Rural, Local Economic, and SME Cluster Development

DRAFT

Proceedings 

Rural, Local Economic, and 

SME Cluster Development 

2 nd Workshop and Meeting 2011 

Rural Research and Planning Group (RRPG) 

DRAFT

Page | ii 

Workshop Proceedings of "Rural Research & Planning Group (RRPG) 2 nd Workshop 

And Meeting 2011 - Rural, Local Economic, And SME Cluster Development" was 

prepared by Centre for Participatory Development Planning Services – P5, Diponegoro 

University, in September 2011. 

Editor : 

Holi Bina Wijaya 

Editor Team : 

Iwan Rudiarto, Wiwandari Handayani 

Text and Design : 

Hasanatun Nisa Thamrin, Dwi Feri Yatnanto, Rizqa Hidayani 

Cover photo : 

Left picture : P5 Undip observation, SME in Kebumen Regency, Central Java Province 

Right picture : P5 Undip observation, one of rural area in Central Java Province 

Published by : 

Center for Participatory Development Planning Services 

(P5 UNDIP) 

Faculty of Engineering - Diponegoro University 

Department of Urban and Regional Planning 

Building B, Second Floor, Room B-203 UNDIP Tembalang 

Semarang 50275 – Indonesia 

Tel / Fax: +62 24 7648 0583 

Email: p5_undip@yahoo.com 

Website: www.p5undip.org 

DRAFT 

Pusat Pelayanan Perencanaan Pembangunan Partisipatif 

(P5) UNDIP 

Semarang 2011 ISBN 978-602-99749-5-9

FOREWORD 


Editor & Workshop Committee 

Dear distinguish readers and workshop 

participants, first of all let me introduce 

you to the substance of the 2 nd Meeting 

of RRPG 2011: International Workshop of 

“Rural, Local Economic, and SME Cluster 

Development”. The workshop was held on 

September 19-20, 2011 that arranged by 

Department of Urban and Regional 

Planning, Diponegoro University in 

Semarang, Indonesia. It is also supported 

by Province Government of Central Java, 

Magister Program of Urban and Regional 

Development and Center for Participatory 

Planning – P5 Diponegoro University, as 

well Urban and Regional Planning 

Department and Center for Innovative 

Planning Development of Universiti 

Teknologi Malaysia - UTM. 

The 2 nd Meeting of RRPG 2011 is a 

continuation program after the 1 st RRPG 

Meeting on October 2010 at UTM, 

Malaysia that toke the topic of “OVOP?”. 

RRPG or Rural Research and Planning 

Group is an open networking group that 

based on volunteerism, trust, and same 

interest to the research and planning of 

the rural area. We share our experience, 

knowledge, and idea that make better 

understanding of rural challenge and 

collaborate how to deal with it. 

The 2 nd RRPG meeting is followed by 31 

participants. They are from 6 countries 

citizenships mostly from Indonesia, 12 

universities, 3 CSO, 3 International NGO, 

and 4 government bodies. Now, with the 

global era where the activities are 

borderless, where the communication and 

interaction are very easy, then a strong 

networking becomes an important asset 

to improve our quality of live. 

The workshop topic of rural, local 

economic, and SME cluster development 

relates to RRPG substances concern on, as 

well regards to the recent substance 

challenge in Indonesia. The proceedings 

provides you with the substances of the 

workshop that divide the topics become 

four main categorizes. The first chapter it 

gives you the international perspective of 

rural and local economic development 

from 4 different countries. The second 

chapter discusses about the government 

policy and practices of local economic 

and SME cluster development in 

Indonesia, both in National level and 

provincial/local level. The third section 

presents the interesting cases in Indonesia 

and Malaysia. While the last section 

presents the specific substances cases i.e. 

tourism, social economic aspects, social 

capital, spatial perspective, etc. 

DRAFT 

Last but not least we would thanks to all 

partners who make the 2 nd meeting RRPG 

can be happen. Thus, we would like to 

take this opportunity to express our 

gratitude to all those who have 

contributed to this work. Especially, we 

would like to thank to Dr. rer.nat. Imam 

Buchori as head of Urban and Regional 

Planning Department, and Dr. Joesron 

Alie Syahbana as head of Master Program 

of Urban and Regional Development who 

Page | iii

facilitated and support for all institutional 

requirements. We would like also to 

appreciate Assoc. Prof. Dr. Ibrahim Ngah 

as head of Urban and Regional Planning 

Department, and Prof. Dr. Amran as Head 

of Center for Innovative Planning 

Development that give many support to 

connect the RRPG networks, as well many 

thanks to our senior colleagues Prof. 

David Preston one of RRPG founder that 

give many ideas and inputs for the 

workshop contents. 

As well, we would like to thanks to Center 

for Participatory Planning – P5 

Diponegoro University for its facilitation 

Workshop Secretariat, and great thanks to 

the committee team i.e. Dr. sc. agr. Iwan 

Rudiarto, Wiwandari Handayani, Msc, 

Artiningsih, MSi, Rizqa Hidayani, ST., Dwi 

Feri Yatnanto, ST, Hassanatun Nisa 

Thamrin, ST., and all committee team for 

Page | iv 

their great efforts to make this second 

RRPG meeting happen. We also would 

like to thanks to FPESD Central Java 

Province, BAPPEDA Kabupaten Magelang, 

as well Bapak Kirno and all colleagues 

from FRK Borobudur for the field visit 

support in Borobudur area. 

Finally we also to give high gratitudes to 

all partners and participants for their 

support to the workshop. Hope you will 

enjoy the discussion of substances, and 

have benefits from it. 

Thank you. 

Editor & Workshop committee, 

DRAFT 

Holi Bina Wijaya

FOREWORD 

Dr.rer.nat. Imam Buchori 

Head of Department of Urban and Regional Planning 

Faculty of Engineering, Diponegoro University 

Your Excellency, Rector of Diponegoro 

University 

Your Excellency, Dean of Faculty of 

Engineering, Diponegoro University 

Distinguished Professors and Colleagues 

Ladies and Gentlemen 

Assalammualaikum warahmatullahi 

wabarakatuh 

First of all, let’s thanks to God that today 

we can meet in this room in order to 

attend the International Workshop on 

“Rural, Local Economic and SME Cluster 

Development”. We all know that without 

His blessing we cannot have this useful 

meeting. 

This workshop is the second Workshop 

and Meeting of Rural Research and 

Planning Group (RRPG), following the first 

workshop conducted in Universiti 

Teknologi Malaysia (UTM) last year. We 

consider this event as an international 

workshop because it is attended by 

participants coming from six countries, i.e. 

Malaysia, Japan, UK, Germany, USA, and 

Indonesia. About 15 papers will be 

presented there. This event is also 

adjusted as one of “dies natalis” or “the 

day of birth” activities of Diponegoro 

University (UNDIP). 

The RRPG was firstly initiated by UTM and 

UNDIP in a meeting two years ago as a 

realization of Memorandum of Action 

(MoA) between the Head of Department 

of Urban and Regional Planning of UTM 

and that of UNDIP. The meeting decided 

to conduct an international workshop on 

“One Village One Product” by inviting 

participants from several countries, which 

in turn was considered as the first 

International Workshop and Meeting of 

RRGP. 

In this opportunity, I would like to express 

my gratitude to the works of the 

workshop committee, especially Mr. Holi 

Bina Wijaya, who has been hardly working 

in preparing everything to the success of 

this workshop. Special thanks to Professor 

Ibrahim Ngah from UTM as the founder of 

RRGP for his support to this event. 

DRAFT 

Finally, thank you for your attention and 

wassalammualaikum warahmatullahi 

wabarakatuh. 

Head of Department of Urban and Regional Planning 

Faculty of Engineering, Diponegoro University. 


Page | v

FOREWORD 

Associate Professor Dr Ibrahim Ngah 

RRPG Representatif 

The RRPG would like to welcome all 

participants to the second workshop and 

field study in Semarang. To cater for 

more diverse interests, we have chosen 

broader theme for this workshop: “Rural, 

Local Economic, and SME Cluster 

Development”. We are glad to have more 

participants this year including those who 

have attended the first workshop last year 

in Malaysia and the new members from 

Indonesia, Malaysia, Vietnam and United 

Kingdom and other countries. RRPG aims 

to become an international platform for 

meeting and networking among those 

specialists/experts and practitioners in the 

field of rural development and planning. 

This includes exchange of knowledge and 

experiences, discussion on research 

findings and ideas, plan and organize 

activities for mutual benefit. 

The idea of forming RRPG came from a 

meeting in May 2010, together with 

Professor David Preston from Oxford, Pak 

Imam Buchori and Pak Holi Bina Wijaya 

from Universitas Diponegoro (UNDIP), Dr 

Suriati from Universiti Sains Malaysia 

(USM) and colleagues in Universiti 

Teknologi Malaysia (UTM). The first 

meeting and field study was held in UTM 

on October 4-5, 2010 attended by 

scholars from Japan, Indonesia, Malaysia 

and Bangladesh. The theme of the last 

year meeting was One Village One 

Product (OVOP) and we gained a good 

exposure on various experiences in the 

implementation of OVOP in a few 

countries in Asia and other related topics. 

We are glad that some members 

managed to maintain networking and 

organized a few activities such as students 

exchange programs between UTM and 

UNDIP including students’ visits, summer 

school and research collaboration. 

In this year meeting perhaps we can look 

further into possibility of research 

collaboration and writing of book 

chapters on topics which are of common 

interest or “cross border”. An example of 

the “cross border“ research topic is 

international migration which could be 

carried out collaboratively among 

researchers from the migrants place of 

origins and destinations. 

DRAFT 

On behalves of RRPG I would like to 

thanks UNDIP and members of organizing 

committee for hosting the meeting and 

making excellent arrangement to enable 

this program successful. To expand our 

networking all new participants will be 

added to the list of RRPG members. We 

would like to welcome and thanks all the 

participants for giving support to the 

success of RRPG. 

RRPG Representative, 


Page | vii

TABLE OF CONTENT 

Foreword 

Holi Bina Wijaya. Workshop Committee iii 


Head of Department of Urban and Regional 

Planning v 


RRPG Representatif vii 

Table of Content viii 

Contributors x 

CHAPTER 1 INTRODUCTION 1 

Introduction 

Holi Bina Wijaya 3 

CHAPTER 2 

CURRENT EXPERIENCES AND 

RESULTING ISSUES 7 

Helping Cluster Development Benefit 

Local And Regional Societies And 

Economies 

Prof. Dr. David Preston 

University of Oxford. United Kingdom 9 

The OVOP Movement and Its Farm 

Related Industrial Development 

Prof. Kunio Igusa. 

Asia Pacific University. Japan 13 

Challenges in Rural Economic 

Transformation in Malaysia 

Assoc. Prof. Dr. Ibrahim Ngah 

UTM. Malaysia 41 

The Other Side of Local Supporting 

Economic of Rural Areas in Java 

Dr. Joesron Alie Syahbana 

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UNDIP. Indonesia 47 

Recalibrating Cluster Theory for 

Developing Country : Examples from 

Indonesia 

Prof. Nicholas A Phelps 

University College London. United Kingdom 51 

CHAPTER 3 

LEARNING FROM LOCAL ECONOMIC 

AND CLUSTER DEVELOPMENT IN 

INDONESIA 69 

Local Economic and Cluster 

Development in Central Java Province 

Indonesia 

Anung Sugihantono 

Economic Develepment Forum. FPESD. 

Central Java Province. Indonesia 71 

Local Economic Development in Central 

Java Province: Current Process. 


UNDIP Indonesia 75 

DRAFT 

Local Innovative System (SIDa) for 

Cluster Development. 

Agus Suryono 

Research and Development Board. Central 

Java Province. Indonesia 85 

CHAPTER 4 

IMPACT OF LED AND SME 

CLUSTERING 97 

Salt Fish and Brown Sugar Maker, make 

Pangandaran Tourism Resort Alive? 

Dr. Uton Rustan and Ira Savitri 

Bandung Islamic University. Indonesia 99 

Development of Biofarmaka Cluster 

Karanganyar Central Java 

Dr. Rustina Untari 

Soegijapranata University 113

Local Economy and SME Cluster in 

Seberang Prai, Penang State, Malaysia 

Colonius Atang, Sharifah Rohayah Sheikh 

Dawood, Suriati Ghazali, Narimah Samat. 

Universiti Sain Malaysia-USM. Malaysia 116 

CHAPTER 5 

KEY ELEMENTS OF CLUSTERING IN 

SPESIFIC SITUATIONS 130 

Simulating Farm Income in Rural 

Mountain Area: a Spatial Perspective 

Dr. sc.agr. Iwan Rudiarto 

UNDIP. Indonesia 132 

Bonding/Bridging Social Capital: Is it a 

Choice or Necessity? A Case Study of 

Rebana Cluster, Central Java 

Sri Utami 

Semarang State University. Indonesia 147 

The Interplay Between Socioeconomic 

Structures and Actors in Industrial 

Clusters: the Case of the Kotagede 

Silver Handicraft Cluster in Yogyakarta, 

Indonesia 

Poppy Ismalina, PhD 

Gajahmada University. Indonesia 160 

DRAFT 

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CONTRIBUTORS 

1. Professor Dr. David Preston 

d.a.preston@leeds.ac.uk 

Senior Research Associate, University of 

Oxford. 

United Kingdom. 

2. Professor Kunio Igusa 

kigusa@apu.ac.jp 

Graduate School of International 

Cooperation Policy 

College of International Management. 

Ritsumeikan Asia Pacific University. 

Oita. Japan. 

3. Associate Professor Dr. Ibrahim Ngah 

b-ibrhim@utm.my 

Department of Urban and Regional 

Planning 

Universiti Teknologi Malaysia. Skudai 

Johor Bahru. Malaysia 

4. Dr. Joesron Alie Syahbana, MSc 

yoesrona@yahoo.com 

Master Program of Urban and Regional 

Development. 

Diponegoro University. 

Semarang. Indonesia. 

5. Professor Nicholas A Phelps 

n.phelps@ucl.ac.uk 

Bartlett School of Planning. University 

College London - UCL 

London. United Kingdom 

6. Anung Sugihantono 

anung_semarang@yahoo.com 

Secretary of FPESD (Forum 

Pengembangan Ekonomi dan Sumber 

Daya) 

Economic and Resource Development 

Forum 

Jawa Tengah Province 


7. Drs. Agus Suryono, MM 

agssmg@yahoo.com 

Chairman 

Board of Research and Development of 

Central Java Province 

Page | x 


8. Holi Bina Wijaya 

h.wijaya@undip.ac.id 

Center for Participatory Planning 

Urban and Regional Planning 

Department 



9. Dr. Ir. Uton Rustan Harun, MSc 

rustanuton@yahoo.com 

Bandung Islamic University 

Taman Sari 1. Bandung 

Indonesia. 

10. Colonius Atang 

collendong@gmail.com 

Research Officer 

School of Humanities. Universiti Sains 

Malaysia. Penang, 

Malaysia 

11. Poppy Ismalina, PhD. 

poppy_ismalina@yahoo.com 

Faculty of Economics and Business, 

UGM 

Jogjakarta. Indonesia. 

12. Dr. sc.agr. Iwan Rudiarto, MSc 

irudiarto@yahoo.com 

Urban and Regional Planning 

Department. 



13. Dr. Rustina Untari 

r.untari@gmail.com 

PUSBANGDAYA / Soegijapranata 

Catholic University 


14. Sri Utami 

sriutami2008@gmail.com 

Semarang State University 


DRAFT

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DRAFT 

CHAPTER 1 

Introduction 

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DRAFT

INTRODUCTION 


Editor 

h.wijaya@undip.ac.id 

Local economic development (LED) has 

become an important strategy especially in 

developing countries, since it promotes the 

use of local resources as a basis for 

economic development and employment 

promotion. The importance of LED mostly is 

due to its support for the betterment of 

local people through the use of local 

resources. It also promotes sustainable 

development. Many international agencies, 

like United Nations agencies, have adopted 

this approach for their programs. 

In many countries, local economic 

development has become an important 

mode of rural development. Traditionally, 

agriculture and rural industries are mainly 

the economic bases of rural areas. Rural 

people have used their local resources and 

skills to produce the local products. With 

these products they fulfill their needs and 

support their life. This activity cycle has 

occurred for long time of rural growth. 

Until now, many rural development 

programs relate to poverty eradication. It is 

the challenge how to transform the 

development program that is not only to the 

poorest people, but also to promote the 

advance people’s economic status and rural 

competitiveness. 

The small and medium enterprise (SME) 

cluster links a group of SME production 

activities in the same area that has 

synergistic linkages between them. The idea 

of the SME cluster mostly focuses on the 

value chain of production activity among 

SMEs and supporting entities of production, 

which encourage the collective efficiency 

and profit in the cluster. SME cluster is one 

of the LED approach in the operational 

business level. 

There are many experiences of the SME 

cluster and LED practices. Some are 

successful, others not. The name and 

approaches may vary in different contexts 

and countries, but there are some similarity 

of the idea and concept. Many components 

and context become relevant factors for 

better achievement. There are relevant 

studies and experiences to share, in order to 

learn how the SME cluster, local economic, 

and rural development work, and give 

benefits for the people while encourage 

sustainability of development. 

The workshop is the effort to give some 

options to the participants and readers to 

face with the development of rural and local 

economic context. It has the purposes i.e. 

• Conducting the discussion for 

• 

knowledge and idea sharing of rural 

and local economic development, as 

well SME clusters development. 

Sharing the experiences of good and 

best practices of rural and local 

economic development, and SMEs 

clusters experiences from different 

• 

context and countries. 

Building and improving RRPG network 

for the development and knowledge 

sharing at the local, national, and 

international level. 

DRAFT 

The contributors of this proceedings consist 

of the academicians, researchers, and 

practitioners who have experiences and 

competences to the development of rural, 

local economic, business clusters of SMEs at 

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local, national, or international levels. (see. 

Contributors, page-x). The idea and 

information from different background 

perspectives will give us better 

understanding of the problems and 

solutions. 

Regarding to the substance, there are some 

initial issues and questions that guide the 

workshop discussion, as well the readers, to 

explore the context, challenges, and the 

option of solutions of rural, local economic, 

and SME cluster development challenges i.e. 

• The rural development is a significant 

part of national or regional 

• 

development. 

Is it true?, why?, how is it happen? 

What sort of rural areas do national 

governments prioritize compared with 

state/regional governments? 

The local economic and SME clusters 

are important as alternative ways for 

country development strategy. 

Are they? Where have they been 

• 

most/least successful? 

There are some similarity and difference 

of practice approaches. 

What are they? How is the process? 

• There some key elements and success 

factors to every practice situation. 

What are they in specific? 

• There are some interesting and realistic 

future research priorities regarding to 

the workshop topics 

What are they? What is the opportunity 

to carry out the work? 

These are open list of questions. Participants 

and readers could add more relevant issues 

and questions. The point is how important 

and realistic the topics to our interest work 

and life. 

The substances of paper follow to the three 

main stages. The writings in first part will 

provide current experiences and resulting 

issues from the international context 

perspectives, while the second part provides 

some main practices in Indonesia. The last 

part will present the specific cases and ideas 

Page | 4 

from the experience and perspective of 

contributors. 

In the first part David Preston will initiate the 

thought how cluster development benefit 

local and regional societies and economies. 

This idea is followed by three experiences 

from Japan, Malaysia, and Indonesia.. The 

popular concept of one village and one 

product - OVOP and its progress will be 

presented by Kunio Igusa. It has quiet long 

progress for almost 35 years, and the 

progress of process and result has been 

documented. Recently, the OVOP concept 

also has been adopted by some other 

countries. Ibrahim Ngah will present the 

rural transformation as a current 

development challenge in Malaysia. While 

the third case of rural growth issues in 

Indonesia will be presented by Joesron Alie 

Syahbana. The experiences and perspectives 

from three Asia countries are expected 

could give some general ideas and issues of 

the region. The last, Nicholas A. Phelps starts 

to initiate the idea to recalibrate cluster 

theory for developing country 

industrialization. He proposes the 

differentiation of industrial clusters in three 

types, i.e. traditional, transitional, and 

modern. The first part papers will bring us 

the opportunity to explore the current 

practices from different context in the Asia 

region. It gives the reason and expected 

result of development, as well the 

opportunity to improve the understanding 

and concept of cluster development as part 

of rural and local economic development. 

DRAFT 

The presentations in second part provide us 

with some of the main practices 

onformation in Indonesia, especially in 

Central Java Province. Central Java Province 

is an appropriate model to represent the 

local economic and SME cluster 

development in Indonesia. About 7 millions 

of 40 millions of SMEs in Indonesia are 

located in Central Java. This province has 

become a reference of National agencies 

and other local governments to the local 

economic development practices. The

papers in this part provide the experience of 

local economic and cluster development 

National and Central Java. The specific 

programs of innovation system, regional 

economic development also become part of 

discussion. 

The last part of discussion provides us with 

some specific cases. These are relates with 

the type of business as regarding local 

resources business i.e. tourism, fish 

processing, biofarmaka, rebana, silver 

handicraft etc. The other aspect is regarding 

to the factors those become critical 

influence factors and result of the local 

economy and SME cluster. These things 

relate to the participation, socio economic 

structure, social capital, location and spatial 

aspect, and some other aspects relates to 

the production process. 

The thoughts and experiences sharing from 

the contributors are valuable inputs to bring 

us for the better understanding of the rural, 

local economy, and SME cluster, as well 

encourage the new opportunity to find the 

options of concept and solution for 

knowledge improvement and better 

development result. 

DRAFT 

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DRAFT

DRAFT 

CHAPTER 2 

Experience and Resulting 

Issues 

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DRAFT

HELPING CLUSTER DEVELOPMENT BENEFIT LOCAL AND 

REGIONAL SOCIETIES AND ECONOMIES 

Prof. Dr. David Preston 

Senior Research Associate. University of Oxford. United Kingdom 

E-mail: d.a.preston@leeds.ac.uk 

A common issue relating to cluster 

development (OVOP etc.) is the extent to 

which it is driven by the community or 

communities that make up the cluster. 

The World Bank describes communitydriven 

development as characteristic of 

projects that increase community control 

over the development process in a paper 

analyzing part of the Indonesian 

experience (Dasgupta and Beard 2007). 

This paper offers valuable insights into 

ways in which village development 

projects can be managed and controlled 

by elites yet still be of benefit to all sectors 

of village society, however much the elites 

retain control and ensure that they receive 

substantial benefits. However, three of the 

four communities which they studied are 

effectively urban neighborhoods and only 

Sekar Kamulyan (SE of Bandung) is a rural 

community. It is therefore important to 

consider how cluster development can 

best benefit societies and economies at a 

local and regional level. 

Reviewing some of the papers presented 

at the last Workshop in the context of a 

range of relevant publications, a series of 

challenges can be identified which need to 

be addressed to maximise the benefits of 

cluster development to households, 

communities and the broader regions of 

which they are part. We should also 

examine the extent to which there are 

common issues which this form of 

development faces in different South-East 

and South Asian countries. Other issues 

may also be emerging from current 

research and some of these will surely be 

discussed in our meetings here. 

Challenges in the social, economic, 

political and physical environment 

Social: There is a clear need to assess and 

to find ways of strengthening social 

capital (social networks, associations etc.). 

The importance of social capital is 

frequently emphasized in the current 

literature. There is also a need to examine 

the degree of community cohesion and 

inclusion – across race, political party, 

gender and class status. It is clearly a 

major element in one of the presentations 

on Bangladesh. 

Economic: Diversification of livelihoods to 

avoid excessive dependence on a small 

number of activities – to provide a cushion 

against hard times and environmental 

challenges (like volcanic ash clouds!) – is 

also important. So maybe clusters of 

complementary SMEs are highly desirable 

only so long as they do not depend on 

satisfying relatively undifferentiated 

markets. For example, the dangers of 

dependence on tourism may be reduced if 

products are also sold via city retailers and 

even overseas (using internet links) as well 

as direct sales to visitors. 

DRAFT 

Political: A greater degree of 

decentralised political control seems to be 

common in many of the countries where 

cluster development has been examined. 

In federal states, it may be difficult to 

Page | 9

David Preston - Helping Cluster Development Benefit Local And Regional Societies And Economies 

ensure that the interests and priorities of 

regional political units (States in Malaysia) 

are included. Note that the important 

early progenitor of cluster development – 

One Village One Product (OVOP) – was 

based in the Japanese Prefecture of Oita 

and depended on regional rather than 

national support. 

The degree of dominance of the interests 

and priorities of high-level political actors 

must be examined if the dangers of topdown 

development are recognised. At a 

state level, what are essentially political 

issues and priorities – certainly in 

federated Malaysia – may be promoted 

that differ from those at a national 

government level. 

A further issue is frequently the extent 

that control has been devolved to the 

community and, within the community. 

Such devolution may ensure that the 

benefits of new initiatives are as widely 

shared as possible, as implied above as a 

social challenge. 

Physical: The development of SMEs 

inevitably uses local common resources 

such as water and land. It is necessary to 

safeguard access to natural assets/capital 

– forest, water, land – especially important 

when traditional access (for native 

peoples) has been restricted or denied. It 

is important too to ensure that 

contamination of water (and to some 

extent air) by industrial production is 

regulated. An issue that is important to 

many people in some Malaysian villages 

where we have worked is how to make 

abandoned land available to village 

people. This may be particularly complex 

when many village people live much of 

the year far away and cannot use their 

land in the way to which previous 

generations were accustomed. 

Page | 10 

Research challenges (a possible 

focus for debate during the 

meeting) 

o Little seems to have been published 

that evaluates the consequences of 

OVOP/SME etc. development on 

different categories of people (in 

particular according to gender and 

age) in the area affected by such 

development. It would be good to 

hear what the group knows of such 

studies that have been carried out. 

o Can we assess the extent to which outmigration 

(for example of women from 

Java to Malaysia) mentioned by Hart 

(2004) from some rural areas has been 

checked by the development of new 

employment opportunities in rural 

areas? 

o It would be very useful to compare the 

results of such developments in 

different but perhaps comparable 

countries – maybe comparing 

Indonesia/Malaysia; Japan/Korea and 

more generally S Asia and SE Asia. Is 

this something that the RRPG group 

could consider seeking funding to do? 

Future Challenges and 

Opportunities 

DRAFT 

o Impact of new communications 

technologies (e.g. widespread fast 

Internet connectivity) on where and 

what sort of industries can develop 

away from major urban centres. 

o Better communications by road, water 

etc may allow value chains to become 

shorter and perhaps more benefits to 

producers (Gibson and Olivia 2010) 

o New patterns of international cooperation 

creating broader areal 

synergies (using ASEAN, Asian 

Development Bank and even WTO as 

organisational models).

David Preston - Helping Cluster Development Benefit Local And Regional Societies And Economies 

Bibliography 

Ali, Abu Kasim and Mansor, Ahmad 

Ezanee (2006), Social capital and 

rural community development in 

Malaysia. In Yokoyama, S and 

Sakurai, T. (eds.) Potential of Social 

Capital for Community 

Development (Asian Productivity 

Organization: Tokyo), 141-171 

(accessible via www.apo-tokyo.org) 

Dasgupta, A and Beard, V.A. (2007) 

Community driven development, 

collective action and elite capture in 

Indonesia, Development and Change, 

38(2), 225-249. 

Tambunan, Tulus T H (2011) Development 

of small and medium enterprises in a 

developing country. The Indonesian 

case, Journal of Enterprising 

Communities, People and Places in 

the Global Economy, 5(1), 68-82. 

Tremblay, D-G (2004) Networking, Clusters 

and Human Capital Development, 

Research Note 2006-08A, Université 

du Québec à Montréal. 

Gibson, J and Olivia, S (2010), The effect of 

infrastructure access and quality on 

non-farm enterprises in rural 

Indonesia, World Development, 38(5), 

717-726. 

Hart, G (2004), Power, labor and 

livelihood: processes and change in 

rural Java: notes and reflections on a 

village revisited, Global Field Notes, 

University of California No. 2. 

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THE OVOP MOVEMENT AND ITS FARM RELATED 

INDUSTRIAL DEVELOPMENT 

Prof. Kunio Igusa 

Graduate School of International Cooperation Policy 

College of International Management. Ritsumeikan Asia Pacific University. Japan. 

E-mail: kigusa@apu.ac.jp 

Presentation Tittle : The OVOP Movement and Its Farm Related Industrial 

Development 

Contents of Presentation : 

1. Economic Position of Oita and its Development 

2. What’s the OVOP? 

3. Framework of Oita’s OVOP and its Development 

4. New Trend of OVOP Mavement in Oita and Japan 

5. Introduction to the Cases of Neo-OVOP Activity in Oita 

• Ajimu-Wine Initiative 

• Management of Oyama Agriculture Cooperative 

• Caballeros Ham Studio Project 

• Collaborative Business of “Himeno-Kawahara” and “Azemichi Group” 

6. Conclusion 

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Kunio Igusa - The OVOP Movement and Its Farm Related Industrial Development 

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CHALLENGES IN RURAL ECONOMIC TRANSFORMATION IN 

MALAYSIA 



Universiti Teknologi Malaysia 

b-ibrhim@utm.my 

INTRODUCTION 

This paper discusses the recent strategy of 

the Malaysian government to transform 

rural economy into a high income status, the 

issues and challenges. Since a couple of 

years, under the new Prime Minister Dato’ 

SriMohd Najib bin Tun Hj. Abdul Razak, five 

major initiatives were launched i.e. 1 

Malaysia; Government Transformation 

Program (GTP), New Economic Model, Tenth 

Malaysia Plan and Economic Transformation 

Program (ETP). ETP is the government’s 

economic agenda in response to the goal of 

achieving high income developed nation by 

2020 that is both inclusive and sustainable. 

Based on the past trend of economic growth 

the logical path for achieving the goals is 

through the development of high value 

added secondary and tertiary sectors. The 

prospects for the rural sectors will be quite 

limited but some efforts have been taken to 

identify and nurture the growth of high 

value added activities of the rural sector. The 

author will examine the implication, issues 

and challenges for the rural sectors for the 

targeted economic transformation. 

RURAL CHANGE IN MALAYSIA 

Recent discussion on rural change in 

Malaysia has been dwelt with by Preston 

and Ngah (2011). During the past decades 

population growth continued to concentrate 

in a few urbanised region while rural areas 

experiencing outmigration. The share of 

rural population decrease from 73 per cent 

in 1970 to 37 per cent in 2007. Share of 

agriculture sector shrinking from 20 per cent 

in 1985 to 9 percent by 2007. National 

poverty rate fell from 49 per cent to less 

than 5 percent from 1970 to 2007. The 

percentage of households with piped water 

in rural areas had increased from 42 percent 

in 1980 to 90 per cent in 2005. Electricity 

supply was widely covered in rural areas of 

peninsular Malaysia in which all states 

recorded more than 90 per cent of 

households with electricity by 2000. Lower 

coverage of slightly less than 70 per cent 

was recorded in Sabah and Sarawak 

Changes on mobility of rural people were 

also remarkable with better quality of 

highways, increased ownership of vehicles 

and availability of public transport. More 

people are seeking works in distant 

metropolitan centres not only due to 

improved transportation but also general 

improvement in education levels. Non-farm 

works becoming more important in rural 

areas, including tourism. 

DRAFT 

Preston and Ngah (2011) visualized rural 

economic change in three dimensions 

(Figure 1). First the process of broadening 

involves new land based activities such as 

protection and management of land 

resources, production of new crops which 

benefit local people as well as attract 

visitors. Second, re-grounding involves the 

use of existing and new human capital for 

off-farm activities such as offering transport 

for people and goods to nearby commercial 

Page | 41

centre, as well as activities such as home 

stay to diversify rural household income 

sources. Thirdly, deepening which is farming 

based including new farming methods such 

as organic or biodynamic using existing 

biodiversity in the form of wild plants, fish 

and other wild life with value added. The 

New land-based work, park 

management 

New crops 

RURAL DEVELOPMENT 

PROGRAMMES 

The transformation of rural Malaysia was to 

large extent influenced by rural 

development initiatives undertaken by the 

government since independence in 1957. 

Ngah (2007) has made a comprehensive 

review of the rural development 

programmes and how it appears to improve 

living conditions of rural people, through 

improvement of rural economic activities, 

poverty eradication, provision of 

infrastructure and amenities. The summary 

of the strategies and programmes according 

Page | 42 

Ibrahim Ngah - Challenges in Rural Economic Transformation in Malaysia 

Broadening 

Re-grounding 

process of change is dynamic and spread 

unevenly in space. Remote rural areas such 

as Sabah and Sarawak tended to be less 

connected by road and transportation. 

Places nearer to urban centres are more 

connected as well as better access to 

market. 

Deepening 

Using existing social capital 

Income from off-farm work 

Incomers with new ideas 

Organic/biodynamic production 

Short supply chain marketing 

Identified locality product 

Traditional product including wild plants 

and animals 

DRAFT 

to development periods from independence 

until now is shown in Figure 2. Two main 

strategies that produced huge impact are 

the new land development and in-situ rural 

development. Entrepreneurial and SMI 

development are also focused for rural 

economic development. This includes the 

One District one Industry Program (SDSI) 

which was discussed in the previous RRPG 

meeting and also studies in detail by 

Professor Igusa team (see Igusa, 2009). 

Other initiatives under the Ministry of Rural 

and Regional Development include Training 

and Entrepreneur Supervision programme, 

Financial Support Scheme, Development of


Business Premises, Marketing and 

Promotion Programme, and Rural Tourism 

and Home stay. 

The recent strategy under New Economic 

Model focus on achieving the goal of 

becoming a high income nation that is 

both inclusive and sustainable by 2020. 

Among the initiative is the New Economic 

Transformation Programme. 

