The Role of Small and Medium Enterprises (SMEs) in Supporting the People’s Economy in Indonesia

The Role of Small and Medium Enterprises (SMEs) in Supporting the People’s Economy in Indonesia

Novita Aprilia^*, Waspodo Tjipto Subroto, Norida Canda Sakti

Faculty of Economics and Business, Universitas Negeri Surabaya

^*Correspondent Author

DOI: https://doi.org/10.51244/IJRSI.2024.11120036

Received: 07 December 2024; Accepted: 14 December 2024; Published: 10 January 2025

ABSTRACT

The role of MSMEs in supporting the people’s economy in Indonesia. Study adopted a systematic literature review with data obtained from journals and research articles from 2015-2024. The data source platform used in this study is from Scopus. Evidence from empirical works reviewed showed that that micro, small, and medium enterprises (MSMEs) play a very important role in supporting the people’s economy in Indonesia, with a contribution of around 60.5% to the gross domestic product (GDP) and absorbing almost 97% of the total national workforce. As the main driver of the local economy, MSMEs not only create jobs but also function as a social safety net that helps improve people’s welfare, especially in rural areas. In addition, MSMEs contribute to increasing the country’s foreign exchange through the export of quality local products. To achieve equitable and sustainable prosperity, people’s economic policies should aim to empower society through fair access to resources, strengthen small and medium enterprises (MSMEs), and encourage active participation of the people in economic decision making.

Keywords: MSMEs, People’s Economy, systematic literature review

INTRODUCTION

This document is a template. Micro, Small and Medium Enterprises (MSMEs) play a very crucial role in the Indonesian economy. With a total of around 66 million business units, MSMEs contribute around 61% of the national Gross Domestic Product (GDP) or the equivalent of IDR 9,580 trillion (Haryo Limanseto, 2022; Kadin, 2024). This contribution shows how important MSMEs are in driving economic growth and community welfare. MSMEs also absorb around 97% of the total workforce in Indonesia, which means nearly 117 million people depend on this sector for their livelihoods. In this way, MSMEs not only function as economic drivers, but also as a social safety net that helps reduce unemployment and improve people’s living standards (Hasan et al., 2023; Surya et al., 2021).

The MSME sector has the ability to expand employment opportunities and create new jobs (Shohibboniawan Wahyudi et al., 2024;Surya, B., Menne, F., Sabhan, H., Suriani, S., Abubakar, H., Idris, 2021). In this context, MSMEs play an important role in reducing poverty by providing access to individuals who do not have opportunities in the formal sector. Many of these workers come from low educational backgrounds, so the existence of MSMEs is very crucial in improving their quality of life. MSMEs also contribute to increasing the country’s foreign exchange through exports (Heriqbaldi et al., 2023; Meng Sun, 2021). High quality products produced by MSMEs, such as handicrafts, processed foods and textiles, are often in demand on the international market. By marketing their products abroad, MSMEs help diversify the country’s sources of income and increase foreign exchange inflows.

In economic crisis situations, MSMEs are often the main support of the economy. The flexibility and adaptability of this sector allows them to survive and even thrive in the midst of difficult conditions. During the global economic crisis in 1997/1998 and the impact of the COVID-19 pandemic, MSMEs proved to be able to maintain local economic activities and provide support for the community. The Indonesian government recognizes the importance of the role of MSMEs in the national economy and has launched various programs to support the development of this sector (Arnita et al., 2024; Limanseto, 2022). One form of such support is the People’s Business Credit (KUR), which provides access to financing with low interest and easy terms for MSME actors. However, challenges still exist for MSMEs in accessing financing. Around 46.6 million out of a total of 66 million MSMEs do not have access to capital from banks or other financial institutions (Kadin, 2024). This indicates the need for further efforts to overcome the obstacles faced by the sector.

Digitalization is one of the most important aspects of MSME development (Radicic & Petković, 2023). Many small business owners are using digital platforms to boost their sales. Digitalization enables MSMEs to reach a wider audience and increase their daily presence in the worldwide market. For MSME students, training and skill development are also the main priorities. Together with several private organizations, the government has implemented a training program to improve the managerial and technical skills of business owners (Kraus et al., 2022). This is done so that they can do well in both local and international markets. Additionally, MSMEs are important in ensuring economic distribution throughout Indonesia (Piliang, 2024; Septiani et al., 2024). There are small businesses in rural areas and small towns, thus economic growth is not just concentrated in large cities but also extends to smaller towns. This helps to reduce the economic disparity between towns and rural areas (Benardin & Anita, 2023; Diartika & Pramono, 2021). The existence of MSMEs encourages innovation and creativity among the community. Many small businesses create unique products based on local culture that can attract the attention of domestic and international markets. This innovation not only increases the attractiveness of the product but also strengthens Indonesia’s cultural identity.

