Small and Medium Enterprises (SMEs) and Technology Incubation Program in Indonesia: Current Issues and Challenges

By
Manaek Simamora and Kurleni Ukar
Center for Innovation
Indonesian Institute of Sciences-LIPI
Sasana Widya Sarwono Lt. 1
Jl. Gatot Subroto No. 10, Jakarta 12710, INDONESIA
E-mail: manaek@yahoo.com, manaek@inovasi.lipi.go.id, nike@inovasi.lipi.goid

A Country Paper presented at the Consultation Workshop for a Project on “Stimulating Innovation, Entrepreneurship and Competitiveness of Small and Medium Enterprises Through Technology Incubation,” 2-4 July 2007, Kuala Lumpur, Malaysia, organized by SIRIM, Malaysia, Industrial Technology Institute, Srilanka, and IDRC, Canada. [The authors have made minor editing from original paper presented at the Workshop.]

EXECUTIVE SUMMARY
The significant magnitude contribution of SMEs to Indonesia’s economy is one of the consideration for the government of Indonesia to launch many policies and programs to support the enhancement of the competitiveness of SMEs. For exemple, Presidential Decree Number 30 of 2003 on government procurement of product and services give preferences for SMEs especially if the products and/or services are locally manufactured or produced and/or use local technology or intellectual property. Mid-Term National Development Plan (RPJM) 2005-2009 clearly specified the government commitment to strengthen SMEs, e.g., through the“development of science centers and actualization of incubator role and technical implementation units and Technopreneur development, such as development of new venture based on research results through technology incubator.”

In June 2007, the government launched a new policy to further accelerate the innovation capacity of the real sector and empower small and medium enterprises aimed, among other, at encouraging the growth of newly technology-based enterprises and establishment of center for innovation and for that purposes the government will support the establishment of Innovation Center for the expansion of entrepreneurship by optimizing the role or already existing institutions. Technology incubation program or even Iptekda program (if it is directed more to assist newly-technology based companies) can then play important role to help materialize the objective of this latest policy through creation of newly technology-based companies.

A closer look at the Indonesia’s industry structure suggest that in 2005, the number of SMEs consist of more than 99.8% of total number of enterprise and its contribution national GDP is more than 56% of total national GDP. On the other hand contribution of SMEs to total export value in 2005 is only 14.76% of the total (small enterprise: 3.75%, medium enterprise: 11.01%) which indicate low competitiveness of SMEs to compete in the global market. It is therefore necessary to enhance innovation capacity of the SMEs in Indonesia in order to increase its competitiveness. This is one of the reasons the government of Indonesia keep introducing policies and programs to stimulate this sector so as to strengthen its competitiveness level.

As has been recognized widely, innovation in its wide definition is one key to competitiveness. And in many cases, technology contribute in enhancing innovation capacity of the industry. It is along this line that technology incubation programs become an important mechanism to nurture and create the growth of newly-based technology companies especially the ones using research results and/or intellectual property from research institutes and universities.

Incubation program in Indonesia started in 1990 by running a pilot project called Pilot Business Incubator Indonesia assisted by UNDP. Since then the development of incubators in various part of Indonesia has grown supported by various government programs like Ministry of Research and Technology, Ministry of Industry, Ministry of National Education, and Ministry of Cooperative and SMEs empowerment. Up to now there has been around 33 incubators in Indonesia, six of them, to some extent, can be categorized as technology incubator and the other 26 as business incubators. These business incubators provide services such as training, mentoring, consultancy, etc. Most of them do not provide physical infrastructure to host technology-based company or tenants using its affiliation technology.

It is recognized that good coordination of technological-incubator programs in Indonesia needs to be improved so that they have significant impact to SMEs competitiveness. The issuance of Presidential Instruction Number 7 of 2007 for example through the establishment of Innovation Center for the promotion of entrepreneurship and innovation of SMEs by optimizing the role of existing institutions and facilitators is, among other, aimed at improving this coordination issue so as to ensuring implementation of government programs in a consistent manner and sustainably managed. Given the risky nature of establishment of newly technology-based companies through technology incubation program, required sustainable funding support from the government; while the management of technology incubator can obtain other sources of revenue from commercializing its professional services and possibly get a portion of technology transfer revenues (commercialization of which facilitated by technology incubator) from its affiliation.

