Doing Business in Indonesia

Understanding the Indonesian Economy

Navigating the Indonesian economy requires an appreciation for its nuanced macroeconomic policies, acknowledgment of its impressive economic growth trends, and an understanding of how its strategic location fortifies its role in ASEAN and global trade.

Macroeconomic Policies

Indonesia’s macroeconomic policies have aimed at maintaining stability and fostering sustainable growth. In 2022, measures were introduced to manage inflation and support domestic consumption, a significant component of the nation’s GDP. Structural reforms, such as improving investment climate and updating tax policies, have been instrumental in reinforcing economic resilience.

Economic Growth Trends

Looking at economic growth trends, Indonesia’s GDP in 2022 measured at approximately $1,319.10 billion, reflecting a robust and expanding economy. The country’s rich natural resources and significant domestic demand partly fuel the growth. Efforts are ongoing to diversify the economy to mitigate the risks associated with commodity price fluctuations.

Indonesia’s Strategic Location

Indonesia’s strategic location is a pivotal asset. Situated along vital international trade routes, the nation benefits immensely from its proximity to other Asian economies and its integral position within ASEAN. This advantageous position contributes to Indonesia’s economic potential and allure as a business destination.

Legal and Business Framework

Doing business in Indonesia requires navigating its comprehensive legal framework. This involves understanding the Job Creation Law, compliance with stringent business licensing requirements, and adherence to corporate governance standards.

Job Creation Law

The Job Creation Law, enacted in November 2020, significantly reformed various economic sectors to improve Indonesia’s investment climate. It simplified regulations related to business licensing, investment requirements, and employment. Companies must familiarize themselves with this law, which consolidates numerous prior rules into a single, streamlined framework.

Business Licensing Requirements

Business licensing in Indonesia has been overhauled to facilitate ease of doing business. The new framework categorizes businesses into low, medium, and high risk, each with specific licensing requirements. Low-risk businesses benefit from more straightforward licensing procedures, while medium and high-risk companies must adhere to more rigorous standards.

Compliance and Corporate Governance

In Indonesia, compliance and corporate governance are critical for business operations. They are structured to ensure that companies operate transparently, responsibly, and with accountability. There are specific mandates for financial reporting, board composition, and shareholder rights. Moreover, the legal framework in Indonesia dictates mandatory audits for certain types of companies to uphold these governance standards.

Starting and Operating a Business

Starting and operating a business in Indonesia involves navigating various procedures, requirements, and legal frameworks. Although the country has implemented reforms to improve the ease of doing business, entrepreneurs must still prepare to deal with bureaucracy and adhere to regulations, especially regarding construction permits and access to utilities.

Ease of Doing Business

Indonesia has been actively improving business efficiency by simplifying regulations and streamlining processes. According to World Bank rankings, Indonesia has made progress, yet businesses should still be prepared for complex dealings with bureaucracy.

Setting Up a Business

Entrepreneurs can expect to set up a business in approximately 1 to 3 months. Essential steps include creating company documents and having a Deed of Establishment ratified by the Ministry of Law and Human Rights, which can be expedited with the help of local consultants. For detailed guidance on document submission and procedures, visit the How to Start a Business in Indonesia As A Foreigner—FAQ Article.

Dealing with Construction Permits

Dealing with construction permits requires navigating through approximately 18 procedures, highlighting the importance of thorough preparation. Businesses must also consider the cost, a percentage of the warehouse value, and the potential 200-day processing time for completion.

Getting Electricity

Establishing a reliable electricity connection for a new business involves several steps, including applications, inspections, and installation. Despite reforms to improve procedures, companies should anticipate a process that could take time and resources.

Business Reforms

Indonesia has made notable business reforms to open more sectors to foreign investors and improve tax administration. These reforms are designed to create a more favorable environment for local and international businesses operating in the country. For an in-depth look at Indonesia’s reforms, the PDF Doing Business in Indonesia – PwC provides comprehensive insights.