NEW ECONOMIC TRANSFORMATION 

PROGRAMME 

The economic Transformation Program 

(ETP) is a comprehensive effort to 

transform Malaysia into a high-income 

nation by 2020. To achieved the vision of 

high-income nation, the target growth of 

the gross national income (GNI) is 6 per 

cent per annum with per capita GNI 

change from USD6,700 or RM23,700 in 

2009 to at least USD15,000 or RM48,000 

by 2020 (Malaysia, 2010). Under ETP, 12 

key economic growth areas were 

identified to be focused. These “12 

National Key Economic Areas (NKEAs)” are 

to receive priority for public investment 

and policy support. However, the main 

players and funding will come from 

private sector with public sector 

investment as catalyst to spark private 

sector participation. 

The identification of 12 NKEAs and 

planning of ETP were based on labs1 

1 

A lab is an intense forum in which relevant 

participants (from private sector corporation and 

public sector agencies) are brought together in a 

group with the objective of finding radical yet 

practical and specific solutions to problems. 

During the course of a lab, participants conduct 

brainstorming sessions to generate ideas, conduct 

analysis to determine the feasibility of those ideas 

and test and refine them with multiple 

stakeholders. 

discussion involving the key players in 

public and private sectors. The labs 

sessions establish detailed pelan, 

aspirations, strategies and actions, 

including requirement for funding, 

investment and labour for each NKEA. 

The ETP finally come out with 131 projects 

under 12 NKEAs which targeted for RM 1 

trillion expected impact to GNP and to 

create 3.3 million jobs. 

On the basis of the proposed projects, 24 

or 18 per cent of the projects are more 

related to rural sector (i.e. Palm oil and 

agriculture), which expected to contribute 

12.9 per cent of GNI and 3.6 per cent of 

new jobs opportunities. 

The NKEAs under agriculture focus on 

selected activities which have high growth 

potential including aquaculture, seaweed 

farming, swiftlet nests, herbal products, 

fruit and vegetables and premium 

processed food (Table 2). 

The agriculture projects provides business 

opportunities such as snack industry, 

ornamental fish, aqua feed mill, herbal 

products distributors, poultry farming, 

mushroom farming, aqua export centre 

and packaged fruit production. Since the 

nature of business require high capital 

and technology not many rural people will 

be able to participate. Capital from big 

local and foreign companies is expected 

to undertake the businesses. 

DRAFT 

Page | 43

Table 1: Incremental GNI impact and new jobs created from 12 NKEAs in 2020 

Page | 44 


NKEAs Projects 

GNI 2020 

(RM 

Billions) 

New jobs by 2020 

(Thousands) 

% GNI 

Oil, Gas & Energy 12 131 52 11.0 

Palm Oil 8 125 42 10.5 

Financial services 10 121 275 10.2 

Wholesale & Retail 15 108 595 9.1 

Tourism 12 67 497 5.6 

Business services 8 59 246 5.0 

Electronics and electrical 11 53 157 4.5 

Communications and infrastructure 10 36 43 3.0 

Healthcare 6 35 181 2.9 

Education 13 34 536 2.9 

Agriculture 16 29 75 2.4 

Greater Kuala Lumpur/Klang Valley* 10 392 553 32.9 

131 1190 3252 100.0 

* Some portion of income from NKEAs are overlapping 

Source: Malaysia 2010:pp.28, 47-54 

Table 2: 16 entry points projects for the transformation of agriculture sectors: 

Agriculture Projects 

2020 GNI 

(RM Million) 

Jobs 

Created 

1 Expanding the production of swiftlet nests 4,541.2 20,800 

2 Unlocking value from Malaysia’s biodiversity through herbal 

products 

2,213.9 1,822 

3 Upgrading 

vegetables 

capabilities to produce premium fruit and 1,571.5 9,075 

4 Venturing into commercial scale seaweed farming in Sabah 1,410.6 12,700 

5 Farming through integrated cage aquaculture systems 1,383.0 10,072 

6 Scaling up and strengthening of paddy in other irrigated area 1,370.3 (9,618) 

7 Replicating integrated aquaculture model (IZAQs) 1,273.2 11,890 

8 Scaling up and strengthening paddy farming in Muda Area 1,033.6 (14,880) 

9 Securing foreign direct investment in agriculture 819.9 1,208 

biotechnology 

10 Strengthening the export capability of the processed food 

industry 

884.3 4,928 

11 Establishing a leadership position in regional breeding services 466.6 5,390 

12 Establishing dairy clusters in Malaysia 326.3 761 

13 Strengthening current anchor companies in cattle feedlots 182.9 2,000 

14 Rearing cattle in oil palm estates 150.0 3,600 

15 Investing in foreign cattle farming 116.5 NA 

16 Introducing fragrant rice variety for non-irrigated areas 100.1 NA 

Source: Malaysia, 2010 pp. 47 

DRAFT

CHALLENGES 

Issues of Inclusiveness 

• Projects proposed require big 

investment from private sector. 

• Most likely not many local people can 

participate in the projects. 

• Rural people are diverse such as some 

have land and many others did not 

owned land. 

• The strategy for rural transformation to 

be effective and inclusive should cover 

wide ranges of approaches that cover 

the various dimension of rural change. 

Labour Force 


Although the proposed projects could 

create employment opportunities, but 

currently there has been shortage of 

manpower in the rural areas. 

Uneven Distribution of NKEAs Projects 

The nature of the proposed NKEAs projects 

tended to be urban based. It will create 

further concentration of economic activities 

in urban areas, particularly the Greater Kuala 

Lumpur region. 

Migration and Rural Depopulation 

Majority of the NKEAs projects are urban in 

nature and benefitted large metropolitan 

areas such as Kuala Lumpur 

Conurbation/greater Kuala Lumpur. It 

strengthened the process of convergences 

of the existing concentration of economic 

activities in core region, thus created 

polarisation effects and continuing 

depopulation of rural people. 

REFERENCES 

Igusa, Kunia (2009), Rural Entrepreneurs and 

SDSI Policy in Malaysia: How malaysian 

Type of OVOP Function, in Igusa and 

Ab. Latif (ed) Workshop Proceedings 

One District One Industry, Ritsumeika 

Asia Pacific University and University 

Malaysia Kelantan 

Malaysia (2010), Economic Transformation 

Programme, A Road Map for Malaysia, 

Puterajaya: PEMANDU, Jabatan 

Perdana Menteri . 

Malaysia (2011), Population Distribution and 

Basic Demographic Characteristics 

2010, Population and Housing Census 

of Malaysia 2010, Putrajaya: 

Department of Statistics. 

Malaysia (2011a), Preliminary Count report, 

Population and Housing Census of 

Malaysia 2010, Putrajaya: Department 

of Statistics. 

Ngah, I (2009), RuralDevelopment in 

Malaysia, in Ishak Yussof ed. Malaysia’s 

Economy, Past, Present & Future, 

Kuala Lumpur: Malaysian Strategic 

Research Centre, pp. 23-60. 

DRAFT 

Preston, D. A and Ngah, I (2011) Change in 

Rural Malaysia, paper summitted to 

Journal of Rural Studies (under review) 

Page | 45

Page | 46 

DRAFT

THE OTHER SIDE OF LOCAL SUPPORTING ECONOMIC OF 

RURAL AREAS IN JAVA 

Dr. Joesron Alie Syahbana 

Master Program of Urban and Regional Development 

Diponegoro University, Semarang, Indonesia 

yoesrona@yahoo.com 

BEYOND THE REACH OF RURAL 

POOR’S WELFARE 

Most of active volcanos in Indonesia are 

located in Java Island which in one hand, 

they are related to the danger of natural 

disaster, in other hand created best farm 

lands in Indonesia. No wonder, this smallest 

of five main islands in Indonesia has been 

high concentration population of Indonesia 

for many centuries. Recently, Java has been 

inhabited by more than 60 % of Indonesian 

population. So, intensive urbanization and 

industrialization with their implications are 

going to be inevitable process in this island. 

In one side, both urbanization and 

industrialization process are going to be 

economic engine for local and national 

economic growth, in other side when the 

existing small fertilized farm lands in Java 

are not sufficient anymore to support local 

economic of rural areas, very small to small 

farmers and the landless farmers as well are 

hard to depend their future social welfare 

on both farm lands and agricultural 

activities. 

Those farmers are still hard to earn other 

incomes from non-agricultural activities 

(industrial and urban sectors) since most of 

rural-urban linkages which are expected to 

increase their social welfare are still 

rudimentary. In straight words, agricultural, 

social services, and other rural development 

program are still largely beyond the reach of 

the rural poor’s welfare in Java Island. 

Therefore, it is unargumentable that rural 

areas in Java are going to be a source of 

mass poverty which any time widely spread 

over urban areas in many parts of national 

geographic areas and other parts of the 

world as well. 

Only with wide-ranging concepts of 

agricultural, industrial, rural development, 

rural - urban linkage development as well as 

its appropriate applications will effectively 

reduce the mass poverty as a main problem 

which is prevalent founded in most of rural 

areas of Java. It is different situation to 

introduce and to promote industrial 

revolution between urban and rural areas, 

even related to carefully green industrial 

revolution applications because of low 

standard social welfare, sensitive physical 

environment, and improper institutional 

development. 

DRAFT 

Agricultural based-sectors’ role keep on 

tending to decrease in GNP, although some 

modernization ways of agricultural and rural 

industrial development have been injected. 

The problem is most of villagers or farmers 

are not ready to go in. Furthermore, sound 

is that for new generation of villagers, 

industrialization and urbanization sectors 

are much more attractive rather than to live 

longer in the rural areas with daily dirty and 

muddy works in the farm lands. So, mass 

migration (with poverty and low social 

welfare) would be more spread over urban 

areas in Indonesia, even overseas soon. 

Fortunately, a part of villagers are still very 

creative, innovative, and dynamic to create 

their supporting economies, however. 

Page | 47

Although a part of rural areas have succeed 

to escape from local depressed economies, 

another part of them are still in struggling, 

the other part are still found depend on 

“the other side of supporting economies” 

which some of them tend to be establish 

and to be a part of their specific supporting 

economies for many decades. Those rural 

types are not really poor, but what they are 

doing to support their local economies are 

just incompatible with Indonesian value 

system (even universal value system). 

However, only few studies, researches, and 

development programs are interested or 

pay more attention to them. Sound like they 

were never touchable or considerable. 

The search for an appropriate combination 

of different policies and instruments for 

poverty-oriented rural development which 

arise some arguments and debates. The 

current debate is characterized by the 

following pairs of opposites: (i) accelerated 

economic growth versus general social 

development; (ii) effective promotion of 

local and regional projects versus countrywide 

programmes at sectoral and macro 

level; (iii) complex, integrated projects 

versus sectoral programmes geared to 

specific target groups; (iv) the strengthening 

of government organizational structures 

versus promotion of the self-organization of 

the beneficiaries; (v) the supply orientation 

of public services versus demand 

orientation; (vi) blueprint planning versus 

open planning processes (Gsänger, 1994). 

DEVELOPING BRIGHT SUPPORTING 

ECONOMIC 

Rural development in Java has played an 

important role in both national and 

international development cooperation over 

the past decades. No wonder, nowadays 

some rural areas in Java have been rapidly 

developing not only affected by local and 

national urbanization and industrialization 

but also the global one since they have 

been being linked by both national and 

Page | 48 

Joesron Alie Syahbana - The Other Side of Local Supporting Economic of Rural Areas in Java 

global rural and urban linkages. Both the 

national and international flows of people, 

goods, resources, capital, knowledge and 

experiences become ever more important 

and increasingly present in all cities, though 

in differing proportions (Lynch, 2005). 

Each rural area in Java tends to have a 

specific non-agriculture business affected by 

both heritage and new concepts basedbusiness, 

traditional and current market 

influenced by wider rural-urban linkages. 

Supporting rural economic development in 

Java varies from place to place depend on 

local potencies and linkage with wider 

economic activities. Most of them naturally 

grow and develop, some are injected by the 

development concept from external 

institutions. Rural areas in surrounding 

Pekalongan, Jepara, Kudus, Surakarta, 

Yogyakarta, Tasikmalaya, Tegal, Bandung, 

Bogor, Malang, Magelang, and others have 

recognized as centers of small and medium 

scale industries in Java which have grown 

not only from after independence periods, 

but also long before independence periods. 

Even some of them are found naturally 

linked by traditional cluster system since 

their activities engage within arrays of 

internally and externally by linked industries 

and other important entities to compete 

with others (Porter, 1998). 

DRAFT 

Recently, some rural area successfully 

produce from standard to high quality 

products which a part of exported goods 

and even to be a part of both national and 

global branded products. Generally, their 

products are related to high specific skill 

handy-crafts made of woods, leather, metal, 

textiles, foods, and other materials order or 

requested by both national and global 

companies. Most of potential products of 

rural areas have been touched and 

promoted by concepts of SME development 

and local economics provided by both 

national and international institutions, such 

as cluster development, OVOP (one village 

one product), etc, and generally most of 

them want to be the winner. No wonder,


although many individual different projects 

have been very successful, they have often 

failed to have the desired wide impact and 

sustainability. Most of agencies which 

promoted them such as argued by (Gsänger, 

1994) have only pursued a successful 

cooperation programs which has heavily 

focused on project based-activities and only 

paid little attention which is in line with 

sectorial policies. Only few of them have 

formulated the policies as to leave sufficient 

scope for both business growth and social 

development. The view that a supplyoriented 

strategy of providing services, 

know-how and inputs could set in motion 

sustainable development processes proved 

to be a serious mistake. This strategy failed 

in two respects: on the one hand, it reduced 

those concerned to functional objects; on 

the other, it expected government to bear 

fiscal burdens which were intolerable in 

most countries. Consumers came to expect 

public services as a matter of course, which 

led to budget deficits that were difficult to 

reduce. Anyway, a part of them have created 

better local economic development and 

social welfare. 

Although a part of rural owner’s enterprises 

have successfully adopted new concepts of 

local supporting economies, other parts are 

still struggling to sustain avoiding collaps 

and bankcrupts, etc due to aspects of 

macro-economic and financial situation, 

managerial skill, skilled labor piracies, 

disputable between rational and irrational 

economic , which left many idle skill labors 

who finally move to urban areas as both 

permanent and non-permanent residents. 

Therefore, some phenomenon appear 

related to production process which also 

related to (national and global) rural-urban 

linkages: (i) some rural areas do not produce 

goods anymore, but only provide specific 

skill workers and labors from standard to 

high specific free skill workers, such as: 

building interior workers, furniture and 

wood carving workers, batik and other 

textile, shoes and other leather products 

workers, etc, the production and marketing 

process is directly managed by urban 

owner’s enterprise in the big cities, (ii) Some 

rural (local) owner’s enterprises engage in 

cooperation with the urban’s ones. The 

production process in rural areas with 

strictly under control urban’s ones and 

marketing process directly managed by 

urban’s, (iii) it is not rare that a part of urban 

owner’s enterprise are also successful 

enterpreuner derived from rural areas. 

As a part of global phenomenon, 

international flow of people (say worker 

migration) is also important in developing 

bright rural-urban linkage and local 

supporting economic. Nowadays, many rural 

areas are known as human resources of less 

to medium skill workers for international 

demands such as: home services, building 

and infrastructure construction services, 

seamen, etc. The popular country 

destination is Midle East countries, Malaysia, 

Hongkong, Taiwan, and Korea. There is a 

speciality of service found in each rural area 

which related to jobs and country 

destination. Of course, their remittance has 

going to be a part of bright local supporting 

economic although there are a lot of 

unsolve problems have appear dealing with 

this international migration workers. 

DRAFT 

DARK LOCAL SUPPORTING 

ECONOMIC IS THERE AND GETTING 

ESTABLISH? 

Although as mentioned that Javanese 

villagers are creative and struggle, not all 

rural areas in Java occupied by skilled 

workers, but many of them are no and or 

less skill people with very low standard of 

social welfare who living in geographycally 

depressed or disadvantaged areas. Of 

course, mass poverty is easily found in this 

type of rural areas. Their migration to urban 

areas is not always well accepted by formal 

and bright informal supporting economic, 

but dark informal sectors more welcome to 

them. Again, the flows of people who 

Page | 49

involve in dark informal sector become ever 

more important and increasingly present in 

big cities in Indonesia, even in overseas 

The dark supporting economic covers 

among others: prostitution, human traffics, 

criminal cases, other dark workers which 

most of them are incompatible with existing 

value system. Bright supporting economic 

development is little bit too late, their dark 

supporting economic has already 

established to be a part of their sustainable 

life. Such as bright supporting local 

economic, there is also speciality of rural 

areas to maintain this other side of local 

supporting economic. Changing their 

paradigms in supporting economic, sound is 

going to be a very big challenge. 

HIGH LIGHTS 

From discussions mentioned above some 

high light words can be described to enrich 

more new effective paradigms and concepts 

for rural development among others such as 

follows: 

1. Agricultural, social services, and other 

rural development program are still 

largely beyond the reach of the rural 

poor’s welfare in Java Island. In the 

straight words, rural areas in Java are 

still saving mass poverty who ready to 

move to national and global urban 

areas creating wider rural-urban 

2. 

linkages; 

Learning from the causes are to be 

found in their conception, the strategy 

for their implementation and the 

environment in which they have been 

implemented, rural development 

3. 

projects with new concepts of local 

supporting economic in the past have 

had not so much created impacts of 

their sustainability; 

Accelerated local economic growth is 

not enough to cope mass poverty 

problems due to less pay more 

attention on general social and 

institutional development; 

Page | 50 


4. It is found a part of the new 

implemented concepts to rural 

development is too rationalistic which 

is unsuitable with local value system; 

5. It is only pay little attention to dark or 

other side of local supporting 

economic of rural areas in Java which 

getting establish; 

6. Only with wide-ranging concepts of 

agricultural, industrial, rural 

development, rural - urban linkage 

development as well as its appropriate 

applications will effectively reduce the 

mass poverty as a main problem which 

is prevalent founded in most of rural 

areas of Java. 

REFERENCES 

Berger, Guy (1992), Social structure and rural 

development in the Third World, 

Cambridge University Press, New 

York, USA 

Gsänger, Hans (1994), the Future of Rural 

Development, Between the 

Adjustment of, the Project Approach 

and Sectoral Programme Design, 

Frank Cass, London 

Jentsch, Birgit and Simard, Myriam (2009), 

International Migration and Rural 

Areas, Cross-National Comparative 

Perspectives, Ashgate Publishing 

Limited Ashgate Publishing 

Company, Farnham BurlingtonS, 

England USA; 

DRAFT 

Lynch, Kenneth (2005), Rural–Urban 

Interaction in the Developing World, 

Routledge, New York, USA 

Munir, Risfan and Fitanto, Bahtiar (2005), 

Pengembangan Ekonomi Lokal 

Partisipatif (Participatory Local 

Econoic Development), LGSP –USAID, 

Jakarta. 

Porter, Michael (1998), Cluster and the New 

Economics of Competition, Harvard 

Business Review, Boston-US

RECALIBRATING CLUSTER THEORY FOR DEVELOPING 

COUNTRIES : EXAMPLES FROM INDONESIA 

Prof. Nicholas A Phelps 

Bartlett School of Planning. 

University College London. United Kingdom. 

E-mail: n.phelps@ucl.ac.uk 

INTRODUCTION 

The premise of this paper is that the existing 

academic and policy literature on industrial 

clustering can be better calibrated to 

developing country settings by 

incorporating the insights of bodies of 

literature on constraints on small firm 

growth and the different forms that business 

growth takes. This body of literature has to 

some extent been overlooked within, and 

certainly as yet not linked to, the 

contemporary mainstream interest on 

processes of industry clustering. It is present 

within the (often area-specific) literature on 

the small firm sector in developing countries 

but this literature rarely finds its way into 

the mainstream conceptual literature on 

industry clustering. Ironically, those 

important attempts to formulate a theory of 

clustering for developing country settings 

actually overtly down-play the role of 

individual enterprise dynamics in favour of 

the idea that clusters are, if anything, an 

even more appropriate vehicle for 

promoting economic development in these 

settings (Schmitz, 1995, 1999). 

The incorporation of insights regarding 

individual small enterprises into questions of 

clustering is doubly important. First, the very 

term external economies – on which notions 

of clustering and agglomeration are 

founded – has very often served to exclude 

discussion of their relationship to internal 

economies; and yet there is an intimate 

relationship not least because the 

boundaries of the firm are not fixed and 

have not been fixed in history as clusters 

have gone through periods of 

internalisation and externalisation. Second, 

and reflecting also the mobility of firm 

boundaries, the distinction between internal 

and external barriers to small firm growth is 

often unclear. On the one hand, what are 

regarded as external constraints might 

equally well be internal constraints given 

that it is the most dynamic of small firms 

that engage with policy assistance and 

mobilise external networks to overcome 

barriers to growth. On the other hand, 

internal constraints often persist despite the 

presence of external economies and joint 

action notably in the form of government 

assistance. Furthermore, these confusions 

are compounded when we recognise that 

there are different types of external 

economy effect that need to be 

distinguished in the process of clustering 

and that a question central to the whole 

concept of clustering and external 

economies – their geographical locus – has 

been almost totally ignored or avoided 

(Phelps and Ozawa, 2003). It may, in reality, 

be inappropriate to conclude anything in 

general about the role of external 

economies and joint action in the process of 

clustering. And while, as Schmitz (1999: 472) 

observes, it may not be desirable to 

proliferate classifications of clusters 

inductively as he suggests of the industrial 

DRAFT 

Page | 51

Nicholas A. Phleps - Recalibrating Cluster Theory for Developing Countries : Examples from Indonesia 

districts literature, equally it may be as well 

to entertain some broadening of ideas 

regarding different types of industry clusters 

in order adequately to capture some of the 

key aspects of traditional industries in 

developing countries. 

The latter is not the principal aim of this 

paper but it is a by-product of it as I seek to 

infuse the theory of clustering with the 

literature on small firm growth and growth 

constraints. One irony it seems to me is that 

the insights from this body of work on small 

firm growth constraints – perhaps most 

consciously elaborated in developed nation 

settings - can make an important 

contribution in better speaking to the 

developing country context in which the 

indigenous sector and existing industry 

clusters consist of small or micro and 

frequently informal businesses, including 

individuals as outworkers, in rural or semirural 

settings (McCulloch, 2009) and in 

business systems and cultures that are in 

transition and at best only partially detached 

from non-capitalist relations of subsistence. 

Indonesia is a prime case in point. A vast 

archipelago in which there is an equally vast 

number of traditional industry clusters, very 

few of which represent successful 

internationally competitive modern industry 

clusters as a result of trade and investment 

liberalisation. Central Java, is home to the 

majority of these clusters and has 200 

industry, tourism and agricultural clusters 

actively supported but their scale, past 

patterns of growth and growth remain an 

enduring policy challenge. I wish to 

complement and broaden the range of 

existing research on cluster development in 

developing country settings. Alongside 

existing interests in the presence or absence 

of parts of the division of labour locally in 

industry clusters inspired by the Global 

Commodity Chain (GCC) or Global 

Production Networks (GPN) literature, I wish 

to open up consideration of the growth 

aspirations of businesses which cannot be 

assumed and the forms of growth being 

Page | 52 

pursued in the developing country context 

both of which seem likely to determine the 

potential emergence of these clusters. This 

paper begins in the following section by 

outlining a framework that is better 

calibrated to the small firm developing 

country setting. Here we note some of the 

limits of existing theories contributing to an 

understanding of the development of 

competitive industry clusters, the relevance 

of incorporating literature on small firm 

growth constraints and forms of business 

change . We then pass on to describing the 

methods used in surveys of businesses in 

two batik industry clusters Central Java and 

interviews with relevant policy makers. 

Finally we conclude 

THE LIMITS OF CLUSTER AND VALUE 

CHAIN THEORY 

The existing academic and policy literature 

focused on industrial clustering speaks 

primarily to large, often multinational, 

companies in developed country settings. 

And yet there exists a large often areaspecific 

body of research on small firms and 

industrialisation including clustering in 

developing countries. The problem is that 

these bodies of literature have rarely 

intersected and cross-fertilised conceptual 

thinking on the particular nature of 

clustering in developing countries or indeed 

particular categories of developing 

countries. Those approaches which have 

sought to speak more centrally to the 

problems faced by developing countries in 

promoting industrial clusters (see for 

example, Humphrey and Schmitz, 2002) are 

also rather silent on both the growth 

aspirations of entrepreneurs and the forms 

of growth that might be possible for 

companies in the developing country setting 

than might be expected. In this paper we 

attempt to integrate insights on small firms 

and the developing country economies and 

the industry clustering literature 

DRAFT


GLOBAL COMMODITY CHAINS, 

CLUSTERS AND THE DEVELOPING 

WORLD 

Our basic understanding of the clustering of 

industries dates to the late 1800s and the 

already substantially industrialised cities and 

regions of Britain. Inductive theorising 

regarding agglomeration or industry 

clustering has been apparent since this time 

and is at once the strength and weakness of 

various theories and typologies of 

clustering, doubtless including ideas 

presented here. In particular, clustering 

theory has at its heart both (a) a circular 

argument and (b) an argument that explains 

retrospectively from a vantage point in 

which the original seeds of clustering have 

become obscure. It is hardly surprising, then, 

that the theory of clustering and 

agglomeration takes for granted the notion 

that there must be benefits to such 

agglomeration and that these have driven 

the growth of industry. 

Alfred Marshall’s trinity of external economy 

effects – linkages between companies, 

labour market pooling and the industrial 

atmosphere – were an attempt to explain 

the rise of major concentrations of industry 

after the event. His writings say little or 

nothing about the initial causes of these 

industry clusters or agglomerations but 

rather are an explanation of cumulative 

causation (Phelps, 1992). Marshall’s concept 

of external economies proved a staple of 

economic geographical analysis that 

enumerated and studied important industry 

clusters and their linkages until the 1970s. 

One of Marshall’s trinity - the quantifiable or 

pecuniary externalities represented by 

material inter-firm linkages and the 

transaction cost efficiencies of clustering 

was given a more formal expression by Scott 

(1983, 1986), Scott and Storper (1989) in 

terms of horizontal and vertical 

disintegration of production. The other two 

of Marshall’s trinity – the unquantifiable 

technological externalities of labour market 

pooling and industrial atmosphere – were 

formalised by Storper (1997) under the 

label ‘untraded interdependencies’. 

More recently a number of different forms 

of clustering have been described. Gordon 

and McCann (2000) have provided the most 

persuasive and theoretically sound of these 

classifications. Their typology is used in 

figure 1 to form the basis of different types 

of clustering in developed countries. I have 

added an additional developed country 

variant and also tried to distinguish 

traditional industry clusters in developing 

countries along several dimensions. Alfred 

Marshall’s ‘pure’ theory of external 

economies and agglomeration has been 

distinguished recently from an ‘industrial 

complex’ form (composed essentially of 

large vertically integrated multinational 

companies) and ‘social networks’ typified by 

the small and medium sized companies of 

the craft industries of the ‘Third Italy’ 

(Gordon and McCann, 2000). These 

discussions inadvertently made apparent a 

number of different types of external 

economy effects and were part and parcel of 

a reviving of a distinction to be made 

between Marshallian external economies of 

efficiency and Jacobs (1969) external 

economies of diversity. The very largest 

global city regions actually benefit from 

Jacobs externalities and one might argue a 

particularly propitious combination of 

Marshallian and Jacobs externalities (see 

Phelps, 2009). And thus in figure 1 I set 

industry clusters in global city regions apart 

from the other types of cluster identified by 

Gordon and McCann (2000) ad found 

predominantly in developed countries. 

DRAFT 

Helpful though these classifications are for 

alerting us to the fact that there are 

qualitatively different forms of industry 

cluster with different economic logics, this is 

a classification that has little relevance to 

understanding clusters of traditional 

industries and any transition affecting these 

industries as they become incorporated into 

capitalist relations on an international scale. 

Page | 53


One seemingly good starting point to 

consider the prospects for industry 

clustering in developing countries is the 

literature on global commodity chains 

(GCCs) (Gereffi) and global production 

networks (GPNs) (Henderson et al, 2002). 

The potential for industry clusters has also 

been placed in this wider context of global 

commodity chains orchestrated by 

developed country multinational enterprises. 

This literature derived from world systems 

theory and is imbued with a sense of 

domination of developing countries in trade 

and investment relations by developed 

world multinational production or retail 

companies. As GCCs become stretched 

across national territories so the outsourcing 

of manufacturing and business functions 

too has become geographically 

decentralised. While the approach is open to 

the growth possibilities of industry clusters 

in developing countries, it remains oriented 

towards understanding the development of 

industry clusters as a result of, or 

subsequent to, exogenous forces, notably 

the arrival of by large MNE producers or 

buyers. Thus, although not primarily 

oriented to depicting the emergence of new 

industry clusters outside the developed 

country setting, perhaps the most important 

by-product of both approaches has been 

the identification of prominent examples of 

such clusters (Bair and Gereffi; 1991; Yeung 

et al, 2008). 

The seemingly paradoxical idea that 

clustered small craft industry firms of 

developing countries could become 

upgraded through integration into 

international production networks (Weijland 

1999: 1516) was elaborated in early research 

on Indonesia and Central Java by Smyth and 

Sandee and colleagues and then later 

formalised by Schmitz (1995, 1999). The 

quantitatively more important phenomenon 

of clustering in developing countries and 

the more geographically concentrated 

nature of clustering pointed to their 

potential in developing countries and to the 

Page | 54 

need for a greater recognition of the variety 

of clusters on wider processes of 

industrialisation (Perry 2005). Schmitz (1999: 

470) describes the basis of developing 

country clusters in terms of collective 

efficiency where this ‘is the competitive 

advantage derived from local external 

economies and joint action’. The presence of 

external economy effects is insufficient of 

itself to produce advantages to clustering 

these have to be mobilised through joint 

action, which it appears has been quite 

prevalent in developing country cases such 

as the Bangkok jewellery industry (Scott, ) 

and therefore has rightly been the subject of 

significant government interventions in 

countries like Indonesia. Since exceptional 

entrepreneurs are rare, clustering, and 

efforts at joint action draws-out the more 

numerous ‘ordinary entrepreneurs’ so that 

the ‘missing middle’ of businesses in 

developing country economies – larger 

indigenous entrepreneurs can be grown. 

The sheer number of craft industry clusters 

in Indonesia and their apparent significance 

at a time of market expansion prompted 

initial interest in likening them to the 

instances of flexible specialisation in Europe. 

‘Considering however the poor state of the 

great majority of CI producers in these 

clusters and their sometimes desperate 

attempts to survive, it might seem absurd to 

compare such clusters with the industrial 

districts described by Piore and Sabel 

(1984). Nonetheless, prominent cases from 

developing countries showed that ‘it needs 

only a few fortunate years of market 

expansion to create gains from externalities 

and joint action’ (Weijland, 1999: 1519). The 

possibilities for flexible specialisation have 

been examined in developing countries, 

including Indonesia. However, Smyth (1992) 

and Smyth et al (1994) found that industry 

clusters in footwear, metal products and 

rattan furniture shared some of the 

characteristics of flexible specialisation but 

development was stunted due to lack of 

adequate market information and 

DRAFT


inadequate technology and with dualistic 

development tendencies apparent. Sandee 

et al’s (1994) study of the roof tile industry 

in central Java revealed generally low levels 

of technology employed. In sum, there 

appear to be limits to clustering of this 

character in Indonesia due to ‘the immense 

power of large businesses, unfavourable 

government regulations, low linkages with 

an expanding market and inequalities in 

gains from growth and innovation’ (Turner, 

2003: 31). 

However, not unlike the theory of clustering 

applied in the developed countries, 

Schmitz’s (1995, 1999) theory of clustering 

in developing countries tends to start from 

the assumption that presence in a 

geographical cluster can present particular 

development opportunities albeit that 

external economies present have to be 

mobilised by joint action, Though as Perry 

suggests, clusters may represent no real 

opportunity in particular (Perry 2005: 231). 

The differences between this explanation of 

the differences between developing and 

developed countries are however ones of 

degree rather than absolute, leading Perry 

(2005: 240) to argue that the theory of 

collective efficiencies put forward for 

developing country clustering processes 

‘gives insufficient attention to the industry 

conditions required for effective cluster 

development. Rather than seeing clusters as 

sufficiently powerful to change the 

conditions on which industries develop, 

industry development shapes the 

opportunities existing for enterprises 

located in clusters. (Perry 2005: 240). 

Nevertheless, much of this thinking 

continues to set the tone for much of the 

applied policy-related research on the 

subject which typically considers how to fillout 

local industry value chains. For example, 

according to one recent report related to 

our interests in this paper, ‘the concept of 

clustering and value chain analysis are 

complementary’ (GTZ, 2008: 3). However, 

the experience since has led subsequently to 

Humphrey and Schmitz (2002) questioning 

the compatibility of industry clusters and 

global value chains in the case of 

developing countries. They identify three 

forms of industry upgrading (process, 

product and functional upgrading) and 

relate these to four forms of GCC 

governance (arm’s length, network, quasihierarchy, 

and hierarchy). They argue that 

network forms of governance are the most 

desirable but least likely scenario from the 

point of view of the prospects for industry 

upgrading and associated cluster 

development in developing countries. This 

has tended to be confirmed by some of the 

literature on the growth prospects and 

sustainability of developing country clusters 

(Gibbon and Ponte, 2005; Phelps et al, 2009) 

based on the orchestrating role of such 

MNE buyers and producers and in particular 

the constraints on acquiring all parts of the 

value chain locally. Evidence from the Jepara 

furniture cluster has also tended to confirm 

this with this dynamic and export oriented 

industry cluster also being largely buyer 

controlled (Sandee et al ILO, 2002) and with 

smaller companies less favourable access to 

inputs and complaints about government 

supervision of raw material supplies. 

The role of clustering in the idea of 

collective efficiencies (Schmitz, 1995, 1999) 

was likened to the sorts of external 

economies apparent in these flexibly 

specialised industrial districts described 

above – especially in terms of the role of 

social capital of households and other local 

institutions in providing finance and the like. 

