Recent Development of Small Medium Enterprises’ Businesses

Profitability: Evidence from Indonesia

A. M. Tjahjadi

, C. A. Purwandari

and N. W. G. Massie

Research Analyst at The World Bank, Indonesia

Analyst at Coordinating Ministry for Economic Affairs, Indonesia

Research Assistant at Institute for Economic and Social Research, Universitas Indonesia, Indonesia

Keywords: #ICIB, Profitability, SME, Quantile Regression.

Abstract: Small Medium Enterprises (SMEs) has an important role in the Indonesian Economy based on the fact that

more than 90 percent of domestic employment is in this sector. At the same time, the Government of

Indonesia enacted law 20/2008, which is focused on strengthening SMEs' participation in economic growth,

job creation, and poverty reduction. Using Small Medium Enterprises Dataset of Indonesia from 2010 to

2015 which consisted of 50,000 businesses observations, the research investigated the research problem: the

business conditions and business profitability in Indonesia. We used quantile regression and descriptive

methods involving the owner's characteristics, such as: gender, age, years of education; and production

factor, such as: material cost, and amount of production. We found that: 1) the owner characteristics and

production factor had significant changes in the medium business sector over the 5 year period; 2) in the

recent year, the owner characteristics played important role in the small business sector, compared to the 5

years earlier. From the policy perspective, the government could increase the profitability factor in SMEs by

ensuring the coordination between stakeholders.

1 INTRODUCTION

1.1 Research Background

Small and Medium Enterprises (SMEs) play a

significant role in promoting economic growth, and

ensuring equitable and sustainable development for

the country (Kerr et al., 2014). This condition is

usually associated with their ability to absorb labor

that the formal sector cannot accommodate. A study

conducted in Thailand shows that SMEs contribute

60 percent to their employment (Anuchitworawong,

et al., 2006). In Indonesia, SMEs have a

considerable contribution to economic national

development. It was about 60 percent to GDP of

Indonesia and absorbed up to 116 million labors in

late 2017. The rapid development of SMEs has been

shown by their contribution to the national income,

the provision of employment, as well as the number

of business units and entrepreneurs.

SMEs as referred to the Law No.20/2008 have

criteria which are distinguished in their respective

ways covering micro, small-scale and medium-sized

businesses. After 2015, the percentage of SMEs was

99.9 percent of all business units, while the

remaining 0.01 percent covered a total of large

business units (UB). The total number of Micro

Enterprises (UMi) from 2016 to 2017 was growing

2.04 percent or has increased about 1,243,322 units,

3.56 percent for Small Enterprises (UK) which

increased about 26,043 units, and 3.67 percent of

increase for Medium Enterprises. Aside from being

one of the alternatives to create job opportunities,

SMEs also contribute to driving the pace of

economic growth after the monetary crisis in

1997/98 when the large companies experienced

difficulties in developing their businesses. Data from

the Central Bureau of Statistics (2013) showed that

the number of SMEs did not decrease after the

economic crisis in 1997 – 1998. In fact, the

increasing number of SMEs was able to absorb 85

million to 107 million workers until 2012.

We argue that such huge contribution and

coverage of the Indonesian economy renders the

studies on SMEs important, especially those dealing

with the performance and characteristics aspects of

the SMEs. We specifically focus on the ownership

of the SMEs, practically investigating how the

Tjahjadi, A., Purwandari, C. and Massie, N.

Recent Development of Small Medium Enterprises’ Businesses Proﬁtability: Evidence from Indonesia.

DOI: 10.5220/0008429001830189

In Proceedings of the 2nd International Conference on Inclusive Business in the Changing World (ICIB 2019), pages 183-189

ISBN: 978-989-758-408-4

183

characteristics of the owner of SMEs correlates to

the performance of the SMEs. We are interested to

do disentangle, for instance, whether SMEs run by

female owners are performing better, or whether

more educated owners correspond to better

performing SMEs. While answers might sound

trivial, we notice that only a little number of

researches are done on the SMEs in Indonesia

covering such aspects. This study aims to contribute

into the literature in that regard.

1.2 Literature Review

1.2.1 On the Development and Importance

of SMEs in Indonesia

This section provides a review of relevant literature

on the inquiry of the study. First, we describe the

literature on the development and general condition

of the SMEs in Indonesia. The development of

SMEs is believed to strengthen the foundation of the

national economy. This cannot be denied that the

ability of SMEs is able to absorb 90 percent of the

workforce in Indonesia. The percentage of micro

and small enterprises to GDP is expected to increase

average income for low-income groups in order to

reduce poverty. Literature studies on SMEs in their

development have been widely carried out in

Indonesia and some other countries in the world.

