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The Asia-Pacific region has become a power house in the global economy and hosts some of the largest economies in the world, including – China, Japan, and India.  Located in the middle of this geography is Indonesia and it presents an opportunity for investors but substantial risks remain for organizations entering the nation to do business.  

Over the last 40 years, Indonesia has seen rapid urbanization and a dramatic rise in wages for its citizens. The current population is around 270 million and most people speak English.  The rule of law is weak and to make matters worse, the government disfavors international arbitration. Indonesia has different cultures, traditions, languages and religions and claims “Unity in Diversity” as its motto.  But religious extremists pose a threat to this stance, and it remains to be seen whether tolerance for different viewpoints will win over fundamentalism.  87% of Indonesians are Muslims, and there is an undeniable trend moving the country towards a conservative religious culture. 

The democracy in Indonesia is young and flawed based on the Economist Intelligence Unit’s Democracy Index. Since the fall of General Suharto's regime in 1998, Indonesia has been conducting presidential elections every five years with a hope to reduce rampant corruption, nepotism and collusion that prevailed during Suharto’s autocratic reign.  

Economic Landscape
Indonesia’s economy has been on the upswing. With low government debt and prudent fiscal management, Indonesia’s economy is growing. Global investors have been reluctant to commit resources to Indonesia for multiple reasons, not the least of which are corruption, lack of a robust legal system, and uncertainty in government.  Banking, mining, IT, and related businesses are thriving.  Five of the top 10 businesses in Indonesia are state-owned. Small businesses account for about 60% of GDP and employ 108 million residents.  Infrastructure is in poor shape, and needs investment capital.

Mitigating Risk

Organizations considering Indonesia as a market must commit to constant trips and oversight.  Local cultures demand frequent engagement with those with whom you are doing business.

Indonesia has a long history of fraud and misconduct within the government. In 2000, then President Adurrahman Wahid found himself in the center of the now infamous Buloggate case. Wahid requested that Bulong, the state-run food and distribution agency, provide him with $12 million in cash. After several meetings, Wahid was paid $4 million in cash, which he deposited into his personal bank account. Once the scam surfaced, Wahid was removed from office. 

In 2017, parliamentary speaker, Setya Novanto, was found guilty of embezzling millions and costing the country $170 million in state losses. President Joko Widodo was elected in 2014 for a five-year term. He is widely regarded as a new breed of politician, promising change and relief from Indonesia’s corrupt past. His work, coupled with the 2002 launch of the Corruption Eradication Commission (KPK), has helped Indonesia combat some corruption issues. Transparency International gave Indonesia a score of 38 using their 2018 Corruption Perceptions Index, with zero being the most corrupt and 100 being very clean. Out of the 180 countries survey, Indonesia ranked 89, which is a great improvement from ranking last in 1995.  

Terrorism
Indonesia struggles with violent riots and bombings. In 2002, a bombing took place at the Kuta Beach Nightclub killing 202 people. In 2011, two Christian churches were set on fire by Muslim protestors claiming the churches were engaged in blasphemy. In 2018, 12 people were killed in the city of Surbaya when an entire Muslim family acted as suicide bombers and attacked three churches. 

As presidential and legislative elections are coming closer, many citizens have registered to vote. It’s estimated that 192 million people have registered their voice to be in heard in upcoming elections. 

Maximizing Opportunities 

KLINK considers Indonesia to be a challenging opportunity for businesses considering options to China.  As wages rise, as intellectual property theft remains unchecked, China may end up killing its golden goose status.  And unlike China, Indonesia has natural resources for agriculture, energy, and mining. 

Labor costs in Indonesia are low.  The main language is Bahasa Indonesia, however, most of the population speaks and understands English. KLINK would encourage companies to conduct a market entry assessment prior to conducting business in Indonesia. Their business practices differ drastically than the West – things move slower and are built upon committed relationships rather than sterile business transactions. Understanding who you are working with and establishing a connection with intermediaries will help to make the process go smoother. 

Risk Rating 7

Key Takeaways 

• Located in the center of the Asia-Pacific, Indonesia is in a prime location for global trade 
• Corruption continues to plague government, making access to permits and licenses difficult
• Religious culture is becoming conservative 
• The Indonesian people appear eager for change and are willing to work
• Legal recourse is difficult if disputes arise
• Poor infrastructure is both an opportunity and a limitation

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