The impact of technology incubation program in Indonesia has not been very encouraging. There are several factors that need to be considered in order technology incubation program in Indonesia achieved its mission, namely: (1) sustainable funding support, (2) consistent implementation of policies and programs, (3) active involvement of business professional in the incubator management—currently mostly managed by internal and technical people. It is expected that implementation of Presidential Instruction Number 7 of 2007 can address these issues. Especially for the third issue, it is necessary to conduct a series of capacity building program in order to enhance the professionalism of the incubator management. Experts and incubator practitioners from countries which has already succeeded nurture and develop technology incubator will also be very useful to be carried out. This capacity building program can also be conducted together with other Asian countries that might have similar problems with Indonesia. Cooperation with other regional or multilateral organization can accelerate implementation of this capacity building; however dependence of this source must be avoided.
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Content
• Introduction
• Policy Aspects in Promoting Innovation to SMEs
• Incentive program stimulating linkages
• Profile of SMEs and Innovation Promotion
• Iptekda Program and SMEs
• Current Status of Technology Incubator Program
• Issues and Challenges of technology incubation development in Indonesia
• Recommendations

Full paper: 22 pages witth charts and tables.

Readers are invited to comment on this article. For those interested in this paper and want to have it, please make your request by sending e-mail to ventura.inovasi@gmail.com.

Supporting SME Innovation: The Role of Facilitators

By Syahrul Aiman and Manaek Simamora

Source: Competitiveness at the FRONTIER, July 2009, pp. 10-11, published by the Masters of Management Program, Faculty of Economics, University of Indonesia and SENADA, a four-year USAID-financed project, http://www.senada.or.id/

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Governments have a clear interest in promoting innovation among small and medium enterprises. They can move this goal forward by creating an environment where supporting institutions can thrive.

Policy makers throughout the world have increasingly realized that innovation is key to national and regional economic competitiveness. Innovations can improve productivity and create job opportunities, ultimately leading to improved welfare of citizens.

Small and medium enterprises (SMEs) have a special role to play in this process. In 2005, 99.9 percent of Indonesia’s firms were SMEs or micro-enterprises, that together accounted for more than 56 percent of GDP. On the other hand, the contribution of SMEs to total exports was not quite 15 percent (about 4 percent by small enterprises and 11 percent by medium ones). This indicates that Indonesian SMEs have little ability to compete in global markets and suggests that support is needed to improve SME competitiveness, especially through enhancing their capability to innovate.

In general, SMEs are constrained by limited access to human resources (talent), capital, intellectual property (IP) and/or innovations, business networks, and infrastructure to promote innovation, such as science/technology parks and incubators. These constraints require serious attention from government and other stakeholders. They can be addressed in many ways, for example through entrepreneurship education programs at all levels, training, and innovation competitions. In particular, the government can work to ensure that supporting institutions offer the facilitation, mentoring, and intermediation services that SMEs require in order to innovate.

Polices to Encourage Innovation
Innovation need not be restricted to large companies. SMEs can access inventions and innovations even if they lack the facilities to conduct their own research, by turning to outside sources such as research institutions and other domestic or foreign companies. In addition, independent inventors and innovators in Indonesia are a rich potential source of innovations for SMEs. Data show that from 1971 to 2007, the majority of patent applications in Indonesia (52 percent) were submitted by individual or independent inventors and the remaining ones were registered by universities, R&D institutions, and private firms.

Ironically, many large companies such as IBM, Intel, Procter & Gamble, Shell and others that have the resources to conduct their own in-house R&D often excel at “open innovation,” taking advantage of inventions and innovations created by others. SMEs, especially in Indonesia, are less likely to practice this strategy.

Through supportive policies, governments can encourage SMEs to adopt innovation. For example, the Malaysian government gives incentives to companies that obtain licenses for foreign technology by bearing 50 percent of the license fee if the production or business activities are conducted in Malaysia. The Indonesian Government has also issued a policy, through Government Regulation (Peraturan Pemerintah) No. 35/2005, to encourage the creation of intellectual property and the adoption of innovation by giving incentives to businesses that meet certain requirements to conduct research that leads to innovations.

