Inclusive or Divisive? The Impact of Entrepreneurship and Macroeconomic Drivers on Income Inequality in Indonesia

Abstract

Background: Income inequality remains a persistent challenge in Indonesia despite sustained
economic growth and poverty reduction. While the country continues to advance toward its Vision
2045 goals of becoming a high- income and equitable nation, disparities in wealth and opportunity
remain evident across regions and social groups. Entrepreneurship is widely promoted as a
driver of innovation, job creation, and inclusive growth; however, its impact on income
distribution is complex. In some cases, entrepreneurial activity fosters equality through
employment and productivity gains, while in others, it amplifies disparities when access to capital
and markets is uneven.

Purpose: This study investigates the impact of entrepreneurship, economic growth, trade
openness, financial development, human capital, and labor force participation on income
inequality in Indonesia. It aims to assess whether entrepreneurship fosters inclusive growth or
exacerbates disparities, in alignment with Indonesia’s Vision
2045 agenda.

Methodology: Using annual time-series data from 1990 to 2024, the study employs the
Autoregressive Distributed Lag (ARDL) model to capture both short- and long-run relationships.
Robustness is verified through Fully Modified Ordinary Least Squares (FMOLS) and Dynamic
Ordinary Least Squares (DOLS) estimations, complemented by comprehensive diagnostic and
stability tests.

Finding: he results reveal that entrepreneurship, financial development, and labor force
participation exacerbate inequality in the long run, while economic growth, trade openness, and
human capital help reduce income disparities. In the short run, GDP growth and human
capital serve as strong equalizers, whereas entrepreneurship exerts only a mild effect. These
outcomes suggest that without appropriate equity mechanisms, entrepreneurial and financial
expansion may disproportionately benefit wealthier groups.

Limitation: This study is subject to several limitations that should be acknowledged. First, it relies
on national- level time-series data, which may obscure regional variations in income inequality
and entrepreneurial activity across Indonesia’s diverse provinces. Second, the available data do
not differentiate between necessity-driven and opportunity-driven entrepreneurship, which may
have distinct effects on inequality. Third, while the ARDL model effectively captures short- and
long-run dynamics, it may not fully account for potential structural breaks or nonlinear
relationships arising from policy changes or economic shocks. Lastly, the study focuses primarily
on macroeconomic variables, excluding sociopolitical and institutional factors that could also
influence inequality dynamics. Future research should consider panel data and spatial
approaches to provide deeper insights into regional disparities and the multidimensional nature
of inclusive growth in Indonesia.

Originality: This paper offers one of the first Indonesia-specific long-term empirical analyses of
the entrepreneurship–inequality nexus. By integrating multiple macroeconomic determinants, it provides novel insights for achieving a more equitable balance between growth and inclusion
in an emerging economy context.