International Journal of Civil Engineering and Technology (IJCIET)
Volume 10, Issue 04, April 2019, pp. 1788–1797, Article ID: IJCIET_10_04_187
Available online at http://www.iaeme.com/ijmet/issues.asp?JType=IJCIET&VType=10&IType=4
ISSN Print: 0976-6308 and ISSN Online: 0976-6316
© IAEME Publication
Scopus Indexed
THE ROLE OF SMALL AND MEDIUM
ENTERPRISES (SMES) IN IMPROVING THE
LOCAL ECONOMIC GROWTH
Agussalim M
University of Ekasakti Padang, Indonesia
Paulus Insap Santosa
University of Gadjah Mada, Indonesia
Darmini Roza
University of Ekasakti Padang, Indonesia
Rina Asmeri
University of Ekasakti Padang, Indonesia
ABSTRACT
Small and Medium Enterprises (SMEs) have a great contribution to the economic
growth in Indonesia both macro and micro. Economic growth in west Sumatra
exceeded the national economy in 2015 up to 5.46% while the national economic only
4.71%. In 2016, economic growth in West Sumatra only grew about 4.81%. Despite
the decline of economic growth, SMEs remain a factor supporting the economic
growth in West Sumatra. This study was conducted to determine the extent to which
the role of Small and Medium Enterprises (SMEs) in their contribution to the economy
of local communities in West Sumatra. This study was empirically examining the role
of SMEs in improving the economy of local communities by using qualitative methods.
The research result explained that SMEs have already given a big share in improving
the local people's economy due to most of the people of West Sumatera have an
entrepreneurial spirit that have been ingrained hereditarily which has become the
structure root of the original culture of the local economy.
Key words: Small and Medium Enterprises, local economy, Padang.
Cite this Article: Agussalim M, Paulus Insap Santosa, Darmini Roza, Rina Asmeri,
The Role of Small and Medium Enterprises (SMES)) in Improving the Local
Economic Growth, International Journal of Civil Engineering and Technology 10(4),
2019, pp. 1788–1797.
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The Role of Small and Medium Enterprises (SMES)) in Improving the Local Economic Growth
1. INTRODUCTION
Economic problems that occur within the scope of macroeconomics are influenced by several
factors such as high number of unemployment, increase of the poor, and a gap of per- capita
income between the communities, low of human development index and there are inequality
developments between rural and urban areas. However, all of these factors can be overcome if
related stakeholders (government, business and community as consumers) are synergizing
together.
In fact, the presence of business actors both high and mid-level entrepreneurs have a
contribution to the economic development of a country, including developed or developing
countries 1-4. One of the developing countries that focus on improving business performance
in the SMEs (Small and Medium Enterprises)5,6 category is Indonesia7.
The World Bank have released information about the conditions of entrepreneurship
opportunities in Indonesia by issuing the Ease of Doing Business index. The World Bank said
that Indonesia in the ease of investment category has improved since in 2016 among all
countries in the world it was ranked by 106 and then reach 72 in 20178. This means that,
Indonesian government has committed to facilitate all of necessary activities to support the
sustainability of SMEs. The results of the World Bank study can be said as the government
commitment in order to solve economic problems in Indonesia.
The contribution of SMEs sector to gross domestic product (GDP) has been increasing in
the last five years9. Ministry of Cooperatives and Small and Medium Enterprises noted that
the contribution of SME increased from 57.84 percent to 60.34 percent. In addition, the SMEs
has also helped the absorption of workforce in the country. Employment absorption in the
SME sector grew from 96.99 to 97.22 percent in the last five years 7,10. Therefore, the high
level of unemployment can be gradually overcome by the large number of workforce
absorbed. This statement was supported by the results of research from Tambunan that SMEs
sector is able to increase the income of local communities. Moreover, it shows that SMEs
have a strategic role in eradicating poverty and unemployment3. SMEs became one of the
fastest growing businesses and from 3.7 million SMEs became businesses that contributed
99% of which 58% contributed from all jobs and 38 from GDP5. The research findings also
explain that through SMEs developing competent entrepreneurs is very important to note11 in
the development of sustainable SMEs.
