By :

 Noer Soetrisno


A  b  s  t  r  a  c  t


Small Enterprises as the main player of Indonesian Economy and main provider of employment of nearly 89% of total employment, however its share in GDP accounted for 41% only. The medium enterprises that been expected to play as effective link between small and big enterprises only contributing limited role in employment (10.55%) and value added (16%). Indonesia’s definition of SMEs is broad in scope and base on sales and assets. The main problem of SMEs in Indonesia is extremely low productivity compared with big enterprises, particularly in agriculture. Micro enterprises occupied the biggest number of small enterprises of nearly 98% of them. The role of science and technology is very important, however its should suitable to local condition, serve the cluster of industry and link the SMEs with the rest of the economy and the world market. Furthermore linkage with financial support, both bank and non bank financial institution, will make industrial and information technology to be an effective instrument in promoting SMEs. The success of promotion of SMEs will create long term sustainable economic growth in greater participation of people and more equitable results. In this regard, clustering approach to SME development will make the program focus, well targeting, effective, market driven and sustained. The role of BDS provider very critical in bringing the cluster become a dynamic one.














Noer Soetrisno




     Indonesian economy is basically characterized by the existence of grassroots economy in the small enterprises sectors which accounted to nearly 99.95 percent of economic undertaking. In the year 2000 an estimate of the number business establishment was published by Central Bureau of Statistics reported that currently there are more 40 million unit of small economic undertaking units in all sector of the economy, including agriculture, and at the same time there are only around 60 thousand medium enterprises and more than 2000 unit of big enterprises. However they contribute about 41 percent only to GDP, hence together with medium enterprises reach  slightly over 57 percent in the GDP, while about 43 percent are contributed by big businesses which contribute about half percent in the labor absorption.


   Since the coverage of SME definition by Law no 9/1995 cover all sector of the economy and based on amount of annual sales and assets other than land and building, the size of small enterprises include also the micro enterprises which has been estimated about 97 percent of total small enterprises establishment or about 39 million unit. Hence the number of small enterprises excluding micro size enterprises only slightly more than one million unit. The main weakness of the SME sector in Indonesia is productivity gap between small sector and the big size enterprises. The value added/worker in the sector accounted about 0.5 percent of national average value added/worker in the big enterprises.

* Paper Submitted to UNCTAD Expert Meeting on Improving the Competitiveness of  SMEs through Enhancing Productive Capacity : Financing Technology, Geneva 28-30 October 2002.

The evidence of low productivity has create wide gap in the market share and living condition of the worker. At least there are two important reason for low productivity in the small sector are due to lack of appropriate technology in production and low investment density in small sector especially in agro- based industry. This obstacle is worsened by the fact that small sector has nearly no access into commercial banking services and other financial services. Therefore it is relevant to find modalities in improving technology and its financial support for SME development.


     Indonesian economy which is characterized by dualistic nature of the modern and traditional has bring the approach in SME development become more complicated and required suitable strategy. In this regard since the early 2001 Indonesia has been adopting SME clustering strategy in SME development. The development of SME in Indonesia out side agriculture sector has been increasingly got attention since the middle and late seventies, however it was moving very slow because it was trapped by sectoral ego and lack of focus and consistency, both in financial and non financial supports.

     In regards to the national policy guide line SME development policy has presently got a high support. The decision of the House of Representatives has outline the importance and direction of economic development that place SMEs as the pillar of the economy. On the other hand Law on National Development Program has been enacted and outline the strategy on SME development. In this regard Indonesia has produce a multi stakeholder participation in formulation of SME Action Plan namely Medium Terms Action Plan ((MTAP) supported by Asian Development Bank. The MTAP has outline for policy action namely: first, creation of conducive policy environment at national and local level; second, improving access to productive resources both financial and non financial resources; and third, strengthening entrepreneurship development. Hence the policy guide line is in existence and one of the priorities is promoting competitive strength of SME. This objective will be achieved through development of competitive cluster of SMEs.


     This paper is aimed at explaining the rational and understanding of cluster development strategy (CDS) and the implementation in Indonesia. Since the strategy just newly implemented the paper will provide al on going evaluation in some cases and the plan for expansion. The instruments and the prospect of the CDS will also be part of the discussion.


