Esbm lecture 4

Entrepreneurship
and the Economy
Authored by: Vierri Christian
Submitted to: Johan Jang

Analysis on Micro, Small, and Medium
Enterprise (MSME) impacting the economy
Micro, Small, and Medium Enterprises are currently the most popular enterprise for entrepreneurs in every
country, developed or undeveloped. MSME is basically called the “backbone” of the economy in each
countries. MSMEs are said to be helping economies based on increasing employments, sustainable growth,
increase of trade and the earnings of export, and lastly, it helps develop entrepreneurship skills to many people
in the society (Singh and Venkata, 2017).
Most of these businesses start as a small company, and if they are capable of earning better profit, then they
would automatically move up as a medium sized company. As most of MSMEs are committed to
socio-economic goals, their main objectives are too earn profit, innovation, and to help their surroundings.
Generally, these helps would include recruiting unemployed workers, and help provide to people under the
poverty line (Singh and Venkata, 2017).

Region Number of MSMEs (In Millions)
East Asia 185
South Asia 80
Sub-Saharan Africa 40
Latin America 50
Central Asia and Eastern Europe 20
Middle East and North Africa 20
High Income OECD 60
Total 455
Table 2: Region-wise estimated
breakup of micro, small and medium
enterprise (Singh and Venkata, 2017)

According to IFC, there are an estimate of 455 million MSMEs in the world, of which 80% belong in emerging
markets, and about 70% of them that are based of micro enterprises, as shown in Table 2 above (Singh and
Venkata, Quoted by IFC, 2010).
It could also be shown on Table 2 that the number of MSME businesses in High Income OECD is not very high.
This is because in high income OECD countries, MSME businesses has a hard time in gaining access to public
procurements, whereas public procurement is important for MSME as it is the source of direct income for
companies. Another problem faced by MSMEs in high income OECD countries is that the countries are already
developed, which means that the large firms holds a huge power in innovation and workforce skills, making
MSME businesses not have enough resources to catch up with the large firms (OECD, 2017).

According to Singh and Venkata (2017), MSMEs have played a huge role in the local and international
economy, contributing 55% of GDP and 65% total employment in high income countries, 70% GDP and 95%
total employment in the middle income countries, and over 60% GDP and 70% total employment in low income
countries.
Moreover, the impact of MSMEs in the local and domestic economy could be said that it is to increase the
growth of GDP in the country, contribute to society by the creation of jobs and employment, and increasing the
government revenues through their payment of taxes and duties.

Comparison of impacts to economy by
MSME and Large Business
The comparison of impacts to economy by MSME and Large business could be said that MSME holds control
of 455 million businesses in the world as of 2017, way more than large businesses. It could be said that MSME
has a better opportunity in contributing to its society by creating more jobs to people around them (Singh and
Venkata, 2017).
Another one could be that MSME businesses has an objective of innovation, so it means that many MSMEs
would have more innovations than large businesses, which concludes that it would need a large amount of
workforce in order to create the output of the innovation, unlike in large business, it would take them years to
create a new innovation as they would have to make sure that the risks are not high, as it would be a big step for
the large company (Deeb G, 2014).

How MSME and Large Business
could impact different levels of the
economy in Local, Regional,
National, and International Context

Impact of UMKM (MSME) and Large
Business in Indonesia (National)
As stated by Tambunan (2011), the presence of many micro and small businesses in Indonesia just shows that a
large number of people in Indonesia is unemployed and/or has poverty problems as these businesses are
established by people living in a poor household. However, the government has taken notice about the number
of small businesses being established, which makes them create a new constitution of “UU No. 20 Tahun 2008”
about UMKM to help them get paid attention to, and that they could ask for funding from banks.
Therefore, the impact of Usaha Mikro, Kecil, dan Menengah (UMKM) in Indonesia is that it helps create jobs
for the society, which means that unemployed and unqualified people could have a job that produces money,
leading them to go above the poverty line. UMKM also helps Indonesia increase economic growth and national
stability in the economy (Indonesia B, 2015, p.27).

2010 2011 2012 2013
Total MSME
(UMKM) in
Indonesia
(Units)
53,823,732 55,206,444 56,534,592 57,895,721
Growth of
UMKM in
Indonesia
(Percentage)
2,01 2,57 2,41 2,41
Total UMKM
Workforce in
Indonesia
(Units)
99,401,775 101,722,458 107,657,509 114,144,082
Workforce in
Indonesia
(Percentage)
3,32 2,33 5,83 6,03
Total Large
Business in
Indonesia
23,345 23,370 23,592 23,698
Total Large
Business
Workforce in
Indonesia
(Units)
4,501,145 4,629,369 4,928,839 5,004,912
Table 3.1: Growth of
UMKM and large
business in Indonesia
as of 2010-2013 (Bps,
n.d.)

