CORPORATE GOVERNANCE

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DW Putu Aditya Dharma P. (1406305172) /14
Ni Putu Lissya Suryantari (1406305175) /15

FAKULTAS EKONOMI DAN BISNIS

UNIVERSITAS UDAYANA
BUKIT

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 2017
ASEAN Economic Community (AEC)
ASEAN Economic Community (AEC) which established on December 31, 2015, is a
mutual agreement to integrate the ASEAN countries (Indonesia, Malaysia, Philippines,
Singapore, Thailand, Brunei Darussalam, Cambodia, Vietnam, Laos and Myanmar). The AEC
has been seen as a way to promote economic, political, social and cultural cooperation across
the region. As an integrated single market ASEAN region with an area of approximately 4.47
million square kilometers inhabited by over 600 million people from the 10 member states
are expected to improve efficiency and boost the economic competitiveness of the ASEAN
region as indicated by the free flow: goods, services, investment, labor, and capital.
Values in the Globalization which implemented in AEC 2015, including:
1. The product quality of goods and services.
2. The quality of personnel who have special competence and professional.
3. The quality of management system standards and applying modern values that
promote efficiency, effectiveness and transparency.
4. Mobility of money, goods and people with non-traffic and borderless.
5. Focus on the strength of national competitiveness (quality of goods, services and
people).
With the enactment of AEC 2015, is expected to have a positive impact including the
following:
1. The opening of the market for export products in ASEAN.
2. Ease of access to capital investment among ASEAN countries.
3. Ease of obtaining goods or services produced outside our country.
4. Increased tourism activities, mobility of people and money are high.
On the other hand, there are also some negative impacts from the enactment of AEC 2015:
1. The loss of export market because the country lost the competition compared to other
countries in ASEAN.
2. The flood of imported products in the domestic market will destroy small and medium
enterprises in the country.
3. The possibility of speculation in the financial sector, which could destroy the economic
stability in the country.

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 4. Human resources from other countries are more qualified and professional, which will
displace labor in the country.

Indonesia as the ASEAN members that have a population of at most this will
potentially be a strong market for trade in goods and services produced by the countries in
ASEAN. The opening of the ASEAN financial markets provides an opportunity to increase open
access for SMEs to financial resources, not only in the domestic but also the international
financial markets. On the other hand, SMEs in ASEAN countries face a tough challenge,
because of the increasingly fierce competition. In Indonesia, the largest part of economic
actors are SMEs, presumably can and need to be prepared to face the liberalization era. If
SMEs can not maintain its existence and to make improvements in order to face an
increasingly open market behavior in the future, many SMEs will be destroyed. The SMEs
should no longer rely on cheap labor in developing its business. Creativity and innovation
through the support of research and development is very important to note. In addition SMEs
should take advantage of the opportunity to achieve and maintain market potential existence
of its SMEs well. To take advantage of these opportunities, the greatest challenge for SMEs in
the face of MEA is how to define a strategy to win the competition. One strategy that can be
used is to create excellence and distinctiveness of the products produced.

GROWING ROLE OF SMES IN ASEAN ECONOMIC COMMUNITY

ASEAN is a diverse and economically dynamic grouping of 10 Southeast Asian

countries, collectively accounting for the worlds third largest consumer base and a 3.2
percent share of the worlds gross domestic product (GDP).

That proportion is set to rise in the coming years, as catch-up growth sees emerging
ASEAN countries close the gap on the major European economies by 2030. Small and medium
enterprise (SME) development in ASEAN is a key strategy, focusing on supporting SME access
to finance, markets and global opportunities, human resources development, information
and advisory services, technology and innovation.

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 The contribution of SMEs to economic growth, employment and development in the
region plays an important part in achieving equitable economic development and regional
economic integration.

Below is the comparison of the three ASEAN countries on economic strengths, the
banking penetration of micro, small and medium enterprises (SME) and the opportunities and
challenges faced by the SMEs.