In reality it seems that these social capital 

underpinned just one, and perhaps the least 

important, of Marshalls trinity of external 

economy effects. 

DRAFT 

On closer inspection there are several 

interrelated issues that emerge regarding 

the potential connections between 

GCC/GPN analysis and clustering. First the 

concept of clustering or agglomeration is 

notoriously ill-defined. External economies 

have often been invoked rather generally to 

Page | 55


explain the existence or potential of what 

are in reality very different types of clusters 

(Phelps and Ozawa, 2003) even in the 

context of developed country economies. 

And despite the fact that literature has 

begun to distinguish qualitatively different 

types of clustering or agglomeration it 

might reasonably be argued that more work 

is necessary to further specify the different 

properties of different types of cluster in 

different country settings. Critiquing 

Schmitz’s (1995) theory of industry 

clustering in developing countries, Perry 

(2005: 228) argues that predominantly to 

‘insufficient attention to the contingent 

conditions required for sustained business 

growth within clusters’ though this line of 

thought can be extended to established 

theories of clustering in developed 

countries. It may well be that, despite the 

presumed effects of international 

integration, broad labels such as developed 

and developing countries may have to give 

way to a finer grained understanding of the 

particular national and local conditions 

relevant to understanding any number of 

cluster characteristic and potentials. 2 

Second the causal relationship between 

individual firm performance and the 

advantages of clustering and external 

economies has often been assumed, yet the 

small firms literature has often questioned 

the direction of causality between internal 

and external constraints of firm growth and 

by extension the relationship between 

processes internal to the firm and external in 

the cluster. Thus, GCC and GPN analysis has 

focused largely on the relationships among 

companies in clusters and across value 

chains but not on the relationship of these 

2 It is quite clear for example that some of the 

most conspicuous success stories regarding the 

rise of industrial clusters from participation in 

GCCs/GPNs and which have contributed to 

upgrading in a selected group of formerly 

developing countries that are now more 

accurately considered as developmental states 

(e.g. Taiwan, Singapore). 

Page | 56 

networks of relations to the internal 

capabilities of the companies involved even 

when the companies involved are internally 

heterogeneous MNEs . Not surprisingly, this 

bias finds expression in the applied research 

on the subject. To reference the GTZ (2008) 

study of the Rattan furniture industry in 

Sukoharjo in Solo region again, adopting a 

value chain approach would suggest that 

‘upgrading depends on a variety of factors. 

It typically requires strengthening of 

business linkages and business services for 

product or process improvement’ (GTZ, 

2008: 3). 

Third, there is the question almost always 

sidestepped, including by economic 

geographers, regarding the geographical 

scale at which clustering can be said to 

operate. We have tried to address this 

question in a limited manner in table 1. On 

one level, the question of geographic scale 

of clustering can simply be dismissed or 

ignored as one reflecting technologyrelated 

transitions in mobility. In this way 

the same forces of agglomeration apply but 

simply at new ever expanding geographic 

scale. However, such transitions in the 

geographic scale of industry clustering are 

not trivial in terms of their implications for 

the survival and growth dynamics of 

industry – we frankly know very little about 

whether individual clusters have made such 

transitions and how they have done so since 

empirical studies have tended to report on 

individual examples of clustering at a given 

geographic scale at a given point in history. 

It seems particularly important to try to 

understand how the urban transition and 

the geographic scale of industry 

organisation may play a part in the 

transition of traditional industry clusters of 

developing country context into larger scale, 

export-oriented, formal industry clusters. 

DRAFT


RE-CALIBRATING CLUSTER THEORY 

FOR DEVELOPING COUNTRIES: 

BRINGING THE FIRM BACK IN 

Hardly any of the theoretical literature 

discussed above speaks specifically to the 

prospects for the small or micro firm sector 

that predominates in developing countries – 

despite the vast applied research in both 

developed and developing countries that 

testifies to the many constraints and 

limitations of small businesses. It is our 

contention that the academic and policy 

literature on industry clusters could usefully 

incorporate insights from literature focused 

on small firm growth constraints (ACOST, 

1990) and on the anatomy of job change 

and business growth (Massey and Meegan, 

1981; Turok, 1991), albeit that this literature 

itself is drawn from developed country 

settings. Although in some senses 

conceptual thinking on small firm growth 

constraints has been more advanced in 

regard to developed countries, its relevance 

to developing countries is particularly 

powerful given the predominance of small 

and micro businesses including within 

industry clusters. It may also seem strange 

that insights from this literature have not 

been incorporated as seriously into 

theoretical thinking about clustering given 

the number of empirical studies of small 

firms in developing countries and not least 

in Indonesia an even central Java. 

FURTHER SPECIFYING THE 

CHARACTER OF TRANSITION 

The application of some of the above 

theories of clustering is problematic in the 

developing country setting in which one can 

argue that there are often multidimensional, 

and uneven, processes of 

transition. I have tried distinguish this 

multidimensional nature of clusters in table 

1. Thus, in the developing country setting as 

Forbes (1981) has suggested, there is not a 

single story of capitalism sweeping away old 

pre-capitalist patterns of enterprise but 

rather a complex pattern of coexistence and 

interrelatedness. Some time ago McGee and 

Yeung (1977) argued that South East Asian 

cities retained businesses that were in 

traditional sectors with dynamics different to 

those of modern industry. McGee (1999) has 

also been prominent in promoting the idea 

that South East Asian cities are distinguished 

by desakota - a mixing of urban and rural, 

town and village with consequent linkages 

between agriculture and non-farm 

enterprises and even blurring of boundaries 

between the two. While any simple notions 

of distinguishing developed and developing 

world in terms of the prevalence of formal 

and informal business has also been 

questioned by the coexistence of formal and 

informal businesses in developing countries 

(Roberts). Such dualistic theories of the 

developed and developing world derive 

from assumptions in which there is 

effectively a seamless or foreshortened 

transition from traditional to modern, from 

rural to urban, from closed to open 

economy - none of which can treated 

theoretically as smooth or instantaneous in 

developing country contexts. The 

Indonesian case is informative here. These 

and other considerations indicate that the 

prime assumption of a progressive 

movement toward capitalist relations (under 

which businesses wish to accumulate 

inexorably) is less valid in a setting in which 

subsistence and support of extended family 

and ethnic communities is as important. 

DRAFT 

Declines in some rural craft industries after 

periods of growth are better understood as 

processes of transition in which there is a 

degree of disentanglement from the rural 

household economy and a taking on of the 

trappings of modern industry organisation 

including specialisation and vertical 

disintegration rather than out right 

stagnation (Sandee and Weijland, 1989). The 

domain of trade is important for 

understanding growth potential. For 

McCulloch (2009), trade liberalisation and 

Page | 57


improvements in accessibility as well as 

lessening of government bureaucracy 

should stimulate growth. Thus, in those 

examples of traditional industry clusters 

having enjoyed a measure of success in 

exporting a virtuous circle of growth and 

innovation has been evident, as in the case 

of industries in Bali (Cole 1998, cited in 

Tambunan and Wie, 2009). Here accessibility 

to international businesses including finance 

and knowledge transfers have been 

important. 

The picture here is not a static one. ‘In the 

past, the strength of local linkages between 

the farm and the non-farm economy helped 

to transmit income gains in agriculture to 

the whole rural economy ... However, the 

local nature of many of these linkages is 

now a constraint rather than a vehicle for 

growth. Both in agriculture and in the nonfarm 

economy, the opportunities for growth 

are likely to lie through greater linkages with 

the domestic urban economy and 

international markets’ (McCulloch, 2009: 8). 

In this respect, divergent processes in which 

smaller villages most isolated with local 

markets have experienced declines, while 

more open larger villages or urban centres 

have lost employment yet made significant 

productivity gains, experiencing ‘modern’ 

forms of business growth. It is here that the 

passive aspect of external economies and 

the active aspect of joint action to Schmitz’s 

(1995, 1999) notion of collective efficiency 

and associated potential for the cyclical 

development of clusters is important too. 

The question of transition is also an 

awkward one for policy as the most dynamic 

of industry clusters in central Java have had 

average firm sizes rather larger than the 

official definition of 1-5 workers for cottage 

industry (Sandee et al, 1994:130) on which 

support schemes have been focused. 

Page | 58 

SMALL FIRM GROWTH ASPIRATIONS 

AND CONSTRAINTS AND 

CLUSTERING IN DEVELOPING 

COUNTRIES 

The literature on small firm growth 

constraints alerts us to one fundamental 

feature of the micro and small firm sector 

frequently ignored in the industry clustering 

literature which assumes the necessity of the 

accumulation process. First, aspirations for 

business growth in the small and micro firm 

sector cannot be assumed. A significant 

minority of small business owners in 

developed country economies do not wish 

to grow their business or else want simply to 

retain its present turnover. Even in the 

developed county setting, the implications 

of this finding have tended to be ignored 

with the exception of there being some 

assumption that such aspirations have been 

reduced to the desire simply to pass on to 

family members (ACOST, 1990). The same, 

slow, inter-generational, processes of 

change are perhaps more apparent in the 

developing country setting as part of a 

complex combination of reasons that 

militate against the dominance of strategies 

of accumulation associated with modern 

industry sectors. Moreover, such nongrowth 

aspirations may have wider 

repercussions in that sources of innovation 

from within the firm may be less given 

socio-cultural views of the 

inappropriateness of employees showing 

initiative in front of an employer and from 

outside of the firm given that inter-firm 

linkages and networks may be a source 

predominantly of imitation and survival than 

genuine product or process innovation 

(Turner, 2003: 153). 

DRAFT 

Here ‘It is important to recognise ‘that 

small-scale entrepreneurs in developing 

countries may well be operating in a 

contextual environment in which economic 

ideas of profit and loss are not the only 

markers of “success” ... this certainly does 

not sit well with the concept of “growth” ...’


(Turner, 2003: 37). Turner’s (2003) research 

on small firms in Makassar is particularly 

revealing of the sorts of factors that lead in 

the direction of entrepreneurial strategies 

that involve survival or subsistence as 

opposed to consolidation or accumulation - 

there being no necessary reason why, as in 

the developed country context, 

accumulation strategies are numerically the 

most important among firms or indeed 

perceived unambiguously as the most 

successful. Instead, then, ‘Often 

entrepreneurs appeared to respond with a 

somewhat “survivalist” attitude to the high 

levels of competition, rather than 

attempting to meet it by undertaking 

diversification and innovation in designs’ 

(Turner. 2003: 104). Instead ‘”success” was a 

multi-faceted concept that included other 

factors in addition to economic growth 

alone. ... [such as] the ability to provide 

support for workers, family and members of 

the community as well as ... philanthropic 

actions’ (Turner, 2003: 121). Thus, in her 

study of a variety of urban small businesses, 

Turner found that ‘The entrepreneurs did 

not see the necessity to expand their 

enterprise, since they perceived themselves 

as being already successful in providing for 

family needs’ (Turner, 2003: 121). Moreover, 

evidence from small businesses in villages in 

the Yogyakarta special region, indicates that 

even those entrepreneurs pursuing 

accumulation strategies do so conservatively 

(Rijanta, 2008). 

FORMS OF SMALL FIRM GROWTH 

AND CHANGE AND CLUSTERS IN 

DEVELOPING COUNTRIES 

A more diverse literature but one that also 

draws significantly on the experiences of 

small firms focuses on the form that growth 

takes. Massey and Meegan (1983) were 

among the first to adopt a structuralist 

approach to accounting specifically for job 

loss in he UK. Their concern was with 

employment loss in primarily large firms and 

distinguished technical change, 

rationalisation and intensification as three 

analytical categories, highlighted the 

importance of the latter form of change 

associated with piecemeal changes in 

process technology and work practices. This 

influential work was adapted by Turok who 

also drew on some of the small business 

literature of the time to incorporate other 

potential forms when distinguishing 

between ‘capital widening’ and ‘capital 

deepening’. These elements were 

enumerated by Turok, (1991) in a study of 

small firm growth in Southwark, London (see 

table 2) and form the basis for the following 

discussion. 

What his study of small companies in the 

London borough of Southwark revealed was 

that ‘growth’ actually took a variety of forms 

and often involving the least celebrated of 

these. Taken together the two studies 

pointed to a need to move beyond 

somewhat heroic, Schumpeterian, views of 

entrepreneurialism as major product or 

process innovation as part of the ‘creative 

destruction’ even in the modern industry 

sectors of developed country. The 

conclusion is important as heroic notions of 

innovation and business development also 

appear to figure prominently in some of the 

most influential writings on industry 

clustering in developing countries. 

DRAFT 

In the developed country context, this view 

has rightly undergone some revision with 

scholars noting the pervasiveness of 

incremental innovation and innovation 

promoted via customers and suppliers (Von 

Hippel) and the likes of reverse engineering. 

In the developing country setting, heroic 

notions of the form of business growth and 

change are, if anything, more in need of 

revision due to the enormous constraints 

internal and external to firms. Humphrey 

and Schmitz’s (2002) influential discussion, 

for example, only distinguishes between 

product and process innovation and seems 

to contain implicit assumptions about the 

nature of such innovation. However this 

Page | 59


severely limits an understanding of the 

range of changes apparent and overstates 

the possibilities for industry upgrading in 

the transitional context of developing 

countries. We can speculate that particular 

forms of change are likely to be prevalent in 

the developing country setting – notably 

stagnation and extensive growth or 

rationalisation rather than the likes of 

product development, intensification and 

technological change (see table 2). 

For a start, product development as a form 

of change and growth in industry clusters in 

developing countries is likely to be limited. 

The reason for this is that growth through 

product development is extremely stressful 

on small businesses among whom, it should 

be remembered, there is a very high degree 

of failure and attrition. This is the case in 

developed countries where there are major 

problems in financing periods of negative 

profits. It should hardly be surprising then 

that the problems are particularly serious 

among the small businesses in developing 

countries ‘when discontinuous leaps of 

investments are required for the expansion 

of CI beyond its family resources (Grosh and 

Somolekae, 1996, p. 1881 cited Weijland 

1999: 1515-1516). Instead, here as indeed 

among many small companies in developed 

countries, ‘entrepreneurs in clusters ... limit 

themselves to continual but very slight 

changes in the products, while neglecting 

improvements in design or processing that 

could lead to greater outputs and growth’ 

(Turner, 2003: 54). The point is emphasised 

by Pedersen et al (1994) who describe how 

the process of ‘entrepreneurialsim usually 

means being the first to introduce a 

technique, which is mature in and of itself, 

and make it work in the local social context’ 

(Pedersen, 1994 quoted Turner, 2003: 151). 

Here the innovation process could hardly be 

likened to the Schumpeterian waves of 

creative destruction said to characterise 

capitalist economic relations in developed 

country economies. Instead the innovation 

process in developing countries as one 

Page | 60 

which rarely threatens the existence of the 

cluster itself. Indeed, in some senses, the 

opposite of product innovation – reductions 

in product quality – were prevalent among a 

proportion of entrepreneurs as one element 

of a survivalist strategy in response to falling 

profits (Turner, 2003: 172). 

One thing that academic and policy research 

within the global value chain tradition has 

alerted us to is the fact that certain parts of 

the value chain, certain functions or parts of 

the division of labour are likely to be 

missing. A recent GTZ (2008) report of the 

Sukoharjo furniture industry highlighted the 

need for design and research and 

development capacities among a larger 

proportion of businesses to be improved 

given the reliance on buyers (GTZ 2008: 20). 

At present, that innovation in design which 

is apparent amounts to little more than the 

copying of designs from international 

catalogues with resultant limited value 

added. Imitation and copying are the 

essential mode of business development in 

many traditional industry clusters while 

‘innovation may be especially difficult to 

achieve if a small enterprise has found a 

certain marketing niche. For these 

enterprises, it is tempting to remain there 

rather than try to complete in another 

market’ (Turner, 2003: 54). 

DRAFT 

Many traditional industry clusters in 

Indonesia have remained poor and stagnant 

(Weijland, 1999). Some indication of the 

inertia involved in developing country 

settings is provided by Turner’s study of 

small firms in Makassar where over half of 

business reported no change in their 

technology being used and as many as 65% 

of entrepreneurs had made no change to 

methods of production. This is strong 

evidence of the sort of stagnation or 

extensive forms of growth identified in table 

2. Craft industries in Indonesia were seen as 

remarkably passive in skills, product range, 

marketing, and raising of capital, with 

businesses often waiting for buyers to come 

to their door though this did not prevent


export success (UNDP et al., 1988, p. 146 

cited Weijland 1999: 1516). 

It should be remembered of course that the 

implications of industrialization of craft 

industries are ambiguous regarding total 

employment created. The more successful of 

industry clusters examined by Sandee and 

Weijland’s (1989) study of the tile industry in 

Boyolali found a decline in employment as a 

result of industry rationalization and gains in 

efficiency with the transition from 

household-based enterprises to more 

specialised enterprises and with vertical 

disintegration affecting some functions. The 

character of many of these clusters is such 

that they consist of very small enterprises 

that produce for very local markets relying 

on substantially on unpaid family workers 

and incidental use of paid laborers. These 

micro-enterprise clusters are often regarded 

as dormant evidencing very little change in 

technology and markets (Sandee Isdijoso, 

Sulandjari, 2002). 

It is intriguing to note that some of the 

traditional specialised industry clusters 

appear to be part of broader urban industry. 

Pekalongan may be an example since it has 

been described as an industry cluster but it 

actually represents a large, quite diverse, 

urban ‘cluster of clusters’. Although known 

for batik, batik is just part of a wider textiles 

cluster that employed around 130,000 

people in 2002 (Sandee et al, 2002). 

Although the Pekalongan urban 

agglomeration is probably of insufficient 

size to speak of Jacobs externalities of 

diversity being present it certainly does raise 

the intriguing question of the possibilities 

for greater innovative potential from ‘related 

diversity’. 

TRANSITION IN FIRMS AND 

CLUSTERS AND POLICY IN 

DEVELOPING COUNTRIES 

Policy applied to developing countries has 

evolved from developed country theories 

and policies yet ‘Any advantages from 

clustering are insufficient to face 

development challenges arising from the 

globalisation of economic activity. The 

significance of business clusters in low 

income economies needs to be reviewed in 

the light of actual experience…’ (Perry, 2005: 

227). This is something that appears to have 

been realized in more recent writings on 

clustering in developing countries 

(Humphrey and Smitz, 2002). Dominance of 

buyer driven networks means that 

producers have not been active in change 

processes, and yet the ‘case study on tile 

production shows that producers can have 

effective participation and that learning by 

visiting is a very effective instrument of 

promoting change’ (Sandee et al ILO: 48). 

But small craft industries remain important 

to economic future of Indonesia and 

employment generation and poverty 

alleviation and so the question remains how 

policy should be targeted. 

The Indonesian government has long been 

interested in supporting small craft 

industries. In the past, this has included 

policies to link them to larger indigenous 

and state companies, though the efficacy of 

such policy must surely be questionable 

when these same large indigenous 

companies have themselves been sheltered 

from competitive pressures, while even 

MNEs in the era prior to trade and 

investment liberalisation were also not 

especially exposed to international 

competitive pressures since they were 

essentially serving the local market. 

DRAFT 

As policy has evolved, the assumption in 

policy making has been that preentrepreneurial 

industry clusters could 

contribute little to industrial development 

and were about survival only prompted the 

view among policy makers should be 

supported through community 

development measures rather than 

mainstream industry policy (Weijland, 1999: 

1515 ). It is therefore surprising that in a 

neoliberal era, market failure analysis of the 

Page | 61


need for government intervention has 

persisted (Schmitz, 1999:), and persisted 

under guise of policies to promote 

clustering. Weijland’s suggestion that 

‘Considering the feeble state of CI (craft 

industry) on the one hand and its cluster 

potentiality on the other, an appropriate 

policy might include elements of various 

approaches, applied in sequence, putting 

social capital first, followed by marketing 

and finance. This approach would be 

designed to build viable clusters rather than 

to foster individual enterprise’ (Weijland, 

1999: 1524) sums up the sort of logic that 

has informed the support for industry 

clusters in more recent times. Alongside this 

have sat calls from an orthodox economics 

perspective for supply side improvements to 

a range of constraints seen to be external to 

individual businesses as a whole, including 

industry clusters. These have included: trade 

and investment liberalisation negotiated at 

the national scale, improvements to the 

business climate and bureaucratic and 

regulatory efficiency for business-facing 

aspects for government at all scales, and 

infrastructure improvements to promote 

exports and erode the sheltering effect of 

purely local markets. The assumption 

underlying both these strands has doubtless 

been that small rural cottage industries are 

not easily reached by direct government 

policies but by indirect measures such as 

improving economic environment and 

widening markets (Sandee and Weijland, 

1989: 80). 

The evidence however points to the fact that 

both a theoretical understanding of the 

potential and limits of industry clustering in 

a developing country in prolonged 

transition like Indonesia and policy 

interventions needed to effect that 

transition might need to be focused more 

selectively on certain businesses and 

entrepreneurial behaviours. 

Page | 62 

POLICY AND THE TRANSITION TO 

CAPITALIST RELATIONS 

A rage of external constraints on micro and 

small firm growth doubtless persist in 

Indonesia. These include the likes of 

generalised issues of regulatory efficiency 

and the availability and cost of finance for 

investment. The issue is really about the 

relationship of these constraints to the 

dynamics internal to enterprise. The 

evidence relating to small craft industries in 

Central Java has indicated a poor take-up of 

policies to support small companies which 

had reached only a minority of the 

companies and had had little effect in the 

less dynamic of clusters (Sandee et al., 

1994). Assistance was found to be most 

effective in terms of raising business 

performance when the most dynamic firms 

used it, raising the issue of the direction of 

causality. A small proportion of the most 

dynamic of companies appeared to make 

use of multiple schemes. Of a number of 

schemes investigated by Sandee et al (1994) 

secondary data indicated that take up was 

no higher than 7.4% of enterprises, while for 

their own data on a selection of industry 

clusters the rates of participation rose as 

high as 40%, though 30% did not participate 

in any schemes. 

DRAFT 

There are two important observations that 

can be drawn from incorporating the above 

considerations se two bodies of literature 

into a consideration of industry clustering in 

developing countries. Firstly it is apparent 

that not all industry clusters will be worth 

supporting at the present time since the 

internal capabilities and aspirations of the 

businesses concerned may be insufficient or 

may be in need of prior development. There 

are an estimated 130 industry clusters in 

Central Java (and a further 70 clusters in 

agriculture and tourism) that are currently 

being supported in some way. These include 

several clusters in the same industries 

(notably batik and furniture) in different 

locations in Central Java that are likely to


have different growth trajectories and 

potentials as well as the uncovering and 

development of different possible policy 

approaches (Forum Pengembangan 

Ekonomi dan Sumberdaya - FPESD Jawa 

Tengah, 2011). 

There may be a generalised need to provide 

support to raise entrepreneurial 

resourcefulness and future planning since 

many of the entrepreneurs in Turner’s study 

centred on Makassar appeared pessimistic 

or at a loss for how to solve business 

problems. As many as one fifth of all 

entrepreneurs lacked ideas or knowledge of 

how to expand the markets for their 

products (Turner, 1994: 147). 37% were 

unsure of how to overcome problems with 

their business and instead were content to 

‘get by’, to ‘let it happen’ or return to the 

kampung (Turner, 1994: p.105). The 

assumption is that a number of these 

clusters may not be worth supporting 

especially if across the cluster business 

growth aspirations are found to be modest. 

UNDP et al. (1988, p. 86) found that support 

for clusters should be targeted and screened 

carefully with respect to viability the 

capacity for upgrading, and the locality 

(Weijland, 1999: 1525). The problem is that 

there appears no clear pattern regarding the 

impacts of policy on performance at the 

level of clusters. Stagnant and dynamic 

clusters there were no impacts but it was in 

the most dynamic clusters where policies 

had the most impacts. Sandee et al (1994) 

did however suggest that high growth in 

industry clusters leads to higher 

participation in support schemes. 

Secondly, particular policy objectives may 

entail the support of qualitatively different 

forms of growth within industry clusters. The 

different forms of business change outlined 

above represent very different challenges 

and risks to small and micro firms. Following 

on from this, the forms of growth requiring 

support may not be those most commonly 

assumed within the existing academic and 

policy literature on industry clustering, 

including that focused on developing 

countries. 

For example, ‘product development’ is often 

assumed, according to industry cluster 

policy orthodoxy, to be both intrinsically 

desirable and as a contribution to 

completing parts of the value chain 

otherwise usually absent in the developing 

country setting. Ironically, these parts of the 

value chain have been found to be absent or 

diminished in older industrial regions 

previously celebrated as industrial clusters 

but now more notorious as ‘branch plant 

economies’ where the conception functions 

such as research and development of 

externally-owned and controlled companies 

may be missing and where, as a result, rates 

of product innovation are low (Phelps 2009). 

This line of reasoning also finds expression 

in the literature on clustering in developing 

country contexts where the desirability of 

product upgrading is assumed even if the 

difficulties of effecting it are recognised 

(Humphrey and Schmitz, 2002). However, 

from the small firm literature it is worth 

remembering that this form of growth also 

is repeatedly stressful in terms of demands 

for finance and can increase the likelihood 

of business failure (Oakey, 1983). Finance for 

such growth may require particular types of 

‘patient capital’ and the evidence suggests 

that small businesses in Indonesia have 

simply not had the access to his kind o 

capital that migt be required. Significant 

market failures here but also related to the 

nature of the business environment as cycle 

to break out. 

DRAFT 

A recent Ash Center for Democratic 

Governance and Innovation (2010) report 

identified jobless growth as a problem 

though what was meant here by the use of 

the term is the lack of new ‘real’ jobs in the 

formal sector being created in Indonesia 

compared to other developing nations as 

opposed to work sharing or informal sector 

jobs being created. Though the distinction is 

one that is revealing of reductionist western 

Page | 63


neoclassical views of growth and forms of 

growth in economies and does not do 

justice to the complexities of business in a 

transition economy as we have alluded to 

above, the report nevertheless points to the 

vital need for jobs to be created in order to 

reduce poverty in Indonesia. The 

implications are ambiguous at this moment 

in time. For example, if employment growth 

is the objective of policy, it may, for 

example, be more important to support 

‘extensive growth’ such as adding more of 

the same productive capacity and skills or 

through the piecemeal technological change 

of ‘intensification’ rather than through the 

significant process innovation of ‘technical 

change’ which is likely to promote 

productivity growth beneficial in the longer 

term but also jobless growth. This, 

incidentally, is the conclusion that Turok 

intimated in his study of local economic 

policy in the UK. 

CONCLUSION 

There are a number of open questions that 

flow from the discussion in the preceding 

sections of this paper. 

First, thinking about the nature of industry 

clustering in traditional industries in 

developing countries is not an exercise, it is 

vital to development of the theory of 

agglomeration itself and a reminder that 

economies are never all of a part but are to 

greater or lesser degrees developed or 

developing composed of companies and 

industries that are likewise modern or 

traditional. 

Second, the process of transition seems to 

imply a transition in the scale at which 

clustering or agglomeration takes place – 

that gains in efficiency imply a 

rationalisation at the village scale and the 

consolidation of industry and clusters at the 

district scale at the very least. 

Correspondingly does policy need to 

encourage the most dynamic firms within 

Page | 64 

village industries to interact at the district 

scale. 

Should efforts to support businesses be 

concentrated on the most dynamic? Those 

with the greatest growth aspirations are in 

any case likely to be those that are selfselecting 

in terms of business support and 

networking and in pursuing. Among these 

there might be further scope for 

concentrating resources on those firms 

pursuing particular types of growth... 

notably those most scarce in the transitional 

developing country context – product 

development, technological change, 

diversification... partly for the intrinsic value 

of these forms of growth in raising overall 

levels of industry productivity and value 

added but partly as a means of establishing 

indigenous lead companies who might 

transform aspiratons and forms of growth 

sought by the wider population of 

companies. 

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DRAFT 

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in global chains: the causes and 

consequences of export dynamism in 

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south: A critical appraisal from 

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227-243 

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accumulation', Transactions of the 

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46. 

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economies to knowledge 

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development in Britain’s older 

industrial regions’ Environment & 

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scale cottage industries in Indonesia: 

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DRAFT 

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roof tile industry in kabupaten 

Boyolali, Central Java’, Bulletin of 

Indonesian Economic Studies 25: 79- 

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DRAFT


Table 1 Forms of growth and change in small enterprises (after Turok, 1989) 

Intensification: piecemeal adoption of new process technology 

Product development: the development of new products 

Rationalisation: cutting of capacity 

Technical change: substantial investment in process technology 

Extensive growth: addition of more of the same capacity 

Stagnation: no significant change in either process or product technology or associated 

employment 

Diversification 

No single dominant form 

DRAFT 

Page | 67

Table 2 Traditional, transitional and Modern industry clusters compared 

TRADITIONAL TRANSITIONAL MODERN 

DEVELOPING COUNTRIES DEVELOPMENTAL DEVELOPED COUNTRIES 

Type of 

Craft industry Craft industry Marshallian Social network Production complex Cosmopolitan urban 

cluster/agglomeration 

region 

Urban transition Rural ‘rurban’/‘desakota’ Urban Urban Urban Urban 

Nature of enterprise Predominantly, Mixed 

Predominantly formal Predominantly Formal Formal 

informal informal/formal 

formal 

National economy Closed Partly open Open Partly open Open Open 

Type of external ‘collective ‘collective 

Marshallian trinity: ‘Collective Inter-linkages (quasi- Jacobian & 

economy 

efficiency’: inter- efficiency’: inter- inter-linkages, labour efficiency’: vertical integration) Marshallian: diversity & 

linkageslinkages 

(vertical pooling, industrial Social capital of 

efficiency (vertical and 

(horizontal disintegration) atmosphere (vertical family, union, 

horizontal 

disintegration) 

and horizontal church and 



community ties. 

Entrepreneurial 

Survival/ Mixed Growth/accumulation Mixed Growth/accumulation Growth/accumulation 

aspirations 

subsistence 

Forms of growth Stagnation Extensive growth, Product innovation, Product Extensive growth, Product innovation, 

and rationalisation intensification and innovation technological change technological change, 

technological 

diversification 

change, 

diversification 

Changes in scale of Village Village to district City quarter, town or District Urban extension: Metropolitan region 

clustering 

city 

company or industry 

enclave 

Indonesia Indonesia China, Taiwan, S. Korea Italy Singapore, 

Malaysia 

Ireland, USA 

Page | 68 


DRAFT

DRAFT 

CHAPTER 3 

Learning from local 

economic and cluster 

development in Indonesia 

Page | 69

Page | 70 

DRAFT

EXPERIENCE AND LEARNING OF 

LOCAL ECONOMIC DEVELOPMENT THROUGH CLUSTER 

APPROACH IN CENTRAL JAVA 

Anung Sugihantono 

Head of Central Java Board of Investment as Secretary of Economic Develepment Forum FPESD 

Central Java Province. Indonesia 

E-mail : anung_semarang@yahoo.com 

A. OVERVIEW 

Central Java is located in the middle of the 

island of Java with a population of 32.38 

million people spread across 35 Regencies / 

Cities majority of peasant livelihood or 

relating to the agricultural sector. 

GDP of Central Java in 2010 at current prices 

reach Rp 444.4 billion, while at constant 

prices reached Rp 187.0 billion with GDP 

supporting three major sectors are 

agriculture (19.4%), manufacturing (32.9%) 

trade and industry (19.6%). While other 

sectors contributing to GDP reached: 28.1%. 

Per capita income of Rp 13.7 million / 

person, but until the month of March 2010 

there were 5.369 million people still live 

below the poverty line set by the 

government. 

As an agricultural area which is supported 

by an international infrastructure (2 airports 

and two ports) and regional toll roads, the 

primary artery and other regional and local 

ports; Central Java is divided into 8 corridors 

of development area, those are 

Kedungsapur (Kendal Regency, Demak 

Regency , Semarang Regency, Salatiga City, 

Grobogan Regency, and Semarang City); 

Subosukowonosraten (Surakarta City, 

Boyolali Regency, Sukoharjo Regency, 

Wonogiri Regency, Sragen Regency, Klaten 

Regency); Purwomanggung (Purworejo 

Regency, Wonosobo Regency, Temanggung 

Regency); Barlingmascakeb (Banjarnegara 

Regency, Purbalingga Regency, Banyumas 

Regency, Cilacap Regency, Kebumen 

Regency); Petanglong (Pemalang Regency, 

Tegal City, Tegal Regency, Pekalongan 

Regency, Pekalongan City); Sampan (Batang 

Regency, Pekalongan Regency, Pekalongan 

City, Tegal City, Tegal Regency, Brebes 

Regency, Banyumas Regency); Banglor 

(Rembang Regency and Blora Regency); 

and Wanarakuti (Jepara Regency, Blora 

Regency, Kudus Regency, Pati Regency). 

Each has a superior potency and direction of 

local economic development that realcontributed 

at regional level. 

B. LOCAL ECONOMIC 

DEVELOPMENT 

DRAFT 

The concept of local economic development 

in Central Java is economic development 

with local human resources as the main 

principal in terms of area (village, district 

and or the regency / city or specific regions), 

utilize of potential natural resources, 

artificial, and skill , also local wisdom with 

applied technology approach and 

development of market network in regional, 

national and or international. 

The concept of this approach is based on 

the characteristics of entrepreneurs in the 

Regency / City in Central Java which is 

99.27% of micro and small scale, medium 

scale 0.56% and 0.17% large-scale 

enterprise (According to Law No. 20 of 

2008 on Micro, Small and Medium 

Enterprises, microenterprises are the criteria 

Page | 71

of having a net worth of at most Rp 50 

million and annual sales of Rp 300 million; 

for small businesses have a net worth of 

more than Rp 50 million up to a maximum 

of 500 million and annual sales of more than 

Rp 300 million up to a maximum of Rp 2.5 

billion, while the criteria for medium-sized 

businesses is to have a net worth of more 

than Rp 500 million to Rp 10 billion and 

have annual sales of more than Rp 2.5 

billion up to a maximum of Rp 50 billion). 