As Indonesia is considered a developing country, UMKM businesses has created a huge impact in employment
of Indonesia. As of 2013, Badan Pusat Statistik (BPS) has stated that UMKM has contributed 6,03% of growth
in employment, and has contributed a total of 57,895,721 units of UMKM businesses being held in Indonesia
(Badan Pusat Statistik, 2016). The table also shows the consistent growing of UMKM businesses in Indonesia
as of 2010-2013 which is from 2,01%, to 2,57% in the next year, and then 2.41% in 2013, while the workforce
has been constantly growing from 3,32% in 2010, to 6,03% in 2013. This shows that the growth of UMKM has
helped the people of Indonesia to have jobs and stay above the poverty line (Badan Pusat Statistik, 2016).
UMKM businesses in Indonesia has also contributed a number of positive that are underestimated. One of them
being that UMKM is spread everywhere across Indonesia, which helps in providing basic needs to the
community, and also the increased number of uses of local raw materials and resources which leads to saving
the foreign exchange of Indonesia from becoming unstable (Indonesia B, 2015, p.30). Some UMKM businesses
are already advanced enough that their market share is no longer national, but international. The data from
Kementerian Koperasi in 2017 shows that the number of foreign exchange players are mostly from UMKM
businesses, reaching up to Rp.88,000,000,000 (Billion). This shows that UMKM businesses has helped
providing income of Indonesia in the form of foreign exchange (Dwi, 2017).

Local
As in Jakarta, UMKM have impacted the economy by dominating 93,46% of the market, with 1,14 million units
of businesses generating in more than 15 categories of business. This means that UMKM business have
impacted more to the economy in Jakarta than large businesses in Jakarta which only covers up about 6,5% of
the market. It is seen from the data that Jakarta Barat covers up the most MSME business with a total of 26%,
containing 322,049 units of businesses in Jakarta, while Jakarta timur cover up 21% and Jakarta Selatan with
20%. Most of these businesses are either trading businesses, or processing industries, except in Kepulauan
Seribu, where most of the small businesses are based on accomodation and food & beverage businesses (Jakarta
K, 2018). MSME businesses who conduct a trading business in Jakarta are usually in a form of street vendors
who do not have enough capital to expand their business, which means that the small businesses would need
new innovations in order to help expand their business to a larger size.

Regional
UMKM (MSME) has also impacted the economy in the region of Jawa Timur, dominating 99,85%, having
6,825,931 units of businesses as of 2013, increasing by over 2 million than the year before, leaving only 0,15%
of large businesses. From the 99,85% of UMKM, 85,09% are in the form of Micro business, 14,19% of Small
business, and 0,57% of medium business. UMKM also contributes to 98% of workforce in Jawa Timur. UMKM
businesses has impacted the economy of not only Jawa Timur, but also nationally as it is said to be the second
highest economic contribution after Jakarta. In Jawa Timur, most of the UMKM business are formed by the
agriculture sector, controlling 60% of UMKM, followed by other businesses with 39,75%, having more than
11,117,439 workforce combined. To conclude, Jawa Timur has improved their economy growth by 6,55% in
2013 by the help of UMKM businesses (Istifadah, 2015). As most of MSMEs in Jawa Timur is controlled by
agriculture sectors (Istifadah, 2015), it might not be a great idea for the agricultural businesses to turn into a
large business as there would be many competitors competing with the price of their products, which might not
be good for the large business as it would not be able to decrease the price of their products as low as the
smaller businesses.

International
MSME businesses have impacted many levels of economy internationally, as it is said to have helped the
economy not only by increasing employment rates, but it has also contributed to the growth of a country’s gross
domestic product (GDP) based on increased outputs and profits made. MSMEs have also helped governments
increase their revenues by the large amount of MSME businesses paying taxes and duties.
Table 3.2: MSME Growth rate by
income group from 2000-2009 (Kushnir,
Mirmulstein, and Ramalho, 2010)

As seen in table 3.2 above, it shows that the growth of MSME businesses have been affecting more
lower-middle income group people than any other. The high income group shows a less growth rate as most of
them are based on higher base, as the lower-middle income groups tend to innovate and grow faster than higher
income groups, who believes in “higher income - slower growth rate” (Kushnir, Mirmulstein, and Ramalho,
2010).
It is also shown in the table that MSME businesses has created an impact by contributing in job creations and
economic development mainly for the lower-middle, low, and upper- middle income groups, and also holds
33% of employment in developing countries.

Table 3.3: MSME contribution to GDP
(Kushnir, Mirmulstein, and Ramalho, 2010)

In table 3.3, it shows the contributions MSME businesses have impacted to GDP contribution in each regions. It
also shows that East Asia has been the most impacted by it, which is mostly from China, with MSME
contributing 80% of the total employment (Kushnir, Mirmulstein, and Ramalho, 2010).
The tables 3.2 and 3.3 has showed us that the growth of MSME has impacted the economic development and
job creation globally, measured through their regions. It shows that MSME has benefited the society by
contributing as a social economy through job creation for low-middle class people, and also contributing the
growth of GDP by the goods or services provided, and government revenues in boosting taxes and duties.

Reference
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Deeb, G. (2014). The 5 Reasons Big Companies Struggle With Innovation. [online] Forbes.
Available at:
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Dwi, H. (2017). 3 Peran Penting UMKM. Penggerak Penting Ekonomi Indonesia. [online] KOMPASIANA.
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OECD (2017). Enhancing the Contributions of SMEs in a Global and Digitalsied Economy.
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erprises_and_Their_Constraints_A_Story_from_Indonesia [Accessed 23 Nov. 2018].

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