The discussion in most studies on SMEs emphasized

the impact of SMEs, constraints faced, and

institutional problems. Hal Hill (2001) stated that

SMEs in Indonesia plays an important role in the

domestic economy so that it becomes a challenge for

the government in establishing an appropriate policy

to deal with several institutional issues related to the

deregulation of business licensing in the region,

subcontracting employment activities, and access to

microfinance services.

The ability of SMEs to improve national

economic growth requires legal protection through

government laws and regulations, both in terms of

production and financial. According to Wuryandani

and Meilani (2013), the policies that impose SMEs

are often as the cause of higher informal sector in

Indonesia due to the reluctance of companies to

formally register their business. Informality can be a

barrier to cooperation between large companies and

SMEs. Informality can also prevent banks from

providing access to credit. The limitation of access

to financial services was found by several studies as

the main obstacle to the development of SMEs. In

the Survey Report of Small and Medium Industry

(2015) 38.84 percent of SMEs reported access to

financing as a major obstacle, while 90.11 percent of

SMEs did not build any partnership or receive any

assistance to run their businesses. As Camino and

Cordone (1997) their research in Europe explained

that the reason for the difficulty of SMEs getting

access to credit was due to the obligation to involve

a loan guarantor institution that could not be directly

carried out by the bank. Studies conducted on the

sustainability of SMEs showed that 75 percent of

SMEs throughout the world have short business

periods of no more than five years (Charles et al.,

2005).

Furthermore, studies conducted on a number of

SME entrepreneurs in the Special Province of

Yogyakarta experienced several obstacles,

including: marketing, funding capital, innovation

and utilization of information technology, use of raw

materials, production equipment, absorption and

empowerment of workers, business development

plans, and readiness to face the challenges of the

external environment. Purwaningsih and Kusuma

(2015) identified internal and external factors that

influenced the performance of batik and handicrafts

clusters in the creative industry of SMEs in

Semarang. The results of the study using partial least

equation modeling (PLS - SEM) method showed

that internal and external factors significantly

determined the performance of SMEs. Internal

factors include human, financial, technical

production and marketing, while external factors

consist of government policies, socio-economic and

cultural conditions, and the role of related

institutions. The influence of external factors on the

performance of SMEs was greater than internal

factors. The internal factor such as technology gave

a small influence because the production technology

was made hand-crafted.

The role of SMEs in the history of economic

development in Indonesia has contributed to holding

back the crisis turmoil in 1998. Tambunan (2002)

suggested the need for SMEs' industrial strategies

because the sector has a better level of competition

compared to large businesses, seen from the

percentage share of output that reflects efficiency

and productivity. Different results are shown by a

study conducted by Wahyuningrum et al. in 2014.

The study mapped the main problems of SMEs in

Indonesia using the Ishikawa Diagram. The main

problem of SMEs in Indonesia lies precisely in the

quality of their human resources. SMEs in Indonesia

are also facing limitation in the development of

education and human resource skills. Therefore,

SMEs should be able to absorb and empower

uneducated and unskilled labor to be more

ICIB 2019 - The 2nd International Conference on Inclusive Business in the Changing World

184

productive (Pradhan, 2014).

In addition, several studies also supported the

important role of SMEs in improving the economy

in developing countries. The positive impact on the

economy was explained by the study of Daniels and

Mead (1998) that SMEs contributed 12-14 percent

of national income in Kenya. This was supported by

Rogerson's (2000) study that the majority of black-

owned SMEs in South Africa were micro business

replications that could increase employment. The

composition of the workforce absorbed one third of

the total 27 companies was women and 90 percent of

them are black people. As explained in the literature

study above, this study is intended to examine what

most factors determine the performance of SMEs

between production factors and owner

characteristics. Considering the availability of

survey data in Indonesia, this study will classify

SMEs into micro, small and medium enterprises

based on the classification in Law 20/2018.

1.2.2 On the Impacts of Different

Ownerships of SMEs

Intriguing results are seen in the literature covering

the different ownership types of SMEs across the

globe. Obstacles in starting and raising businesses,

including getting a business loan were also faced

mainly by women as owners. Women's ownership in

the SMEs have a significant contribution in

Indonesia, there were more than half of SMEs in

Indonesia owned by women (IFC, 2016). The World

Bank Company Survey (2009) estimated that

women have 44.1 percent of small businesses, 35.0

percent of medium-sized businesses and 27.7

percent of large businesses. However, the data in

2011 showed that there was no difference in

productivity between female-owned SMEs and

male-owned SMEs when they were running the

company. Women (23%) were less often involved in

manufacturing than men (33%), which is usually a

more productive sector.