The proportion of business scale is 

dominated by a small micro businesses with 

the amount of labor is very large and 

scattered locations in all district / city, 

pushing the Central Java Provincial 

Government establish a second mission in 

the medium-term development concept in 

2008 - 2013 by increasing populist 

economic through micro small and micro 

and also sustainably labor-intensive 

industries. 

Recognizing the existence and 

characteristics of business efforts and 

challenges faced in the present and the 

future, then the Central Java Provincial 

Government took stakeholders both from 

Government, Indonesian Chamber of 

Commerce (KADIN), Universities, 

Associations, FEDEP in Regency/City, and 

Non-Governmental Organizations to 

provide forums for communication in order 

to formulate policy and strategy 

development in the Economic Development 

and Resources Forum (Forum 

Pengembangan Ekonomi dan Sumber Daya, 

FPESD). 

FPESD domiciled in the Province, since 

established in 2003 by the Decree of the 

Central Java Governor, it has fundamental 

duties to give consideration to the Governor 

of Central Java; give input as a policy of 

economic development programs; 

coordinating concerned agencies / 

institutions and FEDEP in the field of SMEs 

policy and advocacy programs in Central 

Java, facilitate the development of SMEs, 

Business Development Services (BDS), and 

Page | 72 

Anung Sugihantono – Experience and Learning of Local Economic Development Through Cluster 

Approach in Central Java 

productive economic development in 

Central Java. Operationally, FPESD is divided 

into 7 Working Groups that are Industry and 

Trade, Agriculture and Agricultural Areas, 

BDS and Capital, Tourism and Culture, 

Technology and Innovation Development, 

Conducive Business Climate, and FEDEP 

(Forum for Economic Development and 

Employment Promotion); with activity in the 

form of technical guidance, support 

equipment production, facilitation of capital 

assistance, the application of simple 

technology, workshops, exhibitions and 

training, dialogue forum and coordination 

meetings. 

As partners in Regency / City level, formed 

Forum for Economic Development and 

Employment Promotion (FEDEP) whose 

members consist of representatives from 

Related Unit Device at Regency / City level, 

Legislative, Representative Associations / 

Forums / Society and Chamber of 

Commerce, Universities, Employers , and 

representatives SMEs clusters or other local 

organizations; with the principal task of 

providing recommendations in terms of 

performance and facilitating business actors 

(private sector), government sector 

performance (helping the government's 

job). Its existence is established by the 

Decree of the Regent / Mayor is valid for 5 

years to conduct training activities in the 

form of meetings (discussions / dialogue 

forums), workshops, focus group 

discussions, and seminars. 

DRAFT 

C. CLUSTER APPROACH 

Clusters in a general sense is a commonly 

used definition in Regional Economic 

Sciences to define the grouping of similar 

industries in a region (Richardson, 1971). 

Clusters are also commonly used to divide 

the territory or area in the industrial area or 

even in an industrial complex (Soetrisno, 

2009).



Nationally, there is still no single definition 

that is formal-used, standard and a common 

development orientation, but the Ministry of 

Home Affairs (2009) set the terms cluster is 

a group of companies, suppliers and related 

industries which are interconnected , and 

the institutions that specialize in specific 

areas which are at a particular location 

(geographical concentration). With the 

development of stratification Static Cluster 

(Sentra), Starter Cluster, Dynamic Cluster 

and Advance Cluster. 

Government of Central Java, through FPESD 

since 2003 using the terms cluster is a set of 

similar business units are located in an area 

(village, subdistrict, regency / city) that has 

traditionally held, from generation to 

generation with local wisdom and local 

resources. Therefor, the concept of 

development has been established three 

groups of clusters in Central Java, those are 

Agriculture Cluster that includes agriculture 

and fisheries; Industry Cluster that includes 

processing and packaging; and Tourism 

Cluster that includes providers of tourism 

services. Cluster development approach 

through the grouping, based on the 

characteristics of entrepreneurs and the 

challenges faced and the resources available 

to answer the challange. 

Data collection conducted at the end of 

2010 until June 2011, there are 200 clusters 

in Central Java which can be grouped in 

agricultural cluster of 54 units spread over 

27 regencies / cities; industrial cluster of 57 

units spread over 33 regencies / cities; and 

tourism cluster of 16 units spread over 13 

regencies / cities. When viewed from the 

type of business group, for agriculture 

cluster there are 10 business groups, 

industrial clusters of 16 business groups, 

and tourism cluster of 3 business group. 

Until now, has not been conducted cluster 

stratify, that the concept of the 

development taken is still a macro with the 

basic pattern is cluster seeded by FEDEP 

accordance with the potential and vision of 

development that exist in each regency / 

city. 

In general, the problems and challenges 

faced by businesses incorporated in the 

cluster are: human resources, raw materials 

and processing, equipment and technology 

including the recognition of intellectual 

property rights, capital, market access, and 

adaptive workplaces, such as demands for 

security, safety of work and proenvironment. 

Regional competitiveness 

survey results in 2010, showed that business 

competition is 5 parts of the main 

complaints of business in Central Java. 

Problems and challenges of the above need 

to be answered with comprehensive 

approaches including promoting social 

capital within the scope of the existing 

clusters in Central Java; therefor, programs 

have been done are the dialogue and 

discussions, exhibitions, workshops, cluster 

development, and training. 

So far, there have not been done is 

quantitative assessment of the impact of 

cluster development in Central Java and 

both aspects of the local economy or 

contribute to regional economies; but the 

real benefits in the scale of the persons, it 

was found that the amount of business 

increased, rising incomes and well-growth 

of environmental groups or SME clusters. 

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D. LESSON LEARNED 

Developing the local economy in an era of 

global competition with the cluster 

approach that has specific local 

characteristics for a decade (10 years) 

provides typical learning of Central Java, 

those are: 

1. Complete understanding of the business 

both types of business, technology, 

social capital, access to raw materials 

and other stakeholders that affect or 

contribute to the process of production 

and marketing into one very 

fundamental factor. 

Page | 73

2. The establishment of the organization at 

the level of players in either cooperative 

or other not quite approachable with a 

formal approach, takes a personal 

approach and specific efforts to provide 

assurance of the benefits for being 

united in the face of greater 

competition. 

3. Cluster approach is not enough by take 

a sight of local players, that is in the 

village or subdistrict level, unless the 

goods or services are specific and not 

available in other areas. So that, forums 

for dialogue is needed to be built by 

policy makers at the regency / city and 

province to accommodate and build 

togetherness. 

4. Intermediation institutions either in the 

form of Business Technology Center, 

Business Development Services, and 

Regional Research Council is very 

important and very necessary. 

Operational pattern that needs to be 

enhanced is to build a network of 

intermediary institutions between the 

palyers of these institutions. 

5. Lingkage with community service 

agencies and research institutes in 

universities and large businesses have 

not been running an ideal and equal for 

developing applied technology; still 

interpreted as a cluster of small business 

units whose benefits are not felt 

regionally. For that, we need clarity and 

understanding the concept of 

comprehensive development. 

E. CONCLUSION 

Local economic development with a cluster 

approach in Central Java more emphasis on 

the potential of local resources, both natural 

resources and manpower. To that end, 

Central Java Provincial Government has 

made various efforts to improve the 

performance of institutions that play a role 

in coaching and development of SMEs, 

namely: 1) Institutions are closely associated 

Page | 74 



with product development, utilities and 

quality of human resources; 2) Financial 

institutions related to the provision of funds 

professionally (microfinance); 3) Marketing 

institutions that facilitate SMEs in marketing 

and market access. Through cluster 

development for SMEs, is expected to create 

jobs, alleviate poverty and to improve the 

quality of economic growth through the 

development of regional excellent products. 

F. BIBLIOGRAPHY 

Decree of FPESD Chairman No. 

FPESD/2097/10 on the 

Establishment of FPESD Working 

Groups in 2010 

Decree of the Central Java Governor No. 

500.05/30/2003 on the 

Establishment of FPESD Period 

2003-2007 

FPESD. 2005. FPESD Jawa Tengah Profile. 

FPESD. 2006. Annual Report. Semarang 

FPESD. 2011. Regencies / Cities Clusters 

Profile. 

Law No. 20 / 2008 on Micro, Small and 

Medium Enterprises 

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Minster of Home Affairs. 2009. Circular of 

the Minister of Home Affairs No. 

500/1404/V/BANGDA dated June 

30 th 2009 about General Guidelines 

for Competitive Product 

Development Based on Clusters. 

Jakarta 

Richardson, Harry W. 2001. Dasar-Dasar 

Ilmu Ekonomi Regional. Translated 

by Paul Sitohary. Jakarta: 

Universitas Indonesia 

Soetrisno, Noer, 2009. Pengembangan 

Klaster IKM/UKM di Indonesia: 

Pengalaman dan Prospek, Makalah 

disampaikan pada Workshop dan 

Pameran Klaster Interasional, 

Oktober 2009, Surakarta

LOCAL ECONOMIC DEVELOPMENT IN CENTRAL JAVA 

PROVINCE: A CURRENT PROCESS 


Centre for Participatory Planning 

Urban and Regional Planning Department 


Presentation Tittle : Local Economic Development in Central Java Province : 

A Current Process 

Contents of Presentation : 

1. Local Economic Development – LED , in Central Java Province 

2. Policy Strategy of LED 

3. Progress of LED in Central Java 

4. LED Framework 

5. LED Stakeholders 

6. Local Economic Development Forum 

7. LED agenda of Central Java 

8. Central Java LED Agenda 2011 

9. LED Strategic Plan 

10. Fact Findings 

11. Challenges 

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Holi Bina Wijaya - Local Economic Development in Central Java Province : A Current Process 

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LOCAL INNOVATIVE SYSTEM (SIDA) FOR CLUSTER 

DEVELOPMENT 

Agus Suryono 

Research and Development Board 

Central Java Province. Indonesia 

E-mail: agssmg@yahoo.com 

Presentatiom Title : Local Innovative System (SIDA) for Cluster Development 

Content of Presentatiom : 

1. What is SIDa? 

2. What is cluster-based SIDa? 

3. Cluster Description 

4. Why do we consider cluster-based approach development for SIDa? 

5. How to create potential cluster as a region’s competitiveness 

6. How to decide potential cluster? 

7. How to establish cluster dialoue forum (Forum Rembug Klaster) 

8. Cluster Profile 

• Business Plan Peanut Cluster Sulebu Makmur 

• Organisation Structure 

• Identifying the Needs of Technnology 

• Roadmap of Product Peanut Cluster in Jepara 

• How to empower the cluster institutions? 

• Technology Transfer and Inovation Development Penaut Cluster in Jepara 

9. How to do monitoring and evaluation? 

10. The sucessful key of cluster-based SIDa 

11. Lesson Learn 

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Agus Suryono - Local Innovative System (SIDa) for Cluster Development 

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CHAPTER 4 

Impact of LED and SME 

Clustering 

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SALT FISH AND BROWNSUGAR MAKER, 

MAKE PANGANDARAN TOURISM RESORT ALIVE? 

Dr. Uton Rustan and Ira Savitri 


Bandung Islamic University. Indonesia 

rustanuton@yahoo.com 

ABSTRACT 

Today, tourism is considered as driving regional economics sector which is towing and driving 

the development that can enhance economic growth and prosperity of the region. Pangandaran 

is a leading tourist area of West Java region, located on the South Coast with the economy of 

coastal resources (salt fish), and agriculture (oil palm). The paper traced the “space” of socialeconomic 

activity of salt fish and brown sugar, ranging from natural resources characteristics, 

the activities of production, labor mobility up to the marketing of household production as called 

“local economic clusters” related to clusters of tourism activities. Clusters of the local economy 

sector (salt-fish maker and brown sugar maker) gives a different effect on the development of 

tourism in Pangandaran area and vice versa, the activities of tourism in Pangandaran give / not 

give effect to the local economic sectors. Therefore, what kind of development policy to be 

considered to encourage the linkages of economic clusters in term development of Pangandaran 

tourism Resort? 

KEYWORDS: spatial cluster activity, salt fish, coconut sugar, brown sugar and tourism resort 

1. OVERVIEWS TOURISM AREA, 

CLUSTER ECONOMIC AND 

DEVELOPMENT REGION 

Today, tourism has been regarded as an 

industrial activity sector influence on local 

economic growth as far as regional and 

national levels due to the impact on 

economic activities and welfare. 

Phenomenon that deviates from the view of 

classical economics (Keynesian, Richardson, 

1954) which views economic growth 

depends essentially on the basis of export 

activity as an economic base that relies on 

the growth rate of primary production or 

manufacture industry (Dommar, 1954; 

Chenerry, 1993). Tertiary sector activities 

such as tourism services can not be 

considered the foundation of a strong 

regional economic growth, but it turns out 

in this era of globalization, sector tourism 

industry to be the choice as development 

strategy of many countries (China, 

Southeast Asia and other developing 

countries). Emphasis on developing 

integrated economic region, began with 

planning for tourism cluster, and various 

tourism development activities, included 

tourism facilities and infrastructure, are 

designed both in terms of spatial plan for 

tourism area, event tourism activities that 

encourage socio- cultural activities and 

economic of local communities. 

DRAFT 

Tourism Area Cluster 

On the other hand, despite the many 

advantages of tourism and economic 

development due to tourism activities, 

Page | 99

negative impacts are often highlighted as 

the treat for the development of a region 

into a tourist area. In general, the problem 

of conflict the impact of tourism, particularly 

on socio-cultural impact, be the foundation 

of negative views to the tourism outlook. In 

the context of the pros and cons of regional 

development through a strategy tourism 

area, then the arrangement of space, this 

tourist area is placed as a particular area and 

can be considered as a special economic 

clusters. In this condition gives the tourist 

area of negative impact, then it can be ininsulating 

arrangement only on special 

economic cluster. Conversely, if tourism is 

providing a positive impact on economic 

growth and development of the region then 

the region should be more organized, 

regular and orderly in providing these 

influences positively. 

Delineation of the tourist area as a specific 

region development based on (1) the basic 

characteristics of tourism destination, such 

as the specific attractions, tourist activities 

(passive or active) who performed at a 

tourist attraction, and (2) completeness of 

tourism components (facilities, 

infrastructure, public facilities, 

accommodations) and linkages to the socioeconomic 

activities of local communities. 

Therefore also the development of tourism 

activities is a model of economic growth is 

"bounded" to the site (in situ) and will never 

move (such as primary sector). Unlike the 

economic growth of manufacturing industry 

secondary sector) that is moveable 

depending on the profit of the production 

and economic value it generates (spaceless), 

As the development of tourism as the 

primary sector, then the structuring, 

managing and development planning has 

the same principles with the management of 

agricultural development should be 

emphasis on sustainability, preserve natural 

resources. 

Tourism carrying capacity is the analyses 

method introduced in tourism planning 

area. It’s mentioning the maximum number 

Page | 100 

Uton Rustan & Ira Savitri – 

Salt Fish and Brownsugar Maker, Make Pangandaran Tourism Resort Alive? 

of people that may visit a tourist destination 

at the same time, without causing 

destruction of the physical, economic, sociocultural 

environment and an unacceptable 

decrease in the quality of visitors' 

satisfaction” (Wikipedia, the free 

encyclopedia). Whereas Middleton and 

Hawkins Chamberlain (1997) define it as 

“the level of human activity an area can 

accommodate without the area 

deteriorating, the resident community being 

adversely affected or the quality of visitors 

experience declining” what both these 

definitions pick up on is carrying capacity is 

the point at which a destination or attraction 

starts experiencing adverse as a result of the 

number of visitors. This relates to a level of 

unacceptable change within the local 

economy of a tourist destination, it is the 

extent to which a tourist destination is able 

to accommodate tourist functions without 

the loss of local activates, take for example a 

souvenir store taking the place of a shop 

selling essential items to the local 

community. 

Local Economic Cluster 

Characteristics of attraction is basically a 

wealth of natural resources possessed by 

something the place (place) that has a 

certain appeal specific (natural scenery, 

cultural activities) in which people are willing 

to pay / cost or sacrifice to get it. Regions 

that have attraction in general is an asset 

with local communities, where local people 

collectively maintain its sustainability. The 

emergence of the economic value of 

tourism as there are costs to be incurred in 

the maintenance and preserve the natural 

resources beauty, which often shape society 

into economic institutions Attraction 

maintenance of "unrelated" to the basic 

economic activities of local communities in 

meeting their needs through the mechanism 

of production, local consumption. Local 

economic activity is the basis for economic 

growth in the community (economic base) 

according to classical economic ideology, 

DRAFT

ased on natural resource wealth and 

human resource capacity to process them. 

Ability to increase production capacity, 

human resources, technology and capital 

can transform the local economy into a 

regional economic center as well as drivers 

of overall economic growth (export base). 

Development Region 



The number of visitors coming from outside 

the tourism area, providing business 

opportunities for local people as a service 

activity that became the main source for 

household income. It’s the beginning of the 

CLUSTER ECONOMIC OF 

PANGANDARAN TOURISM RESORT 

Small mainland 

peninsula with 

a national park 

with beaches 

and stunning 

scenery to rival 

the beaches of 

Bali on the south coast of Java. Pangandaran 

is one of Java's best-kept secrets as far as 

international tourists are concerned, but has 

*two streams of economic activity” (source 

of household income) in addition to the 

local economic base activities (cultivated 

natural resources, production, distribution, 

consumption). In the spatial planning model, 

two space of economic activities are 

encouraging the growth and development 

of the region as a "development region" IO 

model is an economic model of analysis is 

usually done to analyses how the sector of 

economic activity is linkages each other and 

to see what the main economic activity 

driving the other activities. 

DRAFT 

been extremely popular with locals for 

along, long time. A small fishing town, it 

possesses one of Java's finest beaches and 

Pangandaran Nature Reserve teems with 

wild bull, barking deer and monkeys. The 

people are very friendly, this combined with 

the idealize surroundings make this a great 

place to spend a few days relaxing islandstyle. 

Pangandaran is halfway between 

Bandung and Yogya, about 5 hours by bus 

from Bandung and 8 hours from Jakarta. 

Pangandaran Area Development, 

included Kalipucang, Majingklak and Parigi, 

Page | 101

at a national level strategy is expected to 

develop a balance growth of border region 

between West Java and Central Java, 

through the development of tourism, 

preserve natural resource, sustainable 

environment and the utilization of marine 

resources. This border region not only 

different on geographically, geo-economic 

and geo-politically, but also has a potential 

conflict because Citanduy watersheds 

provide a sedimentation which caused 

environmental damage of the 

Nusakambangan ecosystem. 

Pangandaran Tourism Area has a rich 

panorama of natural beauty where tourist 

can enjoy the panorama of sunset and 

sunrise at West and East Pangandaran, 

Natural Parks of Pananjung (habitat of wild 

Java-bull). In 60'year, the early years of 

Pangandaran Tourism Area was demanded 

by foreign tourists because tourism area is 

still virgin resort (panoramic views), 

amusement park and have a historical value 

of landings of Japanese troops during the 

Pacific War (Nusawiru Air strip). With the 

increasing number of visitors who stay 

overnight to enjoy the sunrise and sunset, it 

started many locals rent out part of the 

house or his house. Since then the service 

activities for the tourists started to rent a 

house, model home stay, hotel, restaurant, 

cafe until the provision of personal needs 

(clothing, swim equipment, massage, 

entertainment etc) were growing and 

expanding. Year 90’s was the popular 

tourism destination for foreign tourists and 

subsequently replaced by the domestic 

tourist rush. Foreign tourist then move to 

western area of Pangandaran such as Batu 

Hiu, and Batu Karas. Shifting the volume of 

foreign tourists to the domestic tourist, 

made effect on economic activity of tourist 

services. Year 90’s the development of 

Pangandaran Tourism Area was dominated 

by the construction of a re-modeling of 

traditional house into home stays model, 

modern hotels, restaurants, cafes and 

surfing fasilities. While today's when tourism 

Page | 102 



are dominated by domestic tourist so 

retailing activities, street vendors, hawkers 

as a major economic tourist activities. Such 

condition as the condition of tourism over 

carrying-capacity. Over carrying-capacity 

indicated by dense of the tourist area, overcrowed 

tourist area, mess of mass, 

disorderly, noisy, trash, dirty and 

environmental pollution. Foreigner visit 

tourist destination is now shifted towards 

the western of Pangandaran, such as Batu 

Hiu, Green Canyon, Batukaras for a more 

exclusive, comfortable and quiet area, 

although selected domestic tourism have 

also started to dominate. 

HOUSEHOLD ECONOMIC CLUSTER 

OF SALTFISH PRODUCTION 

The main activities of the people who live in 

sea shore, is fishing and fishery is typical 

term of economic sector. Fishery is defined 

in terms of the "people involved, species or 

type of fish, area of water or seabed, 

method of fishing, class of boats, purpose of 

the activities or a combination of the 

foregoing features". A fishery in 

Pangandaran mostly sea fishing to capture 

of wild fish (lutjanidae, ephinepelus, pampus 

argentus, trichiurus spp, thunnus thynnus, 

mackerel) and very few of raising fish 

through fish farming (shrimp, milkfish). 

Directly or indirectly, the livelihood of over 

10 thousands people in Pangandaran 

depends on fisheries with the production of 

2.600 ton annually. So overfishing, the 

taking of fish beyond sustainable levels, is 

reducing fish stocks, fishing ground and 

employment in many term. 

DRAFT 

Therefore in general, the coastal community 

as a fisherman identified as a poor 

community group. Poverty is caused by a 

lack of fishing opportunities, lack of access 

to information, technology and capital, 

culture and lifestyle that inclined wasteful, 

causing the fishing community's bargaining 

position weakened. At the same time, 

government policy has been less pro

fisherman as one of the stakeholders in the 

coastal areas. 

a. Characteristic of Natural Resource 

Problems occur due to poverty of 

fishing communities fishing 

communities living in the harsh natural 

environment that is always filled with 

uncertainty in running the business. 

Changing climate and capture’s 

seasons can not be ascertained and 

the over-fishing condition will 

increasingly make the fishing 

communities continue to be in a 

vicious cycle of poverty . 

b. Level of Education 



Poor fishermen who generally stuck to 

the traditional culture, the culture has 

not been captured by technology 

advances of modern science, the 

quality of human resources and low 

productivity levels are also very low 

catch. Educational level is directly 

proportional to fishing technology that 

may be generated by the fishermen, in 

this fishing technology in and fish 

preservation. 

c. Patterns of life-fare laisure 

Streotipe wasteful and lazy attitude by 

the various parties are often 

considered to be the cause fishermen 

poverty. Whereas fishing activities 

should have a strong work ethic is like 

going fishing at dawn to go home the 

afternoon, then took his time in his 

spare time to fix the nets. Fishing is 

considered by some fishermen as 

crops that do not require such initial 

efforts to plant, preserve or maintain 

the growth of fish, resulting in wasteful 

habits and it causes poor bargaining 

position weakened. 

d. Marketing of fishing catch 

Revenue sharing of fishery business 

depend on labor structure such as ship 

owner, foreman, worker and helpers. 

Almost 50% of fishing catch goes to 

ships owner and gasoline seller, 10% to 

foreman and rest for worker and 

helpers which consist of 8-10 persons. 

Not all coastal areas have the Fish 

Auction Place (TPI). This makes the 

fishermen (worker and helpers) are 

forced to sell their catch to middlemen 

at prices far below market rates. 

e. Government programs that are not 

impartial fishermen 

One is with the rise in fuel prices which 

is a scourge for fishing, they mainly 

look at the high dependence on the 

type of diesel fuel. If the boat engine 

sizes 5-12 PK requires an average of 10 

liters of diesel at sea, each boat will 

cost spend Rp.21.000 in normal 

conditions or in the base price for 

Rp.2100. But generally the fishermen 

to buy diesel prices Rp.25.00-27.000, 

because it depends on the agent level 

playing field. The more agents the 

more long for the market chain and 

the higher price of diesel fuel into the 

hands of fishermen. Prices are "forced" 

to buy, to be able to continue living at 

sea, despite the mediocre conditions. 

Fish processing can be subdivided into fish 

handling, which is the preliminary 

processing of raw fish, and the manufacture 

of fish products. Another natural subdivision 

is into primary processing involved in the 

filleting and freezing of fresh fish for onward 

distribution to fresh fish retail and catering 

outlets, and the secondary processing that 

produces frozen for the retail and dried for 

salt fish trades. 

DRAFT 

• Profile Activities Fishermen and 

Salted Fish Production 

Fish is a highly perishable food which 

needs proper handling and 

preservation if it is to have a long shelf 

life and retain a desirable quality and 

nutritional value. The central concern 

of fish processing is to prevent fish 

Page | 103

from deteriorating. The most obvious 

method for preserving the quality of 

fish is to keep them until they are 

ready for cooking and eating. Ancient 

methods of preserving fish included 

drying, salting, pickling and smoking. 

All of these techniques are still used 

today but the more modern 

techniques of freezing and canning 

have taken on a large importance, but 

not in Pangandaran. 

For many years the methods used to 

preserve fish and fish products at 

Pangandaran are included: 

• the control of temperature using 

ice, 

• the control of water activity by 

drying, salting or smoking 

• the chemical control of microbial 

loads by adding acids 

Usually more than one of these 

methods is used. When chilled or 

frozen fish or fish products are 

transported by road, rail, sea or air, the 

cold chain must be maintained. This 

requires insulated containers or 

transport vehicles and adequate 

refrigeration. Fish processing is also 

concerned with proper waste 

management and with adding value to 

fish products. There is an increasing 

demand for ready to eat fish products, 

or products that don't need much 

preparation. 

Fish curing includes and of curing fish 

by drying, salting, and smoking or by 

combinations of these processes have 

been employed. On sailing boat fish 

were usually using ice immediately to 

prevent spoilage; the traditional boats 

of today commonly bring in un-iced 

fish due to the cost. Fish to be cured 

are usually first cleaned, scaled, and 

eviscerated. Fish are salted by spraying 

them by salt and dried in open area. 

Page | 104 



• Capital and Labor Mobility 

Basically the fishermen workers are not 

need capital because they are selling is 

a labor in the division of labor of 

fishinh, thereby providing capital for 

the fishermen do not benefited the 

fishermen workers but the owners of 

fishing boats. They do not have any 

items that could be collateral to 

borrow money except their body, 

because their energy that they able to 

sell so not only the fishing sector they 

work but in other informal sector as 

freelance workers. As long as they do 

not catch fish, in the lane time, they 

worked odd jobs such as farm laborers, 

hawker, rickshaw driver (tukang beca), 

construction workers etc. So really they 

are much more flexible in making a 

living (higher labor mobility) than 

those who became foreman of 

fishermen or boat owners 

• Marketing Production Patterns 

DRAFT 

Pangandaran as salted fish producer 

mainly known by the domestic tourist 

is jambal roti (catfish species - 

Pangasius nasutus). Local 

manufacturers of jambal roti is often 

not enough satisfied supply this 

commodities for souvenir from 

Pangandaran due to the lean times 

catchimg fish of jambal so saltfish 

traders import them from other places 

such as Cilacap or Pelabuhan Ratu. 

Among the small fish (bloating, layur, 

mackerel, shrimp, snapper) and trash



fish which distributed among 

fisherman workers, were sold directly 

to neighbor or local market to fulfill 

their daily income. If they not able to 

sell their fresh fish to the local 

demand, albeit in different ways how 

to sell the fish, then they preserve it by 

drying, drying, salting, boiled (pindang) 

and smoking. Drying and salting 

process for long time has been 

HOUSEHOLD ECONOMIC CLUSTER 

OF COCONUT FARMERS 

Basically the coconut can be used for the 

fulfillment of human needs from the roots, 

leaves, tree, flower until the fruit. It means 

theoretically, everything in the coconut can 

be cultivated and exploited by human being 

such as coconuts from the South Coast of 

West Java. (figure 1 and table 1). But in fact 

the effort of exploiting and processing 

coconut was not optimal. Many of coconut 

farmer community, such as coconut tappers, 

brown sugar producer, collector and sellers 

who live in poverty. Coconut from the south 

coast of West Java is 76.% taken its fruit to 

practices by Pangandaran fishermen 

with the technique were virtually 

unchanged. Trading the salt-fish begin 

by the member of household (children, 

wife, relative) as fish hawkers, then the 

middlemen collect the salt-fish for 

certain amount to sell further place, 

town or city. Very vew they sell to 

fishermen cooperative. 

be processed into food ingredients (cocomilk, 

copra), and only 23.08% were tapped 

to serve as coco-sugar and brown sugar. 

DRAFT 

Daun 

Bunga 

Buah 

Batang 

Akar 

Fig 1. 

Part of Palm Tree that can be utilized 

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No Part Utility 

1 

2 

3 

4 

5 

Uton Rustann 

& Ira Savitri – 

Salt Fish and Brownsugar Maker, Maake 

Pangandaran Tourism Resort Alive? 

Leave 

• Atap Sirap 

• Sapu Lidi 

• Ketupat 

• Handycraft 

Flower • Gula kelapa 

• Gula Merah 

• Cuka 

Fruit • Santan 

• Air (Minuman 

Kesehatan) 

• Daging (copra) 

• Minyak 

• Sabut 

Tree • Material 

Bangunan 

• Kayu bakar 

• Obat 

Root • Medicine (sakit kulit 

seperti gatal di 

celah jari kaki, celahh 

kangkang, obat 

demam dan mencrett. 

The Role of Coconut Farmers in 

Pangandaran Tourism Resort 

The benefits of coconut trees which will be 

discussed here is the flower that was tapped 

to serve “nira” (honey) as a raw material for 

coconut sugar and brown sugar brown 

sugar (see Figure 2). With the nira (same 

basic materials), from coconut tree can be 

Pictures 

DRAFT 

produced a different kind of sugar (coco 

and brown) and quality of sugar. Coconut 

sugar (palm sugar) predominantly goes to 

the market as food staple - people basic 

needs. While the market of brown sugar is 

demanding by tourism at hotel, restaurant 

and well known café.



Percentage of processing between palm 

sugar with brown sugar are very lame at all 

(See Figure 3). This is due to processing into 

brown sugar require a delicately and longer, 

more difficult and patience and require 

appropriate technique. Currently the 

processing of coco-sugar to brown sugar 

are still using the traditional technique (by 

hand sanding continuously). Even though. 

this processing of brown sugar are 

prosperous comparable to the high price. 

But until now the demand for brown sugar 

are still limited, due to the limited foreign 

tourist and lack of promotions. 

Fig 2. 

Part of the Coconut Flower be tapped as sugar raw material 

Source: many references and field survey, 2011 

Coconut sugar or palm sugar is sugar 

produced from evaporating sap (honey) of 

palm trees. In the market palm sugar which 

is called “gula jawa”, usually sold in a half 

cup, half elip, and round cylindris. Thus form 

is produced from the mold used in the form 

of half a coconut shell (java: bathok), 

bamboo mold (so the round cylindrical 

DRAFT 

shape). Palm sugar is widely used as a spice 

in cooking because it has a distinctive 

aroma and flavor caramel palm. In addition, 

palm sugar is also used to sweeten 

beverages, soy fabric, cookies fabric, and 

cake makers and material flavor enhancer in 

foods. 

Page | 107

Brown sugar is a term used to name the 

palm sugar in crystalline form. Brown sugar 

has its own advantages of grain -smallshaped 

crystals- are easily soluble in hot 

water or cold water, in addition to sugar 

crystals (java: gula semut) can be made into 

a variety of flavors with different properties, 

such as sugar crystals can taste ginger 

Page | 108 



This paper is taken as a case study of palm 

sugar producers communities in the district 

of Ciamis. Approximately 13 million palm 

trees found in this district. 10 million trees 

(+ 77%) used to be coconut oil (incl Virgin 

Coconut Oil), meat, coconut milk, and fruit 

for drinks (kelapa muda). 3 million coconut 

trees (+ 23%) to be processed sap (nira) for 

palm sugar and brown sugar. Today tourism 

in the district of Ciamis has not raised the 

palm sugar and brown sugar become one 

Fig. 3. 

Market share of palm and brown sugar 

Source: Field survey, 2011 

Palm Sugar Brown Sugar 

Fig 4. Palm sugar and Brown sugar 

prevent and cure colds, coughs, flu, 

flatulence, taste kencur can prevent and 

cure pains, rheumatism, stomach ache or 

other flavor so that when used in drinks will 

provide a distinctive flavor. The difference 

between palm sugar and brown sugar can 

be seen in Figure 4. 

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of the local commodity. Whereas palm 

sugar and brown sugar can become 

particular souvenir of tourism resort of 

Ciamis. By attracting a nice packing and 

promotion it will lift one of local economic 

cluster to support tourism in the district of 

Ciamis. Currently tourist resort that has been 

selling palm sugar (not brown sugar) just at 

the Batu Hiu Area and brown sugar are very 

few to the exhibition and luxury hotels with 

a finite number (depending on order).