The Role of SME  in the Indonesian Economy


     Among Asian countries experienced with monetary crisis Indonesia is the worst one, because the crisis has expanding into economic and multi dimensional crisis. however the crisis has brought an important lesson to Indonesia on the strategic position of grassroots economy and the SME sector. This is partly related to the weakness  of the past development policy in maintaining high economic growth performance through massive support to big businesses. Because during the crisis the maintenance of economic activity, particularly in basic need supply has been secured by traditional sector and small business sector. Since the crisis started in the mid of 1997, Indonesian economy was slump down with a negative growth of minus 13.70 percent in 1998 and starting gaining a positive growth in 1999, however until the present time (second semester of 2002) the economy not return to the level of pre crisis yet. The recovery process take nearly five years make Indonesia has been caught up by or left behind its competing economies.


     Indonesia started to pay more attention to SME outside the agriculture sector since mid 1970s, however concerted effort produced a slow progress in transforming into a modern industry. Several measures has been exercised however they are terminated as the project gone, hence lack of sustainability. In the eve of strengthening economic growth the SME sector was lack aside and strong initiative from the central government in planning process has weakened the role of local initiative to explore local potential which are commonly pro SMEs. On the other hand macro target base on growth achievement tend to neglect the consideration of strengthening SMEs, hence the decision is biased against SME. Only during the crisis SMEs gaining the momentum because they can save the economy from further swing down.

      The important of SMEs in the advanced economies commonly associated with the maintenance of growth and promote employment, while at the same time it is also efficient sources of export growth through efficient supporting industry. In Indonesia during the process of regaining the positive growth since 1999 the role of SME sector has been considered important. In the year of 2000 Indonesia recorded a revival of positive growth of 4.7 percent, which has been recognized driven by aggregate consumption side that reflect the strong support of small sector. The remaining question is the maintenance of the existence of SME as exposed during the crisis need to be continued in the future, otherwise the revival of conglomerates will marginalize them. It is evidence that the middle sector has not shown their recovery process as exposed by big businesses. Starting 2001 the biggest contribution has been regained back by big enterprises in the manufacturing sector as it was experienced before the crisis.


     The biggest contributor to the provision of employment are coming from three main sectors of the stronghold of SMEs  namely, agriculture, trade hotels and restaurants and manufacturing industry. The strong domination of small sector in the agriculture and the service sector has make them dominate the job provision to the economy which in total accounted for 99.44 percent in the whole economy. This fact make the SMEs should be given greater attention because of its contribution to the support to the living of the masses of the population. However at the same time this make the burden of SMEs become complicated, since that they are not for developing viable and competitive SMEs only but for employment and poverty reduction as well. The argument behind the inclusion of SMEs in poverty reduction orientation is that the fact that the  majority of small business in Indonesia are micro enterprises and the informal sector which are relevant to link the objectives..


     In addition SME also play a pivotal role in the promotion of local economy and local community which are very important in promoting regional equity in economic development. SMEs also proven to be market creator and innovation to the economy both at local and national level. The innovation of SME generated from its flexibility to the changes and sensitivity to the need and capacity of the market (Urata, 2001). They are flexible and responsive, therefore very creative and innovative in responding the market, particularly in the handicraft and garment industry. The innovation also found to be a result of dynamic linkages between enterprises, particularly interaction between the traditional and modern sectors. The latter will depend on the ability to make efficient link between small and big enterprises.


     In the future the role of manufacturing sector will be critical, since value added creation at first step can be explored from the processing activity only. The condition of the processing sector at this stage did not sufficiently utilize the available raw material, but some industry has been experiencing difficulty in getting the input due to inefficient trading system or inappropriate distribution system. The existing processing sector fail to provide efficient link with the local potential yet and make them not able to explore potential comparative advantage.

On the other hand, big businesses sometime facing difficulties in input procurement base on local sources due to insufficient quality and quantity as a result of lack of efficient intermediary. The link between input producers and the processing industry still weak hence developing the capacity of intermediation by the agent is important. The linkage between player are need to be strengthen through several program. The gap in productivity in terms of value added per worker confirm that there is a weak linkage and inefficient matching between actor implies that there is no supporting process among the actors.


