Government intervention to enhance the MSME development becomes a critical issue in the debate of MSME literature. Several scholars claim that government intervention for removing developmental obstacles and for empowering and boosting competitiveness of the MSME are urgently required. However many studies show that most of the MSMEs particularly that are located in traditional industrial clusters where government intervention is absent, have an ability to survive and grow. This paradox is examined in this study by analysing the impact of the government policy and the role of governmental institutions on the MSME survival in labour-intensive clusters in East Java Province in Indonesia. Using qualitative approach, this case study discovered that the survival of MSMEs is more influenced by their capability to gain collective efficiency and by their ability to maintenance social capital rather than impact of gGW OCtoberovernment intervention. Thus, this study contributes to the MSME literature by highlighting the importance of local wisdoms in viewing the development of the MSME and provides a policy recommendation for the government and other institutions to consider these factors seriously into account in designing and implementing the MSME empowerment policies.
(This paper is presented in “ The 2013 GW Global Entrepreneurship Conference organized by George Washington University-World Bank-ICSB, on October 17-19, 2003 at Washington DC )