SMEs play a significant role for the economic growth in developing countries, such as Indonesia. They are estimated to represent around 90% of the businesses and 50% of employment worldwide (World Bank, 2022). Data per May 2021 from the Ministry of Cooperatives and SMEs shows that there are more than 64 million SMEs actors in Indonesia that contribute to roughly 61% of national GDP with over 97% of total labour absorption (Limanseto, 2021). With this such huge scale of business representation, it is rather important to put more effort bolstering SMEs in Indonesia to be more resilient and sustainable for the benefit of the national economic growth as well as public welfare improvement.
This article will discuss what so called elephant in the room. Corruption is one of the most important and urgent issue to deal with but often being left out in almost every discussion about SMEs in Indonesia. Just like any other business, SMEs cannot simply escape from the threat of corruption, especially with their nature of having limited resources, experience and knowledge. The attitude of underestimating the latent but yet imminent danger of corruption probably stems from the perception that it can only cause harm when it’s done by government officials and/or large companies (e.g. MNCs).
Clearly this point of view cannot be more wrong. Just as highlighted by UN Global Compact that the smaller the firm is, the more likely it is to be affected by corruption. In fact, SMEs are more vulnerable since they do not have same option and assistance available to avoid corruption and to implement effective anti-corruption measures compare to bigger companies (Rune, 2011).
There is a long list of categorisations made by various authors to help classify and explain corruption to their readers, such as grand-petty corruption, black-white-grey corruption, and political-private-administrative corruption, etc. Corruption can also take in many forms including bribery, embezzlement, collusion, nepotism, extortion, gifts, etc. To simplify the narratives and to make it more relevant for SMEs, we will only separate corruption into two distinguish forms, internal and external.
The Transparency International defines corruption as the abuse of entrusted power for private gain. According to Corruption Perceptions Index (CPI), Indonesia is scored 38 and is ranked 96th place out of 180 countries. This low score means that this country is still perceived to have a serious problem of corruption particularly concerning public sector.
Various sources have mentioned that bribery as part of administrative corruption is the most prevalent and well-known form of corruption that affects SMEs that goes between the business with external parties such as public officials. On the contrary, we shouldn’t simply turn a blind eye on the facts that many SMEs have failed due to corruption occurred internally, such as fraud, embezzlement or misappropriation of funds by company’s own employees.
This internal corruption is closely associated with business managerial competence and capacity. International Finance Corporation (2019) noted that SMEs commonly possess ambiguity in business roles with key personnel wearing multiple hats at the same time. This situation causes unclear separation between the company and personal cash of the owner/founder. Bushe (2019) asserted that this unprofessional conduct of using corporate cash for personal purchases often leads to business failure. Moreover, SMEs organization and structure normally have more informal relations between staff and management and therefore stimulate a great permeability to corruption and create a culture to tolerate corruption more easily throughout the business (Daniel & Alina, 2012).
There are several internal prevention and control mechanisms to future proofing SMEs from the threat of corruption according to UNODC & UNIDO (2012). First, there should be commitments from the high-level leadership and in the case of SMEs most likely to be the shareholders (owner/founder), board of directors, or other key personnel to combat corruption. This step could be fulfilled by adopting business codes of conduct that specify anti-corruption policy outlining the company’s set of value for everybody to follow and comply. Second, establish an internal system such as a reporting structure and mechanism to ensure compliance. SMEs can copy the reporting hotlines established by larger companies, or they can opt for alternative mechanisms such as an open-door policy or the establishment of anonymous complaint boxes. Third, there should be training for both SME owners and employees to raise awareness about the short and long-term consequence of corruption both for individual and for the business. The training then should move on to turn that awareness into action where the participants can directly involve, for instance by doing role plays, demonstrations or case studies.
The last and probably the most significant strategy is by joining forces and establishing partnership with other parties, such as with other business through business associations. UNODC & UNIDO (2012) underlined that the associations can increase the efficiency of anti-corruption initiatives launched by individual enterprises. They can help the company through its role as a business focal point, a channel as well as coordinator of collective action. They can also be used as platforms that reach mutual agreements, make commitments to ethical standards, and carry out joint actions to prevent corrupt practices among members.
SMEs can also build greater alliance by joining forces with larger corporations, academia, and other stakeholders to share common concerns and find solutions together. One particular organization that provides these benefits for SMEs in Indonesia is Indonesia Global Compact Network (IGCN), a local network of UN Global Compact which promotes responsible business in the area of human rights, labour, environment, and anti-corruption. Its members not only are able to build network, but they can also access learning materials and activities as well as form collaborative actions on business ethics and governance to combat corruption.
Considering the potential damage of corruption that includes financial cost, legal and reputational risk, as well as erosion of internal trust and confidence due to value degradation of the company, SMEs in Indonesia should step up their games to not only focus on profit accumulation and business expansion but rather to build resilience to shield their start-ups, small-scaled enterprises from any threats that can jeopardise business growth and sustainability. By working against corruption in all its form, companies are safeguarding both business capital and ethics which eventually getting them the stage for long-term success.