     The SME sector in Indonesia majority only seen as another element of the economy characterized by lack of and exclusion from the financial services. This evidence support the strong thesis on dualistic character of Indonesian economy that make transformation process through industrialization went in a slow process and make trickle down effect fail to be materialized. SME development in Indonesia not only related to merely economic problem but to also evolve socio-cultural dimension, particularly in the traditional segments of all sectors in the economy. This is also indicated by low ratio between population and enterprises or number of SME out side the agricultural sector as a benchmarking index (Harvie, 2002). 


     In terms of number of establishment Indonesian SMEs dominated by agriculture and services (RTH=retail, hotel and restaurants) sectors which occupied 60% and 24% of the total establishment respectively. In terms of value added accounted for 26.43% and 30,81% of the SMEs total value added or about 16.07% and 14.63% of the total economy value added receptively. The manufacturing sector only accounted for 26.43% in SME establishment  and 36.17% in value added in the SMEs total value added or 31.81% of the total economy (CBS, 2001). Interestingly the of SME in financial and other services (office and enterprises) are very productive which the average output per worker compared to the other sectors of the economy. In terms of average productivity the financial service sector's SMEs make equally productive between small and medium size of financial service providers. The financial services, particularly non bank are also operating in efficient manner, make them very productive and having wider outreach to the community. This good performance makes the role of  SMEs financial institution play very strategic in promoting small enterprises, micro enterprises in particular.


     In terms of export, SMEs do not play a dominant role yet or accounted for about 15% annually during the three years. The small performance of SMEs also related to the fact oil, mining products and plantation agriculture products play a dominant role, and at the same time these sectors are dominated by big businesses of state owned enterprises. Therefore its making the share of SME product which mostly in the furniture, handicraft, leather and garment industry although its dominant in their respective sectors but relatively small in aggregate terms. It is also part of the exclusion produced by the restriction on licensing of exporter in the past which bias against SMEs and favoring big players. At present concerted efforts has been made in line with the interest of decentralization and correcting the flaws in the past.



SME Cluster Development in Indonesia


     Since the early 1970 Indonesia has been adopting a clustering strategy in the promotion of small industry, particularly in regards to technological development. Several government program has been launched such Small Industry Zone known as LIK, Export Processing Zone and other local centers for small industry. This effort has brought into the establishment of new processing industry in the suburb and rural areas. However the growth of the centers was progressing slowly and till today many of them remain at the infant or underdeveloped stage. The SMEs cluster are both brought by creative innovation among them and also product of creation of new industrial location provided by government and private sectors. Some cluster in agro-based industry also promoted through cooperative such as dairy industry and fishery.


     Based on the data collected by JICA Study Team (JICA, 2002), there are at least 9,800 units of small industry centers with the degree of cluster linkages vary, but majority still in the low technology level. In the centers there are about 450,000 small industry in different activities. In term of geographical distribution more than 58% are located in Java, Bali and Nusa Tenggara. Judging from the perspective technology application about 78 % of the clusters are in low technology level, particularly in the ISIC 31, 32 and 34. Where about 50% of the SME clusters are in the food and beverages industry and textile industry. This evidence indicates that the clusters are actually in the early stage of agglomerating in the same location although in terms of size are also considerably small.


            With regards to the labor utilization the average SMEs in the clusters employing 3 worker which are smaller than the maximum number cottage industry that employed 4 worker or less. However compared with the national average of worker employed in the cottage industry that been reported of 2 person, while small industry on the average employing 8 worker. About 70 percent from the grouping of industry by size of labor found to in the low level technology of industry. This evidence strongly suggest that SME cluster in Indonesia not yet developed but the embryo of the element are already there. The immediate effect of the technology utilization and labor absorption as indicated average value added of the cluster only about 1 billion rupiah or lower than cottage industry that recorded  IDR as 1.2 billion . on the other hand small industry has reached IDR 2.9 billion  or more than double of the productivity of the cluster and small industry. The low productivity of the cluster also exists in all sectors of the economy.

Looking at from the perspective of technology utilization and the stages of cluster development there are three stages of progress in cluster performance. The group of low technology having average productivity of worker of IDR 970.000 and middle level technology of slightly over IDR 2 million  while the group of high technology has reach IDR 8.24 million . The gap of average worker productivity in SMI (Small Medium Industry) can be put in an index of 100 for low technology, 212 for the middle level technology, and 849 for the high technology respectively. This performance indicates that the room for improving productivity is huge.  The gap in the worker productivity in the SME cluster industry however still far below the gap in whole economy where small enterprise only account for half percent of big businesses. Hence industrialization still considerably as a means of promoting productivity while at the same time promote narrowing the gap.