Indonesia is the largest economy in Southeast ASEAN with GDP nominal at US$888
billion and GDP per capita at $3,500. Indonesias banking sector is characterized by a growing
economy. About 76 percent of assets of the financial sector are in the banking sector. It has
low banking penetration with a loan to gross domestic product ratio of 26 percent with only
41 percent of Indonesians having their own bank accounts. About 32 percent of the
population dont save.

The informal sector plays a significant role in serving Indonesians on the lending side
where only 17 percent of Indonesians borrow from the banks, 43 percent borrow from the
informal institutions and 40 percent of them dont borrow at all. SMEs play a crucial role in
Indonesias economy. There are about 52 million in Indonesia and they represent 99.9 percent
of all business units, employ 97.7 percent of total labor force and contribute 57.8 percent of
GDP.

However, even though SMEs are the backbone of Indonesias economy, they get only
small portions of bank financing. Total loans to SMEs are worth about $57 billion, just about
20 percent of total bank loans with a growth rate of about 15 percent per year.

Since the micro segment can employ a lot of people and produce cheap products, it is
a main contributor to national GDP and is widespread around the country. Several advantages
to developing micro-segment enterprises are their strategic value in the economic growth of
national schemes and widespread economic distribution.

Meanwhile, the economy of Malaysia, the 44th most populous country in the world
with more than 30 million people, is the third largest in ASEAN behind Indonesia and Thailand
with a nominal GDP of about $375.6 billion and GDP per capita at about $12,000. Based on
the Economic Census 2011, the total number of SMEs in Malaysia is 645,136. They employ
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about 65 percent of the total labor force with 3.67 million workers, make up 97.3 percent of
all business units and contribute 35.9 percent of GDP.

SMEs can seek financing from various types of financial institutions, including banking
institutions, development financial institutions (DFIs), leasing and factoring companies and
venture capital companies that provide equity financing. In addition, SMEs can also make use
of various specific-purpose special funds set up by the government to help SMEs.

The banking system loans to SMEs accounted for 42.6 percent of total business loans
outstanding by the end of 2005. Most SMEs used their own internally generated funds and
funds sourced from friends and family members to finance their operations. Only 16 percent
of SME respondents indicated a reliance on financing from financial institutions.

Indeed, only 10 percent of micro enterprises indicated that they relied on financial
institutions for financing. A lack of collateral was the main obstacle faced by SMEs when
seeking financing from banking institutions. This was followed by insufficient loan
documentation and the lack of a financial track record, as well as business viability. Almost 10
percent of respondents indicated a long processing time was also a problem.

Singapore is a global commerce, finance and transport hub. The Singaporean economy
is known as one of the freest, most innovative, most competitive, most dynamic and most
business-friendly. Singapores financial system remains sound, but industry must stand
vigilant against rising risks. SMEs and firms with US dollar loans could be more vulnerable
under stress scenarios.

Banks reported higher NPL ratios under stress scenarios for loans to SMEs compared
to large corporations. As loans to large corporations form the bulk of banks corporate loan
books, the higher stressed NPL ratios for SME loans would not severely impact banks overall
asset quality.

However, SMEs access to funding could be affected should banks become more risk
averse in their credit underwriting for SME loans. We need to promote more financial
inclusion to deliver financial products and services to a wider community that is under-served,
including MSMEs.

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 According to the AEC Blue Print, there are four initiatives that can improve SME
capacity to participate effectively and proactively in regional and global value chains.

First, enhance the financing ecosystem in the region to benefit MSMEs, including
through cross-collaboration among various working groups in ASEAN. Initiatives to be
explored may include setting up credit bureaus to facilitate the MSMEs in establishing
credit standing to improve access to financing, credit guarantee institutions to provide
credit enhancement to MSMEs that do not have collateral and other appropriate
facilities or mechanisms that will provide financial access for MSMEs.

