Understanding the ‘Shadow Economy’ in SMES – a Malpractice from Indonesia, 2009-2020

Diana Lestari; Syarifah Hudayah; Arfiah Busari

doi:10.24856/mem.v27i01.2558

Understanding the ‘Shadow Economy’ in SMES – a Malpractice from Indonesia, 2009-2020

Diana Lestari, Syarifah Hudayah, Arfiah Busari

Abstract

Concerns about the shadow economy in Indonesia, estimated to have hurt GDP by around 25% per year. We try to calculate the effect of the components involved in tax revenue caused by the shadow economy because we projected it to hinder the growth of SMEs. It aimed the orientation at Indonesia. We got data coverage from official institutions of national and international related to variable limits. We observe the development in the period 2009-2020, which requires linear regression analysis methods and non-linear logistic regression. The results confirm that among the six hypotheses we propose, five hypotheses are acceptable, i.e. FDI has a significant effect on the share of SMEs, corruption perceptions and control of corruption have a significant effect on income and profit taxes, then it also has a significant effect on the shadow economy, and the shadow economy also has an effect significant to tax revenue. From other findings, only the share of SMEs has no significant effect on income and profit taxes. The added value of this empirical finding can reduce the weaknesses of previous studies that predominantly consider financial (tax) and economic dimensions so that variables such as SMEs, corruption control, and public perceptions of corruption.

Keywords

investment; taxation; SMEs; shadow economy; regression

Full Text:

PDF

References

Abed, G. T., & Gupta, S. (2002). Governance, corruption, and economic performance. Washington, D.C: International Monetary Fund.

Abdi, H., & Williams, L. J. (2010). Jackknife. In Neil Salkind (Ed.), Encyclopedia of Research Design. Thousand Oaks, CA: Sage.

Abuselidze, G. (2012). The influence of optimal tax burden on economic activity and production capacity. Intellectual Economics, 6(4), 493–503.

Aidis, R. (2003). Entrepreneurship and economic transition. Tinbergen: Tinbergen Institute.

Ajaz, T., & Ahmad, E. (2010). The effect of corruption and governance on tax revenues. The Pakistan Development Review, 49(4), 405-417. http://dx.doi.org/10.2307/41428665

Amalia, S., Maria, S., Roy, J., Darma, D. C., & Pusriadi, T. (2019). Underground economy: The shadow effect of human trafficking. LIFE: International Journal of Health and Life-Sciences, 5(1), 137-153. http://dx.doi.org/10.20319/lijhls.2019.51.137153

Amalia, S., Wijaya, A., Darma, D. C., Maria, S., & Lestari, D. (2020). Underground economy: Teori & catatan kelam (Underground economy: Theory & dark notes). Medan: Kita Menulis.

Asih, D., Setini, M., Soelton, M., Muna, N., Putra, I. G., Darma, D. C., & Judiarni, J. A. (2020). Predicting green product consumption using theory of planned behavior and reasoned action. Management Science Letters, 10(14), 3367-3374. http://dx.doi.org/10.5267/j.msl.2020.5.042

Aslan, A., Darma, D. C., & Wijaya, A. (2019). Have village funds impact growth economy and poverty rate?. International Journal of Scientific and Technology Research, 8(10), 2601–2605.

Atawodi, O. W., & Ojeka, S. A. (2012). Factors that affect tax compliance among small and medium enterprises (SMEs) in north central Nigeria. International Journal of Business and Management, 7(12), 87-96. http://dx.doi.org/10.5539/ijbm.v7n12p87

Baurer, L. I. (2005). Tax administration and small and medium Entreprises (SMEs) in development countries. Washington, DC: Small and Medium Enterprise Department, The World Bank Group.

Bird, R. (2008). Tax challenges facing developing countries. Rotman Working Papers Series No. 12. Rotman Institute for International Business, University of Toronto.

