Micro and Small Enterprises (MSEs) in Indonesia: Three Essays

Abstract

This thesis presents three papers on issues related to the sustainable development of micro and small enterprises (MSEs) in Indonesia. The first paper examines the impact of electricity blackouts on the performance of manufacturing MSEs. The identification strategy involves first examining blackouts determinants, and then using these determinants as instruments in an instrumental variable (IV) dynamic panel fixed effects estimation while controlling for factors that potentially affect productivity and are correlated with blackouts. The findings show that the reasons why Indonesia has blackouts are under-investment in the power sector and poor Indonesian national electricity company (Perusahaan Listrik Negara or PLN) governance. The results show that electricity blackouts reduce average labour productivity and that the consequential loss for manufacturing MSEs amounts to approximately IDR 71.5 billion (USD 4.91 million) per year. Introducing a captive generator as a way to cope with power outages is positively associated with productivity and MSEs that have captive generators benefit when the power supply is poor.

The second paper examines the effects of internet utilisation, as part of digitalisation, on the performance of MSEs in Yogyakarta. Relying on primary data collected from MSEs in Yogyakarta, the province with the densest MSE population in Indonesia, the identification is achieved through an IV strategy. The paper exploits the fact that the differences in geographic topography produce conceivably exogenous variations in the strength of cellular signal that MSEs in various areas can receive to connect to the internet. Once geographical proximity had been controlled for, the difference in cellular signal strength should be due to geographical happenstance and building development. The findings show that internet utilisation has enabled MSEs to engage in the digital economy and has improved labour productivity and exports. The associated monetary benefit due to internet utilisation is substantial for local people.

The final paper evaluates the impact of targeted social assistance programs on MSEs performance as a proxy for the development of local economies. Exploiting variation in the timing of conditional cash transfer implementation in Indonesian subdistricts, the paper examines the effects of a key social assistance program on the performance of local MSEs in Indonesia. The analysis is based on a linear subdistrict fixed effects model, combining data from surveys of manufacturing MSEs with village census data. Results show that exposure to the program contributes to an increase in labour productivity in the medium term. The overall effect is driven by increased productivity in urban areas, in villages close to cities and in non-coastal areas. Women engaged in MSEs are also benefited from the program. No immediate impacts are observed. Relaxing credit constraints appears to be a mechanism through which the program affects MSEs in the local area. Show more