Indonesia, who doesn’t know about this country? Its economy is considered to be the 10th 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.
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.
Indonesian Insight 