The problems faced by farmers in the 

processing of palm sugar and brown sugar 

are: 

a. Processing of coconut sugar and 

brown sugar are generally not 

produced by palm farmers, but 

tapper workers or craftsmen. 

b. A system is prevailing a monthly 

payments. The tapper worker 

(sugar producer) have to deposit in 

advanced of brown sugar to the 

plantation owners (by 

appointment). The system is 

certainly benefitted landowners 

rather than sugar maker or 

craftsmen. 

c. Processing technologies of coconut 

sugar and brown sugar is still undeveloped 

technology (traditional 

and cultural) 

d. Farmers blocked the capital for 

processing palm sap into sugar / 

brown sugar (the cost of 

production / operations) 

e. Marketing of palm sugar / brown 

sugar of the farmer directly to the 

receiver / distributor (not yet able 

to market themselves as local 

products / souvenirs tourist area) 

f. Problem of low education, 

economic, and social welfare of 

palm sugar producers 

g. Limitations artisans to tap palm 

wine per day (due to manual 

systems: climb a coconut tree). On 

average each worker capable of 

intercepting 25 liters of sap per 

day) 

h. Sap production is limited (a lot 

when the dry season) 

DRAFT 

Page | 109

COMPARATIVE IMPACT OF LOCAL 

ECONOMIC CLUSTER TO TOURISM 

CLUSTER 

Considering tourism has been regarded as 

an industrial activity sector influence on 

local economic growth, due to the impact 

on economic activities and welfare have to 

re-consider particularly to the specific 

impact on local economy activity. Local 

economy itu ternyata sebaiknya tidak 

menjadi ekonomi skala besar karena sering 

kepentingan local, nilai local tidak 

terperhatikan lagi ketika ekonomi local 

menjadi besar. Prinsip “diminishing return to 

local scale” masih penting dalam 

keberlangsungan kehidupan local, unless 

the local economy occupied by global 

economy trap which is benefited to world 

society. Hal ini ditunjukkan oleh observasi 

terhadap between saltfish economy cluster 

and brown sugar economy cluster to the 

Page | 110 

tourism economy cluster. Saltfish maker 

(jambal roti) and it’s product at 

Pangandaran not have big share in saltfish 

trading in a regional and national market. 

Even though, saltfish maker have 

contributed localized to the Pangandaran 

Tourism Image with jambal roti souvenir, 

particularly to huge domestic tourism which 

was visited Pangandaran. In other side, 

where the existence natural resources (rich 

of palm plantation) has been utilized 

extensively, the palm sugar maker extend 

their product to supply merely local market 

but also regional and national market 

(export to foreign countries). Larger 

marketing of product and lager of 

economic scale they provide, the market 

focus also moving from local market to 

regional and exported target. That is why 

extension their economics of scale almost 

neglecting preservation the local needs and 

local economy as a whole. 

Table 2 : Comparation of Slatfish Cluster and Brownsugar Cluster to Tourism 

1 

2 

3 



Tourism Cluster 

Environment 

Saltfish Economy Cluster Brownsugar Ec Cluster 

• Panorama scence, natural • Conflicting of Drying fish 

bauty 

area on public open • Coconut tree scene 

• Cleanness sand 

space 

• Accessibility 

Accomodation 

• Hotel and Cafe 

• Fresh and freezing fish • Brown sugar 

• Home stay 

• Saltfish and other fish • Palm sugar 

• Restourant 

product 

• Coconut drink 

• Tourist activity 

• Cultural event of fishing • Flavor beverage 

• Equipment 

ceremonial 

• Sea shore guard 

equipment 

Services 

• Guide.information 

• Recreation 

• Security/guardian 

• Public Fasility (toilet, bath, 

drinking water, open space 

• Other personal need 

DRAFT 

• Part time of fishermen 

• Rental boat 

• Cultural event of fishing

4 

Souvenir 

• Food/drink 

• Handicraft 

• Other 

RECOMENDATION 



Tourism Cluster Saltfish Economy Cluster Brownsugar Ec Cluster 

Recommendation for Salt-fish Cluster 

economy 

Fishing and processing fish as the local 

economy (in the form of a gift) of sea shore 

community has to support tourism in 

Pangandaran for generation, beginning as 

fishermen settlement until Tourism Resort at 

regional and national level, several things 

ought to do, such as : 

1. Fishing Area has been categories as 

“over fishing area” should be maintain as 

main resource have to shift from 

cultivation behavior to fish farming, 

maintain stock of fish. 

2. To improvement traditional technology 

to catch the fish until ZEE ( 20 sea mile 

as Economic Exclusive Zone), fishing 

technology, fishing boat capacity and 

preservation. 

3. Re-construction of ‘bagi hasil’ system 

which is more benefited and equity of 

fishermen worker or supported other 

subsidies to their living conditions such 

as housing improvement and betterment 

of environment condition. 

4. The establishment of cooperatives that 

can provide savings, loans and 

opportunity wokrs for fishermen at lane 

time, and accommodating as well as 

purchase their product at reasonable 

prices. 

• Freezing fish saltfish 

• Sea shore handicraft 

• Handicraft from 

coconut material 

5. Preserve the traditional and cultural 

event such as “pesta laut” as tourism 

attractions. 

6. Promote the hotels and restaurant to 

use to local salt-fish brands as culinary 

tourism. 

Recommendation for Brown Sugar 

Cluster Economy 

With the expectation of brown sugar and 

coconut sugar as the local economy (in the 

form of a gift) that support tourism in 

Pangandaran, several things ought to do, 

such as : 

1. Reconstruct the system of production 

sharing between coconut farmers and 

tap workers / brown sugar processors, 

2. Production of capital assistance for 

coconut farmers craftsmen / tapper 

3. Packaging for more attractive of brown 

sugar / coconut sugar and more 

durable, and exclusive. 

4. The establishment of cooperatives that 

can provide savings and loans for 

farmers and accommodating as well as 

purchase the products of brown sugar 

from farmers at reasonable prices. 

7. Provide extensive training and assistance 

of appropriate technology to enhance 

productivity of tapper and processors. 

8. Promote the hotels and restaurant to 

use to local brown sugar brands. 

9. Managing of marketing and promotion 

of local brown sugar to regional as well 

as national level. 

DRAFT 

Page | 111

Page | 112 

DRAFT

DEVELOPMENT OF BIOFARMAKA CLUSTER 

KARANGANYAR CENTRAL JAVA 

Dr. Rustina Untari 

Soegijapranata Catholic University 

Semarang. Indonesia 

r.untari@gmail.com 

INTRODUCTION 

Karanganyar District has significant potency 

to develop agriculture in the broad sense. 

The agriculture sector contributes 21% of 

GDP Karanganyar district, with second ranks 

after industry that contributes 53% of GDP 

Karanganyar District. 

NO TYPES OF COMMODITIES 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

Ginger 

Turmeric 

Powder 

Temu lawak 

Galangal 

Turmeric rasa mangga 

White turmeric 

Bengkle 

Temu kunci 

Temu ireng 

Follow to the growing trend of back to 

nature treatments, the business of emponempon 

farming also evolves. However, 

the conditions at the field show it has not 

grown, and still dependent on middlemen 

while the product quality is still low. 

Therefore, some stakeholders trying to 

develop biofarmaka cluster in Karanganyar 

District, i.e. Research and Develepment 

Board/Balitbang of Jawa Tengah Province 

as an initiator. 

One of the agricultural potential sector has 

to be developed is the plant of traditional 

medicines (herbal or “empon-empon”). As 

an illustration, the cultivation area of 

“empon-empon” in Karanganyar covers 270 

Ha. It has different variety of plants and 

involved more than 400 farmers. The main 

commodities i.e. 

BROAD 

(Ha) 

77.65 

94.00 

16.60 

39.25 

31.30 

5.00 

3.00 

5.00 

5.00 

3.00 

TOTAL PRODUCTION 

(Kg) 

544 000 

940 000 

93,000 

365 700 

287 000 

45,000 

38,000 

30 000 

30 000 

18 000 

DRAFT 

WHY CLUSTER 

Since its great potential, agricultural of 

traditional medicine has potency to be 

developed to become a cluster. 

Development using the cluster approach 

also has several advantages: 

1. It is more efficient (in development or 

business) 

2. SME / farmers can be more powerful 

3. Innovation can often be done 

4. Involve multi stakeholders 

5. etc. 

Page | 113

The value chain of Biofarmaka Cluster as below : 

Seed Cultivation Processing Trading Consumer 

Farmer 

Farmers group 

Seed breeder 

Breeder, fertilizer, 

kiosk 

Saprodi kiosk 

BP4 

KU institute 

Disnas 

CLUSTER AND MEMBER GROUPS 

Like other agricultural regions in 

Indonesia, farmers of medicine plants in 

Karanganyar incorporated in GAPOKTAN 

(farmer groups), which consist of: 

1. Farmers Group Resources in 

Jumantono Rejeki sub District. 

2. Farmers Group Madu Asri II in 

Ngargoyoso sub District. 

3. Farmers Group Kridotani in the sub 

District of Kerjo Kridotani. 

Page | 114 

Rustina Untari – Development Of Biofarmaka Cluster Karanganyar Central Java 

Farmer 

Farmer’s group 

Livestock, 

fertilizer, saprodi 

kiosk 

Department of Land 

Affairs, Balitbang, Regional 

Development Planning 

Board 

NGO 

University 

Farmer 

Small Medium 

Enterprises 

‘Koperasi’ 

BPPOT 

• Middleman 

• Factory 

• Traditional markets 

Trader, distributor, 

cluster 

DRAFT 

4. Farmers Group Aneka Karya Lestari in 

sub District of Mojogedang. 

5. Farmers Group Trisno Asih in 

Jumapolo sub district. 

6. Farmers Group Sedyo Jatipuro 

determination in the sub District. 

7. Kelompok Tani Ngudi Mulyo in 

Kecamatan Kerjo. Farmers Group in the 

sub District of Kerjo Ngudi Mulyo. 

8. Farmers group Waras in Jatipuro Sub 

District 

VC Stage 

VC 

Operator 

VC 

supporting 

VC 

enabler

9. Farmers Group Ngudi Makmur in the 

sub District of Jumantono Ngudi 

Makmur. 

10. Farmers Group Sedyo Tekad Sedyo 

determination in the Jetipuro sub 

District. 

Gapoktan actually is an asset to 

strengthen the technical side of 

agriculture. Nevertheless some members 

still find it strange with the establishment 

of institutions with the 'NEW' name of the 

cluster, and the cluster is not considered 

useful. This causes a lack of good 

supporting capacity of GAPOKTAN. It 

needs to be given the explanation that 

GAPOKTAN is part of the cluster, they 

have more role of the technical agriculture 

production. 

STAKEHOLDERS 

Rustina Untari – Development Of Biofarmaka Cluster Karanganyar Central Java 

Initiation of biofarmaka cluster formation 

in Karanganyar has conducted by 

Balitbang Jawa Tengah. The Catholic 

University of Soegijapranata and 

Pusbangdaya appointed experts 

accompanying the formation of the 

cluster. Other stakeholders are i.e. PT 

Sidomuncul, FEDEP Karanganyar, Bapeda 

District and Province, ATMI Solo, 

PUSBANGDAYA and so on. 

CLUSTER FORMATION PROCESS 

1. There is existing cluster of agricultural 

biofarmaka in Karanganyar District. 

The similar medicinal farming 

businesses have mutual cooperation in 

the same geographical location. The 

cluster has a pre-existing business unit, 

which only needs to be improved. 

2. Institutions of cluster: the process 

includes socialization, formation of 

cluster organizations and the 

preparation of business plans, as well 

as the formation of cooperatives as the 

cluster manager. This activity is fully 

accompanied by Pusbangdaya as BDS. 

BUSINESS AND MARKET 

APPROACH 

Establishment of cluster is not enough, it 

needs concrete steps that can advance the 

clusters business. In this case Balitbang 

Central Java Province, and FEDEP Bapeda 

Karanganyar District invited PT 

Sidomuncul to get involved and do 

business with the biofarmaka cluster. This 

activity becomes a kind of locomotive for 

the cluster to grow more quickly / rapidly. 

Some tangible output of the cluster 

development activities with this market 

approach: 

1. PT. Sido Muncul will accept the 

results of agricultural products from 

biofarmaka Karanganyar Cluster. 

2. Biofarmaka cluster is ready to cultivate 

and develop better product and 

maintained the quantity and quality. 

3. Other stakeholders will give support 

too. 

DRAFT 

Page | 115

LOCAL ECONOMY AND SME CLUSTER IN SEBERANG PRAI, 

PENANG STATE, MALAYSIA 

Colonius Atang, Sharifah Rohayah Sheikh Dawood, Suriati Ghazali, Narimah Samat 

Geography Section. School of Humanities 

Universiti Sains Malaysia (USM), Malaysia 

collendong@gmail.com 

ABSTRACT 

This paper explores the development of SME clusters in the agro-based industries, farming and 

homestay food business of Seberang Prai, in the state of Penang, Malaysia. In many countries 

whether it be a developed nation or a developing country, it is believed that small business can 

contribute to promoting local economic development, as well as enhancing the competitiveness 

of local industries within a global economy. While SMEs may have a role to play in creating jobs, 

and generating wealth, they need to overcome many obstacles. Within the same governance 

structure, some SMEs can upgrade themselves into the value chain of productivity and some are 

not, what are the determining factors that go beyond the governance context? This article 

stresses the importance of understanding the specific context, distinguishing between the actual 

and potential roles of different kinds of SMEs that excel within the cluster development scenario 

in Seberang Prai, Malaysia. A number of government agencies and target group entrepreneurs 

have been interviewed from different case studies to attain data regarding level of success and 

obstacles faced by the SMEs. This will help identify future direction and strategy plans to 

overcome obstacles, enhance the competitiveness and resilience of the SMEs for a more 

sustainable growth. 

KEYWORDS : Local Economy, SME cluster, Seberang Prai, Penang State, Malaysia 

INTRODUCTION 

This paper explores the development of 

Small and Medium sized Enterprises (SMEs) 

clusters in the agro-based industries, food 

based industry, farming and homestay 

business of Seberang Prai, in the state of 

Penang, Malaysia. An increased importance 

has been placed on SMEs and 

entrepreneurship generally, as a way of 

helping to alleviate economic problems. 

Previous research has acknowledged that 

due to rapidly changing and highly 

competitive markets, small firms have a 

growing influence on national economies 

around the world (Westhead and Birley, 

Page | 116 

DRAFT 

1995; European Commission, 1996; Yeh- 

Yun-Lin 1998). In this connection, clustering 

as a process has become catalyst for SMEs 

development especially in the local 

economy scenario. The paper briefly relates 

to the literature on SMEs clustering, and 

networks for regional economic 

development. Further the processes that 

may be necessary to facilitate successful 

clustering and dissemination to SMEs in the 

Malaysian context is also explored. The 

methodology is outlined, and results 

generated utilising a qualitative analysis of 

in-depth interviews of target group 

participants and government agencies. The 

analysis discusses these results in terms of

the potential in assisting the provision of a 

range of supporting mechanisms to 

facilitate successful outcomes for the SMEs, 

the common obstacles faced by each case 

studies and areas for further research that 

will enable mechanisms for further 

development. The study area which is 

Seberang Prai - part of the Penang State 

situated in the mainland - has been chosen 

as one of the hub for SMEs clustering in 

northern region of Peninsular Malaysia. The 

area is seen as a viable and potential region 

to develop SMEs clusters in various 

industries particularly those directly related 

to local economic development and the 

rural population. Despite the fact that 

Penang State is a fast growing hi-tech 

manufacturing region, the agro-based 

industries, farming and food based 

industries also poses a significant position in 

the country’s economy and the rural 

population. The reason for this being that 

Penang is strategically located in the 

northern region and its infrastructural 

development is very efficient, making the 

state a potential one to penetrate the 

modern agro-based industry in order to 

sustain its achievement in this sector. 

Initiated and supported by government 

intervention, the development of the local 

SMEs in these industries has been 

prominent to suggest a balanced growth 

that is very crucial for the state. 

SME clustering 

Colonius Atang, Sharifah Rohayah Sheikh Dawood, Suriati Ghazali, Narimah Samat – 

Local Economy and SME Cluster in Seberang Prai, Penang State, Malaysia 

Clustering has now become very common in 

many regions. The United Nation Industrial 

Development (UNIDO) defines a cluster as a 

local agglomeration of enterprises 

producing and selling a range of related or 

complementary products within a particular 

industrial sector or subsector (Richard, 

1996). Attention has been paid by many 

researchers on clustering of firms (i.e. 

Mesquita, 2007; Saxenian, 1994; Tallman et 

al. 2004; Pietrobelli & Rabelloti, 2004). Their 

work has shown that, besides the passive 

collective efficiencies encountered by most 

SMEs, clusters may also benefit from active 

collective efficiencies (e.g. improved access 

to knowledge and other intangible 

resources) through collaboration with other 

cluster members. Schmitz and Nadvi (1999: 

1504) have termed this process as “a 

conscious pursuit of joint action”. 

Due to changes in production systems and 

the financial market, as well as the changing 

distribution channels and the spread of ICT, 

SMEs and clusters are increasingly 

integrated into the value chains that operate 

across many different regions. In fact, the 

clustering strategy has also led to many 

other activities, allowing SMEs to establish 

strong social networks, where they are 

willing to act collectively and work 

dynamically with each other to achieve a 

shared goal. These social networks create an 

interdependency that shapes a strategic 

direction of markets and technologies in 

which cluster based organizations thrive and 

progress (Tallman et al. 2004). Studies have 

also shown that there is a significant 

relationship between clustering and SMEs 

competitiveness (Pietrobelli & Rabellotti, 

2004; Beccattini, 2001; Enright, 2000). SMEs 

development with a clustering approach in 

countries like Malaysia has become 

important as it is more effective and 

efficient for government to provide 

technical and management supports, 

training and facilities to a group of firms 

located in one place than to individual firms 

in dispersed locations. Some empirical 

studies, shows that cluster location 

relationships help produce beneficial 

advantages such as knowledge spill over, 

ease of access to skilled labour, and 

competitive pressures to innovate and 

increase productivity. It is also easier for 

local institutions (i.e. universities/research 

agencies) to provide technical or training 

supports, local banks to provide loans, and 

other local enterprises to conduct 

subcontracting networks with firms located 

in one cluster. The participation of these 

institutions in promoting SMEs is certainly 

DRAFT 

Page | 117

very helpful for the government in 

implementing its SMEs cluster development 

policies. 

In addition, some authors argue that 

clustering and concentration will lead to 

increasing returns to scale (see, for example, 

Krugman, 1993; Martin and Sunley, 1996). 

Porter (1990, 1998) asserts that there are 

benefits from the comparative advantage of 

local ‘clusters’ of business concentration 

that help firms to compete. Institutional and 

social relations may also strengthen the 

agglomeration process between firms within 

localities, developing joint collaboration and 

networks amongst them (Vatne, 1995). This 

for instance is the role of government 

schemes and agencies that provide grants 

to specific firms in a cluster. Thus many 

factors become key influences to the 

development of SMEs including location, 

firm’s age, sector, size and ownership 

structure. External links also play important 

role such as firm structure, industry structure 

and role of government schemes and 

agencies (Bennet, Robson & Bratton, 2001). 

There are indeed variable geographical 

pattern of internal firm dynamics, industry 

structure and/or government intervention. 

Thus the paper will explore the SMEs cluster 

dynamics and how they link with other SMEs 

production activities in the same location 

that has cooperative linkages between them. 

In this respect the role of government 

intervention and support will also be 

discussed. The study area is Seberang Prai, 

Penang State, Malaysia. There are also many 

obstacles faced by SMEs in rural 

development area wherebt many rural SMEs 

firms have significant constraints to access 

to customers and business advice. Keeble et 

al. (1992) studies show that availability of 

staff, proximity to customers and access to 

business advice or training facilities all to be 

Page | 118 



negative features of remote rural areas. Is 

this the case for the Seberang Prai scenario? 

The analysis of the case studies will provide 

some insights to this line of argument. 

Clustering and SMEs in Malaysian 

Context 

The concept of cluster based economic 

development in Malaysia is seen as the way 

to build a competitive economy rooted in 

high connectivity within the region (see 

Figure 1). SMEs play tremendous role in 

most Asian economies. Typically, the SMEs 

sector is considered to be the biggest 

source of domestic employment, where 

according to an APEC survey, SMEs employ 

as much as 60 percent of the total work 

force. It is therefore important for a 

developing country like Malaysia to build a 

viable SMEs sector in order to broaden the 

sources of economic growth and sustain the 

growth. The development of SMEs is top on 

the national development agenda, as 

reflected in the Ninth Malaysia Plan (9th MP: 

2006-2010) and the Third Industrial Master 

Plan (IMP3: 2006-2020). In today’s economic 

environment, isolated firms are unable to 

achieve the necessary advantages to 

penetrate new markets and sustain market 

share in traditional markets. Instead, the 

path to competitiveness is found in linkages 

between firms in shared resources between 

firms that co-operate and compete with 

each other, with some inputs from public 

and private organisations that supply for 

example human resources, technology and 

physical infrastructure (Adam 1996; see also 

Dawood, 2001). Malaysia is also expected to 

be able to build a new set of these 

competitive advantages that can sustain 

strong economic performances well into the 

future. 

DRAFT



Figure 1: Cluster Based Economic Development 

Regional 

Economic 


Source: adapted from Dawood, S. (2001) 

The global orientation of this cluster 

approach also necessitates the shift from 

being individual oriented to one based on 

the global economy with world class 

enterprises. One of the objectives of this 

plan is therefore to achieve a resilient 

resource of indigenous capabilities. It has to 

be affirmed that one of the fundamental 

concepts in this economic cluster analysis is 

that of regional concentration. As Anuwar & 

Tham (1993) assert, modern industry now 

requires high degrees of employment 

concentration, buyer/supplier linkages, 

specialised services, access to technology 

and sources of innovation in which such 

industries thrive in highly concentrated area 

where many other firms with similar needs 

and capabilities are also present. This is vital 

for the Malaysian economy in order for it to 

achieve a balanced and sound growth in 

both of its FDI input and domestic 

capabilities. The regional concentration of 

industrial activities is thus seen as a 

prerequisite for the policy growth stances of 

the country. As such, network arrangements 

are now often seen as a foundation for 

economic development, particularly at the 

level of the regional economy (see for 

example Cooke 1997; Morgan 1997; 

Dawood, 2001) where government, business 

CLUSTER BASED ECONOMIC DEVELOPMENT 

CLUSTER BASED ECONOMIC DEVELOPMENT 

Appropriate 

Market 

Focus 

C om petitive 

Industry 

Clusters 

Productive 

Factor 

Inputs 

Effective 

Enterprise and 

Government 

Collaboration 

and labour networks can all promote the 

agendas of economic development 

organisations. 

Penang State, the SMEs and Rural 


Penang State consists of two landmasses, 

Penang Island and Seberang Prai located 

across at the mainland (Figure 2). In the 

northern states, Penang is seen as a node of 

high-tech industry, producing among 

others, electronics, electrical goods, 

telecommunications equipment and medical 

products. Penang contains Malaysia’s 

second most important region of industrial 

development after the greater Kuala 

Lumpur/Klang Valley metropolitan area. 

Nevertheless Penang has seen a nearly half 

of a century of economic development 

based on the creation of FIZs where TNCs, 

especially in semiconductor, consumer 

electronics and hard disk drives have sited 

manufacturing facilities. Employment 

growth was centred on Penang Island and 

the districts of Kuala Muda, Butterworth, 

Bukit Mertajam, Nibong Tebal and Seberang 

Perai, associated with FTZ development. 

Penang Island and its adjacent districts in 

Seberang Prai therefore constitute a large 

DRAFT 

Page | 119

and fast growing manufacturing centre. 

While electrical and electronic sector 

become the backbone of the manufacturing 

and economic source and income for a 

significant number of population of Penang 

State, that is 32.2% of Penang employed 

persons in 2009 (SERI 2010), the local 

economy especially the rural economy in 

the state is still striving on SMEs activities in 

the agricultural and agro-base industry 

development, as well as fishery and farming 

areas, which employ 2.5% of Penang 

population in 2009 (SERI 2010). The case 

studies that will be presented here are 

based on genuine cases focusing on those 

who have emerged as successful farmers or 

agro-entrepreneurs, as well as those who 

have achieved considerable level of success 

in food based industries. 

Methodology 

The research has undertaken a case study 

approach focusing on three target groups 

including agriculture, agro-based industry 

and food based industry in the rural 

development context of Seberang Prai 

(Figure 2 in the next page). The method of 

research also involved open-ended and indepth 

interviews with the managers of the 

small and medium- sized enterprises. A 

range of questions were asked, including 

the history of the business, sources of raw 

material supply, government support 

mechanism, markets, and the growth 

challenges facing these enterprises. The 

qualitative data were used applying content 

analysis and case studies. Others 

interviewed are key informants for 

government agencies and non-government 

agencies who are directly involved with the 

agricultural sector and agro-based 

industries in Seberang Prai. Those are 

government officials, management and 

research officers, administrative and 

technical officers from the agencies such as 

the State Agricultural Department, land 

district office, Federal Agriculture Marketing 

Agency (FAMA), and PERDA (Penang 

Page | 120 



Regional Development Authority); research 

institutions such as MARDI (Malaysian 

Agricultural Research and Development 

Institute); those institutions involved in 

providing grants and subsidies for 

agriculture and agro-based industry such as 

Bank Pertanian Malaysia and MARA. The 

research has also utilized visiting and 

observation method in the areas to explore 

agricultural activities, agro-based industry 

and food based industries. 

Participation in Agro-based Industry 

and Food Industry 

Figure 2 shows the distribution of SMEs in 

Seberang Prai. Most prevalent SMEs are 

agro-based industry and food-based 

products, and to a lesser extent, medicinal 

products and handicrafts. Agro-based 

industry includes the cultivation and 

processing of food crops and livestock for 

local and national markets. Types of crops 

cultivated /processed are rice, vegetables, 

fruits, coconut; and livestock including 

chicken, pig, fish, goat/sheep and cow. Most 

of these industries are family based in which 

case one of a few members of the family 

participates in running the industry while 

other members of the family engage in nonagricultural 

employment in the professional, 

manufacturing or services sectors. 

DRAFT 

A good example of the agro-based industry 

is the paddy (rice) cultivation in Seberang 

Prai. There are some farmers who manage 

about 10 acres of field for the paddy 

cultivation in Seberang Prai and most of the 

farm is handled with the support of modern 

technologies such as modern machineries, 

standard irrigation system, high quality rice 

seeds and good fertilization. In addition, 

there are also livestock farmers from small 

and medium scale, using modern 

technology in their handling, slaughtering 

and cold storage facilities. Some of the 

livestock are from high quality breeds such 

as for the goat, cow and chicken.

Figure 1: Distribution of SMEs and Case Studies Area in Seberang Prai, Penang 

Note: 



DRAFT 

1 Farming Developer Synergy Farm (M) Sdn., Bhd. 

2 Puncak Mutiara Café, Kampong Pelet-- Farming and Food based Entrepreneur 

3 Homestay in Mengkuang Titi –Food based business 

4 Penang Halal Hub – Food based business etc. 

Page | 121

The government agencies directly involved 

in developing the agricultural product and 

agro-based products are the Federal 

Agriculture Marketing Agency (FAMA), 

PadiBeras Nasional Berhad (BERNAS), Area 

Farmers Association (PPK), and Majlis 

Amanah Rakyat (MARA). These agencies 

have tried to increase competitiveness of 

the agro-based product for local market and 

export through halal product, processing, 

branding and market segmentation and also 

quality enhancement and food product 

safety for the SMEs. Halal products refer to 

Muslim standard slaughtered meat and 

other products which is permissible to use 

and engage with, according to the Islamic 

law. The state of Penang has been included 

in the huge halal hub project located in Batu 

Kawan, Seberang Prai (see Figure 2), in 

which the objective is to create a cluster 

based SMEs in this region. Based on the 

survey, most of the entrepreneurs of SMEs 

are marketing their product from their own 

premises in a low scale. If problems such as 

transportation are overcome, these 

agricultural products can penetrate larger 

market. Nevertheless the monthly 

promotion sponsored by FAMA encourages 

the SME entrepreneurs to promote their 

product to the public. 

Most of the agricultural product in Seberang 

Prai can be categorized as perishable. One 

of the obstacles to market this product is to 

make sure high quality can be sustained and 

comply with the consumer demand all the 

time. Examples of agricultural product that 

is perishable is fish, meat, vegetables, and 

fruits that need cold storage to preserve 

freshness and a good transportation system 

that ensure freshness and quality of product. 

In some instances, there are complaints 

from small scale farmers who have obstacles 

to market their over supplied products due 

to storage problems. 

The following are the case studies from the 

three group of rural development SMEs 

which is the farming industry, the agro- 

Page | 122 



entrepreneur and food based industry, 

including the halal SMEs cluster. 

Case Study 1: Farming Developer 

Synergy Farm (M) Sdn Bhd 

Established in the year 2000, Synergy Farm 

(SF) is one of the successful Bumiputera 

(Malay) company specialising in plantation, 

processing and packaging of Cavendish 

banana under the brand name “Tropicoast”, 

and mostly are for exporting to overseas 

and local market. The plantation started 

from 174 acres and has now reached about 

250 acres, dedicated mainly for plantation of 

Cavendish banana and fruits, agro-tourism 

and vermiculture project. Apart from fruit 

plantation, SF is also involved in goat 

breeding. The by-product from the 

plantation is reprocessed by this company 

to provide food for the animals. Synergy 

Farm also has its own tissue culture 

laboratory where it has attained certification 

for Malaysian Farming Accreditation Scheme 

(SALM), ISO 9001/2000 certification and 

‘Malaysia’s Best’ for Cavendish banana 

product by the Federal Agriculture 

Marketing Authority (FAMA) (UPEN, 2009). 

In terms of marketing, SF has penetrated 

markets not only in Malaysia (mostly to 

Kuala Lumpur and Sarawak), but has also 

exported to Singapore, China and Dubai. 

Through MOU agreement between SF and 

FAMA in 2001, SF agreed to appoint FAMA 

as a single agent to market their product 

which was 60% for local market. 

Nevertheless, due to high local demand, SF 

was not able to market their product to 

overseas because of land scarcity to increase 

the plantation and produce. Other 

problems faced by SF including lack of 

skilled workers to manage the plantation 

and lack of knowledge in handling the 

product throughout the delivery process. 

With the lack of plantation land in Seberang 

Prai and to meet the high demand for 

Cavendish bananas, SF has taken the 

strategy to create franchise in order to 

DRAFT



develop joint venture and to share technical 

expertise with other SMEs. Since Penang has 

a huge problem of land scarcity, the 

franchise project has opened the 

opportunity to other states in Malaysia to 

start and expand this banana plantation 

project. From the interview findings, through 

this project, franchisees were able to apply 

loan up to RM 500,000.00 from MARA, SME 

Bank and Perbadanan Nasional Berhad. 

Franchisees usually manage the farms 

following methods and techniques provided 

by SF in order to standardise the product 

and for quality control purpose. SF as an 

SMEs cluster has managed to expand its 

product throughout the country and 

overseas with the help and support from the 

franchisees and government agencies such 

as FAMA (thus benefits the society and 

economy at the regional level). It is 

anticipated that the company will sustain in 

such a manner and the government 

agencies will be able to provide continued 

assistance and enhancement programme for 

its workers. However, in terms of 

contribution to the local sector and SMEs 

industries in this area, SF has limited impact 

though it has expanded to other states with 

the branches of the franchisee enterprises. 

This is due to the fact that the nature of this 

agro-based industry is very dependent on 

availability of land and thus the need to 

expand to other states would be the best 

choice to provide any impact for the 

regional development. Therefore to assist 

SMEs cluster and local development, our 

findings revealed that SF contributed 

minimally for job creation to local people 

especially the low skilled farming work such 

as planting, collecting, and packaging the 

produce. 

Case Study 2: Puncak Mutiara Café, 

Kampong Pelet - Farming and Food 

based Entrepreneur 

Started by a local Malay entrepreneur, the 

industry is located in a remote kampong 

area in Bukit Mertajam, Seberang Prai. The 

restaurant is fully owned by Mutiara 

Corporation Sdn Bhd and was opened in 

2004, with an area of 2 hectares which were 

dedicated for goat farming and fisheries. 

Initially the company started off with a 

small-scale production concentrating only 

on goat farming and selling. Eventually, with 

increasing demand the entrepreneur 

expanded his business into food based 

providing meals for customers who visited 

from all over Malaysia, intentionally to 

purchase the goats. The Puncak Mutiara 

Café has now become a relatively big 

restaurant in the middle of the small 

Kampong Pelet. Amongst others, the 

restaurant serves full varieties of mixed 

Asian cuisine as well as a selection of 

international flavours and western dining. 

The restaurant set up is mainly based on 

‘pondok’ (hut) style concept where 

customers can choose from 76 pondoks and 

seating area on the floor. The pondoks are 

named following the goat breeds such as 

jamnapari, dopper, and kadjang. This pondok 

concept is an attractive concept to the 

visitors and clients since it provides a very 

relaxing atmosphere for dining and triggers 

a nostalgic memory for every Malay visitor 

who comes there. It also introduces a 

traditional Malay way of life that is 

diminishing due to modernisation and 

globalisation. When it comes to the rich 

variety of cuisines offered at the restaurant, 

many visitors remark on the wonderful 

selection of foods available there. 

DRAFT 

With gradual development and increasing 

demand for farm animals from the 

customers, the farm now breed more other 

varieties not strictly limited to goats, but 

also chickens, ostrich, rabbits and birds in 

which they use them in the restaurant menu 

as well. According to our findings, there are 

about 200 goats in this farm and some of 

these livestock’s waste product are 

reproduced as organic fertilizers and 

distributed to other local farmers in that 

area. As mentioned earlier, farm animals 

Page | 123

such as goat are also sold to local suppliers 

for the local market. From our interview with 

the entrepreneur, it was found that during 

time of higher demand, the restaurant 

owner will have to purchase goats and 

chickens from outside suppliers from the 

Seberang Prai area, thus contributing to the 

dynamic networking and clustering 

atmosphere. Activities in this location also 

generate employment opportunities for 

about 50 people, most of whom are local 

residents. 

