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The concepts of micro, small and medium enterprises (MSMEs) and industrial clusters have received a great deal of interest from scholars and public administrators in the last decade. The former examines particular actors in an economy with striking limitations to their own development, but which play pivotal roles in the social and economic development at the national level, while the latter looks at the agglomeration mechanism of an industry as it works to obtain efficiency and competitiveness. Scholars have devoted much effort to examining the contribution of industrial-cluster theory toward the survival of MSMEs, while policymakers have formulated and implemented policies to empower MSMEs. However, there have been debates on whether industrial clusters contribute to the existence of MSMEs (Gordon. & McCann 2000; Rocha 2004; Martin & Sunley 2005; vom-Hofe & Chen 2006; Motoyama 2008).\nThis study aims to elicit the driving factors in the survival of MSMEs in industrial clusters. Due to inherent obstacles in analysing the survival of various MSMEs, this thesis adapts Parrilli‘s model which recognises collective efficiency, social capital, and cluster policy as factors contributing to the survival of MSMEs in industrial clusters. This study specifically attempts to (1) empirically identify which of the driving factors in MSMEs‘ survival identified in the literature have been established by in the furniture and footwear industrial cluster of East Java, Indonesia (2) explore the reasons for the establishment of these driving factors in this context; and (3) examine how the factors drive these MSMEs‘ survival.\nA case-study method with qualitative inquiry is applied to discover the context of industrial clusters by identifying internal features and describing types of inter-actor linkages in industrial clusters. Fifty-six MSME owners and/or managers from selected furniture and footwear industrial clusters in East Java province in Indonesia are interviewed. The results and information from the interview are then compared, whenever possible, with available documents, projects or public information.\nThis research finds that the furniture and footwear industrial clusters in East Java-Indonesia are static industrial clusters that grow from traditional production systems. The factors in MSMEs‘ survival in these industrial clusters are driven by collective efficiency, social capital and government policy. Most MSMEs in these clusters are able to survive due to the benefits gained from collective efficiency of the clusters, some of which include information spill-over, access to pooling of labour and efficiency in source input. Furthermore, social capital is considered as a driving factor of MSMEs‘ survival because social capital forms, such as social value and social networks owned by most MSME owners and managers can motivate the owners and managers to sustain their business and cooperate to anticipate their shortages in production and marketing. Finally, industrial-cluster policy is considered as a driving factor of MSMEs‘ survival because this policy can create a conducive environment and provide adequate infrastructure. This study also discovers an association between collective efficiency, social capital, and industrial-cluster policy within an industrial cluster dynamic.\nAlthough the results of this study cannot be easily generated, it generates theoretical and policy contributions. Theoretically, this thesis offers an alternative perspective of MSMEs survival that relies on social and cultural context and adds a growing stream of literature in industrial clusters by identified interlinks between collective efficiency, social capital and cluster-policy factors. Finally, this thesis provides policy recommendations for both central and regional governments in Indonesia. It recommends that the central government give local governments more autonomy and larger budgets to support MSMEs‘ development, and that it encourages local governments to be aware of the aspirations of industrial-cluster actors in formulating and executing policy.
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