     Clustering is a right strategy in focusing the promotion of SMEs, particularly when the location of the industry are scattered in far reaching each other and tend to agglomerate in accordance of similarities in output, input or technology/machineries etc. Clustering also help to make easier in evaluating the performance of the program which theoretically can be expected to be a growth point in each respective area. It is also potentially create an embryo for efficient networking among similar or related clusters. The SMEs cluster development program is basically creating an integrated support in selected clusters There are three main criteria for the selection of the cluster, namely: the prospect of market for the product of the cluster; the number of SMEs and total monthly sales of the cluster should sufficiently feasible to absorb the business development  services and financial services provided to the clusters; and action taking capacity, improved technology, the existence of linkages and infrastructure supports are in favors. Starting in 2001 there has been 99 clusters selected in the program, and currently the selection for another 332 clusters are in progress. in the coming year of 2003 another 500 cluster are planned to be recruited in the program. The three year program is expected to create an engine for self propelling development by the system.



Development of Non Financial Supports


     Under the SME cluster development program three basic element of development supports are created in each selected clusters, namely Business Development Services, basic financial support through Micro Financial Institution, and strengthening the organization of SMEs  and or industry in the cluster. The program realized that capital is important to SMEs but it is not everything, hence non-financial support must come first to assist SMEs. Over three decades the approach to SMEs development are always supply driven led by strong government program which in turn create dependency and in many cases often slowed down by discontinuity of the program because of frequent changes in policy setting.


     The birth of business development services can be looked at as a respond to the failure of the past orientation in development program which heavily implemented through government led program under expansive extension program, more specifically when it was found successful in the promotion green revolution in agriculture. This success story has been adopted widely in other field of development program including small enterprise development. When extortionist program only produce massive production increase and failed to bring prosperity and capacity building of the actors the non government organization promote an alternative approach of assistance through accompanying program. The so called MIA (motivate, inform and accompany) approach has been widely accepted because of its superiority in capacity building and participatory progress of the actor. However it is also found its constraint in the latter day because of its dependence on outside sources of support, particularly from donor institution. This experience suggest a reorientation in SME development by looking at from demand side and treats the services as a need to SME hence can be run on a commercially oriented basis.


     The importance of Business Development Services (BDS) in SME development also become best practices in many successful SME development program in developed economies, therefore it is justified that the approach can be adopted on larger scale and adjusted with the stages of development. Meaning that its can not be expected to change directly from supply driven into demand driven without a transitory step in bring BDS into SME. This effort also facing difficulty due to the continuation of the old approach of supply driven remain in practice in the sector government program, hence make unfair competition and some time incompetence services in SME promotion.


     The BDS provider are basically exists in most of the big cities and universities. There are at least three sources of non government BDS provider namely universities including technology and incubation centers, NGOs and private BDS provider which has developed in many field of business services centers. However in less developed region such district level and outer Java island non existence of BDS provider are still a common phenomenon. Special effort to the establishment of promotion of new BDS provider is critical, however the possible mushrooming of fake and incapable BDS provider should be avoided. The program should not produce moral hazard to the production of BDS (services) product.


     The BDS provider are commonly reside in urban centers where businesses activities are high, hence it is concentrated only in urban centers with low outreach. This situation make SMEs difficult to get access to BDS services as a productive input. The government has been introducing so many model such as business incubator in different sector, business consulting clinic/unit, technology centers etc., however the sponsoring program to the promotion of business advisory unit was not productive and sustain yet due to lack of market creation. Theoretically government should act as regulator and facilitator including market and product development for the BDS provider. This argument became the basic philosophy to be the assignment to the BDS provider to serve a certain cluster that has been selected in the program.

