different forces at work. Most are the product of a disadvantaged economic situationof the poor. Either historically or cu...
The second group, relying more on creativity, flexibility, and partnernetworking, has a wider market room to maneuver. The...
Combined with relatively sophisticated demands of customers in manycreative industries, that mindset and skills accelerate...
become a constant policy priority of the government intervention in the economy.Any failure in preserving their interests ...
is understandable due to the motivation for a quick yield to compensate their cashshortage, its unintended effects are so ...
downstream sides of the business, and as a whole, it forms industry relatedness.Ideally, this network operate organically ...
domestic markets are generally similar, such as textile, garments, leather products,food and beverages. Some of these prod...
design, profiling consumers, and other skills and knowledge would have a verymuch impact on SME competitiveness both in th...
market opportunities.        These potentials are particularly relevant to be considered by the emergingnew generation of ...
Entrepreneuring Spirit       The emerging almost forty million middle class of Indonesian recentlyprovides an impetus for ...
their traditional and local business mindset into a global one. It is expected that thenew generation of entrepreneurs, wh...
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In Search of Sustanaible Small and Medium Enterprises in Indonesia


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  1. 1. IN SEARCH OF INOVATIVE AND SUSTAINABLE SMALL AND MEDIUM ENTERPRISES: ACFTA’s recent impacts and the Future of Small and Medium Enterprises in Indonesia1 Sanerya Hendrawan Department of Business Administration Catholic University of Parahyangan The integration of ASEAN into the China market through recentASEAN-China Free Trade Agreement (ACFTA) has challenged to the most theresilience of small and medium enterprises (SMEs) in Indonesia. Though claimed bygovernment top policy makers in the first instance that it benefited much to theIndonesian industries in the long run, its worse impacts should not be belittled.Economically, it hits hard most domestic industries where traditionally SMEs holddominant share in the country such as garment, foods and drinks, toys, leather. Notfew of them even suffered from bankruptcy, thus worsening the already high level ofexisting unemployment in the country. Politically, SMEs have been, and seem tocontinue, albeit vaguely and indeterminately, the bastion of indigenousentrepreneurs. A seemingly gradual downturn of its role in more liberal Indonesiaeconomy presently may cause further backlash to the government in power. Given these conditions, it is timely to assess the sobering position of IndonesiaSMEs and to project its future prospects, provided that all the unintended presentimpacts of the ACFTA give important lessons to all stakeholders concerned. Withinthe limits of this context, this paper frame several issues to be explored. First, whatare important lessons for strengthening Indonesia SMEs from the current impacts ofdirect competition with Chinese products entering domestic industries? Second,what are factors at issue, laying at different levels and sectors, which may be the basisfor SMEs competitive advantages, which are required particularly in confrontingcompetitive Chinese products? Third, what are obstacles on the road ahead thatmay block the healthy growth of Indonesia SMEs?Different Strategic Position of Indonesia’s Small and Medium Enterprises Small and medium enterprises in Indonesia come into existence due to1 Presented in International Seminar: “Sustainability and Innovation in SME Development in the ASEANChina Free Trade Agreement Era”, 17 November 2011, Catholic University of Parahyangan.
