUD. Induk KUD is the national federation of rural co-operatives in Indonesia, and it was founded on 12 November 1979.

Induk KUD mission is to help the co-operative movement expand joint business relationships, ensure creation and implementation of a business climate that supports co-operative survival and development, education and training, develops co-operative business, and improves the welfare of its members and as a result the community. Induk KUD currently has members in 27 provinces with three overseas representative offices. In 2010, Induk KUD consisted of 30 member societies with 9,437 co-operative members that represented 13.4 individual members.

The cooperative has a savings and loan business unit for members of staff, their members (individual and SMEs), and potential members. They also procure and distribute goods such as raw materials and production facilities to increase production for members and staff. The organization also assists in helping members market and open up markets in domestic and foreign countries in the various sectors that their members are in – agriculture, fisheries, livestock, plantation, mining, forest and crafts.

The basic argument for this approach is because the cooperative has a business model that is relatively similar with a business incubator. From the explanation above, it is clearly stated that the cooperative supports the development of its SMEs member and provide them with necessary access to low interest loan. However the cooperative’s source of funds is limited to the internal contribution of its members, which is one of the reasons for the integration of HIT to expand its external source of fund (public investors).

In this approach, the investors can invest directly to the SMEs and their projects either through the online investment platform (just like in the university approach) or by going directly to the cooperative or over the counter (see figure 2). Over the counter selling channel will be important for the cooperatives that are located and have portfolios of SMEs’ projects in rural area, since internet access will be quite difficult in this area.

While for the development of the SMEs and also monitoring and auditing, it can be done directly by the cooperative or by partnership with the university. Partnership with a university will be quite useful when the cooperative has fewer experts to develop the SMEs, so in order to fulfill the gap the cooperative can collaborate with the university to get the necessary resources.

Figure 2. Universities – HIT Framework Diagram

The advantages of implementing HIT through cooperative are:

1. The vast network of cooperative in both urban and rural areas can create a wider positive effect of HIT implementation.
2. HIT model can be easier to be implemented within cooperative than universities, since cooperative has a quite similar business model with HIT.
3. The cooperation with universities can allow the cooperative to acquire the necessary expertise to develop SMEs and executing a more effective fundraising method.
4. Better support from the government through the Ministry of Cooperatives and SMEs.

Suryo Ariyanto Nugroho

Further Reading: 

Yoshino, N., & Kaji, S. (2013). Hometown Investment Trust Funds: A Stable Way to Supply Risk Capital (Vol. 1). Tokyo, Japan: Springer.

 

Hometown Investment Trust Fund: An Alternative Source of Finance for The SME

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Hometown Investment Trust Fund (HIT) is a small investment that focuses on regional development. The uniqueness of HIT is its model, which aims to develop an innovative financial intermediary channel outside of the indirect funding and market sectors in one country’s financial system. HIT creates a new flow of funds that can accommodate riskier business like SMEs and it also focus on enhancing the financial system to support SMEs as a form to promote real economy development.

The framework of HIT starts with its new capital supply channel where a business operator acts as an asset management company to manage the funds that have been generated from the investors (see figure 1). This business operator’s roles are to valuate the SMEs that will be invested using the funds, channeling the investment to the chosen SMEs and monitoring the SMEs by doing a business audit.

The investors of HIT can invest directly to the project that will be executed by the SMEs through the website (like the model of Crowd funding) that has been developed by the business operator or through the other HIT sales channels, such as banks, cooperative, post office, etc. (see figure 1). This concept of using the website as an investment platform can allow the investors to choose the projects that they are interested in, while also reducing the transaction cost of direct investment to the project. By implementing this direct investment model to the SMEs from household financial assets, HIT can provide other source of funds to the SMEs with better risk tolerance comparing to the banks that bound to the Basel capital requirement.

HIT uses the approach of silent partnership in order to ensure the management independence of the SMEs to run their business (see figure 1). Silent partnership allows people to invest directly to individual projects, however they will not be allowed to participate in the management of SMEs and/or the SMEs project. This approach is different from the traditional investment in the partnerships and common stock where the investors in a publicly traded company are involved in the shareholder meeting to decide the direction of the company.