Bird, R. (2010). Taxation and development. World Bank Operational Studies No. 10150. Washington, DC: The World Bank.

Bank Indonesia. (2020). Laporan perkembangan kredit mikro, kecil dan menengah (Micro, small and medium credit development report). SMEs. Retrieved from https://www.bi.go.id/id/umkm/kredit/Default.aspx (5-12-2020).

Borozan, Ĉ., Barkovic, I., & Maliszewska-Nienartowicz, J. (2005). Government policies supporting SME development: Croatian and polish perspective. In: Sixth International Conference on “Enterprise in Transition” Proceedings (pp. 1455–1476). Split: University of Split.

Cantwell, J. (1989). Technological innovation and multinational corporations. Oxford: Blackwell.

Carter, M. (1984). Issues in the hidden economy—A survey*. Economic Record, 60(3), 209-221. http://dx.doi.org/10.1111/j.1475-4932.1984.tb00856.x

Cung, N. H. (2019). Impact of economic freedom index and corruption perceptions index on corporate income tax revenue in Vietnam. European Scientific Journal, 15(28), 185-196. http://dx.doi.org/10.19044/esj.2019.v15n28p185

Darma, S., Wijaya, A., & Darma, D. C. (2020). Different tests for the existence of agricultural cooperatives in Indonesia: Before and after COVID-19. Asia Life Sciences, 10(3), 615-628.

Decressin, J., & Fatás, A. (1995). Regional labor market dynamics in Europe. European Economic Review, 39(9), 1627-1655. http://dx.doi.org/10.1016/0014-2921(94)00102-2

Dos Santos, P. S. (1995). Corruption in tax administration. Presented at the Twenty-Ninth Annual Assembly of the Inter-American Center of Tax Administrators (CIAT). Lima, Peru, March 29.

Eltony, M. N. (2002). The determinants of tax effort in Arab countries. API-Working Paper Series 0207. Arab Planning Institute - Kuwait, Information Center.

Faal, E. (2003). Currency demand, the underground economy, and tax evasion: The case of Guyana. IMF Working Paper, No. WP/03/7. Washington, DC: International Monetary Fund.

Fanea-Ivanovici, M., Mu¸setescu, R-C., Pană, M-C., & Voicu, C. (2019). Fighting corruption and enhancing tax compliance through digitization: Achieving sustainable development in Romania. Sustainability, 11(1480), 1-24. http://dx.doi.org/10.3390/su11051480

Figlio, D. N., & Blonigen, B. A. (2000). The effects of foreign direct investment on local communities. Journal of Urban Economics, 48(2), 338-363. http://dx.doi.org/10.1006/juec.2000.2170

Gasparėnienė, L., Remeikienė, R., & Heikkila, M. (2016). Evaluation of the impact of shadow economy determinants: Ukrainian case. Intellectual Economics, 10(2), 108-113. http://dx.doi.org/10.1016/j.intele.2017.03.003

Gaspareniene, L., Remeikiene, R., & Schneider, F. G. (2016). The factors of digital shadow consumption. Intellectual Economics, 9(2), 108-119. http://dx.doi.org/10.1016/j.intele.2016.02.002

Grossman, G. M. (1984). International trade, foreign investment, and the formation of the entrepreneurial class. American Economic Review, 74(4), 605-614.

Gupta, A. S. (2007). Determinants of tax revenue efforts in developing countries. IMF Working Paper No. 184. Washington, DC: International Monetary Fund.