Furthermore in terms of promoting 

clustering network and engagements with 

other SMEs in the locality, the restaurant 

menu actually provides diverse links to other 

potential SMEs that are working together to 

supply goods and raw material for the 

restaurant. This, for instance is the ‘noodles 

corner’ in which the noodle suppliers are 

taken from the local area to produce and 

distribute the home-made noodles to the 

café. In another instance to meet the 

demand for the ‘fresh fruits drinks’, the 

restaurant owner networks with the SMEs in 

the local area who supplies the local fruits 

such as dragon fruit, papaya, star fruit, and 

young coconut to cater for the high demand 

from the restaurant’s customers. In fact in 

the same area where the café is located, 

there are many small scale farmers who are 

involved in agricultural related products 

especially local fruit producing, and many 

have actually benefited from the restaurant 

business. The local fruits are the favourite 

juice menus for the visitors especially for 

those foreign tourists and also the locals. 

The restaurant also gets local supply of 

mushrooms from micro level suppliers 

nearby. Supply of fish and seafood are also 

Page | 124 



offered by fishermen from Kuala Muda and 

Juru which is just near by to Seberang Prai. 

Furthermore, the existence of Puncak 

Mutiara Café has triggered other related 

SMEs activities in this area. Amongst the 

most significant development in terms of 

land area and networking is the emergence 

of homestay project initiated by local 

individuals in the adjacent areas. Some 

locals in the area have seen the 

opportunities in starting a homestay 

business in the same location. This is to 

cater for the high demand of incoming 

visitors to the cafe especially people from 

other states and foreign tourists who need a 

place for a sleepover after a long drive to 

the location. This will not only provide 

income to the homestay business but also 

allow visitors to explore and experience 

living in the remote kampong atmosphere. 

From the interview we have found that one 

of the reason for the success of the 

management of Puncak Mutiara Café is the 

knowledge and education level of the 

entrepreneur who has actually completed 

his tertiary education and who is quite 

knowledgeable in handling and managing 

the industry. In our view, this is one of the 

contributing reason how he has maintained, 

expanded and sustained his business with 

high creativity and diversity. Our findings 

also revealed that the Puncak Mutiara Café 

benefits the societies and economies at the 

local and regional level and contribute quite 

significantly to the SMEs clustering concept 

and development in Seberang Prai. The 

photos below show the varieties of farming 

activities and restaurant atmosphere at 

Puncak Mutiara Café. 

DRAFT



Source: Authors’ field visit, May 2011 

Case Study 3: Homestay in 

Mengkuang Titi – Food based 

business 

Mengkuang Titi homestay is located in Bukit 

Mertajam. The word ‘Mengkuang’ is 

originated from the Mengkuang tree, a 

species from the screwpine family. In 

addition to diversifying economic activity, 

many activities developed here at 

Mengkuang Titi homestay are in the field of 

culture, handicrafts and other manufacturing 

and production of traditional cakes. Some of 

the residents of the village are now 

receiving requests from local and foreign 

tourists who wish to stay in the village in 

order to get experience living in a Malay 

kampong. Mengkuang Titi village also has 

its own advantages of orchard fruits such as 

durian, rambutan, langsat and mangosteen. 

As included in the homestay programs, the 

participants/visitors are offered activities 

such as jungle trekking, cycling, fishing, 

camping, having lunch or dinner in Malay 

‘kenduri’ style, visiting the handicrafts centre 

and making traditional cakes either 

individually or collectively. These activities 

create seasonal jobs for the village people 

when they are offered to prepare food and 

other products for the visitors in which they 

will be paid for. Furthermore, the objective 

of a homestay programme is to bring 

additional income to the village residents 

(see Ghazali, Dawood and Samat 2010). 

Residents also provide a production of 

traditional cakes such as bahulu (Malaysian 

muffin) and to better develop the activities 

of other arts, crafts and cultural 

performances, including martial arts, dance 

and boria for commercial purposes. There 

are activities like Mengkuang-mat-weaving 

demonstration, a trip to cottage industry 

factories including bahulu and the bedak 

sejuk (traditional beauty powder made from 

rice flour). 

DRAFT 

Of all the activities, the bahulu industry is an 

important attraction for visitors whereby 

Page | 125

they are able to view bahulu making process 

from the beginning to the end. The bahulu 

entrepreneur produces for both local and 

national demand. Some of the orders are for 

wedding ceremony and from places as far as 

Kuala Lumpur. According to the 

entrepreneur the orders for the bahulu 

reaches its highest demand from customers 

all over the country during festive seasons. 

Most of the raw material supply for making 

bahulu is obtained from the local suppliers, 

mainly for the main ingredient that is 

chicken eggs. The bahulu entrepreneur gets 

her supply of kampong chicken eggs from 

her neighbourhood supplier. 

To run the homestay business especially 

during festive season or when there is 

gathering, most supplies for food 

preparation is also gathered from the 

surrounding area. This includes chicken from 

the farms in Seberang Prai, and fruits such 

as durian, rambutan, manggis, and langsat 

from the nearby orchards in Menkuang Titi 

village. In fact, the Mengkuang Titi 

homestay program is supported under the 

Ministry of Tourism who provide the license 

and training for the local entrepreneur. The 

Page | 126 



Source: Authors’ field work, May 2010 

Case Study 4: Halal SMEs cluster 

Recent efforts by the government to 

develop Malaysia as the Halal hub have 

positioned food processing and food 

production in the fore-front. It is envisaged 

ministry also sponsors allocation for home 

improvement and renovation in order to 

upgrade the homes to become a homestay. 

Furnitures and electrical equipments are 

also provided for the homes to meet the 

stardard requirement for a homestay. In 

addition, training is given in terms of 

hospitality, cooking, and managing the 

homestay. The ministry provide full support 

in promoting for homestay living and their 

products. The only obstacle faced is the lack 

of education amongst the villagers, their 

aging society and not having enough capital 

and knowledge to be creative in managing 

the homestay on their own. In this case 

most entrepreneurs rely on homestay 

operators for making suggestion, promotion 

and marketing to clients. In terms of 

sustaining growth, the homestay is quite 

limited in expanding its development to 

other SMEs in the area except for the micro 

scale and home based supplies. The photo 

below (left) shows the home-based bahulu 

enterprise and on the right where the 

bahulus are packed to be sent to one of the 

customer in Kuala Lumpur. 

DRAFT 

that the SMEs in this sector (food 

manufacturing and food processing) will 

continue to attain the benefits of the global 

food demand and continue to expand in line 

with policies and incentives introduced by 

the Malaysian government. Malaysia’s Halal



hub is a clustering strategy adapting the 

concept and practices of value chain 

activities involving industrial and food park 

development, food manufacturing, halal 

traceability and logistics. 

The Halal hub has been initiated by the 

Malaysian government to accelerate the 

growth of local based SMEs, thus preparing 

them to be competitive at the global level. 

The halal park strategy has given the SMEs 

opportunity to establish strong social 

networks, where enterprises are prepared to 

undertake risky, co-operative initiatives, 

working collectively and dynamically in 

order to achieve a shared goal. This cluster 

based relationship also help produce 

beneficial advantages such as knowledge 

spill-over, access to skilled labour, better 

acquirement and assembly of the inputs of 

production, and competitive pressures to 

innovate and increase productivity. It is also 

easier for local knowledge institutions 

(universities/research and development 

agencies) to provide technical or training 

supports, local banks to provide loans, and 

other enterprises to perform subcontracting 

within the cluster. 

Located in Batu Kawan, Penang, the Penang 

Halal Hub is aimed to facilitate the 

promotion and development of Penang 

International Halal Hub. Government 

initiative is also to direct and coordinate the 

development of Penang Halal industry 

amongst all stakeholders, both public and 

private. The objectives are to strengthen 

Penang’s economic and competitive edge; 

to develop Penang global branding as the 

hub for high quality Halal products and 

services; and to facilitate the growth of 

domestic industries and participation of 

Penang companies in the global Halal 

market. The Halal clusters in Penang 

includes manufacturing industries, agrobased 

industries, life sciences, R & D, 

hospitality and tourism. The Penang 

International Halal Hub has a great potential 

to develop local SME clustering in this 

region. The Penang Halal Hub is currently at 

the implementation and development stage 

and has a good potential to be a viable 

research avenue in the near future. 

CONCLUSION 

The SMEs relationship with clustering 

benefits involves a long-term process where 

firms (industries) are socially as well as 

economically embedded. There are indeed 

wider connection between the different 

function within firms, between producers 

and suppliers at the inter-firm level and 

between firms and the wider local and 

institutional milieu. As such this offers much 

greater potential for firms to engage in an 

integrated network but it is not necessarily 

flexible. It is in this light that this paper has 

cast some insights to explore the industrial 

structure of Penang rurality and the 

dynamics of the activities and emerging 

SMEs clusters. In particular there are many 

SMEs in the study area but most of them are 

oriented towards home based and 

individual rather than performing a strong 

relationship with the clustering process. 

Nevertheless there are some success stories 

from these SMEs and the clustering 

activities. Although these SMEs have further 

advantages for the long-term 

industrialization process, continuous 

government support is needed to provide a 

training ground for workers and the creation 

of indigenous entrepreneurs skill, technical, 

managerial, production as well as marketing 

know how. SMEs through the involvement 

of some local elites have actually enhanced 

the flexibility and diversification of industrial 

production because their output become 

more easily adapted to changing market 

conditions and also due to their ability to 

operate profitably, like the case of Puncak 

Mutiara Café. These people can play 

important supportive role to other emerging 

SMEs entrepreneurs in the locality. This is 

where social capital can be strengthened 

and enhanced their relationship with each 

other in the same vicinity and shared goal. 

This is essential for the local economic 

DRAFT 

Page | 127

development. Through the linkages and 

networks, the local societies are able to reap 

the same benefits for instance in terms of 

generated employment opportunities and 

also neighbourhood spirits that can be 

cultivated amongst the rural communities 

that are engaged in this networking. This for 

instance can be seen from the homestay 

business in Mengkuang Titi and also the 

homestay business emerging from the 

Puncak Mutiara Café business. However, 

some SMEs can potentially lag behind 

compared to others in various aspects, such 

as the technology in use, the quality of 

products, their technical and managerial 

skills and experiences, marketing ability and 

competitiveness in the market place and 

domestic and/or foreign markets. The 

network and linkages within the rural 

economic cluster is indeed vital for the 

success of the regional economy. In addition 

to firms and their networks, the role of 

government and institutions are of 

significant importance. Thus it is a complex 

process referring to a wider hierarchy and 

group of actors and also dependent on the 

nature of production networks and firms (i.e. 

small and innovative entrepreneurs), the 

particularities of the place (i.e. the rural asset 

and regional development) and possibilities 

that will affect the extent of all these 

processes (the elements of growth 

trajectories) and institutional 

embeddedness. By far the government role 

is critical and essential for the needs of the 

local SMEs to thrive and benefit further from 

clustering and networking, thus to ensure a 

dynamic and sustainable economic growth. 

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DRAFT 

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DRAFT 

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Page | 130 

DRAFT 

CHAPTER 5 

Key Elements of 

Clustering in Specific 

Situations

DRAFT 

Page | 131

SIMULATING FARM INCOME IN RURAL MOUNTAIN AREA: 

A SPATIAL PERSPECTIVE 

Dr. sc. agr. Iwan Rudiarto 

Urban and Regional Planning Department 


e-mail: iwan.rudiarto@undip.ac.id/irudiarto@yahoo.com 

ABSTRACT 

Spatial gradient between environmental and other spatial characteristic can be developed on 

the micro level basis with traditional farming system econometrics as well as on regional level 

by utilizing Geographical Information System (GIS) and remote sensing application. Econometric 

analyses were applied to the farm family level while GIS application were carried out to analyze 

and provide data in term of relational function between family’s socioeconomic conditions and 

spatial situation such as land quality and distance to the district centre. These functional 

relations, further, can be used to estimate income development in the study area from spatial 

perspective.Taking Dieng Plateau located in Central Java Province as study area; simulation on 

farm income has been done in two aspects, i.e.soil degradation and land management. The 

results show that by changing different values in two different future scenarios related to land 

quality, farm income was also changed significantly for different income levels. 

Therefore,proposed scenarios on soil degradation and land managemnet is considerable to be 

applied for better agricultural development in rural mountain area. 

Keywords : Multiple regression, Soil degradation, Land management, Spatial perspective, GIS, 

Dieng Plateau. 

INTRODUCTION 

Income situation in many rural mountainous 

areas is mainly influenced by the spatial 

location of each farm family. Spatial location 

may refer to the some conditions available 

in particular area that supports all the 

activities and movement of the farming 

families such as topography form, land 

quality, availability and accessibility to the 

economic centre. Considering all these 

relevant aspects, gradient concept plays 

important role in describing socioeconomic 

conditions of the farming families (Doppler, 

2006). Taking a line from urban centre to the 

remote areas, different level of market 

orientation as well as socioeconomic 

conditions can be discovered. Families who 

Page | 132 

DRAFT 

are located at the higher altitude level, far 

away from the economic centre, lack of 

accessibility, and managing sloppy areas 

tend to have low income level and living 

standard. At the same time, in the lower 

altitude area where other farming families 

are distributed, has more location 

advantages in term of networks accessibility 

and availability of land resources which may 

result to the higher agricultural production 

and income. Therefore, different locations of 

settled and farmland which create spatial 

gradient along mountainous area have 

brought significant influence on income 

development due to resources quality and 

availability.

Iwan Rudiarto - Simulating Farm Income in Rural Mountain Area: a Spatial Perspective 

As two major aspects in livelihood 

development of rural community, 

biophysical and socioeconomic conditions 

may lead to the further concept of linking 

those aspects into future development 

strategies. The way on how to link 

socioeconomic and its biophysical aspect 

into spatial relationship is one of the great 

challenge in social science where spatial 

resolution and context are not the terms of 

most social scientists use frequently. Many 

studies on the linking of social and 

biophysical data such as land use/cover 

change have been recently done by many 

researchers. Those studies typically involve 

joining social science data with remotely 

sensed and other spatial data which has 

applied by WALSH et al., 1999; LIVERMAN et 

al.,1998; TURNER and MEYER, 1991; FOX et al., 

1991; SKOLE et al., 1994; MORAN et al., 1994; 

and GUYEN and LAMBIN, 1993. 

Combining socioeconomic and biophysical 

aspect can be done by looking at the 

relevant factors such as resource availability 

and income development. Spatial 

assessment may produce spatial relationship 

among those relevant factors and therefore, 

different scenarios can be applied to test 

possible future development strategies to 

minimize the socioeconomic gap exist in 

spatial gradient of the area. Prior to the 

estimation of future strategies and its 

impact, this paper tries to establish a GIS 

based multiple regression model to 

generate the variables integrated with 

socioeconomic and spatial aspect in the 

model. Based on the developed model, 

different scenarios on land degradation and 

land management are proposed to see the 

impact to household income in the study 

area. 

STUDY AREA AND SAMPLES 

To simulate farm income, rural mountainous 

area in Dieng Plateau, located at the 

Wonosobo Regency, Central Java, Indonesia 

will be the sample case in this paper. It is 

located on the high altitude area from 1000 

until 2800 meters above sea level (asl). This 

area is a rural zone dominated by farming 

activities that mainly growth potato, 

vegetables, tea plantation, and some 

tobaccos and remaining forests area. Some 

parts of study area are dominated by the 

migrate families from West Java and has 

been settled down for more than ten years 

and assimilated with local social culture. 

Meanwhile, sustainability of farming 

activities in the study area is very much 

depend on the land and related resources as 

integrated component of long life 

productivity not only for the family but also 

for the community. Therefore, some 

extended parts of farming land have 

vulnerability in land ownership and rights, 

which may lead to the tenure security 

problem and land use sustainability. 

To provide basic data on socio economic 

development, randomly selected farm family 

was applied by using standardized 

questionnaires to 75 families distributed in 

the study area. Each location of surveyed 

families was recorded using the Global 

Position System (GPS) to locate them into 

their geographical location. This step is very 

important to be performed as the location 

of each sampling family will be the link 

between socio economic data and its spatial 

aspect. By linking all related data and 

information to its spatial location, spatial 

analysis in Geographical Information System 

(GIS) can be carried out and finally the 

spatial distribution and correlation of 

socioeconomic development in the study 

area can be presented. 

DRAFT 

MODEL CONCEPT AND DEVELOPMENT 

Measuring and Scaling up Micro Level 

Data 

Since available socioeconomic and 

biophysical data are not in the same analysis 

unit then measuring and scaling up micro 

level data for socioeconomic is necessary to 

be done. Socioeconomic data were collected 

Page | 133

from household survey distributed in the 

study area while biophysical data were 

derived from spatial data in regional scale. 

In order to synchronize data unit for analysis 

and modeling purpose, socioeconomic data 

were spatially regionalized through 

Page | 134 


interpolation method by linking the location 

of each household sample into its 

socioeconomic data. By doing so, the 

widening and transferring both 

socioeconomic and biophysical data into 

regional level are being possible. 

Source: Author and Wonosobo’s local development agency 

Figure 1: Location of Dieng Plateau, Wonosobo Regency, Central Java, Indonesia 

The results of micro level and regional 

analyses are spatially incorporated each 

other. As the expected results, relationship 

between socioeconomic and biophysical 

conditions can be observed and established 

with regard to the specific relation, i.e. 

aggregation of socioeconomic constraint 

such as farm and family income as well as 

food availability is able to be predicted from 

the biophysical conditions of the area. On 

the other hand, similar land quality 

conditions located in different areas are 

concerned to be the same in providing farm 

production and income generation. Land 

quality indexes were estimated through the 

spatial analysis based on the slope, land use 

type, and soil quality. By means of functional 

relations, land quality indexes are not only 

relevant for direct comparison of available 

land resources but also related to the 

socioeconomic conditions that assessed 

through the micro level survey to the 

physical conditions of the farm land. 

DRAFT 

Map of Indonesia 

Process and Modeling Approach 

To produce a conceptual relationship 

between socioeconomic and biophysical 

factors, all thematic grid layers were 

combined through the grid transformation 

function available in ESRI ArcView GIS. This 

grid combination is considered possible 

since data are available at the same level, 

i.e.: spatial level. As the result, grid 

combinations between all the combined 

factors which contain specific values of each 

25 x 25 m grid were available. Furthermore, 

these combined grid values were exported 

to the spread sheet form and analyzed in 

statistical program, this study used SPSS 

program to calculate the correlation 

between the observed variables. Correlation 

analysis was applied and found that cost

distance to the nearest district centre and 

land quality variables are highly correlated 

with farm income. Therefore, to explore 

more detail on the relationship between 

these three variables, a multiple regression 

analysis was employed by putting farm 

income as dependent variable and cost 

distance to the nearest district centre and 

land quality parameters as independent 

variables. Putting land quality as one of 

independent variable in this modeling is 

because land quality itself can explain 

different income generation from the 

surveyed family where higher land quality 

will give more products to the farmer. On 

the other hand, cost distance variable are 

widely used to clarify economic concept 

such as land rent economic, developed by 

VON THÜNEN (1863) and RICARDO (1817) as 

cited in Lentes (2003), from geographical 

location perspective. The results of multiple 

regression analysis calculation then were 

used to estimate income development in 

the study area as well as to develop impact 

maps based on different proposed scenarios 

by taking back the results into GIS 

application. 

To develop different future development 

scenarios on farm management, a GIS based 

multiple linier regression model is applied to 

estimate potential future income 

generation. Different future development 

scenarios are mainly designed to modeling 

physical conditions, such as scenarios on soil 

degradation, land management, and 

infrastructure improvement. This is due to 

major problems of farming system in study 

area are significantly related to the long 

term development of agricultural activities 

that very much concern on physical 

conditions as found in micro level survey as 

well as spatial macro analysis results. 

Therefore, to achieve this purpose, grid cells 

of land quality index and cost distance from 

the closest economic centre are spatially 

modified from current condition by giving 

different values for each related grid cells. 

Figure 2 shows the process and modeling 

concept of future development scenarios in 

this study. 

MODELING CURRENT CONDITION 

As mentioned before that GIS application is 

being applied based on the calculation of 

multiple regression model by considering 

farm income per hectare as the dependant 

variable and land quality index together with 

cost distance as independent variables. 

Multiple regression analysis was carried out 

to seek the level of correlation between 

dependant and independent variables as 

well as to find the correlation formula 

between those variables. Further, this 

correlation formula can be used to estimate 

farm income in the study area where land 

quality and cost distance variables are 

functioned as predictor value for the 

dependent variables. 

From the calculation, regression equation 

was found: 

y = 19353.030 + 423.748 x1 – 3.545 x2 

Where; y is dependant variable for farm 

income per hectare, x1 is independent 

variable for land quality indexes, and x2 is 

independent variable for cost distance to 

the nearest economic centre. This 

calculation has been done to 130204 grid 

cells produced from those three 

combinations variables (n = 130204) with 

statistical results of: 

DRAFT 

R = 0.775 R 2 = 0.600 F test = 97.590 

Sig. F = 0.000 T-table = 1.960 

T-stat for regression coefficient= 65.453 

T-stat for x1 coefficient = 396.186 

T-stat for x2 coefficient= -31.520 

Page | 135

Micro level data: 

Farm revenue, farm expenses, and 

cultivated land. 

Figure 2: Process and modelling concept of future development scenarios 

The results of GIS based multiple regression 

model showed that the relationship 

between independent variables (x1 and x2) 

toward dependent variable (y) is quite 

strong, indicated by the R-value of 0.775. 

While determination level, indicates the 

contribution level of land quality and cost 

distance to farm income in explaining values 

Page | 136 


Farm income/ha 

Socioeconomic Variables 

GIS ANALYSIS 

Grid 

f 

Grid 

Combination 

Combined 

Tabular Data 

Exported 

Spread Sheet Data 

Soil Degradation: 

Soil loss in different soil 

colors as well as 

inclinations 

CURRENT CONDITIONS 

STATISTICAL 

ANALYSIS 

Multiple Regression 

Analysis 

Statistical Test and 

Determination 

Regression 

Equation 

Regional data: 

Topography, slope, soil color, road 

network, traveling speed, and 

economic centre. 

Cost distance 

Land quality 

(Bio)-physical Variables 

FUTURE DEVELOPMENT SCENARIOS 

GIS ANALYSIS 

Equation 

Grid 

Calculation 

Income 

Estimation 

Improved Land Management: 

DRAFT 

Soil conservation measures for 

soil rehabilitation and 

stabilization 

GIS APPLICATION 

Income Comparison 

Current Income 

Estimation 

Future Income 

Estimation 

Economic Impacts 

Income Development 

variation of both independent variables 

concerning dependant variable, is in 

medium-high explanatory value, showed by 

the R 2 value of 0.600 (60%). Other statistical 

tests, such as significant level (F-test) and 

partially test (T-test), were discovered in 

acceptable level where both of them 

indicate the influence of independent 

variables (x1 and x2) toward dependent

variable (y) with probability level of 95% in 

all cases. Therefore, the model is suitable to 

be used to estimate farm income in order to 

regionalizing income situation in study area. 

To give more detail justification of the 

quality of regression model, an assessment 

on current farm income collected from 

family survey and estimated farm income 

from GIS calculation was employed. The 

results showed that mean value of 

estimated income from different sub study 

areas are laid for about 8% from mean value 

of current farm income (see Table 1). Middle 

area is indicated as the lowest farm incomes 

due to the physical constraints exist in that 

area, as mentioned in previous chapter. Even 

the results showed an acceptable valuation, 

however, difference means value between 

current income and estimated income is 

highest in middle area. This confirms the 

tendency of regression model to income 

estimation is still overestimate in that area 

where farmers manage sloppy area and low 

land quality. 

Table 1: Comparison of family and estimated farm income per ha (in IDR 1000), 

Dieng plateau, 2006 

Sub study 

area 

Current income 

(family survey) 

Estimated income 

(regression model) 

Confidence limits 

of family survey 

Estimated - family 

survey/confidence 

limits 

Low area 29079.40 24950.24 10746.11 -0.38 

Middle area 25674.56 21384.32 4559.77 -0.94 

High area 35207.08 32343.64 8484.92 -0.34 

Figure 3 : a) Current farm income and, b) estimated farm income under current situation, Dieng 

plateau, 2007 

TESTING FUTURE STRATEGIES 

In developing land use change models 

which is emphasized on land quality 

indexes, some considerations have to be 

concerned on the statement “what will be 

happened when given weights are modified 

to fulfill the desired scenarios?” Modified 

weights to the values is applied to each grid 

DRAFT 

cells in different classes by changing the 

original weight with the assumption: if final 

weight of current grid cells is increased from 

1 to 1.2 then the deviation from the class 

median will be higher 0.2 times for positive 

deviation. This meant that expected future 

land quality is higher from the given class 

which has direct impact on production and 

income. On the other hand, decreasing 

Page | 137

weighted values of grid cells from 1 to 0.8 

will result 0.2 times lower of land quality 

class in which lowering production and 

income as well. 

The principle of increasing and lowering 

land quality indexes from different given 

classes is actually applied for two types of 

scenarios, i.e.: soil degradation and 

improved land management. For soil 

degradation scenario, positive deviations of 

lowering land quality values from each grid 

cells are used to asses different impacts on 

income estimation in the future compared 

to the current estimated income. Likewise, in 

improving land management scenario, 

positive deviations of increasing land quality 

values in each grid cells become the main 

aspect to be evaluated in determining 

income estimation. Therefore, the absolute 

value of change between the original weight 

and the weight for the changing associated 

land use value is very influential. As for 

example, if the original value of 1 is changed 

by the absolute value of 0.2 then the new 

weight for positive deviation is 1.2 and 

negative deviation is 0.8. In positive 

deviations, the weight of different classes 

land quality is calculated by adding the 

absolute value of change to the original 

values in each grid cells of land quality 

raster layer. While for negative deviation, 

the absolute value of change is subtracted 

from the original weights. This procedure is 

applied to the land management simulation 

where the final land quality value is 

expected to be increased. In soil 

degradation simulation, the procedure is 

opposite, positive deviation value is 

expected to be lower as the original weights. 

To produce lower land quality value, the 

original land quality weight is subtracted 

from the absolute change value for positive 

deviation. Negative deviation is resulted by 

adding absolute change value to the 

original weights. 

Page | 138 


SOIL DEGRADATION SCENARIO 

Soil degradation in certain areas can bring 

direct impact to the people surrounding the 

area where declining productivity is the 

main result. This declining agricultural 

productivity is normally followed by the 

income loss. Hence, measurement on soil 

degradation, precisely soil erosion by water, 

is very considerable to know the possibility 

and distribution of soil loss in the study area 

as well as to predict the impact on economic 

development of farming families. Soil loss 

assessment in the study area has been done 

by applying Universal Soil Loss Equation 

(USLE) developed by WISCHMEIER and SMITH 

(1978). This model estimates the loss of 

topsoil due to surface run off during specific 

condition and classified into the amount of 

ton per ha or in risk level. In study area, soil 

loss estimation was estimated and classified 

based on both classifications calculated 

from spatial modeling. 

The tendency of soil loss was mainly 

occurred in the steeper area. This is due to 

soil types and slope steepness factors exist 

in study area. In the context of soil types, 

represented by the soil color, most of the 

medium and high level of soil loss was 

dominated by the high proportion of 

volcanic andosol type with dark-brown 

color. This soil material can be easily 

transported and moved by water. On the 

other hand, high level of slope steepness in 

the study area was also contributed in 

determining soil loss estimation. Slope 

steepness is the most influencing factor to 

estimate soil loss as stated by SCHWERTMANN 

et al., (1987). Therefore the combination of 

soil color and slope steepness can be used 

to modeling soil degradation scenario for 

future development and observe the impact 

of future income estimation. 

DRAFT 

Model Assumptions 

Model in soil degradation scenario is 

developed based on the relationship of soil 

type and slope steepness factors which is


represented by land quality indexes. Main 

assumption in this relationship is that 

continuing soil degradation in the study 

area can produce income declining as 

topsoil which contains organic matters and 

nutrients balance can be gradually sweep 

away during the process. As the 

consequence, soil fertility is also slowly 

declined and resulting to the less ability of 

soil in term of production capacity. 

Therefore, agricultural products become less 

and can directly affect farm income in the 

long run. 

Table 2: Modified weights in soil degradation scenario 

Soil/ Soil 

Slope 

Current condition Degradation scenario 

slope 

class 

color 

classes 

Soil 

Weight 

Slope 

weight 

Soil 

/slope 

weight 

Soil 

weigh 

t 

Soil/slope 

positive 

deviations 

Soil/slope 

negative 

deviations 

1 dark < 8%, nearly flat 1.80 1.50 2.700 1.80 2.700 2.700 

2 brown < 8%, nearly flat 1.60 1.50 2.400 1.60 2.400 2.400 

3 brown-grayish < 8%, nearly flat 1.40 1.50 2.100 1.40 2.100 2.100 

4 dark 8 - 15%, slightly flat 1.80 1.35 2.430 1.65 2.228 2.633 

5 brown 8 - 15%, slightly flat 1.60 1.35 2.160 1.45 1.958 2.363 

6 brown-grayish 8 - 15%, slightly flat 1.40 1.35 1.890 1.25 1.688 2.093 

7 dark 15 - 25%, moderate 1.80 1.22 2.196 1.60 1.952 2.440 

8 brown 15 - 25%, moderate 1.60 1.22 1.952 1.40 1.708 2.196 

9 brown-grayish 15 - 25%, moderate 1.40 1.22 1.708 1.21 1.476 1.940 

10 dark 25 - 40%, steep areas 1.80 1.00 1.800 1.50 1.500 2.100 

11 brown 25 - 40%, steep areas 1.60 1.00 1.600 1.37 1.370 1.830 

12 brown-grayish 25 - 40%, steep areas 1.40 1.00 1.400 1.11 1.110 1.690 

13 dark > 40%, very steep areas 1.80 0.80 1.440 1.40 1.120 1.760 

14 brown > 40%, very steep areas 1.60 0.80 1.280 1.24 0.992 1.568 

15 brown-grayish > 40%, very steep areas 1.40 0.80 1.120 1.00 0.800 1.440 

To obtain different weights for land quality 

indexes, a modified value is set up by 

concerning soil weights that represent the 

soil types adhere to the slope classes. Dark 

soils were set up in the way that areas less 

than 15% of slope are still weighted better 

than the brown and brown-grayish soils in 

the current weights. While brown soils are 

weighted better than brown-grayish soils at 

the same slope class. Moderate sloppy dark 

areas with slope class of 15% – 25%, were 

weighted in the same way as brown soils in 

the current conditions and similarly applied 

to the brown soil weight as compared to 

brown-grayish soil. Future production 

potential for dark soil is expected to be 

lower than brown soils for slope class more 

than 25%. Therefore, weighted values for 

dark soils in this slope classification were set 

up lower than current brown soil weight. For 

brown soils itself, weighted values were 

modified less for all slope classes compared 

to the original weights that is started from 

8% – 15% of inclination. 

DRAFT 

Impact of soil degradation on income 

The process of producing estimated income 

and income loss with its percentage was 

done through GIS application. Firstly, 

estimated income due to soil loss was 

produced through spatial calculation by 

employing multiple regression model with 

proposed modification values in land quality 

weights. Then negative impact of soil 

degradation scenario distributed in the 

study area (as seen in Figure 4a) was 

calculated from the subtraction of estimated 

income scenario and estimated income from 

current condition. Finally, the percentage of 

income loss due to soil degradation 

scenario, as described in Figure 4b, was 

Page | 139

obtained from the comparison of income 

loss itself with predicted income under 

current condition. The results showed that 

lower and middle areas are faintly 

exaggerated by the soil degradation 

scenario while in the higher areas where 

a) 

Page | 140 


income estimation is high; the declining of 

income is fairly significant. Income 

decreasing in higher areas is mostly laid 

between IDR 2 and 8 million per year and in 

low and middle areas income loss were 

observed from IDR 0 to 2 millions. 

Figure 4 : a) Income loss under soil degradation scenario, and b) Percentage of income loss under 

soil degradation scenario 

Referring to Table 3, it is obviously 

described that estimated change of income 

parameters varied within study area. It is 

confirmed that the highest portion of losing 

future income (30% – 40%) is going to 

happen in middle (0.71%) and high areas 

(1.77%). While in the class of 20% – 30%, 

highest losing income was dominated by 

high areas with 7.76% followed by middle 

area 5.49% and low area 4.37%. This 

condition also indicates that the level of 

pursuing income ability in the future is quite 

susceptible in those two areas where 

income deprivation due to soil degradation 

occurred more than 20%. Proportion of 

future income loss for about 10% – 20% is 

lowest in middle area which covered 9.95% 

of total middle area whilst high and low 

areas shared in similar portion of about 11% 

from both total areas. 

Table 3: Percentage distribution of income loss in different sub study areas 

Percentage of income loss 

b) 

DRAFT 

Percentage of area 

Low area Middle area High area 

< 5 68.05 73.79 70.12 

5 - 10 16.32 10.07 9.07 

10 - 20 11.26 9.95 11.28 

20 - 30 4.37 5.49 7.76 

30 - 40 0.00 0.71 1.77 

100.00 100.00 100.00


IMPROVED LAND MANAGEMENT 

SCENARIO 

The amount of soil erosion which occurs 

under given circumstances is influenced not 

only by the soil itself but also by the 

treatment or management it receives. Under 

cultivation of row crops with the rows 

running straight up and down the steepest 

slope, a soil might lose for about hundreds 

tons per hectare per year. But with identical 

soil under well-managed field would only 

lose as many kilograms per hectare. The fact 

show that the difference in erosion from 

different applied management to the same 

soil would give greater benefit on 

preventing soil loss. Obviously, soil 

erodibility is influenced more by the 

management than any other factors, while 

management factor includes both issues of 

land management and detail decisions on 

crop management. In this context, land 

management might be defined as the most 

intensive and productive use of which the 

land is capable without causing any 

degradation (HUDSON, 1989). Therefore, soil 

conservation policy must be positive and 

encouraging but not restrictive. 