Investment Opportunities

Indonesia offers a robust investment climate, with significant opportunities spanning various sectors. Strategic placements in infrastructure development, natural resource utilization, and sector-specific areas are all ripe for foreign investment, attracting global attention for their promising growth potential.

Infrastructure Development

The Indonesian government has prioritized infrastructure as a critical area for development. With an ambitious plan to encourage economic growth, large-scale projects such as roads, bridges, and ports are underway. These projects create many opportunities for foreign investment in the construction and operation phases. The 2023 Mid-Year Indonesia Investment Report highlights the increasing investments in the country’s infrastructure, impacting its overall investment appeal.

Natural Resource Utilization

Indonesia’s natural resource wealth is a considerable draw for investors, especially those focused on raw materials such as coal, nickel, and gold. The country is one of the world’s leading exporters of these commodities. Investment in the extraction and processing facilities presents a high-potential opportunity. There is an ongoing demand for extraction and sustainable practices in utilizing these resources, aligning with global standards and environmental considerations.

Sector-Specific Opportunities

The investment landscape offers diverse opportunities within specific sectors. The agricultural industry highlights coffee, boasting one of the globe’s most sought-after coffee bean varieties. This presents avenues for investment in the industry’s production and export facets. Additionally, sector-specific investments have been facilitated by improvements in the ease of business, making Indonesia a strategic choice for expanding businesses in pharmaceuticals and digital technology areas.

Businesses can leverage Indonesia’s growing economic landscape by strategically investing in these areas. With a firm understanding of the local investment climate and regulatory requirements, investors can tap into Indonesia’s rich opportunities.

Trade and Taxation

Indonesia’s dynamic market features a complex trade environment and a multifaceted tax system. Businesses must navigate these regulations carefully to manage taxation and capitalize on trade opportunities.

Export and Import Processes

Businesses must comprehend the export and import regulations governing transactions when engaging in trade. For exports, Indonesia requires companies to provide documentation, such as a commercial invoice, packing list, and Bill of Lading/Airway Bill. Importers must similarly prepare and have relevant documents, including an Import Declaration Form and approval from the Ministry of Trade. Compliance with these procedures ensures a seamless trade flow and adherence to Indonesian law.

Value Added Tax (VAT) Policies

In Indonesia, a value-added tax (VAT) is levied on most goods and services. Taxpayers must apply an 11% VAT rate, which is planned to increase to 12% by 2025. This is critical for businesses to account for in pricing strategies and when reporting to the tax authorities. Detailed knowledge of taxable goods and services, alongside applicable exemptions, helps in proper VAT handling.

Corporate Taxation

Corporate entities operating in Indonesia are subject to a corporate income tax rate of 22% for the fiscal year 2023. There are incentives available, such as reduced tax rates for publicly listed companies that meet certain conditions, like a 40% minimum share capital offering on the stock exchange. Companies should also account for social security contributions, which are mandatory and represent additional financial responsibilities beyond income taxation. Understanding these corporate taxation nuances is essential for statutory compliance and financial planning.

Foreign Investment Insights

Indonesia’s robust growth potential and strategic location make it a lucrative destination for foreign investment. In recent years, the country has seen an uptick in foreign direct investment, reflecting its improving business climate and government initiatives to attract overseas investors.

Foreign Investors in Indonesia

Foreign investors have identified Indonesia as a high-potential market. Indonesia’s investment is beautiful due to its large and young population, economic diversity, and ongoing reforms. Significant contributors to foreign investment include Singapore, the United States, Japan, the Netherlands, and China, which focus on manufacturing, mining, and services.

Investment Incentives

The Indonesian government offers various incentives to foreign investors to enhance the investment climate. These include tax allowances and holidays, import duty exemptions on raw materials and capital goods, and streamlined business licensing processes. Moreover, according to the 2023 Mid-Year Indonesia Investment Report, the government provides additional fiscal incentives for investments in specific regions and sectors that align with national development priorities.

Positive Investment List

The Positive Investment List is a comprehensive framework highlighting sectors where foreign investors are either fully or partially permitted to invest. The list, detailed in Indonesia’s Job Creation Law, is designed to open up more sectors to foreign investment, simplify the investment process, and clarify ownership limits in various industries. For instance, the renewable energy sector is a crucial area of focus, as the country aims to achieve a 23% renewable energy mix by 2025 to meet its climate objectives.