     Under the program each BDS involve in contractual partnership arrangement with the government to serve the cluster for three years terms, in exchange government provide start up capital to BDS provider that should be paid back in the form of servicing the other cluster nearby or any other area which agreed by both parties within the three year period. Having so the BDS provider are encouraged to serve more clusters which is imply giving the opportunity to expand the market. In implementing the clustering strategy the principles guiding the program are promoting business alliance, institutional synergy, outsourcing and benchmarking has been adopted to optimize the local resources utilization. BDS provider can be considered as prime mover to bring the dynamic of the cluster since it is serving the need of SME. The services expected to be provided by BDS provider to the cluster are information services, consultation services, training, supervision and advisory, business networking/contact, market expansion, technology sourcing, business plan and proposal, and business and management consultation. The BDS provider are required to provide office or service center in area of the clusters hence its serve as a pivot to SME - BDS networking in terms of variety of services and expertise.

     The contracted BDS are required to attend consultation meeting with the government officer in charge at field level and provide regular report on its activities and progress of the clusters. To strengthen the capacity of BDS government provide necessary training and other program in servicing SMEs and bringing the SME in the cluster to be a productive one. The capacity of the BDS also been expected to be able to bridge the gap between SMEs and the formal financial institution, commercial bank in particular. The BDS are required to have the capacity to survive on commercial basis and able to manage a cross subsidy process among different client and source in serving SMEs in the cluster. Hence the program is basically creating market by assigning to serve SME in selected cluster and provision of start up capital of about IDR 50 million or about US $ 5 thousand for each BDS, while within three years the government also improving the quality of BDS provider.


     The BDS provider later on can transform into an engine of dynamiting the clusters by stimulating them into a networking. Since for the first year there are 91 BDS joining the program already and the passed on the first test while at the same they are to accumulate experiences during one year serving the cluster the BDS provider has able to form an association of BDS provider aimed at strengthen their network and co-operation and advocating the program. In fact they have practicing replication of the program to the private sectors and local government, hence the process of snowballing effect has started. The first year evaluation also indicate that 75 out of 99 clusters under the program has been able to be identified the strength and weaknesses by the provider. Early observation many cluster has been able to accelerate their growth in the form of sales and saving collected by the MFIs, particularly export oriented cluster in the furniture and handicraft sectors.


     The basic principle of SME promotion through clustering strategy by providing non financial and financial supports can be outlined as follows:

a.   improved the focus of SME promotion by many institution at the field level;

b. creating transformation process of SME supports from bureaucratic promotion into development of sustainable private business development services as an industry run professionally;

c. by giving three years terms of government involvement in the program will facilitate the process revolving program hence create snowballing effect;

d. there will be no direct involvement of government in SME promotion implies that BDS serve as a catalyst to extend the outreach; and

e. the existence of non financial services run by private will guard the process of dynamising the cluster including necessary adjustment process.


     In every cluster a suitable organization also being promoted on self initiative basis. The SMEs association will represent the interest of SME in promoting the creation of conducive climate at local level. The advocacy can be organized jointly with the BDS provider to make the existence of dynamic cluster can be maintained. Under the clustering system the multi stakeholder forum can easily being materialized.


Financial Supports: Micro finance as Basic Services


     The fundamental problem of providing financial support to SMEs is the availability of funding but access to financial institution is the main constraint. SMEs, micro enterprise in particular are often excluded from the banking services, therefore the role of micro financial institutions which financing support to micro and small enterprises are very important. In the APEC for micro finance has been recognized as sustainable tools to micro enterprise development. Under this program the micro finance services are made available in the cluster area to the improvement and establishment of credit cooperatives run by the community. In order to modernize the credit cooperatives the fund provided by government are channeled through the assigned Bank under contractual basis which is tasked also to train and supervise the operation of micro credit. The linked between credit cooperative and the bank can be expected to produce two benefit, meaning that improvement of the credit administration of the credit cooperatives and reducing cost of searching potential good customer through credit cooperatives. This mutual benefit can improved the quality of micro financial institution while at the same helping the bank to extend the outreach to potentially new customer. Each credit societies will receive revolving fund for six years and the grace period of two years and selling their credit at market rate. The bank will provide additional fund if the demand from the market is growing beyond the capacity of the credit cooperatives. The amount of matching fund is IDR 200 million or about US $ 20 thousand for each credit cooperative in each cluster.


