icro, small and medium enterprises (MSMEs) play a vital role in the Indonesian economy. Currently, around 65 million MSMEs in Indonesia contribute 61 percent to the national gross domestic product (GDP) and absorb 97 percent of the workforce.
The development of innovation also significantly impacts the Indonesian economy. The rapid progress of digital technology has accelerated the growth of innovation in the economy.
Innovation is also closely related to the development of MSMEs. Various studies show the important role of innovation in helping MSMEs develop their businesses. Optimizing innovative capability can strengthen an MSME’s competitive advantage.
However, the empowerment of MSMEs and the development of innovation requires financial support. Each requires a different type of financing. The process of developing innovation requires a longer commitment and a period of testing and trials.
In this instance, equity financing is considered the most suitable option, especially for innovative start-up businesses that are still in the early stages of development. By contrast, the financing of MSMEs can be more flexible as they are generally already operational and can generate revenue. In such cases, either equity or debt financing is appropriate.
Venture capital firms in Indonesia play a key role in developing innovation and MSMEs. Currently, there are 54 venture capital firms licensed by the Indonesian Financial Services Authority (OJK) and operating in Indonesia.
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Venture capital firms can provide both debt financing and equity financing. The total financing disbursed by venture capital firms amounted to Rp16.49 trillion (US$1.06 billion) as of February of this year.
