Asia Regional Studies

A Country Survey: Indonesia as the International Business Environment

Group Member: Kwak, Dong Hun

Song, Hyo Jong
Ko, Eunjung
Farizatul Aqma
Orkhan Lazimov
Submission Date: 7 June 2010

A Country Survey: Indonesia as the International Business Environment

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I. Growth Prospects and Business Opportunities

Indonesia is a third largest democracy and fourth most populous country in the world has

transformed itself from a low income country back in 1960s into a fast growing emerging market.

Indonesia now enjoys a stable political and economic outlook.

NMTP 2010-2014 is among other plans

introduced by Indonesian government to

support its socioeconomic planning system.

Indonesian government assumes its monetary

policy is accommodative to growth and GDP

growth is expected to be 5.5% (2010) and 6.0%

(2011). Growth may exceed this if the

government can accelerate its rollout of

infrastructure investment.

As one of the member in APEC, ASEAN, and G-20 has given Indonesia a lot of opportunities

to form trading partner with Japan, South Korea and Singapore. In order to boost infrastructure

and improve the business and investment climate, the government is implementing a

comprehensive reform agenda. Indonesia FDI inflows plunged by about 43% to $5.3 billion

(2009), but portfolio investment rose strongly as investor confidence improved. Besides, the

government entered into currency swap agreements totaling more than $30 billion that it would

tap true external position.

Indonesia is implementing one stop shops in order to attract more business. The one stop

shops facilitate easier process to start a business where firms only need two business weeks to

start up their own business. Indonesia is Asia’s most active reformer of business regulations in

2008/2009. Reforms introduced in 3 of 10 areas measured by starting a business, registering

property, and protecting investors. Reforms improved the country ranking in ease of doing

business to 122 out of 183 countries. The online reforms also implemented in tax registration

office where that leads to minimization of time. The application to publish the company articles of

association was merged with the issuance of the deed of establishment. Moreover, improvements

to the business licensing process reduced the time and cost to obtain a business trading license
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and the company registration certificate. Between 2005 and 2009, Indonesia introduced 11

reforms to make it easier for firms to operate. The reforms mainly focus on 3 areas: simplifying

start up process, expanding credit information and improving the rights of minority shareholders.

II. Country Risk Assessment

Indonesia is in a good position in terms of sovereign risk. This is because the debt to GDP

ratio of the national government fell to 28% (2009), maintaining a decline that has cut the ratio by

half in 5 years as illustrated in the indicators.

The reasons which have helped bring down the

debt burden are an expanding economy, fiscal

consolidation, and lower interest rates.

Standard & Poor’s has reevaluate Indonesia’s

long-term foreign currency credit rating for its

sovereign debt from BB- to BB (2010).

In terms of political stability, Indonesia seems stable under the administration of Mr. Yudhoyono

where during the president inaugural ceremony, he promised to realize “Prosperity, Democracy,

and Justice”. Government of Indonesia has announced “Program 100 Hari” that consisted of 15

core agendas which 9 of them are focusing on stimulating economy. Indonesia also introduced “A

million friends and no enemy” and “Foreign policy in all directions” that indicates its commitment

in international relations. In spite of all the introduction of policies and plan to stimulate the

economy, there are 52.1 million of workers (about 55% of total employee) earn less than $1 a

day and 7.9 million workers (8.2%) earn less than $2 a day.

Indonesia’s market risk can be measured through inflation level, unemployment rate and

exchange rate. In the case of inflation, the rates has been alleviated by an appreciating rupiah

resulted from the good harvests and lower local food and fuel prices. It decelerated from 12.1%

(2008) to 5.9% (2009). Indonesia unemployment rate has declined from 8.1% (February 2009) to

7.9% (August 2009) or 260 000 jobs are created in this period. However, the labor market is not

providing sufficient jobs to cover the unemployed, underemployed, and the new comers to the

labor market. Languid growth in the tradable sector, especially labor intensive manufacturing has

contributed to this situation. Moreover, about 70% people are working in informal area.
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From the figure 1.6, rupiah has been appreciated about 10% against

US dollar from July 2009 to June 2010. Current

exchange rate is IDR 9 231.51 to every USD 1.

