Paper short abstract:

The paper identifies the important roles of local government and individual champions as exogenous factors promoting the innovation and development of locally-based SME clusters in Indonesia.

Paper long abstract:

Innovation in industry clusters is essential since it can promote the dynamism of enterprises, processes of innovation and local economic development. Influential theories of industry clustering in developing countries have suggested that the collective benefits of industry clustering are said to be latent. Yet it is also clear that informal businesses may not be able to access these benefits in the ways predicted. Moreover, exogenous factors appear important in stimulating industry cluster formation and innovation. The paper will present findings from scoping research relating to exogenous factors shaping innovation in SME cluster formation and development in Semarang, Indonesia - clusters in which the vast majority of SMEs are informally organised. The results indicate that in the context of Indonesia, local government initiatives have significant influence to trigger and maintain industry cluster and SME innovation and development. This institution has a trusted position among local SMEs that have limited capacities to further develop their business propositions. Another important exogenous factor in the development of informal industry clusters is the influence of individual business people or champions. Fieldwork evidence shows that these individual champions often come from outside local communities and bring wider perspectives to bear on the community internal to clusters. The progress and sustainability of informal SME cluster development appear to be strongly influenced by the existence of these components.