Figure 1. HIT Framework Diagram

Hometown Investment Trust Fund has three major advantages. First, it can reduce the information asymmetry, because the investors have direct access to the SMEs’ projects in which they will invest their money to. Second, HIT is a stable source of risk capital, since it is a project-driven fund where the investors decide to invest in the SMEs and their projects that they are familiar with (e.g. the investors can choose to invest to the SMEs that are located in the same region / hometown as they are), thus the investors can trust the SMEs and do a voluntary monitoring whenever they want. Third, HIT can connect households (both investor and consumers) to the SMEs so that they can grow and provide more job opportunities as well as regional development, which can contribute to the economic development of Indonesia.

Suryo Ariyanto Nugroho

Further Reading: 

Yoshino, N., & Kaji, S. (2013). Hometown Investment Trust Funds: A Stable Way to Supply Risk Capital (Vol. 1). Tokyo, Japan: Springer.

Is Kredit Usaha Rakyat (KUR) Really Sufficient to Nurture The SME’s Growth in Indonesia?

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Basic Concept of KUR

Kredit Usaha Rakyat (KUR) or Credit for the people is one of the most notable initiatives from the government of Indonesia to encourage financial inclusion to SMEs in Indonesia.  SMEs in Indonesia are facing some constraints in order to access financing from the banks, which are related to strict requirement of collateral and also high lending rate from the banks. Therefore, the government Indonesia has developed KUR that tackle the issues of insufficient collateral from the SMEs to the bank as well as to provide the SMEs with a reasonable lending rate.

Within this program’s framework, the Ministry of Finance provides insurance for 70% of the loans that are given to the SMEs, while the banks bear 30% of the risk . Under this scheme, there are six national banks and also 26 regional banks that have already joined in order to provide loans to the SMEs.

While in terms of interest rate, because the government guarantee 70% of the loans’ risk, hence the banks become more risk-tolerance and can provide interest rate at the level of 13% for the retail businesses and 22% for the micro-enterprises. This interest rate is considered low, comparing with the interest rate from the informal financial sources. Beside that, in order to manage the risk and potential issue of the government regarding this loan to SMEs, the government of Indonesia has already set a ceiling of 20 million Rupiah that can be borrowed by the micro-enterprises.

Framework of Credit Usaha Rakyat (KUR)

 

Impact of KUR and Its Limitation

KUR program has created a positive impact to the SMEs by supported them with the source of finance that can be accessed easily. In 2012, approximately 29 Billion Rupiah ($3,1 million) had been circulated to 1.909.914 SMEs by the banks as part of the KUR loan program. And stimulated by the success in 2012, the government increased the amount of funds that were distributed to the SMEs through the KUR program, which was estimated as 37 Trillion Rupiah ($2,9 Billion) in 2013 . In 2014, the six national banks that are partaking in the KUR program had provided 11.309.283 SMEs with the funds of 146,33 Trillion Rupiah.

Beside that an analysis has been done to assess whether the government initiative through KUR has created a positive impact to SMEs. This analysis has been established following the credit supply function of the disequilibrium model and also based on the regression model that has been developed for an empirical investigation on credit crunch in Indonesia.

In this model, the loans / credit supply function is defined by the banks lending capacity and the factors that affect the eagerness of the banks to supply the loan, such as: lending rates, real output (GDP), and the non-performing loan (NPL) of the SMEs. Hence, the loan / credit supply function can be described as follows:

CS = β0 + β1 len_capacity + β2 r + β3 y + β4 sme_npl + U

Where:

• len_capacity: The lending capacity, which can be described as: total liabilities minus capital of the bank minus required reserve minus cash in vault.
• r: lending rates.
• y: Real output, which is measured by the real value of GDP.
• sme_npl: The non-performing loans of the SMEs.
• U: Residual

The data that will be used for this regression analysis are the data from 2005 until 2013. From the regression analysis that had been done, the result is the credit supply for SMEs increases when the lending capacity, lending rates, production output (real GDP) increase as well (see table 1). Beside that, the credit supply also increases even when the SMEs’ NPL increases, which indicate that the banks are more risk-tolerance to SMEs’ risky loan because of the government’s support through KUR program (see table 1). Hence, the result shows that Kredit Usaha Rakyat (KUR) has a positive impact towards credit supply, since the bank are willing to give credits to SMEs (even though they are riskier than large enterprises) under this program.

