How effective is institutional quality for the creation of small & medium enterprises (SMEs) in Indonesia?

Abstract

. A good business environment can enhance the growth of small and medium enterprises (SMEs) that leads to better economic growth and development. Many developing countries, including Indonesia, have conducted several business reforms to support this mission. Our research aims to investigate the effect of institutional quality on the formation of SMEs in Indonesia. Additionally, our study will examine how implementation of regulations and policies by the local governments influence the creation of new SMEs in Indonesia. We use a sequential explanatory strategy whereby quantitative data collection and analysis is followed by the qualitative ones. The results of negative binomial regressions over the period of 2009–2018 show that the incidence of corruption, as well as law and order, have a positive effect on the number of new SMEs in 32 provinces of Indonesia. Meanwhile, qualitative analysis confirms the findings from the quantitative analysis that there are some problems related to the governance of licensing process such as the economic rent-seeking practices, weak coordination among local government units, the absence of a periodic evaluation, the incapability of local government apparatus in mastering information technology (IT), and the culture of gratification.