Opportunities and Challenges for MSME Empowerment in Special Economic Zones

Peluang dan Tantangan Pemberdayaan UMKM di Kawasan Ekonomi Khusus

Ilustrated by: Marsha

Written by:

Raevita Andriessa

SEO Content Writer, Pusat Studi Perdagangan Dunia Universitas Gadjah Mada.


Nabila Asysyfa Nur

Website Content Manager, Pusat Studi Perdagangan Dunia Universitas Gadjah Mada.

Ilustrated by:


Desainer Grafis, Pusat Studi Perdagangan Dunia Universitas Gadjah Mada.

Micro, Small, and Medium Enterprises (MSMEs) carry a serious amount of crucial roles for the stability of the national economy. Based on data from the Ministry of Cooperative Spaces and Small-to-Medium Enterprises, the number of MSMEs in Indonesia has reached the number of 64.2 million growing businesses in the first quarter of 2021 and had made contributions to the national Gross Domestic Product (GDP) of 61.07 percent or Rp. 8,573 trillion. Acknowledging the potential for economic improvement, the government pays special attention to MSMEs in Indonesia and continues to strive to empower them in various government policies in order to encourage economic growth. This is reflected in the involvement of MSMEs in the development of Special Economic Zones (SEZs) in various regions in Indonesia.

SEZ has been declared by the government since 2009 with the issuance of Law of The Republic of Indonesia Number 39 of 2009 concerning Special Economic Zones (Law No. 39/2009) and its implementation is further regulated in Government Regulation of the Republic of Indonesia Number 40 of 2021 concerning the Implementation of Special Economic Zones (Government Regulation 40/2021). Based on the Law No. 39/2009, SEZ is an area with certain boundaries within the jurisdiction of the Indonesian Republic which is determined to carry out economic functions and obtain certain facilities. SEZs are developed through the preparation of areas that have geoeconomic and regional geostrategic advantages and functions to accommodate various high-value economic activities with the potential for international competitiveness. Sorong’s SEZ in Papua and Arun Lhokseumawe’s SEZ in Aceh are some of the industrial SEZ in Indonesia, while Mandalika's SEZ is one of the tourism SEZ in Indonesia. To support the development of economic activities in the area, the government provides special facilities and incentives to business owners who are members of the SEZ as an attraction for investment from outsiders.

SEZ's Contribution to MSMEs

The development of the national economy which is carried out with the principle of economic democracy encourages the government to take sides in economic politics that provides opportunities and support for MSMEs and domestic industries. Therefore, as regulated in Law No. 39/2009 a quo, in the development of SEZs, the government provides locations for MSMEs to encourage linkages and synergies with enterprises, both as business actors and as supporters of other business actors. The involvement of MSMEs in SEZ development is expected to increase the competitiveness and quality of the human resources in it contributing to economic growth in the area. Thus, equitable development in Indonesia is not only centered on big cities, but also on the surrounding areas that require more attention.

As a special area, SEZ is equipped with fiscal and non-fiscal facilities for actors and business entities that carry out their business activities in SEZ intending to increase competitiveness to attract investors. In this case, MSMEs as a business segment that participates in economic activities in the SEZ can also feel the benefits from the SEZ development. As stated on the National SEZ Council which based on Law No. 39/2009 and Government Regulation No. 40/2021, some of the benefits that can be felt by MSME owners, business actors, and other business entities in the SEZ include:

1.Remissions in all Tax Obligations

The tax obligations for all MSME actors in the SEZ area will be reconsidered in order to appreciate their contribution to the country's economy. The government imposes a reduction in collecting Income Tax (PPh) for affiliated investors and remissions for business entities inland and/or acquisition transactions for SEZs. Waived Added Value Tax (PPN) and/or Sales Tax on Luxury Goods (PPnBM) payments also apply to business actors in the SEZ area. Moreover, the local government provides reductions, remissions, and exemption from regional taxes and/or regional levies to business entities/business actors in the SEZ, with the reduction in acquisition fees on land and buildings and a reduction in land and building taxes as the bare minimum privilege they can receive.

2.Infrastructure Upgrade

MSMEs and other business actors in SEZ areas will be able to enjoy the ease of access for the infrastructures built inside. In order to improve the accessibility for all SEZ areas, the government built numerous supporting infrastructures. Roads, highways, train stations, harbors, and airports are provided to facilitate mobility for the residents and all visiting external parties. As a result, the number of visitors to the SEZ area will increase and also have the potential to increase the number of local MSME customers.