Table 1. KUR’s Impact to The Credit Supply (2005 – 2013)

However there is a big hesitation towards KUR program, whether it will be sustainable even during a crisis or not. In order to analyze its sustainability, the same regression model will be used, however this time the analysis will be divided into two. The first one is the analysis before the global financial crisis (GFC) that will use the 2005 – 2007 data. The second one is the analysis after the GFC, which will use the 2008 – 2013 data.

Based on the analysis before the GFC, it can be seen that KUR program still has a positive impact towards the credit supply, when the number of NPL increases, the credit supply also increases (see the left side of table 2). However after the GFC, suddenly the banks are less tolerance to risk, which is indicated by the decrease in credit supply whenever the SMEs’ NPL increases (see the right side of table 2).

Table 2. KUR’s Sustainability Towards Credit Supply

After the analysis that has been done both on the impact and also the sustainability of Kredit Usaha Rakyat (KUR), the result is Kredit Usaha Rakyat indeed has a positive impact towards the credit supply for SMEs, however the analysis also shows that the KUR program is more risk-sensitive after the global financial crisis, since this KUR loan program is distributed through banks, which are sensitive against financial crisis. Beside that, the incoming implementation of Basel III capital requirement in 2019 makes the banks becoming more risk-averse by limiting its loan to the SME even with the support of KUR. Hence, it can be assumed that the KUR program is not really sustainable, since it is sensitive towards financial crisis; therefore an alternative source of finance for the SMEs is needed.

 

Suryo Ariyanto Nugroho

Nuclear Power: Restoring Its Trust After Fukushima

Zaporizhia Nuclear Power Plant in Enerhodar, Ukraine (the biggest nuclear power plant in Europe) – Photo taken by author.

The Importance of Nuclear Energy in The Future Energy Mix

Nuclear power is an essential source of energy in the future, because it is a carbon-free energy source and also can generate a significant amount of electricity with a small input of materials comparing to fossil-fuel power station.[1] This statement was supported by a research, which stated that a nuclear reactor needs relatively a less amount of resources (uranium) comparing to fossil-fuel power station to generating the same amount of electricity.[2] Analyzing the average energy consumption in the UK, the research illustrated that the consumption per capita for fossil fuel was about 16 kg per day (a combination of 8 kg of gas, 4 kg of coal and 4 kg of oil), and it creates 30 kg of carbon dioxide waste. Whereas for the same amount of energy output per capita, nuclear reactor needs only 2 grams of uranium per day, and the waste weighs about one quarter of a gram.[3]

However, the benefits of using nuclear energy come with some trade-offs, such as cost trade-off and risk trade-off. The trade-off in cost is mainly caused by the high cost for generating electricity from a nuclear reactor, which is driven by a large construction cost, an extensive time frame to build a nuclear power plant and high up-front capital cost. Nevertheless, if the government will impose a social cost in terms of carbon taxes, the cost for building a nuclear power plant will be more competitive comparing with the fossil-fuel power station.[4]

As for risk trade-off, there have been a lot debates concerning the safety of a nuclear reactor, especially for the risk of radioactivity accident. Radioactivity accident can be occurred majorly because of human error, technical error and force majeure (such as earthquake). However there has been a global safety standard that had been developed to overcome this issue, which reduces a significant amount of risk of serious accident for nuclear reactor.[5]

Declining Public Trust in Nuclear Power

The earthquake that struck Japan on March 11, 2011 created a devastating tsunami that hit Fukushima Daiichi nuclear power plant and triggered one of the worst nuclear energy disasters.[6] There were not any casualties reported due to the radioactive exposure, however the risk perception towards nuclear-based power station has been plummeting in Japan and also in many countries around the world.