In the context of sustainability, many MSMEs have begun to implement environmentally friendly business practices (Achmad et al., 2023). With increasing awareness of environmental issues, some small businesses are starting to use sustainable raw materials and implement production processes that have minimal negative impact on the environment. Overall, the role of MSMEs in supporting the populist economy in Indonesia is very significant. They are not only the driving force of the economy but also serve as a tool to improve the welfare of society as a whole (Surya et al., 2021). Support from the government as well as collaboration between various stakeholders will be crucial to ensure the sustainability and growth of the sector going forward.

With all the potential possessed by MSMEs, strategic steps need to continue to be taken to overcome existing challenges and maximize their contribution to national economic development. The success of the development of this sector will have a positive impact not only on the country’s economy but also on the lives of the wider community. Through various policies and support programs, the government is committed to strengthening the position of MSMEs as the backbone of the Indonesian economy in order to achieve equitable people’s welfare. To achieve equitable and sustainable prosperity, people’s economic policies should aim to empower society through fair access to resources, strengthen small and medium enterprises (MSMEs), and encourage active participation of the people in economic decision making.

METHODOLOGY

The literatures reviewed in this study was carried out by systematic selection that was traced from international databases. The author searched for data sources from various databases, including using Google Scholar and Scopus. The literature search technique used keywords that match the questions from the research. The list of keywords that will be used as the basis in the literature search is economy and MSMEs. Article searches are in English and Indonesian with the year of publication limited to the last 10 years (2015-2024).

RESULTS AND DISCUSSION

Schematic or Diagram Research Results (PRISMA)

Chart 1 depicts the article selection process using guidelines from the Preferred Reporting Systematic Reviews and Meta-analysis (PRISMA). The initial search found that the number of articles from 2015-2024 was 235 articles. Next, the articles are screened. A total of 10 articles were submitted to the next stage. The quality of the articles was reviewed so that 10 articles were synthesized in the final review report from the literature.

Chart 1. Diagram PRISMA

The researcher selects the articles obtained and extracts data on each article obtained from each database. The results of the article were reviewed related to the updating of the curriculum used by universities in the Economics Education study program in this industrial revolution era.

TABLE IThe Role Of Small And Medium Enterprises (Smes) In Supporting The People’s Economy In Indonesia

The Role Of MSMEs In Supporting The People’s Economy In Indonesia

Micro, small and medium enterprises (MSMEs) play an important role in supporting Indonesia’s people’s economy, especially in creating stability and sustainability of the community’s economy (Salsabillah et al., 2023). Millions of small and medium enterprises (MSMEs) act as the main drivers of the economy in the informal sector, which helps create jobs and grow a people-based economy, where the community is actively involved as business actors, not just as workers. MSMEs that grow rapidly strengthen the people’s economy and help create economic resilience, especially during economic crises (satpathy et al., 2025). The contribution of MSMEs to Indonesia’s GDP is also very large. More than 60% of Indonesia’s GDP comes from MSMEs, according to data from the Ministry of Cooperatives and Small and Medium Enterprises. With this large contribution, MSMEs not only support the national economy but also play an important role in ensuring that economic growth can be enjoyed by everyone (Aliyah, 2022). This makes MSMEs the backbone for inclusive economic growth that can reach all of society. Apart from that, MSMEs have a big role in creating jobs. With the development of the MSME sector, millions of people in Indonesia, including those who do not have access or the ability to work in the formal sector, have found employment (Salsabillah et al., 2023). This contributes to reducing unemployment and social inequality in various regions.

Considering that MSMEs are spread almost throughout the country, this sector helps increase income equality in various regions, not only in urban areas but also in rural areas. Local potential, such as crafts, agricultural products and local food, drives many small businesses. This not only maintains local identity, but also generates income for local people, and reduces the number of people living in the city. In the current digital era, small and medium enterprises (MSMEs) in Indonesia are also encouraged to adapt to technological advances (Iqbal Hasyim et al., 2023). Digitalization of MSMEs has opened up new opportunities; Business actors can now access a wider market through e-commerce platforms and social media. With this technology, MSMEs can market their products abroad. The government also helps MSMEs by providing training and technological assistance so that they can more easily adapt to the digital era and become more competitive.

Apart from digitalization, access to capital is an important component in developing MSMEs. Many MSMEs have difficulty obtaining capital from financial institutions and investors(Iqbal Hasyim et al., 2023). Through soft loan or microcredit programs, the government and financial institutions are strategically responsible for providing access to capital for small and medium enterprises (MSMEs). With capital, MSMEs have the ability to develop their business, increase production capabilities, and innovate to improve the quality of the products they make. Limited knowledge and skills are also another challenge faced by MSMEs (Sudati et al, 2019). Many small and medium enterprises (MSMEs) still need training on things like financial management, marketing and the use of technology. Therefore, the role of government and non-government organizations is very important in providing education and training to MSMEs. By acquiring these skills, MSMEs are expected to be able to compete better and manage their businesses more efficiently, which will have a positive impact on people’s economic growth.