  2. 2. different forces at work. Most are the product of a disadvantaged economic situationof the poor. Either historically or currently shaped, their existence has a certainunique ethos and patterns of development. Among salient features of this group aresubsistence business ethos; poor knowledge of the market, inadequate technology; ifnot traditional, lack of capital, and familial management. Rather than being driven bygenuinely entrepreneurial spirit, their business existence serves more as an economicoutlet for absorbing adversely political impacts of the government’s failure ineconomic policies to create full employment. Then there is an increasing small fraction of SMEs which has grown in recentlyliberal economy, particularly in major cities, due to a more entrepreneurial spiritcombined with various business opportunities driven by souring economic growth ofthe cities. More and more young entrepreneurs, particularly from growing middleincome groups of the society, are entering into this group. Not only better in terms ofeducational background, they also possess better access to global information andfast business network, thanks mainly to the impressive penetration of the Internetinto different sectors of life, including the business. Some of them are even clusteredaround influential creative business communities such as Muslim Young Designer,Independent Clothing Community in Bandung. The business ethos of this group ismore a reflection of the American Dream-like spirit that stresses on entrepreneurialambition and the search of independence and personal actualization. Thus, withbetter resources being at their disposal, this group should be positioned to have bettermarket advantages, not only in confronting similar competitive productsdomestically from China or other ASEAN members, but also in penetrating foreignmarkets. The future of Indonesian economy should expect much from this group.Uneven Effects of ACFTA on SMEs Business It is understandable, given such different strategic position, both groups ofSMEs responded differently to adverse economic impacts of ACFTA integration. Thefirst group was the most suffering. Their product consist of agricultural products,including fresh fruits and vegetables; simple manufacturing products such asgarment, footwear, food and beverages. Such products are almost similar to Chinese.Thus, as the Chinese products with lower prices entering the Indonesian market, theylost their market share significantly. Higher production costs, lower quality, fewerproduct varieties, and low differentiation seem to contribute much to the losing oftheir previous advantages in the domestic market. While some went into bankruptcy,others were making not so easy adjustment in their operations. Unless thegovernment seriously takes into account their institutional weaknesses and thenprovides policy preferences on them through trade renegotiation with China, theirexistence will cease. Sooner or later, the forces of regional market ACFTA, whichpromotes product specialization as a basis for firms’ competitive advantage, willdrive Indonesia SMS’s out of their own domestic market. 2
  3. 3. The second group, relying more on creativity, flexibility, and partnernetworking, has a wider market room to maneuver. Their products are also morediversified. In spite of relying more on domestic market, not few of them have arelatively strong foothold in the neighboring and regional markets. Hence, theinvasion of cheap China’s products into the Indonesia market did destabilize theirexisting market grip. But this happened for the time being. Indeed, in the mediumand long term, it would force them to accelerate and further differentiate theirproduct specialization, more on the basis of competitive rather than comparativeadvantages. Firm’s capabilities to capitalize locally and even culturally indigenousresources and regional and global network, combined with the support of newbusiness platform such as Internet, should finally determine their successfuladjustment to such internationally competitive environment. These different conditions of SMEs in responding to adverse impacts ofACFTA implementation should become a baseline for preferential policies of thegovernment in the future. Here it is obvious that development assistance andfacilitation should be given differently, with the second group of SMEs gettingfocused more on intangible resources based, such as brand development andinternational market information; while the first group on tangible resources,primarily technical and financial assistance and market access. It should also be onthe top priority of government assistance for facilitating both SMEs to easy and cheapaccess to E-business infrastructure.Emerging Creative Small and Medium Enterprises Albeit long and gradual, the transformation of Indonesian economy,previously based mostly on the agricultural commodities, into industrial and serviceeconomy has led to the emergence of SMEs sectors that work with relatively muchreliance on knowledge and creativity as the engine of their growth. These sectors,well known termed ‚creative industry‛ and lately put its development efforts withinthe ministry of tourism and creative economy, include fashion and design,entertainment, and leisure and lifestyle, to mention a few. It is surprising that theircompetitive position domestically was not such much affected by the massive entryof foreign products, particularly from China. This is due to their relativelydifferentiated product characteristics and its niche market. Though it has long existence, SMEs in creative industry is forced torepositioning themselves in a more significant role recently. New generations ofyoung entrepreneurs pioneered their establishment and adopt business mindsetwhich drives continuous innovation, not only in product but also in process. Theformation of distribution outlet (DISTRO) as main marketing channel and itscommunity marketing strategy they a adopted for effectively communicating withtheir customers actually marks their better business skill which are needed for theprospective growth of this sector in the future. 3