Eradication of corruption has a long way to go. Further, Transparency International ranked

Indonesia at 111 spot from 180 countries for CPI Index 2009. However Indonesian government

recently is using tough approach through Corruption Eradication Commission (KPK) to eliminate

corruption. The KPK has reported a 100% conviction rate for corruption cases involving some of

the country’s highest ranking officials. Foreign ownership policy in Indonesia can be divided into

100% foreign ownership and joint venture. In the case of 100% foreign ownership, the company

must establish cooperation with local firms in its business and it must disinvestment at least 5%

of shares to Indonesian firms within 15 years after the commencement of the business. However,

joint venture composition of ownership is determined by the investors but Indonesian firms may

hold at least 5% of it. In spite of government efforts to provide convenient business environment,

the country’s contracts enforcement seems unfavorable for the investors. This is given by the fact

that there is favoritism over local firms by which such practices can be seen in the court ruling.

And according to World Bank, 570 days is required to fully enforce a contract.

Bureaucracy in Indonesia is high with its decentralized

administration. The World Bank measured this

by conducting a survey on ease of doing

business. Indonesia was ranked 122 in global

rank for 2010. Opaque regulations and division

of authority contributes to the high level of

bureaucracy. Additionally high cost involved in dealing with construction permit and registering

property may cause business pay bribes to shorten the time.

III. Regulatory Environment for International Business

Boosting investment and upgrading productivity are the main current challenges for

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Indonesia’s economy in order to meet global challenges and reducing poverty and

unemployment. Mr. Yudhoyono conducted new policies as part of outcome of government

control. And it makes Indonesia advanced as to compare with ASEAN countries. This can be

seen in the graph, Indonesia succeed in economy growth at 2008 when there was eruption of

world crisis. It caused by new policy about FDI.

FDI has also been an important

element of Indonesia’s economic

development process. As in many

other countries, Indonesia has been

offered special tax incentives to

promote investment. These incentives include, for example, tax holidays for new firms, tax credit

for new investments, exemptions from import duties particularly capital good and also providing

special zones for exporting companies. The debates over the effectiveness of tax incentives are

always active in Indonesia.

Indonesia, under Mr. Yudhoyono administration had announced plan to 7% growth until

2014 and core six industries preferentially. But it is impossible without FDI because of lack of

budget. Therefore, present government announced new policies for more acquisition of FDI. For

effectiveness, he arranged experts on the right places and adjusted new method of investment

(foreign + local) such as, reduction of terms of investment process, incentive of investment and

simplification of staying permission.

Below is the table where the government addresses problems that may discourage investors

and plan for the amendment of the problems. By doing this, it may creates business opportunity

as a results of improved infrastructure.

Problem Plan of Government Business opportunity

Lack of private
Tax Benefit Simple process of investment
investment

Providing cheap transport with

Inefficient transportation Making Blueprint
competitiveness

Lack of investment / Environment Improvement /

Electronic Plant Subsidy
High Import Reliance Domestic GAS providing

Holding old method / Incentive of agricultural Increase of salt’s demand caused by

Lack of support company process food

Inefficient Fund Flexible Fund of bank Development of Funding

Reliance of Import Output of create Goods Development of New Technology

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 Fund And Insurance for Small Improvement of Woodcraft, Fashion,
Capital Limitation
Business advertisement, Design industry
.

Every person who resides in Indonesia is compulsory to pay domestic tax. It is also

applicable to foreigner who lives in Indonesia. Recently tax deduction for corporate tax is

established for the donation (i.e. natural disaster restore, educational spending, and religion

contribution) or the nonprofit corporation. Below is the table showing tax burden for corporate

and individual.

Corporate tax rate

Year of 2008 Revision in 2009'

A standard of assessment (Rupiah) Tax rate (%) Single tariff

first sum – 50,000,000 10

2009' 28%
50,000,001 - 100,000,000 15
2010' 25%
more than 100,000,001 30
Individual tax rate

Year of 2008 Revision in 2009

A standard of Tax rate A standard of
Tax rate (%)
assessment (Rupiah) (%) assessment (Rupiah)
first sum - 25,000,000 5 first sum - 50,000,000 5
25,000,001-50,000,000 10 50,000,001-250,000,000 15
50,000,001-100,000,000 15 250,000,001-500,000,000 25
100,000,001-200,000,000 25
More than 500,000,001 30
More than 200,000,001 35
As individual tax rate changed from 5 step to 4 step, tax rate for income decrease.