The study found that small and medium enterprises can improve the economy, and the
company can improve performance12. Economic growth is one problem at the regional and
national level. Based on the results of the study, it also compares the higher economic growth
to the decline in the unemployment rate13. Research carried out in the development of SMEs
found that through the use of ERP systems there were many advantages for the development
of SMEs14. SMEs also need different help because they have different challenges15.
Furthermore, the research results in developed countries show that the small and medium
enterprises have contributed to the economic growth in a country. For example 1, reveal that
in Singapore, SMEs have participated in increasing its economic growth. National economic
growth in 2015 grew up to 4.71 percent, which in the last semester in 2014 grew by 4.89
percent. This means that, in the period of October 2014 - March 2015 the economic growth in
Indonesia was decline by 0.18% 16. It can be said that, 4.71% of economic growth was
contributed or supported by all areas of SMEs 17. On the other hand, in 2015 economic growth
in West Sumatra exceeds the national economic growth that reached 5.46% while the national
economic growth was 4.71%. Unfortunately, the economic growth decreased by 0.65% in
2016 which only grew about 4.81%. Meanwhile, according to her article 17, describes the
development of SMEs reach about 1.2 million people in West Sumatra.
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Hence, this is not in line with the research results described above where the growth of
SMEs should have implications for the economic growth. The research findings found that for
the development of knowledge about SMEs both from external knowledge sourcing and
internal organizational facilitators can open new innovations related to the business being
developed by business owners18. By adopting Lean SMEs can improve service quality, reduce
waste use time and costs, and can streamline the organization19. If this can be done, then
economic growth can be increased through the development of SMEs. This condition
consequently encouraged the researcher to conduct a review. This study was to determine the
role of SMEs in improving the economy of local communities in West Sumatera.
2. RESEARCH METHODS
In order to figure out the role of SMEs in improving the local economy (in west Sumatra), a
qualitative research method20-23 was used. While, data source used were primary and
secondary data. Technique for primary data collection was conducted through structured
interviews by using instruments of simple question and observation. Informants were
determined by means of "aims" in order to answer the research objectives. The research
informants were any stakeholders related to SMEs either SMEs actors or other parties who
were considered to have contribution in developing the SMEs. Secondary data was derived
from financial reports related to economic development, development of SMEs both national
and regional and regulations related of SMEs as well as the previous research results. The
data obtained were analyzed through SWOT 24-27.
3. RESULT AND DISCUSSION
SMEs have a very important role in making the foundations28 of Indonesian economy better.
SMEs contribute 99.99% of the total BPS business actors (2015)29-32. According to BPS
(2015), this is evidenced by 1998 when economy crisis hit Indonesia; SMEs were able to
survive compared to large category companies. One of the contributing factors that made
them survive was the capital of SMEs was not depend on foreign currency.
The SMEs sector that can develop well in West Sumatra can be classified into: 1)
agriculture, forestry and fisheries; 2) mining and excavation; 3) processing industry; 4)
procurement of electricity and gas; 5) water supply, waste recycling management; 6)
construction; 7) car and motorcycle repairs; 8) transportation and warehousing; 9) provision
of accommodation and food services; 10) information and communication; 11) financial
services and insurance; 12) real estate. The above SME sectors can be grouped into: 1) street
vendors, as an informal group of SMEs; 2) craftsman, have not be able yet to develop their
business properly; 3) SME groups that have been able to develop their business and have
already built cooperation or partnership with other parties related to the progress of their
business; 4) a group of SMEs that have been qualified in managing their business and have
transformed into more advanced SMEs. These four groups of SMEs have different
characteristics. The differences can be seen from the number of employees owned by the
SMEs group. The better the SMEs, the more the number of employees will be.