  4. 4. Combined with relatively sophisticated demands of customers in manycreative industries, that mindset and skills accelerate entrepreneurship learning thatgenerate further capabilities and core competencies. In a long term evolution of thefirm, as evidenced from many existing medium and big firms, these help firm formand posses unique competitive advantages, which are required for superiorperformance in domestic and international markets. Some previously local and smallfirms, including Es Teler 77, Edward Forrer, can be said to belong to this category.Both started from building strongly local brand with excellent quality products andsupporting services, and then move successfully to national and regional marketthrough franchise business. Underlying this success is the use of local knowledge andmarket intelligence to generate product innovation as well as the tapping of culturalnetworks to support regional expansion, such to Singapore and Australia.Restructuring SMEs Industrial Clusters Most Indonesia SMEs are located geographically at certain industrial clustersconnecting different firms which operate, to a certain degree, from upstream todownstream of the value chain. Leather and footwear products, garments, handicraft,traditional foods and beverages are normally clustered at certain places. With suchcharacteristics, the entry of foreign-made products caused snowballing effects in theindustrial clusters, thus making the downfall of firms either backward or forward inthe value chain. It cannot be denied that while some industrial clusters faces a steadydownturn, others is still struggling for survival, their future growth of whichdepends on new government policies to address existing weaknesses that impededregional competitiveness of local products. Thus unavoidably, a relatively gradual re-clustering and de-clustering eitherin previous or new forms of business marked some SMEs industries. In thisconnection, some SMEs transformed itself into another business, or others merelydiversified into other lines of product or business while also continuing to markettheir present products, but certainly on more efficient and innovative modes. Thesedifferent responses are natural, given divergent resources and competencies of SMEsas well as opportunities available to them. Those SMEs that fell into the first groupabove were generally the ones that were directly facing cost-based competitiveness.Since Chinese products were more superior in term of cost, then unless their productsare improved to be more differentiated in terms of content and quality, they shouldnot be able to continue their existing business. In the long term development of industrial cluster, re-clustering andde-clustering serves as a mechanism of natural selection that put the most innovativefirms at certain advantage position in the market and drive out others indisadvantage or force them into bankruptcy. While this may be justified fromclassical economic perspective, it should not be the case from the equity perspective.Most SMEs in Indonesia represent the economic power of the indigenous and hence 4
  5. 5. become a constant policy priority of the government intervention in the economy.Any failure in preserving their interests or maintaining its momentum of growthshould result in serious political repercussion in the future. Thus what happenedbehind the replacement of industry and trade minister in the recent cabinet reshuffleshould be understood in the context of the minister failure in protecting the interestof Indonesia SMEs.Lessons Learned Seen from the long term perspective, the massive entry of Chinese-madeproducts into the domestic market should benefit Indonesia SMEs. Albeit painful itseffects temporary, it actually open up greater overseas market for both SME finalproducts and cheap factors of such as imported raw materials for production outputs.But this is only the case provided that the government launches right adjustmentpolicies for addressing temporary disturbance to the existing reality. While thisseems to be taken seriously by the new cabinet, most creative efforts should beundertaken internally by the SMEs themselves. Here, some lessons from recentexperiences are worth mentioning for any effort to improve the competitive postureof Indonesia SMEs in the international market, particularly against Chinese products. First of all, it regards creative and innovative initiatives for entering newmarkets. This lesson put heaviest burden on the part of SME owners. Instead ofclinging on traditional ways of doing business such as in design, production, andmarketing, the owner are expected now to be more adept on different tastes andhabits as well as perceptions of international customers. Their business prioritiesshould be more driven out by ongoing changes of international customers. Secondly,SMEs should rely its growth more on the basis of internally distinctive resourcesrather than externally industrial cluster resources. This hardly means that conduciveindustrial cluster is no longer important. But rather, it makes the ultimatedifferentiators for long term growth embedded in SMEs themselves. Thirdly, SMEsneeds closer business networking at different sectors, integrating input, process, andoutput sides with different actors that finally make their business able to act ontotally. But this only happens if facilitated by right government policies which affectboth its upstream and downstream business actors. Behind all these lessons, the keyto the competitive Indonesia SMEs lies in better human capital.Creativity and Innovation is Important It is similar to both big, medium, and small firm that creativity and innovationplay a determining role in driving continuous growth of a firm. But most SMEs arelack of this capacity. Imitating or copying popular designs and styles, especially thosethat already have high market value, almost become the culture of SMEs. While this 5