     To bring the other modern financial institution to provide services to SMEs in the cluster, the government also provide matching fund for venture capital company in the respective region. This venture capital promotion program is aimed at assisting SME which required managerial assistance from experienced company. At the same time the government also provide matching fund to the credit guarantee company to assist SME in assessing the credit from the banking sector, particularly those viable SMEs but not yet bankable due collateral reason. In addition to the said supports the incubator program also being promoted and the matching fund also provided to the Business Incubator Institution which has SME tenant that having a viable innovation or start to venture a new business. The integrated component of financial supports are aiming at speeding up the progress of dynamising the clusters and making the SMEs can select variety of financial supports in accordance their rational choices and size of loans.


     At present  there are venture capital company at provincial level and credit supplementary institution which operate up to provincial level. Starting 2001 the government make an extensive support to extend the outreach of the institutions to make improved access of SMEs to the banking services. The Non Bank financial institution responsible for assets management and capital development also been established in 1999 namely National Madani Capital Development or PT PNM. This NFI is basically a state owned enterprise being tasked to assists banks and other non banks financial institution to support SME projects. PNM also provide assets management services for SME in venturing new investment such as processing unit in agro-based industry. The export credit institution also being established with the aim of providing funding to SME through banking system.


Financing Technology Development

   At an advanced world technology like these day, we should recognize two different kind of technology which are critical to SME development namely industrial technology and information and telecommunication technology. In promoting competitive SME Industrial technology is important because it is a vehicle to the improvement of productivity and quality of the product. It has been many years the small industry development program has been introduced and effort of developing clusters model also being implemented since mid 1970s in Indonesia. However socio-cultural factor constraint the project to sustain, while at the same time traditional clustering are growing without systematic technological development support. In this regards to make use the existing technology centers, both run by universities and government, are critical.


     The situation nowadays are the fact that there are many technology centers are underutilized, but many SME industrial centers or clusters did not have any access to update technology. One of the important element to make use this relatively available technology the role of catalyst is important, that in fact it can be served by BDS provider. Another potential area for technology development is relocation of replaced technology into the less developed region to reduce cost of new investment. This system also provide a modalities of transfer of skills and provide an apparent ship program to the receiving SMEs.


     The second aspect of technology development are telecommunication and information technology which is very important in bringing the SMEs access to many supports center and global market. The internet utilization by SMEs in Indonesia is considerably very low. In this area there is a need a strong support from government sector before enter into commercial stage. In this regard the efforts has been done by related government and non government institutions as well as developing an overseas cooperation.

     With regard to support in information technology to the clusters, different type of IT program has been prepared. Among others modernizing the IT facilities for credit cooperatives under the cluster program to make them able to provide online services among them. In addition the Center for the Development of SME run by the association also been established. Government also provide assistant program to SMEs in applying IT. The private IT network provided by private sector is also growing recently.


     In general, the strategy adopted by government in SMEs technology development among others are:

First, Focusing the government program for strengthening SME competitiveness through cluster program to make the program well targeting and easy to make an evaluation;

Second, Expanding the capacity of technology centers to reach the SME target through development of different program such as Technopreneur program, technology incubation, venture capital organized by Ministry of Research and Technology and National Science Institutes;

Third, Promotion of Technical Support Centers in the banking office to facilitate the link between SMEs and banking sector;

Fourth, Expansion of micro credit through expanding micro banking and improved non banking financial institutions;

Fifth, Promote entrepreneurship program through universities and other relevant institutions organized by Ministry of National Education; and

Sixth, improve the capacity of local government at district level in SME promotion and technology development, including the establishment of regional research and technology centers.


     In many field of venturing new technology application is commonly supported by government budget, however due to some budget constraints it is limited to supporting pilot projects only. On the large scale basis provision of commercial banking support is available at fully commercial consideration. To increase the access to funding institutional arrangement such partnership between private sectors, banking and SMEs are also encouraged, especially in the agro-industry sector. The decentralization process also brought significant effect on the increase of local government attention on SMEs local resources based industry funded by local government. Models of partnership or co-financing and co-guarantee must be created to help financing SMEs in technology improvement.


Concluding Notes


     SMEs are the backbone of Indonesian economy especially in providing employment and maintenance of sustainable growth and potentially for export. The constraint to the growth of SMEs is productivity, hence the role of technological improvement, both industrial technology and information technology is critical. The clustering to SME development has been adopted to create dynamic clusters through financial and non financial supports down to clusters area. The clusters can be an entry point to the technological improvement through the services of BDS provider. Through this network financing technological improvement can be made available.





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