JAKARTA: Indonesia has a bigger revenue gap between small and big firms than other emerging markets, such as India, Mexico, the Philippines and Turkey, according to a World Bank report, with repercussions for the domestic economy.
Furthermore, those large companies failed to translate their revenue into as much employment as in other countries and were less efficient in allocating capital resources, the global financial institution noted, citing the manufacturing sector in Indonesia as a case in point, where the top 5 percent of firms accounted for 90 percent of revenue.
“[The top 5 percent of firms] control only 20 percent [of revenue] in Turkey, 35 percent in Mexico, 67 percent in India and 75 percent in the Philippines.
"These figures are much lower than the staggering 90 percent in Indonesia. It indicates an imbalance that could hinder competition and innovation in Indonesia,” Alexandre Hugo Laure, a senior private sector specialist at the World Bank, said on Monday (June 24).
Speaking at an event in Jakarta to publish the World Bank’s latest report on Indonesia, he said that was why small manufacturers in the country, despite comprising 56 percent of companies, only produced some 3 percent of total output and accounted for 11 percent of total full-time employment.
These firms were also mostly disconnected from international markets, with only 2 percent of small firms using imported inputs or supplies.
The situation was similar in other sectors, the financial institution noted.
The World Bank acknowledged that a concentration of business activity among large firms was not always a bad thing and had some benefits as well.
Their size may allow them to lower production costs, invest in quality improvements and expand globally by exporting products, which could result in positive spillover effects for the country’s overall economy.
However, the World Bank pointed out that sales growth at large Indonesian firms did not translate into as much employment as in other emerging economies and that those large firms were less efficient at allocating capital resources.
Thus, the analysts suggested that the government encourage more interaction between small and large companies, as well as between the formal and informal sectors, such as by incorporating smaller firms into larger firms’ supply chains and enhancing contract enforcement.
“The government should adopt a comprehensive approach beyond local content and downstream initiatives to develop supplier quality, enhance technology transfers and build resilience [among smaller firms],” reads the 2024 Indonesia Economic Prospects report.
Mohammad Faisal, executive director of the Center of Reform on Economics (CORE), said the significant concentration of large firms was an indication of oligopolies.
“It allows big companies to control prices and push smaller competitors down. In the end, consumers will be affected [as they may need to pay higher prices] because of the unequal rivalry,” Faisal told The Jakarta Post on Tuesday.
Closer integration needed Deputy Investment Minister Riyatno insisted that the government was encouraging collaboration between large and small firms through Investment Ministry Regulation No. 1 of 2022, which requires companies looking to invest in certain sectors to partner with small and medium enterprises (SMEs) and commit to that through the Online Single Submission (OSS) business licensing platform.
“This regulation can increase the number of initiatives between large businesses and SMEs, as well as create inclusive growth in the years to come [...]. We acknowledge that [people] have high expectations of the Indonesian government, so we keep reforming,” Riyanto said on Monday at the same World Bank event.
Industry Ministry Regulation No. 46/2022 eases the process for SMEs to obtain the local content requirement (TKDN) certificate and therefore get listed as suppliers on the government’s digital procurement platform.
Khaleed Hadi Pranowo, a director at the Semarang-based SME support organization Impala Network, said the new regulations had helped some small businesses collaborate with larger firms but the rules had not been implemented equally across all sectors and regions.
“Such partnerships are still centralized on the island of Java. They are mostly conducted by labor-intensive large firms that pay attention to corporate social responsibility,” Khaleed told the Post on Thursday.
According to him, most partnerships between large companies and SMEs occurred in raw material supply and in the distribution of finished products.
He expressed hope for more collaboration in production activities to help small firms learn best practices from established businesses.
He also pointed out that several ministries had SME improvement initiatives of their own but there was no “final stitch” to connect them all, which should be the responsibility of the Office of the Coordinating Economic Minister.
Andry Satrio Nugroho, who heads the Industry, Trade and Investment Center at the Institute for Development of Economics and Finance (INDEF), agrees that regulations obligating larger firms to team up with SMEs needed to be closely monitored and evaluated.
He warned of a possible loophole where companies may create small subsidiaries.
“We need to be careful with big companies that opt to establish new small firms just to comply with the regulation, while the actual target of the regulation is existing SMEs,” Andry told the Post on Tuesday. - The Jakarta Post/ANN