  6. 6. is understandable due to the motivation for a quick yield to compensate their cashshortage, its unintended effects are so obvious that it relatively close learningopportunities from innovative experiences. Consequently, no learning curve isobtainable for their sustainable growth in the long run. To thrive in competitiveinternational market requires more than one generic strategy. Superiority on the basisof costs (overall cost leadership) should be combined with differentiation in order tosecure long term growth of SMEs. However, differentiation is the result of creativityand innovation, the implementation of which needs the restructuring of SMEs valuechains, while also necesitating government policy intervention to reduce factor costs.In this respect, shortening suppy chains, reducing cycle times, deintermediating flowof goods to reach its final customers are among the most important factors that mayreduce costs significantly.Resources should be more focused and targeted One endemic problem which is easily found in much SME operation is servingalmost one single mass market. The consequence is clear; the market becomescrowded, forcing fiercely inter-competition among them to gain the same customers.In fact, market is differentiated into different segments with a relatively clear line ofdemarcation. Most SME are not relatively aware enough of this fact. They rush easilyinto the same highly growing market, and then involve in cut-throat competitionthrough price during mature and decline stage, and finally bankrupt and change intoanother business. This business evolution once happened, for example, in a wellknown leather industrial centre in Bandung few years ago. The same pattern shouldfollow in other industries since factors condition, demands, and related andsupporting business inside their industries have not been so different. It has been shown undisputedly that, with customers possessing more accessto information and product choices, then market become so differentiated. Theimplication is that SME products should be focused more on narrowly definedmarket. This means that instead of mass, specialized market is the source of SMEgrowth in the future. With this caveat in mind, hence SME limited resources, whichconsist in assets and capabilities, should be capitalized more effectively. Competitionfrom foreign products, including those from China, which invade many domesticmass markets, would also not be so direct. Thus, survivability, longevity, and growthare more likely to happen in the long run.Close and Tight Economic and Social Networking is necessity In many cases SMEs with fast network have more survivability. This networkcomprises business partners and supporting parties both in the upstream and 6
  7. 7. downstream sides of the business, and as a whole, it forms industry relatedness.Ideally, this network operate organically that the transaction and flow of goods andservices among parties work efficiently and effectively in terms of time, cost, andquality. But in reality information asymmetry and exclusively social bonds workdisproportionally to the effect that it puts many SME in disadvantage position in themarket. This can particularly be seen in agribusiness and footwear and leatherindustries where important market information such as demand size and real priceare almost exclusively known by downstream parties. Unfortunately, these partiesare also dominated by certain ethnics. The result then is often disastrous to SMEviability. Hence, a close and tight network, economically and socially, is required.Cooperative institutions can play facilitating and mediating role in this respect.Despite the fact that in recent development of a rather liberal Indonesian economy,cooperative organizations are marginalized, its economic and social dimension of thisinstitution, which is also strongly justified ideologically, is still powerful enough toincrease the bargaining position of SME in a network of business connectingdownstream and upstream players.Re-framing the Design of Small and Medium Enterprises Institution Recently sad experiences of SMEs competitive performance in confrontingChinese’s low price industrial products should lead to the re-framing of SMEsinstitutions. This requires boldly micro initiatives within SME management to changetheir organization fundamentals and government policy changes to correct someexisting distortions that produce current disadvantages to SMEs in competitiveregional markets. These two measures should be taken immediately andsystematically, for only five years ahead that are still left for member countries,including Indonesia, until the full execution of ACFTA applies in the region. Among the most strategic fundamentals of SME organization that should beprioritized to deal with include resourcing, supply chain, and market information,and social capital. To a large degree, these fundamentals are responsible for the costinferiority of many SME products in facing Chinese product invasion in domesticmarkets. Hence, a significant improvement in these fundamentals should improvethe cost competitiveness of SME products. But this cannot be carried out alone. Thegovernment should support it with policies that lower costs of some important inputsfor production. Time left ahead, up to the full execution of ACFTA in 2016, should beoptimized to correct some distortions that significantly affect input factors.Efficient Enterprises Resourcing and Differentiation Many SME products that were hard hit by the entry of Chinese products into 7