Another study shedding light on the gender

impacts of ownerships is on the Canadian context, as

it found that in 2011, SMEs owned by female

entrepreneurs tend to have a lower profit per

employee but were more innovative than the male-

owned SMEs (Rosa and Sylla, 2018). In the

Netherlands, female-owned SMEs are shown to

utilize the performance-related pay than the male-

owned ones (de kok and Roepers, 2007), while Aidis

(2002) found different business success criteria

between the male-owned and female-owned SMEs

in Lithuania. A study conducted on the Chinese

SMEs also found that single-owned SMEs tend to

have a better conversion rate of research and

development into products (Deng et al, 2013).

Several articles have also investigated the

differences in SMEs performance between those

owned by families (i.e., family-owned) and not. The

results are striking – SMEs owned as family

businesses are found to be less able to sustain a high

rate of sales growth (Hamelin-Schertzer and

Trojman, 2007) and tend to deliberately limit their

growth (Hamelin, 2013). Such SMEs are also shown

to have negative propensity to expand to the

international market, as such family-ownership are

more conservative (Fernandez and Nieto, 2006).

While this study does not cover such broad topics of

the previously-mentioned ownership types, this

study focuses on the gender, age, and education

characteristics of the owners, along with the

performance-related control variables.

2 DATA AND MODEL

This study utilizes two datasets of Indonesian

enterprises, namely the datasets on Micro and Small

Industry (Industri Menengah Kecil; henceforth

referred to as IMK) of the year 2010 and 2015.

Such datasets are gathered by Indonesia’s

Central Bureau of Statistics (Badan Pusat Statistik;

henceforth referred to as BPS), containing the firm-

Table 1: Statistics Descriptive of IMK 2010 Data.

Variable

Obs

Mean

Std. Dev.

Min

Max

Turnover (in IDR; per month)

59,657

9,308,986

32,700,000

1,990,000,000

Owner's gender (Female; percent)

59,657

54,86

Owner's age (years of age)

59,657

Owner's years of education (in years)

59,657

Year of production

59,657

1,996

1,9

2,01

Material cost (in IDR; per month)

59,657

5,015,742

21,500,000

1,000,000,000

Amount of production

59,657

9,308,986

32,700,000

1,990,000,000

Recent Development of Small Medium Enterprises’ Businesses Proﬁtability: Evidence from Indonesia

185

Table 2: Statistics Descriptive of IMK 2015 Data.

Variable

Obs

Mean

Std. Dev.

Min

Max

Turnover (in IDR; per month)

58,137

13,216,413

54,300,000

5,300,000,000

Owner's gender (Female; percent)

8,443

60,7

Owner's age (years of age)

58,273

Owner's years of education (in years)

58,254

Year of production

58,253

1,998

2,015

Material cost (IDR; per month)

58,29

7,642,547

43,400,000

5,250,000,000

Amount of production

58,29

13,200,000

54,300,000

5,300,000,000

level characteristics and performance of firms of

such classifications. The following are the selected

statistic descriptives of the datasets used in the

study. First, Table 1 presents such descriptives of the

IMK 2010 Data. Second, Table 2 depicts the

statistics descriptive of the IMK 2015 data.

Generally discussing the descriptive statistics

above, we may first notice an increase of female

ownership of enterprises between 2010 (around 54

percent) and 2015 (around 60 percent). Material cost

and turnover are also increasing, although that is

only to be expected due to inflation. Meanwhile, the

concentration of the other owner characteristics such

as the owner's age and the owner's years of

education remained relatively unchanged.

The econometric estimation used in this study is

the quantile regression. We do so in order to gain

better, richer characterization of the the sample of

micro and small industries within our dataset. First,

we classify the enterprises into micro, small, and

medium enterprises. We specifically estimate our

models within the 25th, 50th (median), 75th, and

99th quantiles of each subset of the sample, resulting

in four estimations for the micro enterprises, four

likewise for the small enterprises, and only one

estimation for the medium enterprises due to the

sample size.

The model specification used in the study is as

follow.









 



















 











 















  



 











Where q denotes the quantiles (i.e., the 25th,

50th, 75th, and 99th) used in the regressions, 



denotes the dependent variable, i.e. the turnover in

our case, and 



denotes the vector of explanatory

variables used in the study, such as the gender of the

owner, age of the owner, years of schooling of the

owner, material cost, among others. As such, the

results of our estimations are shown in the following

section.

