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The ability of Small and Medium-sized Enterprises (SMEs) to survive amid globalization and world trade liberalization is highly important to Indonesia for at least two reasons.

First, SMEs have historically been one of the key economic actors in the Indonesian economy, accounting for over 90 per cent of all the enterprises across sectors and providing employment opportunities for over 90 per cent of the country's total workforce. Second, the Indonesian trade regime has shifted significantly from a highly protected market to a more open economic system. By focusing on SMEs in Indonesia, this policy paper analyzes the impact of international trade liberalization on SMEs in Indonesia.

Key findings:

• Indonesian SMEs account for more than 90 per cent of all firms and provide employment for over 90 per cent of the country's workforce;

• The number of SMEs and their contribution to the formation of GDP continue to grow every year. In fact, their GDP share is higher than that of large enterprises;.

• There is no evidence to suggest that Indonesian SMEs' exports have accelerated due to the AFTA in 1992;

• At the same time, there is no strong evidence to suggest that SMEs in Indonesia have been negatively affected by the international trade policy reforms.;

• There is also no clear evidence to suggest that the efficiency effects of international trade liberalization have resulted in an increase in average plant size among Indonesian SMEs..

Key recommendations:

• SMEs need to develop their human resource and technological capability, which would lead to improved innovation capacity and competitiveness. In this respect, Indonesian governments, especially at the district level (e.g. provincial or municipal), have a crucial role to play, such as by providing technical assistance, information, soft loans, as well as in facilitating the cooperation between SMEs and local universities, R&D institutes, and business associations.

• The horizontal coordination among government agencies, as well as vertical coordination between the central and local governments in assisting SMEs, which traditionally have been weak, should be strengthened.

• The Indonesian government should be more active in promoting subcontracting linkages between SMEs and large enterprises, including foreign companies, through regulations and incentives.