In Indonesia, about 30% firms view tax rate as major constraints to the business, similar to

Philippines. In addition, about 23% of firms in Indonesia regard tax administration as major issue,

close to the figure for People Republic of China. In terms of custom and trade regulations, only

about 13% of Indonesian firms find them to be the major or severe constraints, the lowest among

selected ADCs. This could be the result of trade liberalization on policies adopted since the mid

1980s. Moreover, as part of its deregulation measures, Indonesia has moved toward simplifying

its customs procedures and some efforts have been made recently to hasten import clearance

and to adopt electronic filing. Indonesia is in a very favorable position in terms of delays in

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clearance of imports and exports at customs clearance, is generally acceptable.

With decentralization, problems associated with taxation have surfaced as critical issues. In the

ICS survey, taxation came out as the foremost issue in the post decentralization period. Half of

the firms indicated that local taxes present a problem to business. Large firms and exporters tend

to more affected by local tax issues. Of the firms considering local taxes a problem, 85%

complain about the multitude of taxes imposed by local authorities. 77% are unhappy with the

confusion in the applicability of taxes, and 73% register dissatisfaction with high tax rates. The

surge of local taxes and fees and the confusion in their implementation cause managers to

spend part of their time in meeting or inspections with the tax inspectorate. About 11% of firms

report that in these interactions, informal payments are expected or requested.

Legal environment remains uncertain, making potential investors wary. About 45% of firms

surveyed in the ICS, don’t believe that the court system in Indonesia practices fairness or

impartiality, and 40% have no confidence that the judicial system will enforce their contractual

and property rights. In addition, about 60% of firms do not agree that interpretation of regulations

by government officials affecting their business is consistent and predictable. These uncertainties

discourage potential investors for they increase the risk and cost of conducting business in

Indonesia.

IV. Conclusion and Recommendation

Indonesia nowadays under Mr. Yudhoyono administration has been improving in providing

more ease and convenient business environment to investors. Though several reforms are being

implemented, there are certain matters which the government needs to pay close attention.

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 Among those are of poverty and unemployment rate where there is a need for government to

stimulate labor intensive sector quickly. Corruption is one of the serious issues where in order to

eliminate it, Indonesian government need to reduce bureaucracy and implement tougher

approach through its Corruption Eradication Commission. Other issues that need to pay attention

is about lack of budget and improvement of infrastructure. It can be overcome through

preference and expansion of FDI by providing incentive, tax cut, or reduction on investment

process. Last but not least, tax burden is most likely the severe constraint that adds up to those

issues. Instead the government should give more tax breaks to encourage companies to list in

stock exchange and to invest in sector that has priority such as oil and natural gas. In short,

Indonesian government needs to remove the overall uncertainty, solve infrastructure bottle

necks, and introduce a new package of incentive so that the country can improve its investment

climate.

References

1) “Doing business in Indonesia”2010 http://www.doingbusiness.com

2) Trade policy regime: framework and objectives WT/TPR/S/184

3) Indonesia Trade, Exports and Imports

http://www.economywatch.com/world_economy/indonesia/export-import.html

4) CIA The World FACTBOOK, Indonesia

5) https://www.cia.gov/library/publications/the-world-factbook/geos/id.html

6) Indonesia, http://www.indexmundi.com/indonesia/

7) Indonesia and WTO http://www.wto.org/english/thewto_e/countries_e/indonesia_e.htm

8) Asian Development Outlook 2010. April 2010. 31 May 2010

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 http://www.adb.org/Documents/Books/ADO/2010/INO.pdf

9) Baek, Yoojin. “2nd direction of economy policy of Yudhoyono in Indonesia.” Regional

Economic Focus ISSN 1976-0507 Vol. 3 No.52 (2009): Korea Institute for International

Economy

http://www.kiep.go.kr/worldInfo/focus_view.asp?num=184641

10) Executive summary. World bank 2 June 2010

http://siteresources.worldbank.org/INTINDONESIA/Resources/Publication/280016-

1235115695188/5847179-1243851359474/6164739-1252905807195/exec.sum.en.pdf

11) Appendix: Snapshot of Indonesian Economic Indicators. World Bank 2 June 2010

http://siteresources.worldbank.org/INTINDONESIA/Resources/Publication/280016-

1264668827141/6742485-1270634116634/annex.en.pdf

12) www.worldbank.org

13) www.oecd.org

14) www.adb.org

15) www.transparency.org