Hoinaru, R., Buda, D., Borlea, S. N., Văidean, V. L., & Achim, M. V. (2020). The impact of corruption and shadow economy on the economic and sustainable development: Do they “sand the wheels” or “grease the wheels”?. Sustainability, 12(481), 1-27. http://dx.doi.org/10.3390/su12020481

Hu, A. G. (2007). Technology parks and regional economic growth in China. Research Policy, 36(1), 76-87. http://dx.doi.org/10.1016/j.respol.2006.08.003

Huynh, C. M. (2020). How does the impact of foreign direct investment on institutional quality depend on the underground economy?. Journal of Sustainable Finance & Investment, 10, 1-17. http://dx.doi.org/10.1016/j.respol.2006.08.003

Ikbal, M., Irwansyah, I., Paminto, A., Ulfah, Y., & Darma, D. C. (2020). Explores the specific context of financial statement fraud based on empirical from Indonesia. Universal Journal of Accounting and Finance, 8(2), 29–40. http://dx.doi.org/10.13189/ujaf.2020.080201

Ikbal, M., Irwansyah, I., Paminto, A., Ulfah, Y., & Darma, D. C. (2020). Financial intelligence: Financial statement fraud in Indonesia. Journal of Intelligence Studies in Business, 10(3), 80-95. http://dx.doi.org/10.37380/jisib.v10i3.640

Imam, P. A., & Jacobs, D. (2014). Effect of corruption on tax revenues in the Middle East. Review of Middle East Economics and Finance, 10(1), 1-24. http://dx.doi.org/10.1515/rmeef-2014-0001

Indriastuti, H., Kasuma, J., Zainurrosalamia, S., Darma, D. C., & Sawangchai, A. (2020). Achieving marketing performance through acculturative product advantages: The case of sarong Samarinda. Asian Journal of Business and Accounting, 13(1), 241-261. http://dx.doi.org/10.22452/ajba.vol13no1.9

Indupurnahayu, I., & Walujadi, D. (2019). Shadow economy and loss of potential taxes in Indonesia: Empirical study 1990-2018. Opcion, 35(20), 2899-2921.

Jiang, T., & Nie, H. (2014). The stained China miracle: Corruption, regulation, and firm performance. Economics Letters, 123(3), 366-369. http://dx.doi.org/10.1016/j.econlet.2014.03.026

Kelmanson, B., Kirabaeva, K., Medina, L., Mircheva, B., & Weiss, J. (2019). Explaining the shadow economy in Europe: Size, causes and policy options. IMF Working Paper No. WP/19/278. New York: International Monetary Fund.

Kihlstrom, R., & Laffont, J. J. (1979). A general equilibrium entrepreneurial theory of firm formation based on risk aversion. Journal of Political Economy, 87(4), 719-748.

Lestari, D., Darma, D. C. & Muliadi, M. (2020). Fintech and micro, small and medium enterprises development: Special reference to Indonesia. Entrepreneurship Review, 1(1), 1-9. http://dx.doi.org/10.38157/entrepreneurship-review.v1i1.76

Lucas Jr., R. E. (1978). On the size distribution of business firms. Bell Journal of Economics, 9(2), 508-523. http://dx.doi.org/10.2307/3003596

Mankiw, N. G. (1987). The optimal collection of seigniorage: Theory and evidence. Journal of Monetary Economics, 20(2), 327-341. http://dx.doi.org/10.1016/0304-3932(87)90019-5

Mazhar, U., & Méon, P-G. (2016). Taxing the unobservable: The impact of the shadow economy on inflation and taxation. World Development, 90, 89-103. http://dx.doi.org/10.1016/j.worlddev.2016.08.019

McCormick, B. (1997). Regional unemployment and labour mobility in the UK. European Economic Review, 41(3-5), 581-589. http://dx.doi.org/10.1016/S0014-2921(97)00024-X

McDonald, R. P. (1999). Test theory: A unified treatment. London: Lawrence Erlbaum Associates Publishers.

Medina, L., & Schneider, F. (2018). Shadow economies around the world: What did we learn over the last 20 years?. IMF Working Paper, No. WP/18/17. New York: International Monetary Fund.

Mnewa, R., & Maliti, E. (2008). The role of small business in poverty alleviation: The case of Dar es Salaam, Tanzarnia. Research Report 08.2. Dar es Salaam: Mkuki na Nyota.