Risk perception is the value reflected by the people towards a risk for being exposed by a specified hazard. The source of risk perception can be identified as distrust of government, dread of the unfamiliar and the availability of heuristic.[7] Soon after the occurrence of the disaster, the Japanese government faced a lack of support from the public to re-operate the nuclear reactors, which was the sign of public distrust to the government as a regulator that responsible for outlining the nuclear reactor’s minimum safety requirement. Consequently, Japanese people are now unwilling to accept the risk to re-operate the nuclear power plants and have also started to criticizing whether nuclear power is the best option for Japan’s future energy.

The incident in Fukushima Daiichi nuclear power plant has also affected other countries for re-considering their nuclear energy development program.[8] From a survey that had been done in 24 countries, which included France, UK, Japan, US and Spain, showed that 62% of the respondents opposed the nuclear-based electricity generation.[9] It happened because the global publics are less acceptable (unfamiliar) with the nuclear energy’s risks after the Fukushima’s disaster.

The availability of media coverage about the Fukushima incident also played a big role for the declining of public risk perception about nuclear energy. This nuclear incident even got more attention than the earthquake and tsunami from the media, which amplified the news to the global public. However, sometimes media could deliver negative rumors and made the public misunderstand the real situation of an event.

Suggested Actions for Restoring Trust in Nuclear Power

The public trust towards nuclear power has been declining significantly after the Fukushima incident, hence the role of good risk communication and risk management will be very important to overcome this issue. To create an immediate positive impact in a condition where the public trust is low, a risk management will be essential to be implemented. There are four types of risk management strategy, such as political regulatory, public deliberation, technocracy and economic balancing.[10] Each of the strategies has its own uniqueness, and selecting the best strategy will depend on the rationale of the distrust itself.

As has been analyzed at the previous section, the public’s rationale for distrusting the government is mainly because the government was lack of capabilities to create policies for minimizing the nuclear energy’s risks. Hence the most appropriate strategy will be technocracy, since this strategy suggests an involvement of the experts / technocrats for advising the government and communicating all of the benefits and risk for using nuclear energy in a more appropriate approach.[11] The experts should work together with the government to create an adequate communication strategy to advise the public to compare between the benefits for using nuclear energy, which is considered as a clean and efficient energy, and the risk of the nuclear energy that can be reduced significantly by implementing a strict safety requirement.

In the long term, the lesson learned from Fukushima incident can be incorporated for improving the regulatory framework to oversee the licensee safety performance.[12] Furthermore the technocrats can advise government to conduct further researches to develop emergency power supply, enhancement of protection and emergency responses, hydrogen management and improvement of the mitigation measurement, so that the risk for operating nuclear power plants can be reduced even further.[13]

Citations

[1] Ansolabehere, S., Deutch, J., Driscoll, M., & Gray, P. E. (2003). The Future of Nuclear Power: An Interdiscplinary MIT Study. Massachusetts Institute of Technology. Cambridge: Massachusetts Institute of Technology.

[2] MacKay, D. J. (2009). Sustainable Energy – Without The Hot Air (Vol. 1). Cambridge, United Kingdom: UIT Cambridge Ltd.

[3] Ibid

[4] Ibid. 1

[5] International Atomic Energy Agency. (2014, October). International Atomic Energy Agency. Retrieved 11 05, 2014, from http://www.ns.iaea.org: http://www-ns.iaea.org/committees/files/CSS/205/status.pdf

[6] INPO. (2011). Special Report on the Nuclear Accident at the Fukushima Daiichi Nuclear Power Station. Institute of Nuclear Power Operations. Atlanta: Institute of Nuclear Power Operations.

[7] Wiener, J. B., & Rogers, M. D. (2002). Comparing precaution in the United States and Europe. Journal of Risk Research , 5 (4), 317-349.

[8] Goodfellow, M. J., Williams, H. R., & Azapagic, A. (2011). Nuclear renaissance, public perception and design criteria: An exploratory review. Energy Policy , 6199-6210.

[9] Kessides, I. N. (2012). The future of the nuclear industry reconsidered: Risks, uncertainties, and continued promise. Energy Policy , 185-208.

[10] Lofstedt, R. E. (2005). Risk Management in Post-Trust Societies (Vol. 1). London, United Kingdom: PALGRAVE MACMILLAN .