Second, expand the scope of financial access and literacy, as well as intermediary and
distribution facilities, such as digital payment services to promote cost-reducing
technologies and the development of financial services for smaller firms and lower
income groups. Enhance discussion channels in ASEAN to develop best practices and
exchange information as well as strengthen cooperation.

Third, intensify the implementation of financial education programs and consumer

protection mechanisms to bolster financial management capacity and encourage use
of financial services.

Fourth, promote the expansion of distribution channels that improve access to and
reduce the cost of financial services, including mobile technology and micro insurance.

SWOT ANALYSIS OF INDONESIAN SMES IN THE ASEAN ECONOMIC COMMUNITY

COMPETITION

STRENGTH

a. SMEs are the main focus of the rides and the most promising for the creation of new
entrepreneurs. SMEs are the closest level that can be reached by people who want to
start entrepreneurship.
b. SMEs are not affected by foreign currency fluctuations, because they use domestic
raw materials.
c. Operational flexibility. SME are typically managed by a small team, each member has
the authority to determine the decision. This makes SMEs more flexible in their daily

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 operations. The pace of this business reaction to any changes is quite high, so this
small-scale businesses more competitive (example: a shift in consumer tastes, product
trends, etc.)
d. Innovations speed. With no hierarchical organization and control in SMEs, products
and new ideas can be designed, tilled, and launched immediately. Despite the brilliant
idea came from employees thought (not the owner) the closeness between them
make these ideas tend to be more easily heard, accepted and executed.
e. Low cost structure. Most small and medium businesses do not have the particular
work space in office complexes. Most run at home with their own family members as
employees. This reduces the extra costs (overhead) in their operations. Furthermore,
small medium businesses also receive support from the government, non-
governmental organizations, and the bank in the form of tax relief, donations, and
grants. This factor major influence in the formation and financing their operations.
f. Ability to focus on specific sectors. SMEs are not obliged to obtain the quantity sold in
large quantities to reach the Break Even Point of their capital. This factor enables small
and medium businesses to focus on sector-specific product or market. Examples:
home-based craft business can focus on working on one particular type and model of
craft and serve consumer demand reasonably certain to achieve profit. Unlike the
large-scale handicraft industry is obliged to pay the rent of the building and the large
number of employee salaries that should always be able to sell so many container
craft to cover monthly operating costs only.

WEAKNESS

a. The low quality of human resources. Reflected in the underdeveloped

entrepreneurial, low productivity, and competitiveness. This weakness influential;
create and exploit business opportunities, market access aggressiveness (mainly
export), and access to capital resources.
b. Limited facilities and infrastructure, especially in transport, telecommunications,
water supplies and electricity.
c. SMEs limited access to productive resources, become an obstacle to the development
of rapid and sustained effort. This is due to the structure of the national economy that
is filled with inaccuracies in the control and allocation of productive resources.

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d. Efforts to accelerate the development of SMEs has various limitations, such as the
country's financial constraints for the development of SMEs, bank intermediation
function is not optimal yet, and implementation of regional autonomy to support the
development of SMEs has not been optimal.
e. The lack of commitment, ability and quality supervisors in government agencies
(especially in areas of provincial and district/city).
f. Unrealized commitment, consistency of policies, and the spirit of integration of
various stakeholders (policy makers) in the development of SMEs. This leads to
inefficiency and ineffectiveness of development of SMEs.
g. Still limited use of information technology (such as the Internet), so that the market
reach is limited and low business efficiency.
h. Technological limitations, contrast with developed countries, SMEs in Indonesia are
still using traditional technology in the form of old machinery or tools of production
that are manual. Underdevelopment this technology not only makes the low number
of production and efficiency in the production process, but also the poor quality of the
products are made, and the capability for SMEs in Indonesia to be able to compete in
the global market.
i. Technological limitations caused by many factors such as lack of capital investment to
purchase new machinery, lack of information about the development of technology,
and the limited human resources which can operate the new machines.
j. Marketing difficulties, results of studies of transnational done by James and
Akarasanee (1988) in a number of ASEAN countries to conclude one of the aspects
related to marketing problems commonly faced by SMEs are competitive pressures,
both in the domestic market of the products similar artificial big businessmen and
imports, as well as export market.
k. Financial limitations, SMEs in Indonesia is facing two major problems in the financial
aspects, the capital (both initial capital and working capital) and long-term financial
investments that are indispensable for the long-term output growth.
l. Raw material problems, limitations of raw materials and other inputs also often be
one of the serious problems for the growth of output or production continuity for
SMEs in Indonesia. Especially during times of crisis, many centers of small and medium
enterprises such as shoe and textile products have difficulty in obtaining raw materials