Land management in farming activities such 

as prevention of soil erosion and land use 

improvement is closely related to the 

measurement of soil rehabilitation and 

stabilization. Soil conservation techniques 

applied in study area are considered 

inappropriate due to high cost and low 

income level. Most of the farmers built 

simple terraces with straight up line as their 

soil conservation to prevent soil erosion by 

putting grass in between as cover crop. 

From micro level survey, it was found that 

more than 50% farmers have been dealing 

with soil degradation for many years 

because of soil erosion problem. This is 

occurred particularly in steep slope areas 

distributed more on the high and middle 

part. But in some areas where farmers 

applied more sophisticated conservation 

techniques to their field showed that they 

were able to gain much better income than 

those are not. Farmers with less proper soil 

conservation techniques have been 

experiencing in income decreasing which 

endangered future income generation. 

Model Assumptions 

Although the results of research and micro 

level survey indicated the ability of 

developing soil conservation, or precisely 

terrace conservation, only for middle-high 

income level but in the long run, suitable 

land management can improve living 

standard of low income level family as well. 

The model is developed based on the 

assumption that improved land 

management is practiced by all farm families 

in study area with any kind of efforts. This is 

also relevant to the actual condition where 

lack of land management techniques have 

been the major problems for the farm 

families to improve their income. Even for 

some extend, income achievement is not 

equal for all expenditures in sustaining soil 

condition. Many farmers are still dealing 

with managing farm field from land related 

problems particularly soil erosion which may 

cause yields and income declining. 

To see how the model works, firstly the 

weight values associated with soil colors was 

modified referring to the different 

assumptions then adjusted to each classified 

grid cells. All soil types were set up 

according to the possibilities of soil 

rehabilitation by expecting a general 

increment of productivity. Hence, a higher 

land quality value must be assigned to the 

grid cells to enhance income development 

from applied land management techniques. 

The minimum increasing of final weighted 

values was set up to 5% higher than the 

current values and maximum increasing for 

final weighted values was adjusted up to 

20% higher than the original values. This 

assumption was done to evade from 

exceedingly pessimistic and optimistic 

estimation. The final weight of land quality 

was assigned to each differentiated slope 

DRAFT 

Page | 141

class as successful soil conservation 

measures are relied on the slope inclination. 

By applying this weighting procedure, a 

gradual change of land quality indexes in 

Table 4: Modified weights in improved land management scenario 

Soil/ 

slope 

classes 

Page | 142 


Soil 

colors 

Slope 

classes 

study area is able to be identified. Table 4 

shows the modified values for land quality 

indexes assigned to each slope class. 

Current 

land use 

Soil/slope 

weights 

Conservation scenario 

Soil/slope 

weights 

positive 

deviations 

Soil/slope 

weights 

negative 

deviations 

1 dark < 8%, nearly flat 2.700 2.835 2.565 

2 brown < 8%, nearly flat 2.400 2.520 2.280 

3 brown-grayish < 8%, nearly flat 2.100 2.205 1.995 

4 dark 8 - 15%, slightly flat 2.430 2.673 2.187 

5 brown 8 - 15%, slightly flat 2.160 2.376 1.944 

6 brown-grayish 8 - 15%, slightly flat 1.890 2.079 1.701 

7 dark 15 - 25%, moderate slope 2.196 2.635 1.757 

8 brown 15 - 25%, moderate slope 1.952 2.342 1.562 

9 brown-grayish 15 - 25%, moderate slope 1.708 2.050 1.366 

10 dark 25 - 40%, steep areas 1.800 2.070 1.530 

11 brown 25 - 40%, steep areas 1.600 1.840 1.360 

12 brown-grayish 25 - 40%, steep areas 1.400 1.610 1.190 

13 dark > 40%, very steep areas 1.440 1.512 1.368 

14 brown > 40%, very steep areas 1.280 1.344 1.216 

15 brown-grayish > 40%, very steep areas 1.120 1.176 1.064 

Concerning physical and economic 

constraints of study area, the development 

potential of steep and very steep area is 

considered less than other areas. This is due 

to higher investment and workload involved 

in rehabilitation and stabilization of those 

areas as well as their vulnerability in coping 

with soil erosion problem under current 

conditions. From field observation, areas 

with more than 40% of slope have been 

already degrading and even some areas 

have reached critical conditions where 

agricultural activities were not suitable 

anymore to be developed. Applying soil 

DRAFT 

conservation measures in these areas do not 

propose the same possibilities as compared 

to areas below 25% of slope class. 

Therefore, increasing productivity of slope 

more than 40% was expected to give an 

impact of 5% from its values under current 

condition. 

Impact of Soil Conservation Measures on 

Income 

More impact variations from spatial 

distribution of income increment and its 

percentage due to improved land 

management was found on the high areas


and less in middle and low area as shown in 

Figure 5a and 5b. In general, almost 50% of 

total study areas were indicated to have 

positive income increment less than IDR 500 

thousands. High level increment of IDR 6 to 

8 million was mainly found in high area. This 

is reasonable while most of this area is 

covered by the moderate and steep slope 

area with high quality of land. In middle area 

where sloppy areas are dominant, high 

income increment is laid between IDR 2 and 

4 millions. This increment also confirms that 

improved land management scenario 

through soil conservations measures is 

comparatively effective in enhancing income 

of farm families. While in lower area, the 

condition was found somehow similar as 

compared to high area. Income increment in 

this area was ranged from IDR 500 

thousands to IDR 4 millions. 

Figure 5 : a) Income increment under soil conservation scenario, and b) Percentage of income 

increment under soil conservation scenario 

Looking up the percentage of income 

increment, it is confirmed that the highest 

percentage of income increment (30% – 

40%) were mainly found in high area. most 

of the income increment in this area showed 

significant improvement from 5% up to 

40%. Although high areas have showed 

significant improvement from the applied 

scenario, middle and low area were also 

affected in the same way but different 

percentage variations. In middle and lower 

area, highest percentage of income 

increment increased for about 10% to 20% 

as compared to current situation. But 

nevertheless, middle area which has low 

income level and living standard has 

confirmed significant influence of income 

increasing although not in the highest level. 

Therefore, improved land management 

scenario through soil rehabilitation and 

stabilization has proven positive impact to 

income development in study area. 

DRAFT 

CONCLUSIONS 

The deterioration of soil resources in study 

area directly affects areas with high variety 

of slope, low generation of income 

potential, and low living standard. Middle 

and high areas tend to have more income 

descent than low areas as living standard, 

slope variation, and income level in this area 

is better than those two areas. Besides, 

physical condition in the middle and high 

areas is not very suitable to have proper 

farming system where soil erosion has 

become major thread in managing the land. 

Therefore, modeling on improved land 

management in study area is very relevant 

to notice its impact to income development. 

Page | 143

The application of GIS has showed its 

significant contribution in modeling specific 

case such applied in study area. Based on 

the multiple linier regression, a relationship 

model was able to be developed and 

calculated in a GIS environment. In this 

study, GIS based multiple linier regression is 

able to show the relationship between farm 

income and its influence factors such as land 

quality and cost distance. Different future 

strategies were proposed in order to achieve 

a better family condition through farm 

income simulation. Significant changes due 

to future development strategies can be 

found in different spatial level spread in the 

study area. However, the development 

strategies at different spatial scenarios do 

not entirely solve the low level living 

standard from the distributed families. 

Income development and living standard 

improvement are not only depend on the 

land quality and location itself but also 

many other internal and external factors 

supporting family’s activities. In this case, 

therefore, the model cannot be justified to 

modeling farming system comprehensively. 

But at least, it is developed referring to the 

actual issues and problems faced by the 

study area. 

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DRAFT 

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Bauer, S., (Eds.) Farming and Rural 

System Economics Vol. 119. Universität 

Hohenheim, Dissertation. Margraf 

Verlag. Wekersheim.


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Vorhersage des batrags und 

bewertung von gegenmaßnahmen. 

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Salas, and A. D. Nobre. (1994): Physical 

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deforestation in Amazonia: In the 

Brazilian Amazon, regional trends are 

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Turner, B. L. II, and W. B. Meyer. (1991): Land 

use and land cover in global 

environmental change: Considerations 

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Journal Vol. 130. pp. 669–679. 

Walsh, S. J., T. P. Evans, W. F. Welsh, B. 

Entwisle, and R. R. Rindfuss. (1999): 

Scale dependent relationships between 

population and environment in 

Northern Thailand. PE & RS Vol. 65 (1). 

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DRAFT 

Page | 145

Page | 146 

DRAFT

BONDING/BRIDGING SOCIAL CAPITAL: IS IT A CHOICE OR 

NECESSITY? A CASE STUDY OF REBANA CLUSTER, 

CENTRAL JAVA 

Sri Utami 

Economic Faculty 

Semarang State University. Indonesia 

E-mail : sriutami2008@gmail.com 

ABSTRACT 

The paper illustrates the basis of interactions of firms in rebana cluster. The frequent interaction 

of the firms which are used to gather access to economic resources on the basis of relations 

within kinship, family, familiarity among others, and strangers, is defined as social capital. The 

basis of the interaction is differentiated into bonding and bridging social capital. The study 

focuses on the basis of interactions of firms which are mostly taken by the artisans to access 

economic resources. The study found that bonding social capital is the route mostly taken by 

firms. Moral obligations, kinship and family systems, norms, values, instability of market and the 

power of the leading actors are the reasons why the enterprises take the strong ties. It is found 

that maintaining these strong ties is useful approach for small artisans to survive because of 

their lack of capability to be independent. However, building wider relationships with other 

different background of people such as global buyers, and different group or organizations is a 

need for the leading firms that mostly have the capacity. It is concluded that bonding social 

capital needs to be maintained as the first approach of small firms to gather easier access for 

economic resources. Meanwhile, it needs to be actualized to trigger wider interactions with other 

partners for the benefit of the firms. Further, it offers an alternative view of an approach for 

those concerned with cluster development facilitation with certain existing social capital. 

KEYWORDS : Social Capital, Bonding/Bridging Social Capital, Javanese Kinship and Family, 

Cluster Development 

INTRODUCTION 

The importance of inter-relationships and 

group networks in human activity seems to 

be interesting to discuss because of its 

dynamic. Most of us are aware that 

maintaining relationships will augur well 

towards the achievement of our goals of life. 

More importantly maintaining and nurturing 

these relationships could persuade others 

towards concerted actions in achieving 

mutually beneficial interests and goals. 

Some people may incur losses due to having 

DRAFT 

less personal ties with any individual or 

group which actually could benefit them in 

accessing certain resources. To achieve 

certain goals, they might be able to reach it 

without certain networks, but, with a big 

deal of challenge. Fewer networks in 

accessing resources might end up in failures 

in achieving the goals. 

People who are within the networks are 

connected through process of relations 

could form a kind of capital (Field 2008). It is 

simplified that the importance of 

relationship of the people is the core of 

Page | 147

social capital “relationship matters” (Ibid: 1). 

Then, he further states that “the more 

people you know, and the more people you 

share a common outlook, the richer you are 

in social capital” (Ibid: 1). His point indicates 

that the relations that people build with 

other individuals or groups would provide 

them wider access to resources by 

benefitting from the connections they have. 

A study of social capital in industrial 

development conducted by Knorringa and 

van Staveren (2006: 5) defines social capital 

as “the set of social relations that enable 

entrepreneurs to gain, maintain or expand 

access to economic resources and that 

entrepreneurs use to reinforce the 

productivity of these economic resources”. 

Further, it suggests that ‘governments and 

multilateral organizations have an important 

role to play in creating enabling conditions 

for social capital formation, by working 

towards reducing inequalities and power 

asymmetries in societies, reducing 

uncertainty and improving participation 

(Ibid.:12)’. At this point, we could see that 

social capital could be triggered by certain 

types of activities from outsiders. The dark 

side of social capital could be likely 

overcome by initiatives of outside actors by 

providing enabling environment which is 

conducive for network and relation 

improvement. 

It was suggested by most scholars that the 

wider the relations with other people, the 

easier access they have to get resources 

they want. How about individuals who have 

less relations? Shall they build their own 

alliances? Shall they ask for a favor from the 

state or the closest connection they have? In 

seeking answers, the paper feeds into a 

discussion of the existing social capital in 

the selected cluster -Rebana cluster. It was 

chosen since it was suggested to give a 

different view due to its unique existing 

social capital. It leads to a description how 

the social capital is built at the cluster, and 

how to some extent it benefits some people 

and offers a possible approach for 

Page | 148 

Sri Utami - Bonding/Bridging Social Capital: Is it a Choice or Necessity? 

A Case Study of Rebana Cluster, Central Java 

government to take in facilitating the 

development. 

Fieldwork3 and desk study were executed in 

July to August 2010, taking a total of two 

weeks. Thirty in-depth interviews were 

conducted in the Rebana Cluster at Brebes. 

Purposive sampling was used in the study. 

The interviews with enterprises centered on 

history of agglomeration of the enterprises 

and relationships with other stakeholders; 

the relations of producer with suppliers, with 

government, and the buyers. The enterprises 

were selected based on the size of the 

employees the entrepreneurs. The selection 

of respondents follow an iteractive 

approach of (a) listing potential 

interviewees from firms classified as big, 

medium, and small size, (b) listing of 

possible enterprises that would be 

interviewed. The selection process was aided 

by key informants knowledgeable in the 

area of cluster. During the field work several 

enterprises not otherwise listed were 

interviewed to validate responses of listed 

enterprises. Discussions with government 

support institutions were accomplished to 

gather their experiences in facilitating 

programs for enterprises, one of the 

influential factors on the existence of social 

capital. A number of documents were 

likewise gathered to complement data from 

the interviews. They include the handbook 

of the addressed regions, news from media, 

cluster program planning generally in 

Central Java, implementation of programs 

and results of the facilitation activities. 

DRAFT 

SOCIAL CAPITAL UNPACKED: 

BONDING/BRIDGING SOCIAL CAPITAL 

The term ‘social capital’ was first noted by 

French sociologist Pierre Bourdieu (1980). 

Bourdieu sees social capital as an asset or 

capital of social relationship related to social 

3 As a part of my thesis completion in 

International Institute of Social Studies (ISS) of 

Erasmus University, the Netherlands.



hierarchy. There is benefit of individuals who 

have connections with privileged people. 

However, it becomes a bad news for 

marginalized people. Those who do not 

have such network with certain people are 

assumed to have less benefit because of less 

access to resources. Relationship that 

matters most for small and medium 

enterprises is termed as social capital by 

some scholars. Additionally, some studies 

discussed interactions which happen at 

different levels of engagement among 

actors, such as the interaction within the 

family, organization, friend, neighbor, and 

those that are based on common 

background within the society. This is 

termed as bonding social capital (see 

Woolcock 2001, Knorringa and van Staveren 

2006). The other type is bridging social 

capital where individuals build new 

connections, wider relationships with other 

individuals of different backgrounds and 

identities (Ibid.). Bridging social capital 

opens more opportunities for individuals for 

upgrading, innovation and growth. 

Several cases confirm that relationship 

within members of family may be one of the 

solutions in accessing difficult resources for 

instance, as in the case of wood carvers in 

Senegal (Repetti 2002) in which the artisan 

is employed by his father. This confirms that 

family relations offer members better 

opportunities in the labor market. Chinese 

start-up entrepreneurs who were assisted by 

their family for initial funding benefitted 

because of lower transaction costs (Au and 

Kwan 2009). Another example is the case of 

Ethiopian shoe makers who rely on their 

similar group for buyer relations (Knorringa 

and van Staveren 2006). This strong tie is 

argued to be important not only as channels 

for information and financial capital, but 

also for motivation, support and 

interpersonal pressure (Au and Kwan 2009). 

The case of Vietnam shoe makers confirm 

that they were able to upgrade by being 

processor intermediaries between the 

Republic of Korea and Taiwan. On the other 

hand, Ethiopian shoe makers tried to utilize 

incipient forms of social capital to enhance 

capabilities of various group of artisans 

within the clusters itself. In the first case, the 

challenge is to move from processing chain 

to direct buyers, while the second example 

largely challenged for its own relations 

among various firms within the network. 

One finding from the study on social capital 

in industrial clusters mentioned that 

bridging social capital play distinct roles in 

cluster development. Whenever bridging 

social capital is strengthened, it leads to 

industrial development in marginalized 

countries (Knorringa and van Staveren 

2006). It reveals to a suggestion of the 

transformation of bonding into bridging 

social capital. It seems that there is a need 

for those having bonding social capital to 

transform into bridging social capital. Is it a 

need or necessity at the context of cluster in 

Central Java? A study by Johannisson and 

Olaison (2008) in relation of social capital 

and entrepreneurship, suggests that the 

strong ties are beneficial to actualize the 

weak ties or bridging social capital. In this 

paper I argue that bonding social capital, to 

certain extent need to be strengthened for 

the sustainability of clusters in Central Java, 

especially for start-up firms. This argument 

is based on the Central Java milieu which is 

characterized by hierarchical position within 

the family, kinship and its prevailing 

asymmetrical social and cultural structures. 

DRAFT 

THE FUNCTION OF JAVANESE 

KINSHIP AND FAMILY SYSTEM 

Geertz’s (1961) studied kinship and 

socialization in Javanese family and found 

that the existence of certain values in the 

Javanese family influence the way people 

behave with other extended networks and 

influences the way they engage in their 

relations with the rest of the world. He 

states that ‘…general social values provide 

legitimacy and meaning to familial 

institutions and serve as normative guides 

Page | 149

for the daily give-and-take among family 

members ‘(Ibid: 146). It implies that the 

interaction within the family members can 

influence the way they behave with others. 

The study found that there are two 

important values that dominate the society 

behavior in Java; they are “respect” and 

“harmonious social appearances”. The first 

refers to an expectation of certain attitude 

between superior and inferior, and men and 

women. It is found that this kind of “respect” 

guides to “social behavior in many different 

context-towards government officials, in the 

school, in the political parties, in 

relationships, among neighbors, and among 

others” (Ibid.). He adds that this value drives 

the relation of superiority and inferiority. For 

those who are inferior will expect for having 

protection, contribution, and assistance 

from the superior. And in return, the 

superior can expect respect, loyalty, 

recognition, and certain appropriate 

behavior and etiquette. It shows the 

hierarchical order for the relationship in the 

Javanese culture. 

The second refers to the way how 

individuals maintain good relationship with 

the family membership to be harmonious, 

and to try as much as they can to minimize 

the personal conflict within the family. It 

implies certain unwritten institutions for the 

member of the family for having ‘good’ 

relationship from generation to generation. 

In Javanese term, it is called rukun. It is welldefined 

by Geertz as ‘a state of agreement, 

of unanimity in a group concerning its 

means and purposes, at least in outer 

behavior. If there is no overt expression of 

divisive opinions and feelings, then the 

group is said to be in rukun (Ibid: 149)’. He 

claims that in fact, the concept of rukun 

refers not to ‘mutual aid and co-operation 

but to the appearance of such and to the 

absence of overt interpersonal conflict’. 

After all, disappointment often happens at 

last after a certain degree of decision is 

made. 

Page | 150 



Cluster 

In the case of Central Java, mentioned by 

Klapwijk (1997), theoretically, cluster may 

consist of any mix of ‘cottage’, ‘small’, and 

‘medium-scale’ enterprises 4 and is regarded 

as a survival cluster. The concept of small 

industry cluster, in Indonesia, as defined by 

the Ministry of Industry, is as a group of 

small enterprises and producing similar 

output, which is located in rural desa or 

small town. Having said that, it retrieves us 

for survival enterprises study discussed by 

Berner et al. (2008), where they exist and 

start not because of their choice, but rather 

because of some reasons, and one of them 

is due to wage employment constraints. In 

their discussion, it is mentioned that the 

entrepreneurs who within the family are 

helping each other. It is merely a kind of 

moral obligation of the poor. The men, who 

are regarded successful, are expected to 

help the other members of the family. They 

are morally obliged to assist the starters or 

more vulnerable blood-line entrepreneurs. 

Johannison and Olaison (2008) call it as the 

importance of social capital for survival 

entrepreneurs. 

Social capital plays an important role in 

cluster development. Reviewing related 

literatures on social capital, the following 

working definition is used throughout this 

paper. 

DRAFT 

Social capital is any resource in either 

concrete or abstract forms which exist 

because of frequent interactions among 

firms and are used to gather access to 

economic resources on the basis of relations 

within kinship, family and familiarity with 

each other and strangers. This paper will 

focus on the relationships in the cluster 

which are largely bonded with certain family 

and kinship systems of Javanese culture 

(Geertz 1961) such as values, norms, and 

habits. It is hypothesized that these as basis 

4 It is according to BPS criterion

of interaction among firms have influence 

on the stock of social capital in the rebana 

cluster. 

Rebana at glance 



In the south of Brebes regency, there is a 

small district namely Kaliwadas. Its 3.357 

inhabitants occupy 240,535 Ha of land. It 

becomes a very attractive place for people 

as the center where musical percussion 

instruments are made. Activities such as 

drying goat leathers and painting them with 

simple sprayer can be seen clearly in front of 

almost every house in Kaliwadas. 

Showrooms in front of their houses are full 

of products such as rebana or terbang 5 , 

marawis 6 , jingle ring 7 , and marching 8 . Most 

5 

Rebana is round, flat, one-side covered by goat 

leather. Circular frame of wood is turned, with one 

hand to tap on the leather. Art in Indonesial, 

Malaysia, Brunei, Indonesia and Singapore, which 

often have a tambourine is a musical rhythm of 

the desert, for example, psaltery, and hadroh 

Qasida. Rebana musical instruments in various 

other areas have different name to call. That is 

terbang. In Indonesia, it is a tambourine with four 

to five pair in jingles and is usually 10"-12" (25 

cm-30 cm) in diameter. Rebana waw originated 

from the word “Robbana”which means “Our 

Lord”. It comes due to the culture of playing 

musical instrument related to Islamic religion. It is 

then often called Rebana. The information is also 

available in www.rebana.net from the Betawi art 

Overview, 2003, and 

http://www.nscottrobinson.com/framedrums.php 

From the fieldwork, the writer concluded that 

rebana is a percussion instrument which is 

typically characterized by the one face to tape 

6 Marawis is one of the traditional percussion 

musical instruments originally from Yemen. In 

Indonesia, Marawis has been adapted to 

Indonesian tastes. Blended and mixed with the 

culture as needed. Marawis song is originally used 

to praise the Prophet Muhammad. Now, it is 

widely used for celebration of certain regions or 

wedding parties. 

people name the area as the center of 

Bumiayu’s rebana. More than 480 home 

industries produce the instruments in the 

area, and employed 4-5 people per 

household. This production becomes the 

main activity for the people in Kaliwadas 9 . 

It was in 1950s that raw materials such as 

woods and goat leather were abundant. As 

the majority of the inhabitants are Muslims, 

traditional activity such as playing music in 

the rhythm of Middle East was usually done 

in the area and neighboring districts. The 

culture also drives them to produce, mainly, 

rebana. Therefore, demand of rebana 

increased. In the year of 1960s, however, the 

producers of the instrument were only 

about 180 households. Artisans used to 

make the products manually. Further, they 

can improve the products better. Since then, 

specialization in the sentra 10 was started. 

From generation to generation, the division 

of the producers naturally happened. There 

are groups of people who involve in the 

framing, designing, and finishing processes. 

They do not use much sophisticated 

technology in making the instruments. 

Mostly, they use their hands for making the 

rebana and only use other simple 

technologies to help them. 

DRAFT 

The production for musical instrument was 

only for domestic market. The demand was 

from Central Java, Jakarta, West Java, 

Kalimantan, and Sumatra. Started in 1990s, 

the market of this instrument was getting 

wider. It starts to attract buyers from 

international markets such as Malaysia, 

7 

Jingle ring is like tambourine but without skin or 

leather. 

8 It has been used since 19 th century by a variety 

of composers. It contains 6-8 tenor drums. (Ibid.) 

9 Bumiayu District data in 2009 

10 The term of Sentra was commonly used for the 

place where the center of production happened. 

Recently, the term of “cluster “ is more commonly 

used to refer to sentra. 

Page | 151

Brunei Darussalam, Singapore, the 

Netherlands, Canada, Australia, and 

America. Besides functioning as musical 

instruments, the buyers make use of them 

as souvenirs. For Malaysia, the demand is 

driven because of religious reasons 11 . 

Because of the prospective market for 

traditional musical instruments, the artisans 

started to make diversification of the 

products such as marawis, jingle ring, and 

marching. The diversification was driven 

mostly by the buyers’ inputs. So far, they 

have some competitions from outside of the 

region such as from Kudus, and Jepara. 

Producers have different ways in marketing 

and selling the products. Most of them have 

showrooms in front of their houses and 

other places. For the big producers, usually 

they also have some branches in other cities 

such as Jakarta, and Yogyakarta. The other 

ways are through spreading brochures, 

offering to any sport and musical shops, 

establishing websites, and joining exhibition. 

Offering to any sport and musical shops is 

the most common way of marketing done 

by rebana makers. A few producers can join 

exhibition. They are mostly big firms who 

are well-known by the government. They 

usually have more information from state 

compared to other small firms. 

THE STARTING POINT OF PROGRAM FOR 

CLUSTER DEVELOPMENT 

The rebana cluster is, then, becoming the 

backbone of the economy of the society. 

Therefore, in 2006, the local government 

started to plan strategic programs for the 

cluster. It was driven by an assessment of 

local economic development 

competitiveness facilitated by GTZ-red12 

11 

Paper presented at the UNESCO by Meleisea 

Regional Expert Symposium on Arts Education in 

Asia, Hong Kong, 2004 

12 

The Indonesian-Germany technical cooperation 

for regional economic development (RED) 

Page | 152 



and FPESD (a dialogue platform for local 

economic development at the provincial 

level) by using PACA instrument. The 

assessment of local competitiveness in 

Brebes regency using a tool of 

competitiveness called PACA13 (Mayer- 

Stamer 2003) exercise resulted in four 

programs to implement. They are programs 

for rebana, agro tourism, salty eggs, and 

onions14 development. They are selected 

for their significant contribution to economy 

in Brebes Regency generally, and especially 

for its locality. Especially for rebana, it is 

well-known to have national and 

international markets. 

The initiation of the establishment of Cluster 

Dialogue Forum was just started in 2006. On 

October 28th, 2008, the meeting resulted in 

the establishment of Dialogue Cluster 

Forum (FRK). Enterprises name it Prima 

Karya Association. It is aimed to discuss 

possible joint-programs for any possibility 

for products upgrade, quality improvement, 

and product diversification. Until the field 

work was done, it seemed that the 

association had not given a lot of 

contributions to the members. The activities 

were rare, and recently the platform 

becomes a place for the government for 

information pool about certain programs. 

However, because of the limitation of the 

programs available from the government, it 

seems that the information ends up only for 

few people. This platform is likely to be less 

functional as it supposed to be. 

DRAFT 

CLASSIFICATION OF REBANA 

CLUSTER 

Rebana cluster could be classified as 

‘spontaneous’ cluster, yet ‘created’ cluster. 

Historically, it emerged spontaneously from 

imitating behavior which was developed. 

13 

An instrument used for assessing certain 

region’s competitiveness 

14 

The report of PACA exercise in Brebes

Nevertheless, it was also created from the 

top as the program for cluster development 

started. As study about cluster in the 

previous paper done by Klapwijk (1997) 

about rural industrialization in Central Java, 

the cluster was acknowledged as the desa 15 , 

as the reference unit. In fact, at the moment, 

the cluster of rebana is borderless. Many 

suppliers, middlemen, supporting 

individuals or institutions do not come from 

the same area. As discussed above, the 

cluster trajectory of the hub-and-spoke type 

is mostly found in developing countries; and 

Indonesia is not the exception. 

The cluster of rebana artisans, mostly, use 

simple technology, and have less potential 

to innovate due to less technology capacity. 

They also have few wider markets and less 

investment on technology. It is in line with 

the typology of hub-and spoke discussed in 

the previous chapter (Knorringa et al. 2002) 

as many found in rural areas in developing 

countries (Tambunan 2005). Even though 

the products have been internationally 

known, the handicraft artisans still use less 

sophisticated technology. Manual work still 

dominates the process of the production. In 

the cluster area, some big firms are located 

in Bumiayu where most small and medium 

firms are located near the big firms. Fierce 

rivalry happens among the firms and there 

are fewer co-operations. However, some big 

firms are the leading family-related firms 

that open chances for other small producers 

as the market pool. It is then appropriate to 

put the rebana on the list of hub-and-spoke 

trajectory. 

Firms and Family Relationship 

In the cluster of rebana, the copying and 

imitating behaviors were repeated within 

the family and extended-family. Its 

uniqueness as the center of production 

drives the region into an identity functions 

15 It is a village 



as a “brand name” in the regional niche 

(Klapwijk 1997). In the case of rebana 

cluster, people began to produce this 

musical instrument in 1950s. The production 

processes were started within small 

households and neighbors. There were 

about 180 households in 1960s. Every 

household has its own bani16. Most bani(s) 

establish and empower their own family 

businesses. When three people 

(representing small, medium, and big firms) 

were asked why they put more priority on 

their family in terms of assistance and cooperation 

instead of their neighbors, similar 

answered were given. They consider that 

building strong bani means building their 

own business. Big leading family would be 

morally obliged by giving other members of 

the family assistance. 

Big firms, in most cases, give the relatives 

more chances to get the job as a trained 

artisan- for beginner, or as a paid-worker. It 

commemorates the case of Senegal wood 

carvers where the father offered a job for his 

son (Repetti 2002). One of the firms would 

also be pleased to give their relatives a little 

bit more payment when they really need it 

and are recruited as employees at the peak 

season. As mentioned by one of the artisans 

“The decision making process is also 

decided together. I prefer to employ 

workers who have bloodline relations...they 

are easy to be managed and trained (Yusuf, 

13 July, 2010)”. Most artisans provide similar 

answers. It leads me to draw several possible 

implications. First, the ties among family are 

strong because of moral obligation. Second, 

employers tend to have domination upon 

other ‘weaker’ family members due to the 

kinship system—helping the other poor 

family. Third, from the economic point of 

view, the contracting suppliers will have 

more bargaining power on prices, market, 

and product criteria. 

DRAFT 

16 It is a term represents a group of family. 

Page | 153

In the case of cluster that will be discussed, 

most cases also show that there are 

expectations from small artisans to get 

assistance from the bigger or older 

successful relative-businessmen. This type of 

being ‘hero’ for other smaller artisans within 

the family is by no means without benefit 

for the ‘hero’. At the end, they could 

determine the required final products and 

prices for a particular market. These leading 

actors face other competitors who have the 

same target of the same market with various 

ways of marketing and production chains, 

and the dynamic change for any level of 

leading actors including the strongest ones 

(Knorringa 1996: 36). 

The basis model of the social capital in 

Rebana cluster 

The Javanese kinship behavior 

As discussed previously, kinship and family 

system play important roles in the behavior 

of individuals towards others (Geertz 1961). 

In the artisan cluster, it is contextualized at 

the position of the artisan business starter. 

Whenever he needs a certain amount of 

financial capital for the production 

processes, he can expect from the have—his 

successful uncle, for example. This 

assistance for sure is by no means without 

any expectation in return. The capital 

providers in most cases are elder, 

experienced, and big artisans. The habit of 

the give-and-take (Ibid.) within the family 

members might be one of the reasons. The 

poor, at this case, the start-up rebana 

enterprises, they can expect to have 

financial capital from the elder or other 

more successful one-the leading actors. In 

return, the leading actors can expect startup 

rebana enterprises to sell the products in 

cheap price for them. 

In the case of rebana cluster, the family 

commonly provides the business starters a 

certain financial capital. For some cases, they 

provide the payment in advance for the sake 

Page | 154 



of production process. Meanwhile, the 

capital provider may expect the artisans to 

give the entire final product to him with 

certain criteria and qualifications. The 

leading actors seem to act like a benevolent 

dominator. As a result, most of the time, the 

decision making process is made by the rich 

family. The small artisans are more 

dependent on the rich that lead them to 

have less voice. As discussed earlier, the 

feeling of respect to the seniors is a ‘proper’ 

attitude regardless of everybody’s 

satisfaction of the decision. For this case, the 

power is obviously held by those who are 

rich, older, and have good reputation in the 

society. 

Moral obligation 

As discussed in the paper by Berner et al. 

(2008), it was mentioned that the way 

survival enterprises maintain their business 

is by helping each other. The successful 

entrepreneurs are expected to have other 

members of the family. This kind of behavior 

explains the moral obligation of individuals 

within the member of the family to be able 

to help other people who have fewer 

resources to survive (Ibid.). In the example 

of rebana, those who are elders, and the 

rich, are expected to help the poor ones. 

Meanwhile, in return, those who help the 

less successful, the beginner, or the 

vulnerable one, will have more bargaining 

position to decide, to direct, and to request 

for certain actions from the them. For 

instance, in the production process relations, 

the ‘helpful’ leading family will be pleased to 

pay them in advance, or provide certain 

required raw materials. For instance, wood 

provision for rebana was done in advance. 

DRAFT 

Cultural values/norms 

As discussed above, the strong relations 

among individuals within the family has 

been found as the norms required being 

obliged in the family (Geertz 1961). In this 

case, in the cluster of rebana, the member of

the bani is required to assist the other 

members who need assistance for starting 

the business. The relations were historically 

connected among the big leading families 

and their generation. This illustration 

confirms the influence of values existing in 

every household to the stock of the strong 

ties they have. 

The strong ties that are generated through 

the available norms might not necessarily be 

intended to lead the members of the family 

to limit their network. In fact, the leading 

firms are those who are able to create and 

build network outside. The norm to engage, 

to respect elder, and to give-and-receive 

habit (Ibid.) confirms an understanding of 

individuals to be more dependent on the 

family. It offers enough space for relations 

within the members of the family. As a 

result, if the relations benefit them, they 

might be reluctant to move outside the 

family. In the examples given, the family not 

only provides financial capital but also 

motivation for business development. From 

the interview, Fuad Amrualloh (28 years old) 

mentioned that ‘to be together with family, 

we will be strong and motivated to cope 

with fierce competition’. It creates certain 

values and norms. It confirms one of the 

benefits they get for having close 

relationship with family. 