Chairman Indonesian Chamber of Commerce and Industry (Kadin) Rosan Roeslani 33
states that the contribution of SMEs sectors 34 to Indonesia’s export in 2016 were about
15.8%. If this number is compared with other Southeast Asian countries, such as Thailand at
29.5% and Philippines at 20% therefore, the performance of SMEs in Indonesia is still
considered low. The low performance factor of SMEs is caused by human capital of
Indonesia35.
Human capital is affected by the Human Development Index (HDI) in each country 36,37.
HDI characterizes the quality of community life where the better the community life, the
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The Role of Small and Medium Enterprises (SMES)) in Improving the Local Economic Growth
better the level of HDI will be. The level of HDI in Indonesia is 70, 18, whereas the level of
HDI in West Sumatra is 70.73. Referring to this number, then the HDI level in West Sumatra
is higher than the national figure. This means that, the level of welfare of the local community
(West Sumatra) exceeds the national average. The HDI level in West Sumatera in the last 4
years can be read in Table 1.
Table 1. Community Development Index
No
Year
2
3
4
5
2016
2015
2014
2013
Local
(West National
Sumatera)
70,73
69,51
68,87
68,3
70,18
68,98
69,55
68,91
Source: research result, 2017
According to the table 1 above, the level of HDI in West Sumatra has a tendency to
always be one level above the national HDI. This means, the Government of West Sumatra
has been able to make the quality of community life better, local people are able to have
decent standard of living, have adequate knowledge and a long life opportunity. That standard
of living obtained cannot be separated from the contribution of the local government in
improving the capacity of the community. In addition, the people of West Sumatra have
known to have a high entrepreneurial spirit that has been ingrained hereditarily.
Indicator of SMEs development can be seen from the added value made from the total
value of goods and services produced by domestic territory in a country that are caused by the
existence of economic activity. This indicator is a condition of economic growth called Gross
Regional Domestic Product (GRDP). GRDP shows the rate of economic growth and the role
of each business field within a region. The field of business is commonly identical with the
activities of SMEs, the higher the growth of SMEs, the higher the level of GRDP in an area.
The GRDP rate in West Sumatra can be seen in Table 2.
Table 2. Gross Regional Domestic Product Year 2013 - 2016
No
Year
Local (West
Sumatera)
Nasional
2
3
4
5
2016
2015
2014
2013
148.111
140.705
133.341
125.941
9.433.034
8.982.511
8.564.867
8.156.498
Source: BPS, research result, 2017
Table 2 describes the GDP of West Sumatra and the combined value of GRDP among 34
provinces in Indonesia. The GRDP is the result of total activities or activities of every SME in
all sectors. The results of each SME's activities will contribute to economic growth both in
West Sumatra and national.
Based on the results that have been described above, it can be concluded that SMEs
contribute significantly to economic growth. If economic growth is good then the SMEs
Growth is assumed to also be good. The development of SMEs in 2011 - 2012 according to
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the Ministry of Cooperatives was better than the large business category. The growth of the
SMEs is presented in Graphic 1.
Graphic 1. Development of SME and Large Business Year 2011 – 2012
Source: Ministry of Cooperatives, 2014
Graph 1 shows an increase in growth for SMEs in 2011 by 34.64%, while in 2012 the
growth of SMEs is 38.81. It means that, the growth increase by 4.17%. While, there is a
decrease for the large business. In 2011 the growth reaches 41.95% and in 2012 a decrease
happen by 0.47% where the growth only reach 40.92%.
The duty and authority to build and develop SMEs is in the Department of Cooperatives
and Small and Medium Enterprises of West Sumatra Government, which is represented to the
Small and Medium Enterprises Development Section. This section has the duty to build and
develop community programs in the field of SMEs and coordinate anything related to all
stakeholders. In accordance with its duties, this Department needs to analyze the real
conditions to find out any problems or obstacles faced by the SMEs in developing their
business.
To obtain the optimum conditions, the development of SMEs needs to be analyzed
according to the existing conditions of SMEs in West Sumatra. The analysis should be based
on viewpoint that can maximize the opportunities and simultaneously minimize the
shortcomings and threats (SWOT) faced by the SMEs actors in developing their business.