[11] Ibid

[12] Buongiorno, J., et al., (2011). Technical Lessons Learned from the Fukushima-Daichii Accident and Possible Corrective Actions for the Nuclear Industry : An Initial Evaluation. Massachusetts Institute of Technology, Center for Advance Nuclear Energy System. Cambridge: Canes Publications.

[13] Ibid

Entrepreneur, Regulator and The Economic Growth of Indonesia

Indonesia, who doesn’t know about this country? Its economy is considered to be the 10^th largest by nominal Growth Domestic Product (GDP) at Purchasing Power Parity (PPP). Referring to World Bank’s data, the annual GDP growth rate of Indonesia in 2012 was 6,2% and it was slightly decreased from 6,5% in 2011.

One of the main reasons behind Indonesia’s elevated GDP growth rate is the quantitative easing (QE) policy to overcome the negative impact of 2007-2008 financial crisis. QE is used to avoid a systemic economic failure by buying the mortgage-backed securities from the investment banks, so that they will be given enough liquidity to promote private lending and also investment. One of the best investment options was to invest in the emerging markets. Soon, countries like Brazil, China, India, Mexico and Indonesia were flooded by investment for advancing their economic, which became the first aspect that increased Indonesia’s GDP growth rate. The second aspect was China’s rapid economic growth (also because of the QE policy’s effect), which led China to become Indonesia’s largest importer for natural resources such as coal, in order to fire-up its massive infrastructure development and industrialization. This enormous import from China had created a big trade surplus and according to The Economist, in December 2013 Indonesia’s merchandise exports rose by 10,3% year-on-year, which increased the GDP of Indonesia.

However, this year US’ Federal Reserves (the Fed) has decided to taper (gradually reduced) its quantitative easing program, which leads to investors’ reluctance to invest in emerging markets, because this rich country gives a prospect of higher yield. This condition makes emerging markets’ economy plummeted, not to mention Indonesia, which recorded a deficit of $4 billion or 2% of GDP at the end of 2013.

So, how should Indonesia overcome this problem? The answer lies in this one word, entrepreneurship. It has been proven that during 2007-2008 financial crisis, the businesses that survived and even took advantage of this crisis are start-up businesses (small medium enterprises). The small medium enterprises (SME) in the countries that have been struck hardly by the crises can protect those countries from high rate of unemployment, because they can absorb the people who had been laid off by their previous employers. Moreover, in the European Union, SME account for around 99% of all businesses and employ more 50% of the labor force in private sector.

The two most important factors that make SME endure the crises are rapid innovation and also government support. Rapid innovation is the main engine of growth for the SME in order to become agile to do some maneuvers for dealing with undesirable circumstances, such as crisis. This rapid innovation is very important for developing new product / service and creating a more efficient and effective operational process, so that they can still serve the customers and also operate even in the most difficult condition. The second factor is government support in form of policies that can become a catalyst for entrepreneurial growth. Some policies that have already been implemented in many countries aim to reduce the financial constraint that entrepreneurs face, such as preferential loan with low-interest rate and also preferential tax treatment for SME.

In Indonesia, the government has already implemented some policies to ease SME’ financial constraint. The first one is low tax rate for SMEs that have a gross profit below 4,8 billion Rupiah, which about 12% from gross profit per annum (1% per month). This tax rate is considered very low comparing to the tax rate in many developed countries, which revolve around 15% per annum. Beside low tax rate, Indonesian government also tries to encourage entrepreneurial growth through an easy access to capital and business incubation, which has been handled by Permodalan Nasional Madani (PNM), a government-owned venture capital and business incubator. And then through some national banks, Indonesian government also provides a low-interest loan, hoping that by this loan the SME can achieve a significant growth.

Nevertheless, with these policies, the government has not achieved a significant growth in the number of entrepreneurs in Indonesia. It is proven by the data that has been provided by the Ministry of Cooperative and Small Medium Enterprises, which states that the number of entrepreneurs in Indonesia was only 1,56% of the population in 2012. It was considered low comparing to Singapore and Malaysia, which have about 7% and 3% of their population respectively.