Apart from that, MSMEs play an important role in maintaining the nation’s economic independence (Nata & Haryono, 2022). In a global economy full of competition, MSMEs help strengthen the domestic economy by producing goods and services tailored to local needs, which helps reduce Indonesia’s dependence on imported goods and strengthen a more independent economic base. By strengthening MSMEs, Indonesia is able to increase economic resilience, which in turn can protect society from global economic changes. Apart from that, government support in the form of regulations that support MSMEs is very important for sustainability (Yeniwati, 2018). The government offers policies that support MSMEs, such as simplifying business permits, reducing taxes for MSMEs, and protecting foreign products. These policies ensure that MSMEs can develop well and contribute more to Indonesia’s people’s economy.

Many MSMEs in Indonesia are engaged in the handicraft industry, regional specialties and other local products. These MSME products introduce local culture to the general public and help preserve old traditions (Styaningrum, 2021). In this way, MSMEs help maintain Indonesia’s cultural identity and promote cultural diversity to the global market. Many MSMEs are driven by women, both as owners and workers, which increases the role of women in the economy and provides opportunities for financial independence. In this way, MSMEs not only encourage the people’s economy, but also create empowerment for women in various business sectors.

Other industries such as logistics, distribution and transportation are assisted by the presence of MSMEs. MSMEs play an important role in encouraging the growth of these supporting sectors, which in turn provide wider economic benefits for society (Kader, 2018). With the involvement of these supporting sectors, MSMEs provide a chain effect that is able to increase economic growth in various lines. In addition, the growth of MSMEs has resulted in increased domestic product innovation. Many MSMEs innovate by making unique and high quality products, from food to clothing and simple technology (Nurlinda & Sinuraya, 2020). With this innovation, not only does the competitiveness of local products increase, but customers also prefer locally made products. The more innovations made by MSMEs, the stronger the position of Indonesian products in domestic and international markets.

Small and medium businesses (MSMEs) are very important for maintaining national economic stability during economic crises, such as the COVID-19 pandemic. During the pandemic, MSMEs helped many people who lost their formal jobs. Even though they were affected, MSMEs were able to adapt quickly by developing new products and services, such as delivery services and online sales. This shows how strong MSMEs are in facing the crisis and how important their role is in helping the people’s economy (Ahmadun, 2015). In facing current challenges, synergy between government, financial institutions and society is very important to support the development of MSMEs. This collaboration includes providing capital, training and wider market access for MSMEs, so that they can contribute as much as possible to people’s economic development. The more support given to MSMEs, the greater the benefits for the Indonesian economy.

Overall, MSMEs are very important to support the people’s economy in Indonesia. MSMEs really help build a more inclusive, sustainable and independent economy in terms of job creation, economic equality and product innovation. It is hoped that the role of MSMEs as the backbone of the national economy which can bring prosperity to all Indonesian people will continue to be strengthened with full support from all parties.

CONCLUSION

In conclusion, small and medium enterprises (MSMEs) play an important role in supporting the people’s economy in Indonesia. MSMEs are an important part of the national economy that supports community welfare and contributes greatly to GDP and job creation. This sector empowers local communities, reduces economic disparities between rural and urban areas, and helps equalize the economy in various regions. Empowering small and medium enterprises (MSMEs) will enable more people to enjoy the direct benefits of economic growth. In addition, MSMEs increase national economic independence by reducing dependence on imports and strengthening local products. With support from the government and related institutions, such as access to capital, training and digitalization, MSMEs are able to increase their competitiveness and reach a wider market. The important role of MSMEs makes them one of the strategic sectors in creating an economy that is inclusive, sustainable and focused on the welfare of the Indonesian people. To make financing programs more inclusive and affordable for small and medium enterprises (MSMEs), the government must develop microcredit schemes and facilitate access to capital. This includes working with financial institutions to provide loans with more flexible terms and lower interest rates. In addition, MSME players must be given financial management training to increase their knowledge of finance and help them manage funds more efficiently and sustainably. To encourage community economic growth, the government must invest in infrastructure that increases market accessibility for MSMEs, such as storage facilities, transportation and roads. In addition, digital technology development must be prioritized by providing training on the use of e-commerce platforms and digital marketing. This will help MSMEs to expand their market reach both locally and internationally, as well as increase the competitiveness of their products in the global market.

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