Labor and Workforce

In Indonesia, the labor market reflects a diverse range of industries, many of which are labor-intensive. Employment is governed by comprehensive legislation, and a significant segment of expatriate workers contributes to various sectors.

Employment Landscape

The Indonesian labor market is shaped by regulatory frameworks, such as the Labor Law 2003 on Manpower and subsequent amendments. Law No. 11 of 2020 on Job Creation was a pivotal change affecting company and employee dynamics. Major regulations include working conditions, employment contracts, and severance. There is also a broad scope for Human Resources and Payroll services.

Labor-Intensive Industries

Indonesia’s economy is bolstered by several labor-intensive industries crucial for employment rates and economic development. Key sectors include:

• Manufacturing: A dominant force in the economy, contributing significantly to GDP.
• Agriculture: Employs a large portion of the workforce despite the shift towards industrialization.
• Services sector: Although characterized by lower productivity, it has seen an increase in employment rates.

Expatriate Workforce

Indonesia’s demand for skilled labor has attracted a growing number of expatriate workers, predominantly in sectors like mining, oil, and gas, as well as managerial and consultancy positions. The expatriate workforce is subject to stringent regulations, requiring work permits and adherence to immigration policies. Employers must navigate complex employment laws to legally employ foreign professionals.

Business Practices and Etiquette

In Indonesia, business practices are influenced by cultural norms and the importance placed on hierarchy and relationships. Etiquette plays a crucial role in business, with expectations surrounding communication and meeting structures that foreign companies should understand and respect.

Business Communication

In the Indonesian corporate environment, communication is formal and hierarchical. Directness is often avoided in favor of implying one’s thoughts and opinions, as preserving harmony and not causing “loss of face” is a priority. Indonesians prefer to establish a respectful rapport before business discussions take place.

• Initial Contact: It’s expected to be introduced by a third party, as cold calls are not the norm. Following an introduction, business cards are exchanged during the first meeting with the respect of using both hands.
• Language: Indonesian (Bahasa Indonesia) is the official language. Knowledge of English can vary, so having a local interpreter or learning key Indonesian phrases can be advantageous.

Negotiations and Meeting Practices

Negotiations may take longer in Indonesia due to the non-confrontational nature of business dealings and a less transparent corporate governance system. Decisions are often made at the top echelons of the hierarchy, which can extend the process as consensus is valued.

• Meetings typically begin with small talk, which is essential to building the necessary rapport and trust.
• Hospitality: It is an integral part of business etiquette in Indonesia, reflecting the society’s value on relationships, often seen in the generous hosting of guests.

Key Aspects:

• Scheduling should consider the many national and religious holidays.
• Being punctual displays respect, although local parties might arrive later.
• Gift-giving is not a widespread business practice; when it occurs, gifts should be given with discretion and thoughtfulness.

Challenges and Risks

Companies face several logistical and operational challenges when doing business in Indonesia. While the nation offers significant market potential, businesses often grapple with bureaucratic hurdles and transparency issues, which impact operational efficiency and market entry strategies.

Bureaucratic Inefficiencies

In Indonesia, establishing a business involves navigating complex bureaucratic procedures, which can be notably challenging in Jakarta, the nation’s capital and business hub. On average, it takes nine different procedures and around 47 days to set up a corporate entity, significantly longer than in many OECD countries. This red tape significantly slows the starting and operating of a business, requiring diligent planning and patience.

Transparency Issues

The challenge of lack of transparency is a considerable hurdle in Indonesia. Information regarding legal requirements and business procedures is not always readily accessible or transparent. This opacity can lead to misunderstandings and delays, making it imperative for foreign businesses to seek local expertise and guidance to navigate the murky waters of Indonesian bureaucratic systems.

