01 young entrepreneur survey ilo east - executive summary

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01 young entrepreneur survey ilo east - executive summary

  1. 1. INTERNATIONAL LABOR ORGANIZATION, JAKARTA YOUNG ENTREPRENEUR SURVEY A survey conducted among Young Entrepreneurs in four provinces in Eastern Indonesia East Java (City of Surabaya and district of Jember) East Nusa Tenggara, NTT, (City of Kupang and district of Sikka) South Sulawesi (City of Makassar and district of Barru) Papua (City of Jayapura and district of Merauke) August, 20 FINAL REPORT Conducted by
  2. 2. 1. Executive Summary The following section presents the summary findings of a business climate survey of Youth Entrepreneurs (YEs) conducted by ILO to assist policy-makers and stakeholders to better understand the business climate of YEs, and to improve conditions for youth entrepreneurship in Indonesia. The survey covers four provinces: East Java, South Sulawesi, East Nusa Tenggara (NTT) and Papua with a sample size of 400 respondents in each province. Each province includes two locations—one urban area with the provincial capital and one semi-urban area, represented by a district with a medium-sized city. The respondents are between the ages of 15 to 29, have full or part ownership of a business or run a business which is owned by their family, and are involved in strategic decision- making in the business. Characteristics of Young Entrepreneurs (YEs) 1. YEs are self-employed or run a micro business. 2. YEs started their business with help from their families. 3. The majority of the YEs employ family members, except for Surabaya, the majority of the YEs employ either direct family members or members from the wider families. The majority of the employees are paid directly, but indirect payment is still very common. 4. The main motivation for starting a business is to be independent and to earn more. Other reasons are because the family wants YEs to become entrepreneurs or because they don’t have a job but need to earn some income. 5. YEs value their profession highly. By far, YEs give the profession of entrepreneur the highest vote followed by government employee, director of a big company and lecturer/teacher. 6. There isn’t a noticeable discrimination of women entrepreneurs. The survey results do not indicate general gender discrimination with regard to most of the key indicators. 7. Age of entrepreneur and years in business are more relevant criteria than gender. The youngest group of YEs aged 15 to 19 IS clearly in a more challenging situation with regard to various factors, such as access to credit. For many questions, the perception also changes depending on how many years the business has been in operation. Social and Cultural Environment Affecting Entrepreneurial Behavior 1. Religious leaders are the most important role models. Including religious leaders along with entrepreneurs in the list of role models to choose from seems to have somewhat misled respondents. Giving a high ranking to a religious leader does not mean that this profession is sought after by YEs, but rather that they highly respect this kind of figure. 2. YEs do not feel handicapped because of their age: The vast majority of the YEs generally do not feel mistrust from customers, suppliers or from financial institutions because of their age. However, the younger the entrepreneurs are (age group of 15 to 19), the more likely they feel mistrust. There is no significant difference between women and men. Business Operation and Business Assistance 1. Access to markets and input-related problems are the obstacles which YEs rate as most severe. Choosing form a list of possible business operation problems, access to markets and problems related to inputs (quality, quantity and price of raw material) are the most severe problems, followed by quality control problems and access to machinery. Financial administration and access to finance follow, and finally human resources related problems are considered to be the least severe problems. 2. Awareness of business services and use of business services is very low. Only around 20 percent of all respondents are aware of business services and of those who are aware, less than half (which is actually less than ten percent of the total sample) have used business services once or
  3. 3. more. Out of those who have used business services, the majority was highly satisfied and the rest at least partly satisfied. The large majority of the users have also paid for these services. Unfortunately, the large majority of YEs are not yet used to looking for external support in case of business problems. 3. Awareness of Business Membership Organizations (BMOs) and willingness to become a member is very low. On average, only 20 percent of YEs are aware of the existence of BMOs and of those who are aware, about one third also become members. Regulatory Environment and Infrastructure 1. Security is a key regulatory environment problem. Security is a key concern for most of the YEs in most of the regions, and was cited by more than half of the respondents. Problems related to legal set-up of the business and business licenses as well as retribution and taxes are the key regulatory issues. 2. Electricity supply is the key concern in terms of infrastructure. For more than half of all YEs, insufficient or interrupted electricity supply is the key infrastructure problem, followed by road quality and transportation of goods and fuel supply. 3. Business formalization is low. Minimum compliance of having at least one generic business license is fulfilled by 45 percent of all businesses on average. Overall, 30 percent don’t consider business licenses as an obstacle, but about half actually say that they don’t care about business licenses. 4. Finding an appropriate physical space for business operations is difficult. Forty-six percent of all businesses find it difficult or very difficult to find a physical space for their business. Business Dynamics 1. The majority of YE businesses are in highly competitive markets. Overall, about three quarters of the businesses have the same offering as many other businesses, and are therefore operating in highly competitive markets with normally low profit margins. 