ASEAN Economic Bulletin 215 Vol. 26, No. 2, August 2009 ASEAN Economic Bulletin Vol. 26, No. 2 (2009), pp. 215–26 ISSN 0217-4472 print / ISSN 1793-2831 electronic © 2009 ISEAS DOI: 10.1355/ae26-2f Spatial Concentration of the Informal Small and Cottage Industry in Indonesia Aloysius Gunadi Brata This paper discusses the spatial concentration of the small and cottage industry without legal entity or informal industry in Indonesia in 1998–2005. The study found provinces in Java consistently show a strong domination in total employment of the informal small and cottage industries. By employing several measures on the employment data, this study found an increase in spatial concentration of the informal small and cottage industry during this period. This paper argues that there are two important explanations regarding the increase in spatial concentration. Both explanations are the impact of economic performance and the impact of high cost of formality. It implies that to decrease spatial concentration there is a need to improve the equality of economic growth across provinces together with an effort to reduce the cost of formality in doing business. Keywords: Spatial concentration, small and cottage industry, Indonesia. I. Introduction Most enterprises in Indonesia are small (enterprises with five to nineteen employees) and micro enterprises (enterprises with less than five employees). According to Badan Pusat Statistik (BPS 2008), 99.99 per cent of total establishments in Indonesia in 2007 are micro-small-medium enterprises. They employ about 97.3 per cent of total employment in all establishments. Contribution of these enterprises in Indonesia’s gross domestic product — in real value — is considerably important at 53.49 per cent. However, since the domestic market is the main orientation of small enterprises, their contribution in total export (non-oil) is rather small (20.02 per cent in 2007) since most of them are establish- ments in the industry sector. About 53 per cent of small establishments in 2007 were farm-based establishments (BPS 2008). However, in terms of employment, non-farm enterprises are more important than small enterprises in the agriculture sector. Contribution of small non-farm establishments in total employment by small establishments is about 53 per cent. A World Bank study shows that 57 per cent of the working population in Indonesia is