This condition analysis is considered important to be conducted in order to increase the
growth of SMEs year by year. As a matter of fact, the increase growth of SMEs has greatly
affected the improvement of economy of the local community.
Moreover, potential issues that must be considered in conducting SWOT analysis can be
seen as follows:

Potential of internal strengths, include human resources as a manager of SMEs from
generation to generation, popular brands in various circles, product quality, affordability,
products marketability;

Potential of internal weaknesses, include limited financial resources, inadequate business
development planning and strategies, high production costs, lack of technology, lack of
marketing skills and lack of collaboration with other parties;

Potential of external opportunities, include increase of market growth, changing needs and
desires of consumers, opening up of the marketing out of the region of West Sumatra and even
Overseas, there are new product innovations, new technologies, regulatory changes
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The Role of Small and Medium Enterprises (SMES)) in Improving the Local Economic Growth
(government programs), demographic shifts and nuances of collaboration among SMEs fellow
have begun to take place;

Potential threats include changes and consumer needs, entry of foreign competitors, new
innovations in every product, consumer thrust began to decrease, lack of competitiveness,
stricter regulation, worsening economy, rapid technological change, demographic changes.
Those potential issues above are problems, opportunities and threats that are faced by the
SMEs in West Sumatra which also the existing condition of SMEs development. The issue of
weakness is a shortcoming for SMEs in developing their business.
Meanwhile, the opportunity is the condition of SMEs that are not part of activities that
indirectly may affect to the growth of SMEs in West Sumatra both in positive and negative
ways. It is expected that, this analysis can support the growth of SMEs and will have
implications for the local economy. Furthermore, table 3 below shows the potentialities,
problems, opportunities and threats in developing SMEs in West Sumatra in details.
Table 3. Matrix of Existing SWOT of Small and Medium Enterprises in West Sumatra
Strength
Weakness
Local culture that embed the entrepreneurial spirit Supported tools and machines used are still
that have been ingrained hereditarily.
simple.
Low princes so that can be reached by all walks of Lack of capital to start a business.
life.
Lack coaching and mentoring from the
Ability to process residul production materials into government to raise the micro business unit.
creative and innovative products.
Raw material suppliers are far from business or
The products offered have good quality, brand
even out of town which can slow the production
priority and latest model.
process.
Production quality is better than the similar
Human resource with creative ability is still hard
business.
to find.
Having skilled workers in the industrial sector.
Unstable pricing.
Equipped with quality industrial equipment.
Many competitors.
Having a personal website and forum also contact Has not be able yet to create its own product as a
person of delivery order.
feaured brand.
A harmonious relationship between the owner and Lack of ability to provide goods (ready stock)
his employees and a good cooperation with the
which sometimes have to wait to be able to get the
distributor.
goods ordered.
Warranty in the delivery of goods.
Opportunity
Threat
Lack of business place that provide a comfortable The unstable economic conditions causes the
place, and remove the latest output products and unstable prices of raw materials that can affect the
has provided employment opportunities for local amount of production.
residents.
Local government policies or regulations on SME
Possible to be made as superior product area.
development.
Design of the products can be accepted by wider Low public purchasing power low appreciation of
community.
local works.
The development of creative industries in the
Sometimes there are disruptions due to inadequate
regions is still small.
internet network.
The existence of capital assistance programs from Many competitors follow or imitate the concept or
investors and government.
style that have been created.
With an innovative and creative effort, it will
High dependence on imports of raw materials,
provide a great opportunity become a big business. auxiliary materials, semifinished materials and
other components
The price is unpredictable, when the price
increases, then the selling price.
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By understanding the real condition of SME development in West Sumatera, so that any
potentials opportunities, problems and threats faced by SMEs can be found. In order SMEs
can participate in the context of economic growth in West Sumatra, it is important to identify
and analyze the problems faced and find the solution. From the SWOT make use the
opportunity (S
to achieve the role of SMEs in improving the local people's economy that will automatically
contribute to national economic growth. With the discovery of weaknesses and take advantage
of the existing (W-O) opportunities, strategies to create the role of SMEs in improving the
economy of local communities can be determined. The SWOT analysis has identified the
strength that can overcome the threat (S-T) in developing SMEs. On the other hand, the
weaknesses or problems encountered can be a way to anticipate any threats in the future (WT). The matrix can be seen in Table 4 below.