2. Business performance and outlook. Only half of the businesses are optimistic that the overall economic performance in their region will be better in the future compared to the past year. 3. Innovation level is low. Only one third of the businesses introduced innovations during the last year through new products or services. The number of respondents with plans for innovation in the future (33 percent) is slightly lower than the number of respondents who introduced innovations last year. 4. Employment potential is limited. About one quarter of businesses plan to employ new staff in the coming year. However, as this is a mere plan, it seems that a large majority of businesses will remain in the same size category. Innovative businesses are more likely see better business prospects in the future and tend to employ more people. Innovation is a key indicator of business growth. Access to Finance 1. Access to credit: Overall, about 40 percent of all businesses have had access to credit once or more, and this is equally the case for women and men entrepreneurs. However, there are clear correlations with other criteria: the younger the entrepreneur and the younger the business in operation, the less likely they are to have access to credit. 2. Commercial banks are also the main source of credit for micro enterprises. Despite the general impression that commercial bank will rarely finance young businesses, the commercial banks are with 24 percent the most important source of finance for YEs, even more so than friends. Cooperatives, Loans and Savings Groups and Rural Banks are the other main sources of finance. 3. Financial literacy. Overall, about two-thirds of all businesses have a bank account, which is the pre-condition to get access to credit from finance institutions. This rate is relatively high, taking into account that only 40 percent of respondents have ever received credit. Those who have
  4. 4. bank accounts also maintain regular or sporadic financial records. It seems that having a bank account is an indicator for keeping financial records. 4. Leasing and insurance are uncommonly used. The majority of enterprises never use leasing for business purposes. For those who do, vehicles and buildings are the most common items leased. Only a minority of businesses use insurance to protect their assets, mostly for vehicles and buildings. Human resources and education 1. The most common formal education for YEs is SMA (Junior High School). 2. YEs feel a strong need for further skills development. Key areas for upgrading are financial management, technical skills and marketing skills. 3. Use of computers and the internet is extremely low among YEs. 4. Employment is rarely formalized with contracts. Promotion of young entrepreneurship contributes to reduce unemployment, but it does not create substantial employment. The figures speak clearly: the 1,600 businesses in this survey have created around 2,500 jobs, or are providing jobs for 1.5 people per business on average, most of them family members. Indonesia cannot expect to solve the unemployment problem by promoting this kind of businesses. On the other hand, the businesses surveyed provide income for 3,000 people at least. Regional competitiveness Regional disparities are considerable for all the above mentioned indicators. The survey uses a competitiveness ranking to compare the different regions, which is based on six sub-indices: cultural and social values, business operations and assistance, regulatory environment and infrastructure, access to finance and human resource and education. Each sub-index consists of factors and indicators. The results of each indicator are averaged in factors and sub-indices. The average of the sub-indices finally results in the overall competitiveness rank. The following provides a short overview of the competitiveness ranking: First rank: the city of Makassar Makassar is the most performing location in terms of business dynamics, with a positive business performance supported by strong regional economic development indicators, strong rankings in terms of individual education, and a very positive outlook for future economic development. In terms of socio-cultural environment, Makassar has the most conducive environment with regards to issues of gender, client/supplier mistrust and risk attitude indicators. These positive signs notwithstanding, there are challenges with the regulatory environment, infrastructure (electricity supply), and limited access to credit. Second rank: the city of Surabaya Surabaya has a strong entrepreneurial environment, low severity of regulatory problems except business formalization, a relatively good regional economic performance and individual business performance, and strong general education. Key challenges are to transform these encouraging framework conditions into more business dynamics in order to expand business. Third rank: the city of Kupang
  5. 5. Compared with the other surveyed locations, Kupang shows a strong result due to a relatively conducive environment in terms of entrepreneurship, low severity of business operational problems as well as a favorable regulatory and infrastructure environment. Key challenges are low business dynamics with a low market positioning of businesses and rather limited plans for innovation and expansion. The city has ample room for improvement in terms of access to business financing, especially increasing loan application ratio, as the following points show: high willingness to get credit, strong financial services infrastructure, considerable business licensing compliance, and more diverse sources of loan. Human resources, however, are still sorely lacking in Kupang. Fourth rank: the city of Jayapura The profile of Jayapura City is similar to that of Merauke in terms of the strong individual educational background of the entrepreneurs, but the socio-cultural environment is generally less supportive. In addition, Jayapura has the lowest rating in terms of gender discrimination. Business, operational issues are less of a problem (in this regard Jayapura has the highest ranking among all districts), infrastructure is ranked low and specific regulatory issues such as business location, and costs related to business inspections as well as problems need to be addressed by the government. Business dynamics are low, driven by the declining economic growth and a pessimistic outlook towards future development. Fifth rank: District of Merauke Merauke has YEs with a strong individual educational background, and a relatively supportive cultural and social environment although there is still room for improving the entrepreneurial qualities of YEs and awareness of society in this regard. The key challenges are in the field of business operations and the regulatory environment, where Merauke is ranked last. In terms of business operations, the YEs in Merauke face severe difficulties in all fields—especially access to markets and input-related problems (quantity, quality, and price of raw materials or input items, and quality control). The problem of access to finance is not regarded as severe, but access to credit is limited. In terms of regulatory environment, infrastructure issues have to be addressed most urgently. Sixth rank: District of Jember The district of Jember is ranked low in terms of