3 RESULTS

In this research, small and medium enterprises have

been developed between 2010 and 2015. During the

period of time, the development was reflected by the

increase in profit, raw material costs, and total

production. From the ownership structure, there was

no significant difference between the average

characteristics of business owners (age, education,

and year of production) in 2010 and 2015. To further

analyze, we use quantile regression to observe

changes that occur in each year (see at table 3 the

Appendix).

In 2010, the ownership factor was found more

dominant in the micro industry compared to small

and medium industries. However, female owners

were young and had a lack of education, and also

earned lower profits compared to small and medium

industries. In particular, female micro-industry

owners had 2 percent lower profit compared to other

micro-industry owners. This finding is similar to

those of Rosa and Sylla (2018) study, where female-

owned SMEs are shown to have a relatively lower

profit.

We further use several production-related control

variables in the study. From the production structure,

industries that were most sensitive to raw material

costs were small industries that had medium to high

profits. An increase of 1 percent in raw material

costs will reduce profits by 1.04 percent. From the

results of this estimation, small industries that have

mid to high level profits must be considered because

they were vulnerable to rising raw material prices.

Meanwhile, the micro industry was only affected by

ICIB 2019 - The 2nd International Conference on Inclusive Business in the Changing World

186

a third. In the case of 1 percent increase in raw

materials, the profit will decrease to 0.3 percent.

In terms of production, the amount of production

significantly affected the increase in production. The

biggest effect of production was in small industries

that had medium to high profit rates. If this industry

experienced a 1 percent increase in production, it

would increase profits by 1.9 to 2 percent as in table

2 (see table 4 at the appendix).

In 2015, the condition of SMEs changed from

both factors. The most dominant change was the role

of women being dominant in the ownership of

SMEs. Female owners got 4 percent to 10 percent

higher profits than other owners. This happened

specifically only for small and micro industries that

had small to medium profit rates. This finding

provides an alternative look to the Rosa and Sylla

(2018) study mentioned above.

Regarding the production structure that occurred,

the level of risk of an increase in raw materials

haunts small, micro and medium industries. An

increase of 1 percent in raw material costs will

reduce industrial profits from 0.5 to 1.1 percent. This

risk was anticipated by the government by providing

funding incentives, especially for the micro industry.

From the scope of production, the number of

production has increased significantly compared to

2010. The increase in the number of production by 1

percent, will increase profits up to 2.1 percent,

especially small industries that have a medium to

high income level.

4 CONCLUSION

Our study attempted to shed light on the impacts of

different ownership types and several production-

related variables on the performance of SMEs in

Indonesia across two different periods of time. Our

findings suggest that across time, the defining

characteristics of SMEs success differ – female

owners becoming more profitable in 2015 compared

to such in 2010.

From the data analysis, it can be seen that the

characteristics of owners in SMEs do not have an

important influence on business profitability, but to

address the inclusiveness of women in SMEs, the

government can provide training to female business

owners to increase production. This suggestion is

inseparable from the large influence of female

owners in the profit of SMEs.

In terms of production raw materials, the

provision of affordable raw materials can be a

priority of the government and related agencies. The

high cost of raw materials will cause the SMEs to

not get the optimal level of profit. This is because

small and medium industries have a vulnerability if

raw material costs increase.

For further growth of the SMEs, better

standardization of the production process is needed.

So far, the government’s support in improving the

quality of SME has implemented by establishing of

Law No. 20 of 2008 about SMEs, that aimed to

facilitate the implementation of an efficient business

environment for SMEs performance. There are four

government tasks related to the production of SMEs,

namely: improving production techniques,

facilitating the procurement of facilities and

infrastructure, implementing standardization of the

production process, and improving the planning or

business plan of SMEs. With an adequate focus on

the owners’ inclusiveness, Indonesian SMEs are

only expected to grow even better, given the right

directions.

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APPENDIX

Table 3.