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 or other inputs because the price in Rupiah become very expensive due to the
depreciation of the exchange rate against the US dollar.

OPPORTUNITIES

a. National economic recovery from the economic crisis.

b. Increased awareness, commitment and concern of the government, businesses, and
communities of the importance of SMEs in the economy.
c. The existence of strong political will from the government, and the growing demands
of society to create a fair and transparent development, and commitment to building
a democratic economic system (although this is still abstract).
d. Support the constitutional institutions (Small Business acts, Cooperatives acts, and
PROPERNAS acts) which gives priority to the economic development of SMEs in
realizing a democratic economic system.
e. Autonomy implementation is getting better, with a better financial balance.
f. Changes in the structure of the national economy from agriculture to industry and
services. This creates opportunities for SMEs (particularly in the field of agribusiness,
agro-industry, tourism, handicraft industry, and other industries) as a strong and
efficient sub-contractor for large enterprises.
g. The rapid development of economic cooperation between countries, especially in the
context of ASEAN.
h. The availability of human resources labor force in large numbers are still not used
productively.
i. The potential of the domestic market continues to grow, along with the development
of the population.
j. The development of information and communication technology, which really support
dynamic business activity, and also support the ability of market access quickly.

THREAT

a. Competition with innovative foreign businessmen, supported by technology, capital,

and extensive business network will make it difficult to compete and develop SMEs.

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 b. Weakness regulatory and law enforcement can threaten SMEs by large businesses
which are aggressively entering the appropriate business areas reserved for SMEs.
c. Still low commitment to the quality of SMEs, causing low consumer trust in the quality
and reliability of the products of SMEs.
d. Low consumer trust in SMEs due to lack of commitment to business ethics
enforcement.

CRUSIAL ISSUE OF INDONESIAN SMES IN THE AEC COMPETITION

ASEAN officials have repeatedly emphasized the importance of SMEs, as the backbone
of the regional economy. The process of regional economic integration is expected to
encourage SMEs to upgrade their capabilities and narrow the development gap among ASEAN
economies. As a result, ASEAN countries are committed to both implementing the AEC
Blueprint for easing tariff and non-tariff barriers, and to monitoring the process based on
statistical measures.

However, the reality is much more complex than scorecard numbers. The first
problem is the lack of public awareness of the AECs opportunities and challenges. Although
there is a growing familiarity with the terms ASEAN and AEC, most SMEs still do not know
what to expect and anticipate. This is largely a reflection of a lack of interest in learning more
about other ASEAN countries or expanding market overseas. This fact is certainly worrying:
SMEs account for more than 97 percent of the Indonesian workforce, but their total
contribution to Indonesias non-oil and gas exports has been gradually declining, from 20.15
percent in 2003 to 16 percent in 2014.

Second, although Indonesia has enjoyed steady development for more than a decade,
the World Competitiveness Index 2014-2015 Report notes that a lack of skilled human
resources, poor infrastructure facilities, and weak technological knowledge persist as serious
problems for the Indonesian economy. This has implications for the SME sector, especially in
the form of limited banking and transportation access, a lack of knowledge about ASEAN
product standardization and export-import procedures, as well as insufficient technical
understanding. Although Jakarta has confirmed 90.5 percent of the AEC blueprint, some
major discrepancies remain between the harmonization policies adopted and the ability of
SMEs to tap into the system and take advantage of it.