  8. 8. domestic markets are generally similar, such as textile, garments, leather products,food and beverages. Some of these products are also primary export commodities ofIndonesia. But since many others products still relies heavily on domestic markets,higher input prices for their production creates cost disadvantages. This is caused bymany factors. But the most important ones are not only higher labor costs in SMEsoperation, but also less modernized manufacturing facilities and smaller batches ofproduction in upstream partners. Compared with manufacturing facilities in China,the conditions are indeed different. The volume of production is more massive, whileits production facilities are also more modernized, given the country already longtime more self-reliance on capital goods for certain sectors. Their labors, whichmostly consist of poor peasants from country sides, also accept cheaper wages andlesser conditions. Together, it makes China products superior in the Indonesianmarket. With such contributing factors to the cost advantage of many China products,the opportunity for addressing problems of production costs in many Indonesia’sSME seems to be not much. For the time being, the only feasible solution is throughseeking strategic advantages other than cost basis, such as differentiating its quality,styles, and designs, or more focusing on certain niche of domestic and internationalmarkets. But for certain other products, especially those which are exclusively tied tonatural resources such as rattan where Indonesia has absolute advantage, the roomfor improvement is still widely open, provided that the government also moves in thesame direction through the banning of rattan export.Tightening Supply Chain and Broadening Networks Strong relations among related actors from upstream to downstream sides ofbusinesses such as in Japan, Taiwan, South Korea, and China are not widely sharedby all SMEs in Indonesia. Except in some sectors such as manufacturing, certainagricultural sectors like palm oil, relations through Foster Parent scheme (FPS),Subcontracting, Core Plasma scheme are relatively strong and successful. In manyother sectors such as foods, furniture, and handicrafts these are too weak to be usedby SMEs as a strategic vehicle for their growth and development. Besides, networkbetween SMEs and R&D institutes or universities are also still less importantcompared to networks with large enterprises through subcontracting. This mayindicates that R&D institutes or universities are not yet so important as a source oftechnology development, skill upgrading or innovation activities in SMEs. As said before, cost-based competition with China’s products is no longerdefendable for some SMEs products. So the competitive basis for Indonesia SMEsshould be now shifted to more differentiated products and or focused markets. Hereimprovements in quality, design, style, and variety of products, better marketresearch become paramount. Since this is not easy job for SMEs alone, researchinstitutions of state and private universities should be involved. Their expertise in 8
  9. 9. design, profiling consumers, and other skills and knowledge would have a verymuch impact on SME competitiveness both in the domestic and internationalmarkets. But this involvement should be put as part of establishing a broadernetwork of industrial clusters and supporting horizontal and vertical industriallinkages as well as gaining better opportunities for integration into global productionnetworks.Capitalizing Market Information Generally, Indonesia SMEs lacks market information. This is certainly incontradiction with the requirement to operate business in today’s global economy,where information provides firms with the ability to deliver a quality product, ontime, and at competitive price, anywhere in the market. Indeed, information is thelifeblood of every business, regardless of size. Improvement in information literacymay lift the isolation of many SMEs from product and market penetration, and manyother market opportunities as well. With almost fourth fold increase of internet penetrating Indonesia marketduring the last five years, information is relatively abundant. The costs of accessingthis information are also decreasing, thank to the rise of different multimedia such ascomputer, mobile phone, and other smart devices; and the lowering costs of internetaccess. So presently there are no longer significant barriers to access. SMEs shouldmake effective use of this information particularly to develop new products forexisting markets or new markets for existing products both domestically andinternationally. Other uses are also required in many other aspects of business, all ofwhich should be aimed at closing the gap of information asymmetry in businesstransactions with different partners. To move in this direction, it is of vitalimportance for SME to conduct business or market intelligence, however little orinformal it is.Entering E-Business Currently liberalized world economy, which is accelerated by E-businessplatform, has paved the way for a broader engagement of Indonesia SMEs, both indomestic and international markets. Despite its small numbers that already enteredthis platform, the results of the engagement is relatively encouraging. This could beseen, to mention a few, in some SMEs of fashion business. In addition to existingmarket share in domestic market, their professional products exposure via theinternet also attract international customers. The key to their success seems to lies atfocused market, quality products, rich and stylish designs. Similar success is also seenin content developers, and handicrafts business. This development should be viewedas signs of the vast potentials of the E-business platform for SMEs to tap into global 9
