Micro Enterprise (MEs) Upgrading in Indonesia: Why MEs are not Growing?

Abstract

Indonesia had a vast number of micro, and small enterprises and only a few larger enterprises, more than 90 per cent of firms were micro-sized enterprises (MEs). Empirical evidence suggested that most of them stagnated and never graduated into the segment of the medium even small-size enterprises, only a small minority of them graduated to the next size category. This research referred to this group as upgrades. It raised the question as to which factors determined the upgrading of MEs into higher scale. The target population of this study was MEs which graduated to small enterprise, operating in different lines of business. The sample size of this study was 209 enterprises. Responses of the subjects were collected through questionnaires. Structural Equation Model (SEM) was used for analysis. As a result, the main factors determined the upgrading of MEs was shaped by internal (i.e. financial literacy, operational training, accessibility to a financial institution) as well as external (i.e. policy, social environment, challenge) factors. SEM results showed that financial literacy and operational training were the most critical determinant to upgrade the scale level of MEs. Meanwhile, lack of accessibility to the financial institution could not stop them from surviving, since they financed by their capital. External factors also contributed significantly to the upgrading of MEs. Eventually, the research provided policy recommendations not only specific to develop microenterprise, but should further upgrade the size of micro size enterprises in operation, management and policy.