Building Intermediary Institutions
Facilitators and mentors can provide services that assist SMEs to create and implement innovation. The governments of OECD (Organisation for Economic Co-operation and Development) member countries, China, and India are leaders in promoting the provision of such services. In Indonesia, the government provides support to mentors and facilitators, including but not limited to government and non-government R&D institutions, the University of Indonesia SME Center, and the Business Innovation Center (a young organization that strives to bring SMEs with innovative ideas together with potential investors).

However, these facilitators face several difficulties, in particular the limited availability of professional human resources. In addition, when the government serves as the direct provider of services, they will not be market-driven. Similarly, while the Corporate Social Responsibility (CSR) activities of large companies may be a source of mentoring, CSR programs are often limited to activities related to the core business of the company providing them.

Thus, support for institutions that offer facilitation and mentoring services must take these concerns into account. Efforts should be made to ensure that institutions have the funding and human resource capacity needed to provide professional integrated services. One strategy for accomplishing this is to provide services on a market-driven, sustainable basis: in other words, in exchange for fees that will be used to maintain and strengthen the facilitating institution.

An MSME Innovation Center
In 2008, the Government of Indonesia, through the Coordinating Minister for the Economy, established the Micro, Small and Medium Enterprise Innovation Center (PI-UMKM), which began operation in 2009 with the following primary missions:
• To grow and develop technological entrepreneurship (technopreneurship) among micro, small, and medium enterprises (MSMEs)
• To synergize efforts to develop innovative MSMEs
• To develop PI-UMKM and its network of partners as integral players in strengthening the Sub-national Innovation System (SIN) in the context of supporting a science-based economy in Indonesia
• To improve market access and information for MSMEs.

PI-UMKM works with a variety of public, private, and nonprofit partner institutions to carry out its goals, including universities, IPR centers, NGOs, and businesses. It selected 16 partners, out of a starting pool of 40, on a competitive basis, assessing the experience each institution had in successfully providing technical and management services to SMEs. These partners will provide integrated services in the areas of technology-based services, human resource capacity building, business network development, and facilitation of access to finance. The goal is to improve the support to organizations that provide services to SMEs, independent inventors, and innovators all along the “innovation chain” – an important step in building an ever-stronger Indonesian national innovation system.
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About the Authors:

• Syahrul Aiman (co-author, “Supporting SME Innovation: The Role of Facilitators”) is the Deputy Chairman for Engineering Science, Indonesian Institute of Sciences-LIPI. He can be contacted at syahrul@lipi.go.id

• Manaek Simamora (co-author, “Supporting SME Innovation: The Role of Facilitators”) is the Head of Division for Business Development, Center for Innovation, Indonesian Institute of Sciences-LIPI. He can be contacted at manaek@yahoo.com, manaek@inovasi.lipi.go.id

National Innovation System of Indonesia: A Journey and Challenge(*)

By Syahrul Aiman (1), Lukman Hakim (2), and Manaek Simamora (1)

(1) Center for Innovation, Indonesian Institute of Sciences – LIPI, Jl. Gatot Subroto No. 10, Jakarta 12710, INDONESIA, E-mail: syahrul@inovasi.lipi.go.id, manaek@inovasi.lipi.go.id, manaek@yahoo.com
(2) Vice Chairman, Indonesian Institute of Sciences – LIPI, Jl. Gatot Subroto No. 10, Jakarta 12710, INDONESIA, E-mail: lukman@lipi.go.id

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(*) A paper presented in the first Asialic International Conference on ‘ Innovation Systems and Cluster : Challenges and Regional Integration’, Bangkok, Thailand, 1-2 April 2004.

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ABSTRACT

Stage of the development of national innovation system of Indonesia is in infancy. The first official statement on the importance of development of national innovation system (NIS) can be found in Strategic Policy on Development of National Science and Technology initiated by the office of the Ministry of Science and Technology (MST). Two previous studies on NIS of Indonesia concluded that linkages amongst the elements of national innovation system in Indonesia were very weak. The concept and policies on national innovation system are still new for most of the representatives of the elements of the system. Further, agreement on which institution should be responsible to develop and coordinate the national innovation system has yet to reach. Perhaps this could explain why most policies related to innovation system are still based on sectoral approaches and interests. However, the government has made serious efforts to strengthen its NIS. This paper provides some highlights existing status of national innovation system of Indonesia and describes some challenges lie ahead.

Key words: National Innovation System, Indonesia, Linkages, Industry Cluster, Innovation Policy