IMPACTS 



Leading actors as the ‘catalyst’ for access 

to Market Opportunities 

Since the leading actors have the resources 

to market information, they become the 

benevolent autocrats. Accordingly, they 

have right to decide many important things 

such as price, punctuality, and certain 

product qualifications. However, for the case 

of rebana cluster, the decision taken by the 

leading actors are likely well-accepted by 

the small firms. It could be related to the 

survival firms who need many kinds of 

capitals from the big firms. One of owners of 

the biggest firms in the rebana cluster 

promises his daughters and sons to join him 

the business because there are many market 

opportunities. 

Labor channels 

As mentioned before, a few markets are 

available. Leading firms have to struggle to 

find the new market. It depends on the 

active leading actors in finding the market. 

Leading firms, the elders, and the successful 

family members, in fact, become the sources 

of information for labors recruitment and as 

the loyal buyers for small artisans. 

It confirms that the condition of such 

environment where there is a high market 

and labor competition, it opens more 

opportunities for small firms to survive and 

it benefits them to acquire certain 

knowledge from the elders—more 

knowledgeable enterprises. It might against 

the argument that the bridging social capital 

is required to lessen the risk of being ‘locked 

in’ in the cluster (Knorringa and van 

Staveren 2006). In fact, from the study case, 

it opens opportunities for small firms to be 

able to acquire certain capital from the 

other artisans- that is their family. 

DRAFT 

Building strong family business is a 

solution for fierce competition 

For most cases, firms are confident that they 

will have better performance for having the 

business together with their family. Having 

business and co-operation within the 

members of the bani drives them to the 

sense of togetherness to be bigger 

enterprises while competing with other 

bani(s). As mentioned by one of the 

interviewees (F. Amrulloh, July 13, 2010) “ 

The competition in the area is very fierce. If 

we stand alone, it would be harder to 

survive in the business. Struggling together 

with family drives us more spirit to achieve 

better performance compared to others. 

Many successful and big enterprises were 

Page | 155

always begun by building a strong bani and 

its members” 

At this point, the feeling of being secure in 

doing the business due to the togetherness 

with the family is sometimes unnoticed. It is 

likely that there is a fear for being 

independent for starters, but there is also a 

willingness to compete with others for the 

business improvement. The feeling of being 

more comfortable with the members of the 

bani or family confirms the firms to be 

reluctant to start making a bridge to build 

network outside the cluster. From the 

investigation, it is found that the small firms 

were hoping to be independent, yet they 

have no ability to perform independently 

due to lacking of resources such as finance, 

less network, and less experience in selling. 

Less risk and instability 

Having strong ties within the family might 

result in less transaction cost and less 

interest for financial reason. For instance, 

start-up artisans in the cluster of Rebana 

prefer to request the financial capital 

assistance from the family because of less 

formal agreement, and might be mostly less 

interest. Yet, they might be asked something 

back as a return. 

Because of less market pool, the fierce 

competition happens. It leads the firms to 

have instability of income and consumers. 

Having strong ties with family will lessen the 

risk in emergency time such as lower 

demands or raw material. Johannison and 

Olaison (2008) name it as the importance of 

social capital for survival entrepreneurs. This 

bonding social capital to some extent 

confirms its benefit for beginner artisans. 

The dark side of strong ties 

The strong ties within the family are good 

news for those who have the leading family 

blood-line. They can access resources for 

their economic activity; labor market and 

market channels. Those who have less 

Page | 156 



resources might need to struggle for having 

a particular relationship with certain leading 

firms; or they might need to expect other 

institutions to facilitate their needs. The new 

cluster dialogue forum (FRK) in rebana 

cluster might accommodate this issue in cooperation 

with government. However, this 

forum is still weak and has a few activities 

for the members. Nevertheless, at least, it 

becomes the pool for information. For most 

cases, the information ends up only for 

those who have certain relationship with the 

government. It confirms the argument 

stating that social capital benefit for only 

certain people Bourdieu (1980 quoted by 

Field 2008), and creates exclusion (Knorringa 

and van Staveren 2006). Further, the strong 

ties in the Rebana are found to limit the 

family business to compete with other 

producers outside the area. 

The strong ties happen in rebana cluster 

drive certain individuals, especially the 

leading actors, to dominate the relationship. 

There is a chance for opportunistic threat 

because of hierarchical condition. The 

bargaining powers of the small firms that 

depend on the leading family are weak, less 

voice in decision making process, and have 

less innovation. Nonetheless, it is not 

impossible that the leading firms can bring 

innovation and is shared with the other 

members of the family. 

DRAFT 

CONCLUSION 

The illustrative study of rebana cluster 

confirms that bonding social capital where 

the relationships are based on kinship, 

family, blood-line relations, close friends 

and close neighbors, seems to be an ideal 

route to take for small enterprises or startup 

business. The discussion shows that the 

route of bonding social capital is their way 

to successfully access resources for 

economic activity in the cluster; financial 

capital, labor channel, market information, 

and information exchange. This study is 

small but yet quite essential for related

supporting institutions to an insight about 

typical interactions in bonding social capital 

which seems to be a useful route for certain 

kinds of society and can be considered in 

facilitating cluster. However, the importance 

of process in bonding into bridging social 

capital transformation cannot be ignored. 

Building wider relationships with other 

different background of people such as 

global buyers, different group or 

organizations are fruitful for certain groups 

of enterprises that have the capacity for the 

transformation. Last but not least, the 

approach taken by supporting stakeholders 

both public and private might need to 

consider the existing bani, the leaders of the 

bani- who are regarded to be influential to 

other members, and the small artisans. 

Having known this, an appropiate approach 

to facilitate the cluster with such condition 

can be planned better. 

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THE INTERPLAY BETWEEN SOCIOECONOMIC STRUCTURES 

AND ACTORS IN INDUSTRIAL CLUSTERS: THE CASE OF THE 

KOTAGEDE SILVER HANDICRAFT CLUSTER IN YOGYAKARTA, 

INDONESIA 17 

Poppy Ismalina, M.Ec. Ph.D 18 

Faculty of Economics and Business 

Gajahmada University, Indonesia 

E-mail : poppy_ismalina@yahoo.com 

Introduction 

An industrial cluster plays a critical role in 

promoting the performance of firms in 

developing countries by allowing for shared 

production networks and stimulating 

business specializations (Berry et al., 2001). 

In the case of Indonesia, researchers 

consider clusters important for the 

development of firms, especially small firms 

(Sandee, 1995; Klapwijk, 1997; Weijland, 

1999; Tambunan, 2006). For example, Rutten 

(2003) finds that in the iron-casting cluster 

of Batur (Central Java, Indonesia), local 

entrepreneurs pursue manufacturing 

capabilities through technological 

improvements, leading to market expansion 

and greater product variety. 

Yet empirical evidence regarding how social 

and economic factors influence the 

structures of interfirm relationships within a 

cluster remains limited. Studies that 

emphasize cooperation among firms in 

clusters lack concrete accounts of how their 

market ties may affect their interfirm 

Page | 160 

relationships (e.g., Nadvi, 1997; Humphrey 

and Schmitz, 1998). Studies that put more 

emphasis on market ties in turn are 

inadequate for clarifying the impact of 

available governance structures, repeated 

transactions, and the role of trust and 

reciprocity (e.g., Porter, 1998; 2000; Sandee 

1995; Klapwijk, 1997; Sato, 2000). 

A few efforts raise the issues of actors and 

local production structures but even these 

do not explore how actors may lead a 

cluster community to improve its 

development and which factors influence 

the structures of clusters. For example, 

Sandee (1995) studies five roof tile clusters 

in the Central Java province (Indonesia). In 

all cases, Sandee (1995) describes 

involvement by traders and large producers 

and their impact on cluster development, 

but he does not consider how actors lead or 

manage firm linkages or how local 

structures of clusters might enable actors to 

overcome constraints to their growth and 

development. 

DRAFT 

17 Paper presented at “2 nd International Workshop and Meeting 2011: Rural, Local Economic and SME 

Cluster Development”, Rural Research and Planning Group (RRPG), organized by UNDIP- Semarang, 

Indonesia in cooperation with Urban and Regional Planning Department and Center for Innovative 

Planning Development, Universiti Teknologi Malaysia, September 19-20, 2011. 

18 Lecturer at Faculty of Economics and Business, Universitas Gadjah Mada. Specialisations: Industrial 

Organizations, Labour Economics, Small and Medium Entreprises Analysis, Development Economics, 

Macroeconomics, and Local Economic Development Specialist. Email: poppy_ismalina@mep.ugm.ac.id/ 

poppy_ismalina@yahoo.com

Poppy Ismalina - The Interplay between Socioeconomic Structures and Actors in Industrial Clusters: 

The Case of the Kotagede Silver Handicraft Cluster in Yogyakarta, Indonesia 

In a study of the structure and nature of firm 

linkages in a rural cluster in Central Java 

(Indonesia), Sato (2000) finds limited 

evidence of specialization, division of labor, 

information sharing, or joint actions among 

local producers. Thus, she concludes that 

firm linkages are of limited importance. With 

respect to the actors, Sato notes one 

industrial cooperative in the cluster, “which 

receives orders mainly from state-owned 

corporations, allocates them to member 

firms, procures inputs for the orders and 

collected outputs for delivery’’ and “is now 

democratically managed under the 

leadership of local industrialists” (2000, p. 

160). Nevertheless, Sato does not explore 

the genesis of the leadership or the 

influence of local structures on the 

involvement of actors in the cooperative. 

Thus, previous studies neglect the 

interdependence of socioeconomic 

structures of clusters and the role of local 

actors. They fail to explain this interplay, 

which affects the dynamics of clusters. 

Accordingly, this study seeks to fill the gap 

left by the absence of an analysis of the links 

between actors and structures. For that 

purpose, this study deals with the dynamics 

of industrial clusters in emerging economies 

with respect to the interplay between actors 

and structures. 

The reasons for this study are twofold: First, 

an industrial cluster is a local system 

characterized by the active participation of a 

community of persons and specialized small 

firms in a variety of production lines. 

Second, the benefits of clustering derive 

from the local structures in which local 

economic agents cope with economic and 

social problems. Therefore, this study 

proposes an extended framework to 

represent comprehensively the dynamics of 

clusters and articulate the clustering effects 

on the development of firms in a cluster. The 

framework combines a focus on the 

socioeconomic structures of a cluster and 

the role of local actors. 

Using evidence from the Kotagede silver 

handicraft cluster, this study undertakes an 

integrative analysis of socioeconomic 

structures and the role of actors. The 

decision to study the dynamics of the 

Kotagede silver handicraft cluster reflects 

observations in previous research about 

Indonesian clusters, which generally share 

conclusion about the development and 

importance of Indonesian clusters. The 

clustering of small and medium-sized firms 

seems to be a common feature of successful 

industrial clusters in Indonesia, and the 

socio-territorial entity is characterized by the 

active presence of a community of people. It 

is possible to single out the role of some 

actors who lead in the pursuit of the 

development of a cluster. Therefore, the 

Indonesian context is appropriate to 

examine clusters in an integrative way. 

Conceptual Views: a Brief 

This study integrates several different 

theories into one comprehensive conceptual 

framework to conceive of a cluster’s 

dynamics in terms of a socioeconomic 

structure and the roles of actors within a 

cluster. The first view refers mainly to the 

Italian district literature, which assumes a 

cluster to be a socioeconomic organization. 

The Italian district literature is relevant for 

understanding the operation of a cluster as 

a socioeconomic organization including the 

role of local economic institutions in 

collective bargaining among the members 

of a cluster community. This literature 

identifies the existence of market relations 

and competition, which are combined with a 

custom of mutual cooperation between 

firms. The reasons mutual cooperation is 

needed to accompany market relations are 

proposed by the proponents of the Italian 

district literature. The Italian literature gives 

a foundation to define a cluster that is 

appropriate with the objectives of this study. 

DRAFT 

Before exploring conceptual views on 

structures and actors, this literature review 

Page | 161



presents the duality theory of Giddens as a 

prelude to an analysis of structures and 

actors into one integrative analysis. Next, 

NIE and new economic sociology deliver a 

concept of structures and actors in different 

perspectives. The NIE theory explains from 

an economic perspective the interactions 

between structures and actors, whereas new 

economic sociology does the same from a 

social perspective. Reconciling both theories 

leads to an understanding of the concept of 

structures and actors in socioeconomic 

perspectives. 

New institutional economics (NIE) and new 

economic sociology are theoretical 

foundations that elaborate the main 

characteristics of structures in 

socioeconomic structures. The notion that 

economic action is embedded in a social 

structure has revived debates about the 

positive and negative effects of social 

relations on economic behavior. 

As an extension of social embeddedness 

theory from the new economic sociology, 

the following conceptual view in the third 

part elaborates some theories regarding 

inter-organizational and interpersonal trust 

and reciprocity. Thus, the three items are 

parts of relational dimensions of social 

embeddedness and complement the 

analysis of social embeddedness, as stated 

Theory 

The Italian District 

literature 

Duality Theory on 

Structures and Actors 

New Institutional 

Economics 

Page | 162 

Table 1. The Conceptual Views of This Study 

by Granovetter (1985, 1990), and make it 

possible to explore the phenomenon of 

social embeddedness and its relational 

dimensions in the context of a cluster. 

The social embeddedness theory of 

Granovetter stresses the relational 

dimensions of social embeddedness, which 

consist of trust and reciprocity. Theories on 

trust conclude that one must draw a 

distinction between the concept of 

interpersonal and inter-organizational trust. 

The economic approach from TCE should be 

complemented by other social and 

psychological approach to give a more 

comprehensive analysis on trust in inter-firm 

relationships. Reciprocity theory explains 

how one partner values his or her 

relationships with other partners: whether 

the relationships are over-benefiting, 

reciprocal, or under-benefiting relationships 

within one organization or among 

organizations. The contribution of each 

partner is not clearly defined. It is different 

from reciprocity in market exchanges in 

which the contribution of each partner is 

defined as money giving after buyer and 

seller have agreed to trade at a specific price 

and quantity. 

DRAFT 

Contribution 

Structure Role of Actors 

-A cluster is influenced by socioeconomic - Local actors have a role in 

structures. 

collective actions in local 

-In a cluster, market relations are 

economic institutions such as 

accompanied by mutual cooperation workers’ union, producers’ 

between firms. 

union or others business 

-Cluster performance results from 

collective actions and the effects of 

external economies 

organizations. 

-Structures and actors are interdependent Actors can come into existence 

elements. 

only within a structured 

-Structures can be reproduced and 

transformed only through actors. 

environment. 

-The market and the economy are the -All economic actions are 

basic reference; society is a given. 

assumed to be rational and



Theory 

New Economic 

Sociology 

Interpersonal and 

interorganizational 

trust, reciprocal 

relationships 

Source: Author 

The History of the Establishment of 

the Kotagede silver handicraft 

cluster: Local Actors as Pioneers and 

Local Socioeconomic Structures as 

Supporting Elements 

Contribution 

Structure Role of Actors 

- The emergence and maintenance of pursuing the efficiency. 

institutions is typically explained through -The behavior of economic 

their alleged efficiency. 

actors: 

-bounded rationality 

-opportunism. 

-The economy is seen as an integral part -Economic actors are socially 

of society. 

embedded in local social 

-Social embeddedness among people in a system. 

community that are influenced by trust 

and reciprocal relationships. 

-Interpersonal and interorganizational 

trust is different. 

-Economic approach on trust. 

-Social and psychological approach on 

trust. 

-The clear concept and implication of 

reciprocal relationships in social 

embeddedness. 

According to Giddens (1976), structures can 

be reproduced and transformed only 

through actors who come into existence 

from within a structured environment. 

Changes in social structures and systems 

take place as a result of human action, which 

is both enabled and constrained by the 

structures (Giddens, 1981). Throughout his 

theory, Giddens places a great deal of 

weight on the notion that actors are 

knowledgeable. 

The history of the establishment of the 

Kotagede silver handicraft cluster can be 

interesting evidence of Giddens’s thesis 

about the interplay between structures and 

actors.The cluster was initiated by traders in 

need of supplementary activities for using 

their labor and capital surpluses through 

individual enterprises cooperating as well as 

groups of firms joining forces in business 

associations. When they were successful, 

other villagers tried to copy their neighbors’ 

innovative behavior, and gradually, the 

clusters grew and turned into producer 

networks with horizontally and vertically 

specialized enterprises. Embedded ties 

among them made the learning process 

effective. Product and process innovations, 

new organization forms, and business 

opportunities emerged through the 

interactive processes that took place within 

the clusters. Embeddedness created 

proximity, affinity, and the basis for the 

development of trustful relations, which 

contributed significantly to the success of 

the interactive learning process. 

DRAFT 

Situated some five kilometers southeast 

from the center of Yogyakarta, Kotagede 

covers an area about one square kilometer 

on the eastern side of the Gadjah Wong 

River. The silver handicraft business has 

developed since Kotagede was the kingdom 

of Mataram, capital of Yogyakarta with the 

Panembahan Senopati government, at the 

end of 1500. At that time, Kotagede was a 

center for making the silver keris (a 

traditional Javanese knife) and jewelry 

provided for Panembahan Senopati’s family. 

Page | 163



When Kotagede no longer served as the 

kingdom of Mataram, it turned itself into a 

distinguished place for artisans. Since the 

introduction of Indonesian tourism in the 

early 1970s, silverwork has become the 

hallmark of the Kotagede artisanship. Trade 

is a main activity for many Kotagede people. 

Though many of them may have vocations 

as government officials or public servants, 

they still engage in silver handicraft 

business. 

Almost all the silversmiths in Kotagede 

come from families that have had the same 

trade for three or more generations. When 

the business expanded, the family business 

was split up into separate units, and each 

part was owned by one family member. 

However, the management tasks are divided 

among the family members: One or two 

were responsible for managing the 

production process and finishing stages, and 

the others took care of order acquisition 

and marketing. One example comes from 

the largest firm in Kotagede: HS Silver. 

Currently, it is managed by the fourth 

generation of the founders of the firm, the 

children of Mr. Harto (the third generation 

of founders died several years ago). 

Mr. Harto was the founder of the local 

business association at the cluster level, 

KP3Y, in the 1960s. He and some other 

actors led the association to manage joint 

actions. At that time, through the 

association, firms in Kotagede cooperated 

by sharing hand tools; information on 

product innovation, conditions, and source 

of raw material; and transport costs on raw 

materials through joint purchases. The goal 

of the joint actions was to reduce 

production costs on the one hand and to 

increase learning on the other; it was not 

specifically to overcome external challenges 

or to reach distance market, but to improve 

learning. At that period, KP3Y had a 

significant role to improve a learning 

process and make information sharing occur 

among the members of the cluster. This 

Page | 164 

situation contributed to the improvement of 

business activities in Kotagede. 

Back to the current business conditions of 

HS Silver, the total turnover of HS Silver is 1 

billion rupiah per month (€75.000). Besides 

marketing the products in local and 

domestic markets (Jakarta and Bali), the 

company mainly exports its product to Italy 

and the United States. Mr. Suryadi (53 years 

of age) and his brothers and sisters have 

managed the firm since their father (Mr. 

Harto) passed away. Mr. Suryadi is the chief 

executive officer of the firm, and his 

brothers and sisters hold other positions 

such as financial director, marketing 

director, and business development director. 

Although they manage HS Silver together, 

each of Mr. Harto’s children has his or her 

own firm as well. As Mr. Suryadi asserted: 

“I am the eldest son of Harto’s family. When 

I was young, my father got me involved in 

the family business. Before he passed away, I 

already built my own firm with support by 

my parents. The name of my company is CV. 

Amie. The company was founded in 1975. 

The main specialization of my own business 

is handbag leather products, since at the 

time I founded the company, there was a 

good opportunity in leather products. In 

1985, I expanded to the international 

markets Europe and Japan. However, I am 

still a player in the silver product business. 

That is the core business of our family. My 

brothers and sisters also have their own 

business but they focus on silver products. 

The production activity of silver products is 

pooled in one big workshop, in front of our 

showroom. My mother asked me to replace 

my father’s position in our family company 

one year after my father passed away, and 

my mother was too tired to manage the 

company. (Interview, 08/09/2007) 

DRAFT 

Thus, like other family firms in Kotagede, Mr. 

Suryadi and his brothers and sisters pool 

production, share common property, and 

collaborate on information about market 

opportunities and external networks. Now,



they have diversified the family business into 

various business fields, such as one-stop 

shopping supermarkets, restaurants, other 

handicraft products, and some retail shops, 

although the core business is still silver 

handicraft. Another large company in 

Kotagede is Narti Silver, which is owned by 

the family of the sister of Mr. Harto (Mrs. 

Narti, who passed away several years ago) 

and now is managed by the children of Mrs. 

Narti. 

Another interesting story is from Mr. R.M. 

Mulyo’s family. He and his wife had five 

small firms in Kotagede: Sari Mulyo, Mawar 

Putih, Tujuh Loga, Melati Putih, and Restu, 

all silver product retailers. Since he divorced 

from his wife, four of their firms are owned 

by his ex-wife and his children. Now, Mr. 

Mulyo owns and manages his small retail 

shop in the main street of Kotagede, 

Kemasan Street. His company does not 

manufacture the products but orders them 

from local artisans and subcontractors. 

Some of products are manufactured by his 

eldest daughter (Mrs. Retno), who owns a 

workshop with her husband (Mr. Jamal). Mr. 

Jamal is the son of one of the owners of the 

medium-sized silver firm in Kotagede (Mr. 

Yahar). This couple built their company by 

joining two families’ firms. 

Mr. Mulyo founded an informal business 

group that has been effective as a rotating 

saving group among the members and has 

been considering starting a business 

association from that group. In addition to 

the rotating savings, information sharing as 

well as joint marketing occurs among the 

members of the group. 

Thus, the Kotagede cluster has been 

surviving for five centuries since the cluster 

has developed as a family business 

structure. Most firms belong to the third or 

fourth generation of silversmiths in their 

families, who get support from relatives in 

running the firm, at present just as at the 

time of its establishment. The members of 

the families pool and mobilize the financial 

and managerial resources needed for their 

business operations and share common 

property, thus expanding their firms. Actors 

in local business associations as well as 

informal business groups significantly 

contribute in leading local people in the 

learning process within the cluster. 

The Dynamic Process of the Cluster 


From the history of the establishment of the 

cluster, this study shows that the cluster has 

developed through a learning process 

among local people in local business 

organizations. The process originates from 

the dynamic capabilities of local people. In 

the early stages of this process, unused local 

resources (financial and human) were 

mobilized through the local organizations 

led by influential actors, putting these 

resources to effective use. This process 

breaks down investments into small risktaking 

steps: The enterprise of one creates a 

foothold for the other, such that ladders are 

constructed that enable small enterprises to 

climb up and grow. Local firms do not have 

to acquire equipment for the entire 

production process. They can concentrate 

on particular stages, leaving other stages to 

other firms. 

DRAFT 

In addition, the cluster has made it possible 

to overcome the traditional trade-off 

between costs and differentiation, in that 

their advantage is based on the reallocation 

of core competencies among local 

entrepreneurs. Thus, in Kotagede, clustering 

has served as not only a collective survival 

means but also as a dynamic strategy of 

local people. 

Structures as a production of human 

actions 

The success of the dynamic process 

depends on the type of governance of interfirm 

relations (Schmitz, 1995; Visser, 1996; 

Dei Ottati, 2003b). Without the intensive 

Page | 165



interactions among the firms in a cluster, the 

dynamic process would be limited to serving 

a collective strategy. The dynamic process 

comes from dense social networks that 

ensure trust and reciprocity among local 

people. For example, purchasing inputs as 

well as marketing often is accomplished 

through the cooperative. Rotating savings 

(arisan) groups are also quite common. In 

the cluster, some of the retailers interviewed 

stated that they often supply raw materials, 

technological assistance, and sometimes 

even credit to some of their subcontractors. 

As Mr. Jamal, a respondent from a mediumsized 

manufacturer/retailer in Kotagede, 

expressed: 

“Our parents showed us how to keep a 

good relationship with our business 

partners, including our subcontractors 

and artisans. They always said that all 

of us are neighbors, so we are a big 

family, although we do not have a 

kinship. That is our value. We believe in 

the advantage of social ties for our 

business achievement. The development 

of the Kotagede cluster has proved that 

collective actions are a critical factor to 

explain growth and performance.” 

(Interview, 20/08/2007) 

In Kotagede, the majority of the 

subcontractors interviewed agreed that they 

try to work hard in developing and adapting 

products to the needs of the 

retailers/traders. They are now more 

satisfied about their relationships with the 

retailers, and they try to set up stable 

linkages, increasing their ability to cooperate 

in defining fashion trends and product 

characteristics. This situation shows that 

cooperation among local people in the 

clusters supports market ties among them. 

Market ties mean the guarantee of 

producing products at the required quality 

level and more competitive prices. Social 

embeddedness engendered by trust and 

reciprocity motivates local people to deliver 

products in time as well as manufacture a 

variety of high-quality products. 

Page | 166 

Intensive interactions between local people 

influenced by both economic and social 

factors constitute the socioeconomic 

structure of a cluster. The structure 

facilitates coordination as well as 

competition between local people within the 

cluster and, in turn, creates the dynamics of 

the process of developing the cluster. It also 

stimulates the development of individual 

firms as cluster members. 

Socioeconomic structures influence the 

effectiveness of people in taking advantage 

of the local environment. Social structures 

facilitate the progress of maintaining stable 

linkages among local people, and economic 

structures encourage local people to 

maintain economies of scale and high 

business efficiency. Many firms have been 

able to introduce important improvements 

in the organization of the production 

process and the quality of their products, 

although they still maintain a traditional 

strategy of commercialization based on 

price. Social structures also diminish 

uncertainty and business risks that are 

usually common in every business, thus 

creating a stable and fairly safe environment 

in a cluster. Such an environment enables 

firms to operate at lower costs and become 

more innovative, which improves firm 

performance. 

DRAFT 

The Role of Actors as Developers of 

Structures 

In the cluster, interactions among local 

people trigger learning dynamics and 

enhance the ability of actors to modify their 

behavior and find new solutions as their 

competitive environment changes. 

Furthermore, it is worth noting that local 

actors have a role not only in the collective 

actions in the form of cooperation between 

individual enterprises, but also in the form 

of groups of firms joining forces in business 

associations and the like. The cluster’s 

socioeconomic structures not only are 

supported by individual cooperation but



also originate from collective actions that 

occur in local business associations. Sharing 

equipment or developing a new product can 

be accomplished by cooperation among 

individual enterprises, but there are many 

kinds of problems that can be solved only 

by local business associations. 

The key issue of a collective strategy is the 

need to control critical resources. This is a 

particularly crucial decision issue for a 

smaller firm, which typically does not have 

the power to control these resources. 

Collective action is not simply a mode of 

harmonizing interests; it is also employed to 

mitigate conflicts between local people 

(Williamson, 1975). 

In Kotagede, local actors have their own way 

in facing outsiders in a cluster. The locals 

were aware that some outsiders pushed the 

price down to attract consumers. This was 

not a healthy business environment. Some 

local actors at the sub-cluster level have had 

a significant role in facing the problem. They 

asked the outsiders to join the associations 

and even join the rotating credit savings 

groups in the sub-clusters. They were more 

cooperative toward the outsiders and 

decided not to create a conflict; rather, their 

goal was a stable and fair business 

environment. The interviews indicate that it 

has not been successful yet; talking about 

price determination is still not easy during 

local meetings. One of the local business 

associations that was successful in reaching 

an agreement about price setting among 

the members is Sari Tulang Aji in the 

subcluster Basen, Kotagede. Mr. Istiadi, one 

of Sari Tulang Aji’s influential actors, 

asserted: 

“There was no choice for us other than 

talking about price determination of our 

products. It is an essential condition to 

create a fair business environment. We 

already have some difficult problems with 

the availability of inputs and marketing of 

our products, so a conflict between us 

would make the situation more difficult. 

That was the reason why I encouraged the 

members to talk about price determination. 

Fortunately, they accepted the ideas and at 

every meeting we now talk about pricing 

and remind our colleagues [what will 

happen] if they push the price very low.” 

(Interview, 07/09/2007) 

Some of them decided to drop membership 

of the association and tried to mobilize 

support from other local people to found a 

new association. Others kept silent and 

avoided having an open conflict with the 

management: “I think attending the meeting 

of the association is still beneficial for me 

since there is still useful information that is 

given at the meetings, and other benefits 

such as the technical trainings offered by the 

local or central government. Moreover, I still 

want to join the rotating savings group, 

which is like money saving for me,” said Mrs. 

Purwanti, a small leather artisan. 

Thus, some local actors in local business 

associations have a significant role in 

creating a peaceful and fair business 

environment. It is part of the way local 

actors constitute socioeconomic structures 

of a cluster and how they support the 

advancement of the dynamic process. 

Making rules, mitigating conflicts, and 

mobilizing resources are the significant 

contributions of local actors in the local 

business associations. However, the roles 

could not be significant in solving problems 

if specific socioeconomic structures did not 

prevail: The actors need the existence of 

social cohesion among the members of the 

clusters so they can ask the members to sit 

together to settle a dispute and find a 

solution. The other members must trust the 

actors; otherwise, they would not follow the 

rules agreed on under the leadership of 

local actors. 

DRAFT 

Moreover, the actors have the power to 

mitigate successfully as well as mobilize 

resources. Giddens (1981) continually relates 

power to actors. He sees power relations as 

continually produced and reproduced in a 

Page | 167



context, related to the invocation of rules 

and the mobilization of resources (Giddens, 

1981). A diffused notion of power is crucial 

to Giddens’s (1984, p. 14) concept of actors: 

“To be an agent is to be able to deploy 

(chronically in the flow of daily life) a range 

of causal powers.” An agent ceases to be 

influential if he or she loses the capability to 

make a difference—that is to exercise some 

sort of power. Power is the means and 

degree of control over human and material 

resources (Colignon and Covaleski, 1991). At 

the cluster level, control (or power) is 

exerted by social consensus through 

processes that facilitate communication and 

consensus among the actors. The logic of 

personal choice and ongoing social 

interaction provides the context for action. 

In this context, leadership is a necessary 

consequence of social activity. In each case, 

it is evident that community leadership 

results from a high degree of voluntary 

activity in community affairs. 

But to the extent that activity in voluntary 

associations leads to having an impact on 

community change, specific actors become 

activists and leaders. 

Furthermore, many small firms need a more 

active commercial strategy to be successful 

in an increasingly competitive market. 

Therefore, actors distribute information 

about trading exhibitions and coordinate 

joint actions in marketing, advertising, and 

market research through the local business 

associations. For example, Mr. Istiadi from 

Sari Tulang Aji is active in seeking 

information about trading exhibitions for 

the members of the association. When he 

gets that information, he asks the chairman 

of Sari Tulang Aji to hold a meeting and 

coordinate the members in preparing a joint 

exhibition by producing more varied 

products and determining the margins for 

the participants. 

Thus, the actors use local business 

associations to facilitate collective learning 

of their members. There are role-making 

Page | 168 

and open perspective actors. Through local 

business associations led by the actors, the 

innovation capability, which usually takes 

place inside an individual firm, becomes a 

collective process in a cluster, based on 

common knowledge accumulated in the 

community rather than in the firms. This 

process enhances local innovation 

capability. Collective learning supports the 

transformation within the cluster. As 

Giddens (1981, p. 28) states, in the 

perception of actors, power is defined as 

situated in a “transformative capacity.” 

Because transformation occurs through 

social relations, power can then be related 

to rules and resources. Power and the social 

relations through which it manifests itself 

are directly related to the actors’ production 

capacity (Giddens, 1984). The transformation 

of the structure of a cluster that results from 

the action of local influential actors is 

significant evidence of the interplay between 

socioeconomic structures and the role of 

actors within the clusters. 

CONCLUSION 

The interplay between socioeconomic 

structures and the role of influential actors 

influences the dynamics of inter-firm 

relationships. Deliberate actions in local 

business associations have stimulated the 

growth of the clusters that originate from 

the dynamic capabilities of local people. 

Socioeconomic structures constituted by the 

behavior of local people facilitate 

coordination as well as competition among 

them. Influential actors lead the decisionmaking 

processes in the local business 

associations that enable the cluster 

members to take advantage of the internal 

environment and external networks. 

DRAFT 

Moreover, this study shows that the cluster 

has developed in a dynamic process, which 

comes from dense social networks that 

ensure trust and reciprocal relationships 

among local people. Intensive interactions 

among local people influenced by both 

economic and social factors constitute the



socioeconomic structure of a cluster. The 

structure facilitates coordination as well as 

competition among local people within the 

cluster and, in turn, creates the dynamics of 

the process of developing the cluster. It also 

stimulates the development of individual 

firms as members of the clusters. 

Socioeconomic structures of the cluster not 

only are supported by individual 

cooperation but also originate from 

collective actions that occur in local business 

associations. Collective action is not simply a 

mode of harmonizing interests but rather is 

employed to mitigate conflicts among local 

people. Some local actors in local business 

associations have a significant role in 

creating a peaceful, fair, and healthy 

business environment. This is part of the 

way they facilitate socioeconomic structures 

of a cluster and how they support the 

advancement of the dynamic process. 

Making rules, mitigating conflicts, and 

mobilizing resources are the significant 

contributions of local actors in the local 

business associations. Thus, the actors use 

local business associations to facilitate the 

collective learning of the members. 

DRAFT 

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DRAFT

Rural, Local Economic, and SME Cluster Development

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