Finance and entrepreneurship in the small-business sector in Indonesia

Abstract

This dissertation attempts to describe and explain the ways in which small businesses . in Indonesia finance their initial establishment and subsequent expansion, and to evaluate the Government's policies relevant to small businesses - particularly those relating to financial aspects. Since the small-business sector is quantitatively very significant, and since little research has been done on the financing of small firms, the study should be useful in helping to formulate future policies and in evaluating current ones. The main data base for the study consists of records of interviews with 114 firms and six commercial banks in Yogyakarta. These interviews were carried out by the author in 1978. Particular attention is given to the popular notion that capital markets are imperfect in less-developed countries, and that this imperfection impinges on small firms in such a way as to constrain their growth. It is argued here that such views are based on superficial and subjective observations of these markets, that there is no substantive evidence to show that they are imperfect, and that small firms' alleged lack of access to finance is greatly exaggerated. The evidence presented in this study suggests that finance is best seen as just one of many problems faced by business owners. Accordingly, it is not access to finance (or lack of it) which is the primary determinant of firms' growth performance, but the entrepreneurial ability of their owners. The Indonesian Government uses the formal finance sector quite extensively as an instrument of economic policy. The most important aspect is the simultaneous subsidisation of State bank lending and control of the interest rates at which this is undertaken. It is argued here that interest rate control works counter to the objectives of the subsidies. This applies to lending policy in general and also to the particular programme which aims to provide greater access to low-cost funds to small pribumi businessmen. Despite the Government's announced intention to promote small pribumi firms, much could be done in several areas by way of changes to other policies which conflict with this objective. Not the least of these would be to discontinue the practice of providing a wide range of explicit and implicit subsidies to large firms.