Determinants of Micro, Small, and Medium Enterprises: The Case of an Emerging Economy in Indonesia

Abstract

The covid-19 pandemic has worsened Indonesia’s economic situation. Most households have tried to survive by running their own business because they have just been fired from their latest company. Unfortunately, this business cycle forced families to reduce production costs due to less aggregate product demand. Many of them collapsed, and fewer survived. The condition of natural selection is to make government create a proper policy to prevent bad things happen in the future since MSME is categorized as an informal sector with many forms, such as culinary, services, and education. Most empirical studies show that the informal sector contributes more than 60% to Indonesia economic outcome. The aggregate demand for MSME products is only consumed by 20% of below-income group households. This study aims to analyse the effect of input factor on MSME productivity, proving that labour and capital investment is determinants for the extreme resilience of MSME in Indonesia. It used secondary data from 2016 to 2020 about the MSME sector in Indonesia and the Ministry of Cooperation using a proxy of MSME productivity and the MSME export ratio of total exports of all economic sectors. This research was then analyzed using the Linear Regression with Ordinary Least squares with STATA 14. The results showed that the labour and capital investment in the MSME sector had a positive and significant effect on the productivity and export ratio of MSMEs. T-statistics and F-statistics indicate both are higher than T and F table (p-value < 0,05). The regression model also does not suffer from classical assumption tests such as heteroskedasticity, multicollinearity, and autocorrelation.