So, why are these policies ineffective? The main reason is because the government failed to identify the real issue for entrepreneurial growth. Indeed, financial is one of the most important issues in this matter, however it is not the only one. As has been mentioned before, there is other factor for the SME to survive, which is rapid innovation. According to Bygrave’s entrepreneurial model, entrepreneurial process is divided into four stages, starting with innovation, triggering event, implementation and growth. Bygrave explained that innovation should come first, because when an entrepreneur recognizes an opportunity, he/she should exploit this opportunity in an innovative and improved way so that a new value can be created for the customers. Then the triggering event will act as a trajectory for the entrepreneur to bring the idea to the next level through business incubation, competition and resources.

Government policies to ease the financial constraint of SME are suitable for the third and fourth stages, which are implementation and growth. Since the government only focusing the policies toward implementation and growth and do not put any concern on innovation and triggering event, therefore the entrepreneurial growth cannot reach a significant number. Indonesian government should realize that in order to boost the entrepreneurial growth, firstly they have to create the entrepreneurs. According to Steven S. Kreft and Russel S. Sobel, government can develop entrepreneurship by focusing toward creating areas more appealing to fetch in and nurture innovative entrepreneurs, or in other word creating an “innovation ecosystem” for the entrepreneurs.

Silicon Valley is the best-case practice on how government can create an innovation ecosystem. Silicon Valley’s tremendous entrepreneurial growth is the result of Stanford University academic development strategy, which encourages the emergence of science-based firms from academic research. It is also supported by the federal government’s policy to fund Stanford Research Institute, which represents 30% of Stanford’s operating budget. Beside that, US government has an initiative to procure semiconductors, aeronautics and space research facilities from the companies that have been nurtured by Stanford University. This initiative has a big impact for the entrepreneurial growth in Silicon Valley, because many people will be encouraged to become an entrepreneur since they believe that the government will always support them.

Indonesia has some areas that are similar to Silicon Valley, and the most prominent one is Bandung. There are some factors that can lead Bandung to become an innovation ecosystem, such as the existence of Institut Teknologi Bandung (ITB) and Universitas Padjadjaran (Unpad), which are two leading research universities and the creative environment that has been nourished by Mr. Ridwan Kamil (The Mayor of Bandung). These factors are proven to foster some entrepreneurial activities in Bandung and almost all of them are creativity-based businesses, such as clothing, games studio, food and beverages, design / architecture firms and software developers. However the entrepreneurial growth in Bandung is far from satisfying, referring to Bandung’s chamber of commerce’s data, it was only 0,18% of the population in 2011 while the ideal percentage is 2% of the population.

Agate Studio, one of the start-up company that has been nurtured by ITB learning environment. It has been recognised internationally by cooperating with Japanese game corporation Square Enix to create a gaming application. Photo credit: Agate Studio

 

In order to utilizing the potential that Bandung has, Indonesian government can implement Silicon Valley’s best-case practice. It can be started by stimulating ITB and Unpad to do more academic researches so that there will be a lot of patents that can be created, hence it can encourage the emergence of science-based firms. The first focus has to be from the human capital at those universities, which can be achieved through enhancing scholarship program for sending the academics to study at the universities that have been succeed to implement such academic development strategy, like Stanford University and Massachusetts Institute of Technology (MIT). And then the government can provide the second stimulus, which is a funding support / endowment for the researches that will be done by those universities. Besides funding support, government’s commitment to procure products/services from those science-based firms that have been developed by the universities can also increase the entrepreneurial growth in Bandung.

To encourage creativity, the government can build an innovation and entrepreneurship center where potential entrepreneurs can gather around and share their ideas with each other. In this innovation and entrepreneurship center, government can also provide some facilities, such as entrepreneurship-related knowledge, business consultancy, incubation and office space for the future entrepreneurs. Many countries such as United States, the United Kingdom, EU countries and Singapore have implemented this innovation-related policy, and their entrepreneurial growth has increased significantly. And in those countries, it has been proven that entrepreneurial growth contributes directly to their economic growth.

Suryo Ariyanto Nugroho