To what extent is social security spending associated with enhanced firm‐level performance? A case study of SMEs in Indonesia

AuthorNina TORM
Publication Date01 Sep 2020
*Roskilde University, Denmark, email: The author would like to dedicate
this article to her late father Ue Torm, who started his international development career as the
rst Danish UN youth delegate in 1970. He introduced her to various countries around the world
and opened her eyes to development work. He will always remain a key inspiration in her writ-
ing and career. The author also wishes to thank Celine Peyron Bista, Ippei Tsuruga, Grace Monica
Salim and Gregoire Yameogo for their valuable inputs and comments, and for their assistance in
interpreting the raw data provided by Statistics Indonesia (BPS).
Responsibility for opinions expressed in signed articles rests solely with their authors, and
publication does not constitute an endorsement by the ILO.
International Labour Review, Vol. 159 (2020), No. 3
Copyright © The author 2020
Journal compilation © International Labour Organization 2020
To what extent is social security
spending associated with
enhanced rm-level performance?
A case study of SMEs in Indonesia
Nina TORM*
Abstract. Although the relationship between social protection and enterprise per-
formance is much debated in the literature, evidence is particularly limited in the
case of small and medium-sized enterprises in developing economies. Using census
data from 2010 to 2014, this article examines how the provision of social security
inuenced business performance in Indonesia. The author nds that increased so-
cial security spending of 10 per cent is associated with a per-worker revenue gain
of up to 2 per cent. Moreover, prots are not found to decrease with increased
social protection coverage, suggesting that increasing worker benets may be a
worthwhile business investment.
Keywords: social security contribution, small and medium-sized enterprises,
enterprise performance, developing countries, Indonesia, case study.
1. Introduction
The Social Protection Floors Recommendation, 201 2 (No. 2 02), of the Inter-
national Labour Organization (ILO) recognizes the importance of national social
protection oors and aims to ensure eective access to at least essential health
care and a basic level of income security as a matter of priority (ILO, 2012). As
such, the Recommendation constitutes the rst international legal instrument
explicitly recognizing the triple role of social security as a universal human
right and an economic and social necessity (ILO, 2014). The World Social Pro-
tection Report 2014/15 – the rst report of its kind – further urged that social
International Labour Review
protection be an important part of the post-201 5 development agenda (ibid.),1
and the commitment to building social security systems, including oors, is re-
ected in the 2 030 Agenda for Sustainable Development (ILO, 2017). This re-
cent drive for the provision of universal social protection has also led to the
emergence of innovative approaches to adapt social protection systems to better
address dierent types of employment (including non-standard forms of employ-
ment) and to facilitate the transition from the informal to the formal economy
(Behrendt and Nguyen, 20 18; ILO, 2016, 2017 and 2018).2
Regional associations like that of the Association of Southeast Asian Nations
(ASEAN), of which Indonesia is a Member State, have also expressed their com-
mitment towards ensuring social protection through the 2013 ASEAN Declar-
ation on Strengthening Social Protection. Within ASEAN, the provision of social
protection varies considerably, yet most countries, including Indonesia, have an
established contributory-based social health insurance scheme for employees in
the formal economy. Around half of the working population in Indonesia, Ma-
laysia, the Philippines, Singapore and Viet Nam participate in old-age pension
schemes or provident funds (Ong and Peyron Bista, 2015). For coverage to be
extended and enhanced, however, further evidence is needed on the associ-
ation between employer-contributed social security and business performance,
especially for micro, small and medium-sized enterprises (MSMEs).3 In Indo-
nesia, MSMEs represent more than 99 per cent of the total number of enterprises
and absorb approximately 97 per cent of the total workforce. MSMEs are thus
major drivers of economic development, contributing around 60.3 per cent of
the value of Indonesia’s gross domestic product (GDP) in 2016.4 The number of
MSMEs is continuously growing. In the third quarter of 2017 alone, the growth
rate was 2.3 per cent (BPS, 2017).
Despite their economic importance, smaller enterprises, particularly infor-
mal ones, face a number of challenges, and workers generally have limited ac-
cess to social security. This may be due to a combination of factors, including
hesitation among employers to invest in their workforce, especially given that
small and medium-sized enterprises (SMEs) often operate on the basis of a short-
term outlook. Likewise, workers may be hesitant to contribute to social insurance
if they do not see any short-term benets and are not risk-averse. However, if in-
terpreted as a form of deferred compensation, social security payments might be
considered as something more tangible by workers. Employers might also nd
them more palatable if they considered that, in the absence of contributions, they
would – at least in theory – be obliged to pay correspondingly higher wages.
1 One of the key objectives of the World Social Protection Report (ILO, 2014 and 2017) is to
provide a mechanism for monitoring progress towards the realization of the Social Protection Floors
Recommendation, 2012 (No. 202).
2 In 20 15, the International Labour Conference adopted the Transition from the Informal to
the Formal Economy Recommendation, 20 15 (No. 204), and the ILO has drafted a guide on extend-
ing social protection to the informal economy (ILO, 2019).
3 Although it is relevant to talk about MSMEs in the case of Indonesia, the data on which
this article is based cover only small and medium-sized enterprises (SMEs). Both terms are used
throughout the article, depending on the context.
4 See the website of the Ministry of Cooperative, Small and Medium Enterprises, www.depkop. [accessed 14 May 202 0].

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