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 The third problem is the inadequacy of the existing AEC preparation. Although there
have been some important regulations associated with SME and AEC preparation, as well as
several commitments made at the local and national levels, inter-agency coordination of ideas
and policies has been poor. As such, some local governments are still confused about the
central-local coordination mechanism and unsure of the framework of the AEC.

Bracing from 2015

To address these concerns, Indonesian President Joko Jokowi Widodo needs to act
now. Despite much rhetoric delivered during both his campaign and his presidency on
prioritizing peoples welfare and economic productivity, Jokowi needs to provide more
tangible incentives in empowering SMEs. Instead of turning to protectionism to undermine
other countries SME products, the government should boost local SMEs competitiveness by
granting special tax breaks, providing assistance in information technology, offering help in
understanding ASEAN product standardization and customs systems, and invigorating the
banking system via export-import banks to support market expansion.

Improving inter-agency coordination will be equally important. Indeed, Jokowi is

currently pursuing new initiatives, especially in establishing a Creative Economy Board and
supporting SMEs marketing through the UKM Indonesia WOW project. However, more
comprehensive coordination will be crucial, especially in coordinating national-local policies.
Its effectiveness could also be enhanced by expanding the participation of non-state actors,
such as inviting participation from business and their corporate social responsibility programs,
along with trade associations, NGOs, universities, and civil societies. Realizing that ASEAN-
related projects are often perceived as elitist, greater involvement by non-state actors will
lead to a stronger commitment to building a sense of community, as well as better policy
contextualization and preparation at both the national and local levels.

Certainly, market liberalization processes are often a double-edged sword, bringing

opportunity for business expansion, but also opening greater risk for economic inequality.
Hence, in dealing with the SMEs challenges, Jokowi should not only maintain his signature
trait in communicating well with wong cilik [lower-class people]; he should also empower
them to survive the AEC, leading Indonesia down a different path than the one Chiapas chose.

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 CONCLUSION

ASEAN Economic Community (AEC) which established on December 31, 2015, is a

mutual agreement to integrate the ASEAN countries (Indonesia, Malaysia, Philippines,
Singapore, Thailand, Brunei Darussalam, Cambodia, Vietnam, Laos and Myanmar). The AEC
has been seen as a way to promote economic, political, social and cultural cooperation across
the region.

Indonesia is the largest economy in Southeast ASEAN with GDP nominal at US$888
billion and GDP per capita at $3,500. Indonesias banking sector is characterized by a growing
economy.

SMEs are the backbone of Indonesias economy, they get only small portions of bank
financing. ASEAN officials have repeatedly emphasized the importance of SMEs, as the
backbone of the regional economy. The process of regional economic integration is expected
to encourage SMEs to upgrade their capabilities and narrow the development gap among
ASEAN economies. As a result, ASEAN countries are committed to both implementing the AEC
Blueprint for easing tariff and non-tariff barriers, and to monitoring the process based on
statistical measures.

SMEs can seek financing from various types of financial institutions, including banking
institutions, development financial institutions (DFIs), leasing and factoring companies and
venture capital companies that provide equity financing. In addition, SMEs can also make use
of various specific-purpose special funds set up by the government to help SMEs.

Improving inter-agency coordination will be equally important. Indeed, Jokowi is

currently pursuing new initiatives, especially in establishing a Creative Economy Board and
supporting SMEs marketing through the UKM Indonesia WOW project. Certainly, market
liberalization processes are often a double-edged sword, bringing opportunity for business
expansion, but also opening greater risk for economic inequality.

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 REFERENCES

http://www.thejakartapost.com/academia/2016/09/13/growing-role-of-smes-in-
asean-economic-community.html

http://thediplomat.com/2015/06/indonesian-smes-and-the-asean-economic-
community/

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