Table 4: Matrix of the Role Strategy of SMEs in Improving Economy of Local Communities
Strategy S-O
Local Government of West Sumatra in
coordination with the Government of Regency /
City create a new concept related to the
development of develop their entrepreneurship
skill.
Utilizing the history and local wisdom of West
Sumatra in developing SMEs on a national scale.
The government cooperates with SMEs actors and
facilitates SMEs in order to establish partnerships
with SMEs who have been qualified in managing
their business
Strategy W-O
Increase the human resource capacity of SMEs,
improve creativity/product innovation, set up a
comfortable environment and collaborate with
other parties.
Improve institutional coordination involved in
developing SME products, development of
entrepreneursip environment to stakeholders
(SMEs actors).
Strategy S-T
Conducting arrangement or grouping of street
vendors (PKL) of regencies/cities in West
Sumatera in order to identify dependent and
independent SMEs.
Conducting integrated management of SME
development.
Promoting quality products by utilizing the
historical values and the strength of community
entrepreneurship that has been done hereditarily.
Strategy W-T
Provide facilities for easy capital facilities for
SMEs, facilitating ease of obtaining raw materials,
provision of internet network facilities and SMEs
in utilizing technology in managing theirs
business.
Prepare skilled practitioners/ experts for a free
consultation and can provide solutions and insights
on issues facing the development of SMEs.
Source: Research Result, 2018
The matrix above is a strategy matrix to enhance the role of SMEs in improving the
economy of local people that can be guided by the concept of new paradigm in increasing
regional economic growth which is believed as a capital to improve regional economy known
as Modern Regional Policy concept. This concept consists of two elements in improving
economic growth that can be identified as: 1) the existence of SMEs actors; 2) using
technology optimally. The management of SME organizations does have some disadvantages
in operational activities. These weaknesses may include marketing difficulties, access to a
very limited financing sources, limited human resources (HR), raw material difficulties and
also limited innovation and technology. Therefore, as a solution, all stakeholders involved
need to encourage each other, assisting in managing the organization/ management of SMEs
in order to overcome the problems.
The role of SMEs according to some literature as described in the introduction above
explains that if the SMEs can grow and develop consistently then the SMEs can play
maximum role including: 1) create the employment; 2) be able to create new industries; 3) be
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able to compete either locally or nationally or even internationally; 4) encourage fair
competition, a conducive environment as well as strengthen the culture among SMEs actors;
5) encourage creativity and innovation, if SMEs can maximize the information technology; 6)
create partnerships between SMEs fellow members. In the existing condition, the role of
SMEs in West Sumatra is still limited at the point 1. Meanwhile, the other points will
implemented soon. The development of small and medium enterprises should be able to
become a vocational secondary education orientation38-40. The development of sustainable
small and medium enterprises can grow the seeds of entrepreneurs 41-43. So that students can
make career adaptations for their work 44,45. In addition, this condition is very important in
growing the career identity of adolescents46 and career exploration, planning career direction
and determining the direction of career decisions47. This condition is important to note
because the problems associated with the selection and determination of career direction often
stress individuals48 even cause academic stress 49,50. If SMEs are growing, it will also reduce
the stress of job seekers because of the wide open employment opportunities.
4. CONCLUSIONS
Economic growth in a region is determined by its GDP. While the GRDP is determined by the
high and low level of activity or economic activity, which is mostly done by SMEs. In West
Sumatra, economic growth exceeds the achievement of national economic growth. The results
show that the role of SMEs in West Sumatra already has played an important role in
improving the local people's economy. This is also supported by the fact that the people of
West Sumatra have an entrepreneurial commercial spirit which has become the structure root
of the original culture of the local economy.
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