The economic role of formal and informal inter-firm networks in the development of small and medium industrial enterprises: study of symbiosis in the Indonesian garment industry

Adam, Latif (2007). The economic role of formal and informal inter-firm networks in the development of small and medium industrial enterprises: study of symbiosis in the Indonesian garment industry PhD Thesis, School of Economics, University of Queensland.

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Author Adam, Latif
Thesis Title The economic role of formal and informal inter-firm networks in the development of small and medium industrial enterprises: study of symbiosis in the Indonesian garment industry
School, Centre or Institute School of Economics
Institution University of Queensland
Publication date 2007
Thesis type PhD Thesis
Supervisor Clement Tisdell
Total pages 320
Language eng
Subjects 340205 Industry Economics and Industrial Organisation
Abstract/Summary It has been frequently argued that the formation of inter-firm networks (business cooperation) could be used as an effective means to promote SMIEs in Indonesia. However, as the majority of previous studies have concentrated largely on investigating SMIEs’ internal management, there has been only little detailed information available concerning the determinants and the economic role of inter-firm networks in the development of Indonesian SMIEs. This thesis discusses not only issues involving the development of SMIEs from the angle of SMIEs’ internal management, but also goes further to examine what are the determinants impacting on the efforts of SMIEs to develop and maintain long-term inter-firm networks, and to what extent and how have inter-firm networks contributed to the improvement in their performance. Thus, this thesis is expected to make several distinctive contributions to knowledge since it provides the first examination of the determinants and the economic role of inter-firm networks in the development of SMIEs in the Bandung garment industry, and is the first estimate of technological capabilities, competitiveness, and growth of SMIEs in Indonesia. To provide a better foundation for considering these three issues, this thesis starts by analyzing the development of both the Indonesian SMIEs and the Indonesian garment industry. Subsequently, this thesis constructs a theoretical framework by adopting a pluralistic theoretical approach. The theoretical framework emphasizes the importance of trust and competency as fundamental determinants for cementing the formation and operation of a network. The framework also highlights several advantages that SMIEs can enjoy from their involvement in a particular type of inter-firm networks. Using these initial analyses and the theoretical framework as guidance, a case study is then conducted by surveying 210 SMIEs in the garment industry in several specific locations of Bandung. The analysis outlined in this thesis indicates the important role of SMIEs in the Indonesian economy. SMIEs are able not only to create employment and generate income for both household economies and the national economy, but importantly also to contribute to Indonesia’s industrial exports. However, despite these important roles, the analysis of the survey (fieldwork) data also indicates that SMIEs suffer from a number of problems. It is found that most SMIEs surveyed face difficulties in securing and expanding their markets. They also have limited resources and access to capital, technology, and raw materials. The majority of SMIEs surveyed eased their problems by engaging in inter-firm networks. However, due to unfair practices, untrustworthy and incompetent partners, a significant number of them terminated and discontinued their engagement. Consistent with theoretical arguments, it is found that by developing inter-firm networks, SMIEs surveyed have an alternative solution to securing and expanding their markets. Furthermore, developing inter-firm networks provides opportunities to SMIEs to have better access to capital, technology, information, and raw materials. This suggests that inter-firm networks can be used as an important means of facilitating the development of SMIEs. Three important conditions may facilitate the preference of the majority of SMIEs surveyed to develop inter-firm networks. Firstly, entrepreneurs in the Bandung garment industry come from a similar socio-cultural background. Furthermore, Bandung’s garment products are popular among many Indonesian for their up-to-date design, good quality, and competitive prices. This popularity attracts many enterprises from Bandung and other Indonesian cities to develop networks with Bandung’s garment enterprises. In addition, by using a binomial logit model, it is found that several attributes of entrepreneurs, particularly educational background, correlate positively with the decision of SMIEs to develop inter-firm networks. The higher educational level of entrepreneurs, the more likely they are to develop inter-firm networks. The fact that the majority of entrepreneurs interviewed have a high level of educational background could be another reason why inter-firm networks have been adopted as a common strategy by the majority of SMIEs surveyed. This is because educational background correlates positively with the ability to build contacts and to communicate with others. The better entrepreneurs communicate with others, the more capable they are to develop inter-firm networks. In line with the theoretical argument, the analysis of the fieldwork data also indicates that trustworthiness and competency are fundamental determinants for the success of long-term inter-firm networks. Thus, to develop such networks, SMIEs need not only to build trust and competency, but also to find trustworthy and competent partners. This entailed several initial mechanisms being utilized by the SMIEs surveyed. Interestingly, the initial mechanism that SMIEs choose to develop inter-firm networks determines whether or not their networks can survive over a longer period of time. Indeed, as the estimates of the binomial logit model indicates, if entrepreneurs develop cooperation through mechanisms other than trade and industry associations and government programs, this increases the probability of long-term business cooperation. In contrast, if entrepreneurs develop business cooperation via trade and industry associations and government programs, this decreases the probability that cooperation will continue over a longer period of time. By using an ordered probit model, the analyses of the survey data also shows that inter-firm networks, together with several other variables, positively influence the performances of SMIEs surveyed. If SMIEs are involved in inter-firm networks, this increases their probability of improving their technological capabilities, expanding their markets, and accelerating their growth. However, the estimates of the ordered probit model also indicate that each type of inter-firm network brings a different positive impact. Engaging in more than one type of inter-firm network has a larger impact on improving the performances of SMIEs surveyed than involvement in one type of network. Also, entering a vertical inter-firm network (putting out and subcontracting) has a greater positive impact in enabling SMIEs to increase their business performances than entering into horizontal inter-firm network (clustering). The significant role of inter-firm networks in providing various benefits for SMIEs may in turn encourage the government to become involved in the promotion of inter-firm networks. However, by assuming SMIEs that can maintain their inter-firm networks over a longer period of time are those that succeed in developing their networks, it is found that such networks can only be developed successfully if they are based on economic and profit motivations. This suggests that the government should focus and limit its involvement in the promotion of inter-firm networks by only adopting market-oriented policy based on actual needs as articulated by SMIEs themselves. Indeed, as the SMIEs surveyed mention, instead of intervening directly, the government should pay more attention to the creation of conducive and stable legal and commercial (economic) conditions. Many SMIEs believe that such an environment is an important prerequisite not only to stimulate the development of inter-firm networks, but also to ensure that these work effectively. Without having to intervene directly, there are many ways in which the government can support the development of inter-firm networks. The first important one is to design and introduce a legal framework (laws) that can be used to solve commercial disputes of firms in a network. In addition, the government could eliminate various nuisance taxes and reduce tariffs and taxes on high quality imported inputs to enable SMIEs to develop inter-firm networks. Finally, the government should eliminate discriminatory policy against SMIEs and implement anti-monopoly laws to ensure that SMIEs and LIEs compete fairly.
Keyword Clothing trade -- Economic aspects -- Indonesia
Business enterprises -- Economic aspects -- Indonesia
Strategic alliances (Business) -- Indonesia
Small business -- Economic aspects -- Indonesia
Business networks -- Economic aspects -- Indonesia

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Created: Fri, 21 Nov 2008, 16:21:23 EST