Industrial Cluster with System Dynamic Approach to Improve Competitiveness: Study on the Micro- and Small-scale Ethanol Industry in Sukoharjo, Indonesia

Abstract: MSMEs initiate economic expansion; however, several challenges in the bioethanol sector, such as exorbitant cost, unstable supply of raw materials, outdated technology, and insufficient market access, are faced frequently. While previous studies on MSME competitiveness have primarily applied static models such as Porter's Diamond, these approaches fail to capture the dynamic interactions shaping industrial performance over time. This research works to close this gap by systematically linking Industrial Cluster Theory and SD modelling to measure MSEs' competitiveness in Sukoharjo, Indonesia. With a mixed method, stakeholder interviews were conducted to develop a Causal Loop Diagram (CLD) of major linkages that will provide a basis for quantitative SD simulations dependent on stakeholder input. Results show that the industry's sustainability is governed by cost-effectiveness, security of resources and marketability. The findings highlight the need for structured industrial clustering to address issues such as fragmentation, improved supply chain coordination, and targeted government interventions to support technology adoption, funding, and market expansion. The resulting framework constitutes a dynamic tool for policymakers and industry practitioners to enhance MSE competitiveness and sustainability.