3. Ease of Business Licensing

MSMEs and other businesses that are established within the SEZ area will be granted convenience in obtaining permits and licenses to set up a business. The business license application will be given by the SEZ Administrators as the middleman. MSMEs will be granted risk-based business licensing which they can obtain through the Online Single Submission (OSS) system, without having to experience all the exhausting stages of proposal approvals. This privilege includes the exemption of proposing building approvals to establish a place of business. Meanwhile, SEZ no longer requires designation as an industrial area, due to the stipulation of an SEZ that carries out industrial-related activities as well as an industrial zone designation.

Reflecting from Mandalika’s SEZ

Stipulated through Government Regulation of the Republic of Indonesia Number 52 of 2014, Mandalika’s SEZ is one of the tourism SEZs that can be considered a great success. The development of the SEZ was life-changing for all citizens who can enjoy the rapid economic growth and improvement of welfare distribution. Their concept as a world-class tourist destination with all the included local pearls of wisdom became the SEZ’s main success factor. The SEZ itself includes all breathtaking tourism sites such as Saleh Bay Area, Moyo, and Tambora Islands (Samota), Mount Rinjani Geopark, Senggigi Beach, and many which contain unique and potential traditions, arts and culture, history, and folk craft industries.

The future projections predicted that more local MSMEs will be involved in supporting Mandalika's tourism, such as providers of transportation, accommodation and lodging, camping ground, and others. As reported by Media Indonesia, Deputy III of the Presidential Chief of Staff, Panutan Sulendrakusuma, stated that the 2021 World Superbike Championship (WSBK) and the 2022 MotoGP at the Mandalika SEZ were the events that highlighted all the attractions and managed to increase NTB's economic growth by 1.7 percent through the participating MSMEs in the region. He also said that the estimated multiplier effect of economic development in the Mandalika SEZ could reach Rp. 4.8 trillion and of the total profits, 45.8 percent will flow to MSMEs, with a value equivalent to Rp. 2.2 trillion. Moreover, business actors are expected to receive a financial boost of Rp. 28.6 trillion in the future and is projected to be able to contribute foreign exchange per year of Rp. 7.5 trillion and contributed to the GDP of the tourism sector of Rp. 16.96 trillion.

Facing the Obstacles in Empowering MSMEs in SEZs

Aside from the various opportunities in the form of convenience and facilities offered to MSMEs in SEZs, there are several challenges to ensure that MSME empowerment in SEZs can be more optimal in the future, including:

1.Producing and Marketing Superior Products

Superior products are products that have the potential to be developed in an area by utilizing local natural resources and human resources. These products are market-oriented and environmentally friendly so that they have a competitive advantage and can compete globally. Even in the famously successful Mandalika’s SEZ, the production and marketing of superior products that are used as Mandalika's trademark as a tourist spot is still a challenge, as it is reported by NTB’s Regional Development Council. Within the area, there are indeed MSMEs that sell souvenirs typical of NTB such as textiles, jewelry, and snacks, but both in type and quality, the products they offer are still widely found in other areas of NTB. If the price of MSME products in the Mandalika SEZ is higher than other products, it is feared that MSME owners in Mandalika will lose competitiveness. This case can also be a lesson for MSMEs in other areas, especially those in the SEZ area to continue to innovate to create quality and more prominent regional specialties and have unique selling points. In addition, product quality and price must also be paid more attention to and adjusted to existing standards to increase competitiveness.

2.Lack of Certainty Incentives

The lack of certainty regarding the receipt of incentives to investors threatens the continuity of MSME business activities in the SEZ. The statutory instruments from the Central Government that regulate SEZs do not fully control the provision of incentives and construction of facilities in SEZ areas and leave the task entirely to the local government. This causes differences in policies regarding the acquisition of incentives in various regions so that each region has a different amount of incentives. Without the certainty of incentives for investors, the development and development of SEZs will be disrupted and thus the empowerment of MSMEs in SEZ areas cannot be maximized. For this reason, the government needs to make more definite policies to regulate the amount of incentives for SEZ investors.

3.Insufficient Coordination and Cooperation between Agencies

SEZs in Indonesia are also still lacking in synergy with the surrounding area and coordination with agencies in the government sector. One of the reasons for this is the location of SEZs, which are mostly located far from the center of local government. Weak inter-institutional coordination can also cause problems such as lack of distribution of resources, lack of training for business actors, and limited and inadequate infrastructure development. Adequate cooperation and coordination are needed in order for SEZs to be successful and to contribute a lot to national development.

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