Nastav, B., & Bojnec, Š. (2008). Small businesses and the shadow economy. Finance a Uver, 58(1-2), 68-81.

Nchor, D., & Konderla, T. (2016). The shadow economy of Czech Republic and tax evasion: The currency demand approach. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 64(6), 2081-2086. http://dx.doi.org/ 10.11118/actaun201664062081

Oi, W. Y. (1983). Heterogeneous firms and the organisation of production. Economic Inquiry, 21(2), 147-171. http://dx.doi.org/10.1111/j.1465-7295.1983.tb00623.x

Omodero, C. O. (2019). The consequences of shadow economy and corruption on tax revenue performance in Nigeria. Studia Universitatis “Vasile Goldis” Arad. Economics Series, 29(3), 64–79. http://dx.doi.org/10.2478/sues-2019-0012

Setini, M., Yasa, N. N., Supartha, I. W., Giantari, I. G., & Rajiani, I. (2020). The passway of women entrepreneurship: starting from social capital with open innovation, through to knowledge sharing and innovative performance. Journal of Open Innovation: Technology, Market, and Complexity, 6(25), 1-14. http://dx.doi.org/10.3390/joitmc6020025

Smith, P. (1994). Assessing the size of the underground economy: The statistics Canada perspectives. Revue Fiscale Canadienne, 41(2), 247-258.

Stawasz, E., & Głodek, P. (2011). SMEs innovation and job creation potential in the shadow economy context. Comparative Economic Research. Central and Eastern Europe, 13(4), 99-115. http://dx.doi.org/10.2478/v10103-009-0048-x

Suparjo, S., Darma, S., Kurniadin, N., Kasuma, J., Priyagus, P., Darma, D.C., & Haryadi, H. (2021). Indonesia’s new sdgs agenda for green growth – emphasis in the energy sector. International Journal of Energy Economics and Policy, 11(3), 395-402. http://dx.doi.org/10.32479/ijeep.11091

Suyono, E. (2018). External auditors’ quality, leverage, and tax aggressiveness: Empirical evidence from the Indonesian stock exchange. Media Ekonomi dan Manajemen, 33(2), 99-112. http://dx.doi.org/10.24856/mem.v33i2.711

Tee, E., Boadi, L. A., & Opoku, R. T. (2016). The effect of tax payment on the performance of SMEs: The case of selected SMEs in Ga West Municipal Assembly. European Journal of Business and Management, 8(20), 119-125.

The Global Economy. (2020). Indonesia economic indicators. Retrieved from https://www.theglobaleconomy.com/Indonesia/ (13-12-2020).

The International Monetary Fund. (2020). Informal economy data: Compilation practices. Retrieved from https://www.imf.org/en/Data/Statistics/informal-economy-data (27-11-2020).

Tülüce, N. S., & Doğan, İ. (2014). The impact of foreign direct investments on SMEs’ development. Procedia - Social and Behavioral Sciences, 150, 107–115. http://dx.doi.org/10.1016/j.sbspro.2014.09.012

Twesige, D., & Gasheja, F. (2019). Effect of tax incentives on the growth of small and medium-sized enterprises (SMEs) in Rwanda: A case study of SMEs in Nyarugenge district. Journal of Accounting and Taxation, 11(5), 89-98. http://dx.doi.org/10.5897/JAT2019.0339

Wijayanti, T. C., & Darma, D. C. (2019). The role of investment and government expenditure on grdp and human development in East Kalimantan. International Journal of Scientific and Technology Research, 8(9), 1232–1237.

Williams, C. C., Round, J., & Rodgers, P. (2009). Evaluating the motives of informal entrepreneurs: Some lessons from Ukraine. Journal of Developmental Entrepreneurship, 14(1), 59-71. http://dx.doi.org/10.1142/S1084946709001144

DOI: http://dx.doi.org/10.24856/mem.v27i01.2558