Year 2010

Micro

Small

Medium

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

VARIABLES

Q25

Q50

Q75

Q99

Q25

Q50

Q75

Q99

Pooled

Female

-0.0210***

-0.0141***

-0.0119***

-0.00137**

0.0209

0.0101

0.0331

0.0266

-0.0561

(0.00637)

(0.00497)

(0.00329)

(0.000553)

(0.0478)

(0.0405)

(0.0341)

(0.0211)

(0.204)

Age

-0.00249***

-0.000880***

-0.000389***

-2.36e-05

0.00143

0.000934

-0.000865

0.00157**

-0.00777

(0.000283)

(0.000221)

(0.000146)

(2.46e-05)

(0.00154)

(0.00131)

(0.00110)

(0.000680)

(0.00733)

years of education

-0.00785***

-0.00526***

-0.00419***

-0.000146

-0.00257

-0.00272

-0.00395

-0.00310*

-0.00989

(0.00112)

(0.000874)

(0.000580)

(9.73e-05)

(0.00420)

(0.00356)

(0.00299)

(0.00185)

(0.0198)

production year

-0.00324***

-0.00176***

-0.000738***

-5.53e-05**

-0.00105

-0.00210

-0.00172

-0.00219***

-0.00612

(0.000294)

(0.000229)

(0.000152)

(2.55e-05)

(0.00166)

(0.00140)

(0.00118)

(0.000731)

(0.00687)

log(raw material cost)

-0.353***

-0.371***

-0.413***

-0.464***

-0.813***

-0.956***

-1.044***

-0.984***

-0.678***

(0.00342)

(0.00267)

(0.00177)

(0.000297)

(0.0210)

(0.0178)

(0.0149)

(0.00924)

(0.0598)

ICIB 2019 - The 2nd International Conference on Inclusive Business in the Changing World

188

Table 3. (cont.)

Year 2010

Micro

Small

Medium

log(production

amount)

1.179***

1.247***

1.349***

1.462***

1.691***

1.912***

2.080***

1.980***

1.673***

(0.00444)

(0.00346)

(0.00230)

(0.000385)

(0.0362)

(0.0307)

(0.0258)

(0.0160)

(0.157)

Constant

10.15***

6.659***

3.895***

1.715***

4.116

5.178*

3.416

5.406***

12.98

(0.589)

(0.459)

(0.304)

(0.0511)

(3.378)

(2.860)

(2.406)

(1.489)

(14.15)

Observations

52,736

4,562

232

R-squared

0.439

Standard errors in parentheses

*** p<0.01, ** p<0.05, *p<0.1

Table 4.

Year 2015

Micro

Small

Medium

(10)

(11)

(12)

(13)

(14)

(15)

(16)

(17)

(18)

VARIABLES

Q25

Q50

Q75

Q99

Q25

Q50

Q75

Q99

Pooled

Female

0.0454***

0.0202***

0.00137

2.29e-06

0.105**

0.0770***

0.0753***

0.0113

0.000941

(0.00695)

(0.00398)

(0.00199)

(1.88e-05)

(0.0420)

(0.0235)

(0.0192)

(0.0102)

(0.175)

Age

-0.000841**

-0.000915***

-0.000320***

-3.45e-07

-0.00122

-0.00227***

-0.00175**

-7.77e-05

0.00666

(0.000329)

(0.000189)

(9.45e-05)

(8.92e-07)

(0.00152)

(0.000852)

(0.000695)

(0.000370)

(0.00487)

Years of

education

-0.00686***

-0.00630***

-0.00199***

-8.23e-06**

-0.00872**

-0.0167***

-0.0162***

-0.00325***

0.0277**

(0.00122)

(0.000699)

(0.000349)

(3.30e-06)

(0.00432)

(0.00242)

(0.00198)

(0.00105)

(0.0137)

Years of

production

-0.00136***

-0.000774***

-0.000231**

6.14e-07

-0.00257

-0.00238***

-0.00311***

-0.000153

0.00127

(0.000337)

(0.000193)

(9.67e-05)

(9.13e-07)

(0.00157)

(0.000878)

(0.000716)

(0.000382)

(0.00477)

Log_biaya_baha

n_baku

-0.518***

-0.568***

-0.619***

-0.654***

-1.000***

-1.095***

-1.100***

-1.031***

-0.905***

(0.00481)

(0.00276)

(0.00138)

(1.30e-05)

(0.0243)

(0.0136)

(0.0111)

(0.00593)

(0.0581)

Log_jumlah_pro

duksi

1.401***

1.498***

1.595***

1.654***

1.947***

2.097***

2.125***

2.027***

1.835***

(0.00599)

(0.00344)

(0.00172)

(1.62e-05)

(0.0359)

(0.0201)

(0.0164)

(0.00875)

(0.108)

Constant

5.494***

3.882***

2.185***

1.374***

6.318**

5.435***

6.720***

1.469*

-1.525

(0.679)

(0.389)

(0.195)

(0.00184)

(3.215)

(1.802)

(1.470)

(0.784)

(9.679)

Observations

51,668

5,790

387

R-squared

0.468

Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

Recent Development of Small Medium Enterprises’ Businesses Proﬁtability: Evidence from Indonesia

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