  10. 10. market opportunities. These potentials are particularly relevant to be considered by the emergingnew generation of young entrepreneurs born from middle class families and maturedin the social economic atmosphere of Indonesia’s liberal economy. Different from theolder generation of entrepreneurs, which were nurtured in the protective andbureaucratic policy environment of the Old Order Regime and typically forced intobusiness because of being unaccepted as civil servant in the government bureaucracyor having strong political clout with top government bureaucrats, the new generationof entrepreneurs enter into SME businesses because of willing personally to becomebusinessman. More and more of entrepreneurs of this type with better educationcome into SME businesses as society also develops better perception for thisprofession. Not only being more adept at international networking, they are alsoricher in business ideas and willing eagerly to new things. These are partiallycharacteristics that in many cases drive significant innovation and success inbusiness. Hence, the new generation of entrepreneurs is expected to benefit most fromthe increasing penetration of e-business in Indonesian market. Institutions likeTELKOM for example, that develops its own business incubator and information andcommunication network through RISTI, should prioritize its corporate socialresponsibility (CSR) activities to help them gain cheap access to e-business facilities.Strengthening Social Capital A more democratic Indonesia, which has marked the country since the end ofNew Order Regime, is restructuring the Indonesia economy towards more liberal,non-discriminate, but remaining equal and prosperous for all segments of the society,regardless of race or ethnicity. This means that economic division betweenindigenous and non-indigenous, which has had strategic implications for economicpolicies since independence, is no longer valid. SMEs, which are historically regardedas representing indigenous economic power, are not put in antagonism with bigbusinesses in another end of spectrum as non-indigenous or foreign economic power.Thus politically such division already ends. Such development should have far reaching implication for the strengtheningof social capital which is required for building up the competitiveness of IndonesianSMEs. What it means by ‘social capital’ here is the common norms and valuesinfluencing the interaction between individual-social networks, and oftenconceptualized into several dimensions comprising social interaction, trust, andshared vision. These dimensions affect significantly access to and use of knowledgeresources of SMEs and create fair and honest in the interchange of whateverresources. Evidences indicate that the presence of such dimensions contribute to thelowering of transaction costs among business actors, thus increasing collectiveefficiency, and finally lead to the effective growth of SME industrial cluster. 10
  11. 11. Entrepreneuring Spirit The emerging almost forty million middle class of Indonesian recentlyprovides an impetus for a more optimistic look at the prospective growth of SMEs. Assaid before, a new generation of entrepreneurs is born from that circle, with bettereducation, better appreciation of business profession than previous generation, andpersonally willing to enter this profession with zeal. In another word, they are calledby what social capital terms ‘self realization’. This is actually the spirit to encourageentrepreneurship, innovation, firm creation and spin off; and together with othersocial capital elements mentioned before, it becomes the driving forces for thedynamic of SME industrial cluster in the future.Strategizing Industrial Cluster The importance of industrial cluster to enhance competitiveness has beenechoed by Porter in his presentation to President SBY in 2009. But so far theIndonesian government still has not yet clear, coherent, and stable strategies andpolicies. Indeed, rather than stimulate to compete globally, some regulation erodedthe competitiveness of SME industrial clusters. With fewer resources and weakerbargaining position as compared with large enterprises, SMEs is better organizedcollectively in the form of industrial cluster. As part of cluster development strategies, the government should alsomaintain and strengthen the common cultural and religious values of Indonesiansuch as collectiveness (gotong royong), familiarity (kekeluargaan). These could serve asvaluable assets that affect productive social networks and the transfer and circulationof knowledge among actors and in cluster.Towards Competitive Indonesia SMEs Disastrous impacts of the ACFTA implementation upon SMEs in Indonesiashould be seen positively for the long development of this sector. It is obvious that ifthe government could not correct some of its unclear and incoherent policies, a lotmore of SMEs would be dragged into the brink of collapse. But it is also clear that thegovernment seems to have taken sobering lessons and consider corrective initiatives.While the results of these initiatives are still to be waited for some time, theexpectation is very clear; the government is able to ensure that the time left until thefull implementation of ACFTA is used effectively for the building up of SMEsreadiness in facing global free trade. In tandem with government initiatives, SMEs management should redesigntheir business model along the line discussed here, and more importantly change 11
  12. 12. their traditional and local business mindset into a global one. It is expected that thenew generation of entrepreneurs, who are born in Indonesia’s more liberal and globalclimate, are in the position to take the lead.CURICULUM VITAESANERYA HENDRAWANSanerya Hendrawan is currently lecturer at UNPAR, and other state and private universities. He was graduatedhis Ph.D. from Katholieke Universiteit Leuven (KUL), Belgium in 1996. He also once studied in European Masterof Public Administration (EMPA) in 1993. His master was obtained from University of Indonesia in 1990, anddoctorandus from Catholic University of Parahyangan in 1982. He already wrote books and articles publishednationally and internationally. While participating in seminars and workshops as speakers, he is also currentlyworking for several institutions on issues of human capital development in Indonesia. He can be accessed 12