socio-cultural environment, mainly because of the low intrinsic motivation of the YEs (lowest ranking overall) as well as the second lowest ranking in terms of mistrust towards YEs. Despite this, Jember YEs show good business dynamics with average individual business performance, but strong market positioning. However, Jember shows the lowest ranking in terms of business operation problems, with also the lowest ranking for overall severity as well as for input- and output-related problems. Access to markets, quality of raw material and quality control are key issues. Seventh rank: District of Sikka The district of Sikka is not that much faced with regulatory problems, but the reasons for the lowest overall ranking are mainly poor business dynamics with the lowest individual business performance as well as the lowest perception of the economic development. In addition, Sikka has the lowest rating in terms of general education as well as in individual educational background. However, these results have to be contrasted with the fact that Sikka has by far the highest proportion of self- employed YEs. Eighth rank: District of Barru YEs in Barru often cite business operation problems such as quality control, low quality of raw materials, access to markets and machinery as key obstacles to growing their businesses. These operational problems are underscored by the fact that Barru has the lowest ranking in the survey in
  6. 6. terms of respondent awareness, and use and satisfaction of business services. Operational problems are worsened by a low ranking for local infrastructure problems (electricity, road quality) as well as by the worst ranking in terms of business safety. Human resources are also a critical issue, with respondents showing a generally low educational level, although respondents’ background is slightly better. The overall negative picture that emerges from the above three aspects is nevertheless tempered with the highest survey ranking in terms of strong business dynamics. Recommendations 1. Applying a two-fold strategy: Support the existing YE businesses as much as possible but also develop policies to facilitate strengthening of YE businesses with more potential for growth, income generation and job creation. 2. Supporting existing businesses: The survey shows that the YE entrepreneurs are facing a number of challenges in various fields. Possible policy directions to support these businesses would include: a. Strengthening business services: Larger businesses normally make use of business services to address some of these issues. Commercial service providers normally focus more on customers with higher incomes in order to cover their cost. However, there are innovative ways to make businesses services also available for low-income enterprises, e.g. by developing accounting and financial training services with students. Such services can be offered at low prices and respond to the skill development needs of many YEs. b. Using IT for access to information and skill development: The low penetration of the internet is a missed chance for access to information, contacts, know-how and market opportunities. Entrepreneurs can organize themselves and one of the members might offer IT services for others, internet kiosks might offer IT services for entrepreneurs or rural information centers might be introduced by internet service providers, as this has been tested successfully in other countries. c. Addressing regulatory issues: Creating a safe environment for business operation is one of the key functions of the government in creating an enabling business environment. However, lack of safety is precisely one of the main concerns of many YEs. The validation workshops are expected to bring more clarity about the safety issues expressed by the respondents and the local governments are expected to take these concerns serious and to find ways to improve the situation. d. Addressing infrastructure problems: It is obvious that an archipelago such as Indonesia is confronted with severe infrastructure problems. Especially transportation of goods to outer island is still burdensome. The infrastructure problems need to be addressed by the national government. Nevertheless, the task of the local governments is to voice the interests of the more disadvantaged areas in order to achieve improvements. e. Strengthening self-organization of YEs: Only a few YEs are member of BMOs. However, many of the operational problems, especially the input-related problems, can hardly be addressed by individual entrepreneurs alone. Sectoral self-organization of businesses is often a requirement to find solutions for such problems jointly. 3. Strengthen YEs ability to increase their potential for economic growth: One of the key problems stated by the survey respondents is that they are mostly operating in sectors with high levels of competition and limited potential for growth. Entering new business opportunities instead of copying already existing businesses requires making sense of market opportunities, innovation, a minimum educational level and preparation. A policy facilitating this new type of YEs would require interventions at various levels:
  7. 7. a. Involving family: We have seen how important families are for YEs. They provide advice, motivate their children to become YEs, provide initial investment capital. Family members have to be addressed in interventions together with the potential YEs. b. Integrating entrepreneurship in formal education: This need is definitely not new, but still timely and relevant. Entrepreneurial education needs to focus much more on ‘what’ business to choose in a first step than ‘how to run’ the business. In the ‘what’, young people have to learn to discover (local) market opportunities, understand market trends and how market works, and be exposed to other, maybe more developed areas in order to see and learn from other local economies etc. c. Providing space for testing business opportunities: Providing the possibility for testing business ideas would help YEs to reduce the risk inherent in each business. Indonesia once experimented with business incubators, which were promoted at universities. Unfortunately, the program was not implemented in a consistent way, which has led to mixed results. However, from international experience, important lessons can be drawn from business incubators, technology parks or start-up centers which might be relevant for Indonesia as well. 4. Addressing Young Entrepreneurs’ constraints locally: Many of the constraints are also local, and each location is challenged to find its own solutions. The chapter on regional competitiveness describes these local challenges and provides specific recommendation for each location.

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