As Indonesia faces the need to diversify its economy away from agriculture and mining, one crucial resource it is missing is hungry entrepreneurs.
That is a bit of an irony for a country dotted with tens of millions of small and micro enterprises that employ more than 60 percent of its workforce. But neither the firms nor the nation gets much benefit from the implied strength of those numbers. And that highlights a desperate need to empower entrepreneurs and reform the country’s regulatory structure.
Most of the country’s micro enterprises, which fall into a so-called “informal sector” outside the government’s reach are run by people who lack the resources and the skill to manage growth, improve productivity, or compete on a wider basis. In an atmosphere where the “formal” economy doesn’t provide enough jobs, those employed informally typically earn less than $2 a day.
“Entrepreneurship here is alive and well, but there are challenges,” said Edimon Ginting, senior economist for Indonesia at the Asian Development Bank, pointing to a difficult regulatory environment and a relatively low quality labour force with inadequate education and vocational training.
The informal sector, a common feature of many emerging economies, comprises firms that skip registration, don’t pay taxes and aren’t usually overseen by a government authority. Despite strength in numbers, the companies’ contribution to national output and productivity is smaller than the formal sector’s, according to the ADB.
The government also loses out on potential tax collections. In 2010, Indonesia’s tax-to-GDP ratio was 10.89 percent, substantially lower than the 12.15 percent-15.97 percent range for neighbours Malaysia, Philippines, Singapore, Thailand and Laos, according to World Bank data.
“Access to finance is also a big issue…the Indonesian economy is less banked and less monetised for an economy its size,” Ginting said.
Ambition and fear
Fear of failure, and the absence of a burning desire for achievement, is partly to blame, critics say.
“Indonesia was colonised for 350 years. We lost our mind-set for entrepreneurship. We only become workers,” said Dr Ir. Ciputra, head of an eponymous conglomerate with business interests in property, health care and telecommunications infrastructure. He was referring to the nation’s colonisation by the European nations beginning in the 16th century and continuing until the end of World War II.
The 81-year old, rags-to-riches Indonesian businessperson – ranked 27th on Forbes’s list of the country’s richest individuals with a net worth of $950 million – has been a serial entrepreneur. He also runs Universitas Ciputra, a Surabaya-based university that aims to create world-class entrepreneurs.
The university currently enrolls 800 to 900 prospective entrepreneurs a year. But Indonesia needs more entrepreneurs with the right skills to support the economy at the grass roots level, Ciputra said.
Although Indonesia is blessed with a lot of natural resources, they can’t last forever, and the prospect of a “demographic disaster” is real unless the country generates and provides jobs to its millions of very young people, he said.
“Our coal is going to finish. Oil, we are already a net importer. What next? Only entrepreneurship,” said Ciputra.
About half of Indonesia’s population is younger than 28.5, according to CIA World Factbook estimates.
FDI and industry
While the government is aware of the acute need to nurture entrepreneurs, and has been promoting manufacturing and knowledge-based industries, the path ahead is difficult, say experts.
“The government is starting to promote technology and creative industries through such initiatives as technology parks. The challenge for technology start-ups is in finding customers beyond the government,” said Donna Kelley, a director at Global Entrepreneurship Research Association.
“The local market for technology products will need to develop, and exporting will be difficult with little experience and reputation in cross-border trade in technology products,” she said.
ADB economist Ginting said a large number of domestic firms aren’t export-oriented, and fall outside a global “production network,” due to inadequate foreign direct investment in the country until recently.
“Indonesia has attracted FDI only in the last three years,” he said.
Sarvesh Suri, the International Finance Corp.’s country director for Indonesia, cited data that showed venture capital investments in Indonesia were “significantly lower” than in emerging markets such as China and India, as well as developed economies such as Singapore.
“I wouldn’t say the quality of entrepreneurs here is at par with what you see in the West. In Silicon Valley, for example, you see a lot of big bets and early stage venture capital money, which isn’t the case here,” Suri said.
A World Bank-IFC global survey on the ease of doing business in various countries ranked Indonesia 129th on the list, offering a peek into the difficulty and expense in registering a new business.
Still, “if we can help improve the investment climate, it will bring in more investments to small-and-medium enterprises,” Suri added.
Access to finance and inclusion
The huge size of the informal sector and the small scale of microenterprises has helped create a thriving microfinance industry in Indonesia.
Achmad Baiquni, managing director of PT Bank Rakyat Indonesia, expects microloan assets to grow 25 percent to 30 percent this year. “Demand [for microfinance] can be higher than 30 percent. But to achieve a credit growth of more than 30 percent, we’ll have to compromise quality,” he said.
Microfinance, defined as loans of less than 50 million rupiah ($5,319), is by its very nature an expensive source of funding, as lenders price their loans to capture the high risks and costs involved.
Bank Rakyat, the country’s largest microfinance provider and second-largest bank by total assets, charges interest rates of between 24 percent and 27 percent on such loans. The segment is a key driver of its high net interest rate margin, which is between 8 percent and 9 percent on all types of loans – a level that towers above interest rate spreads for banks in the West, or developing nations like China and India.
Citing government data, which puts the number of entrepreneurs in Indonesia as high as 55 million, bank officials said the potential for growth in this segment is huge, as only about a third of all micro-businesses in the country took a bank loan. The rest borrowed from other sources, including loan sharks, who charge up to 60 percent a year in certain cases, they added.
One reason cited for the high rates on microfinance loans is the high cost involved, as banks have to hire more loan officers and create a physical presence in far-flung places where borrowers reside and work.
Still, rates have been dropping with increasing competition. Bank Rakyat’s net interest margins, for example, used to be as high as 12 percent about five years ago.
IFC’s Suri said another way to lower interest rates on such loans was by making more information about the borrowers available to lenders. He said the institution was working with Bank Indonesia to establish credit bureaus that can provide this information to the lenders to make a more informed decision on risk.
Ciputra, meanwhile, said that while interest rates were high, they didn’t necessarily present an insurmountable obstacle, and that a “capable” entrepreneur can secure financing at more competitive rates.
The more immediate challenge, he said, was to empower entrepreneurs through training and inspiration. Although some regions in the country were “primitive” and needed more time to develop, Indonesia had the potential to grow, Ciputra said.
“Even primitive areas can produce a superstar,” he said.