Corruption and Due Diligence

Corruption remains a critical concern in Indonesia, as it can present significant risks to companies seeking to enter the market. Due diligence is not just advisable but essential. There are instances where companies may encounter corruption, which necessitates a comprehensive risk assessment and the implementation of rigorous due diligence practices to mitigate potential legal and financial repercussions. Engaging with local experts and conducting thorough checks can aid in identifying and avoiding corrupt practices.

Emerging Sectors and Markets

Indonesia’s dynamic economy has several rapidly growing sectors that offer significant investment opportunities. Key areas such as e-commerce, healthcare, and financial services are altering the traditional economic landscapes, providing new avenues for business development and market entry.

E-Commerce and Digital Economy

The digital landscape in Indonesia is exceptionally fertile. Its e-commerce sector is seeing tremendous growth due to a thriving demographic of tech-savvy consumers. Investment in this space is broadening as companies seek to leverage Indonesia’s large and youthful population, enhancing their digital capabilities to meet the increasing demand for online shopping and services.

• Key Players: Major e-commerce platforms and digital startups.
• Market Dynamics: Rising internet penetration, increased smartphone usage, and improved digital payment infrastructures.

Healthcare and Hospitals

Indonesia emphasizes health services, and hospitals and healthcare facilities are expanding in urban and rural regions. This growth is fueled by an increasing middle class, health-conscious trends, and support from governmental policies to enhance quality of life. Private investments and public-private partnerships are becoming common as the country works to improve its medical infrastructure.

• Investment Focus: Development of hospital chains, introduction of advanced medical technology, and pharmaceutical growth.
• Trends: A shift towards specialized healthcare services and medical tourism.

Financial Services and Retail

The financial services sector is transforming in Indonesia, propelled by fintech innovations and a burgeoning retail landscape. They are adopting new technologies to cater to a consumer base increasingly favoring online transactions and personalized financial solutions. Retail expansion in physical outlets and online platforms is tapping into Indonesia’s vast consumer market.

• Innovation Drivers: Mobile banking, e-wallets, and online financing solutions.
• Retail Growth: Augmented by modern trade facilities and e-commerce synergies.

Regional Focus

When addressing the regional aspects of doing business in Indonesia, it’s crucial to understand the unique economic landscapes and business environments across different areas. Each region, from Java and Jakarta to Bali and its eastern neighbors, presents distinct opportunities and challenges influenced by geography, infrastructure, and regional trade dynamics.

Java and Jakarta

As Indonesia’s economic powerhouse, Java contributes significantly to the nation’s GDP. Jakarta, the capital city on Java’s northwest coast, is the central hub for business and finance. It remains the primary gateway for international investors entering Indonesia. The city’s well-developed infrastructure and concentration of corporate headquarters make it a strategic location for starting and expanding business operations.

Batam and ASEAN Neighbors

Batam is poised uniquely at the crossroads of international trade routes near Singapore. The island is part of the Indonesia-Singapore Growth Triangle and leverages its proximity to Singapore to attract foreign investment and strengthen trade with ASEAN neighbors. As a free trade zone, Batam offers several incentives for international businesses, including tax concessions and simplified customs procedures.

Bali and Eastern Archipelagos

Bali is a tourist paradise and a growing business destination, especially for entrepreneurs and SMEs in the creative, digital, and service industries. The island’s international connectivity and high-quality lifestyle appeal to expats and investors. Further, with their vast natural resources, the eastern archipelagos present opportunities for new initiatives to develop infrastructure and promote sustainable business practices in these regions.

Sectoral Analysis

A diverse mix of agricultural, extractive, and manufacturing activities marks Indonesia’s economy. Sector-specific regulations and opportunities define how businesses operate within these areas, each contributing significantly to the nation’s GDP.

Agriculture and Forestry

Indonesia’s agriculture sector is a mainstay of its economy, employing millions and contributing substantially to export earnings. The fertile soils of the archipelago allow for various crops, including palm oil, a significant export product. The forestry sector, with its extensive tropical forests, contributes to Indonesia’s economic output, although deforestation concerns have led to regulatory changes affecting the sector.

Mining and Minerals

Indonesia is rich in natural resources, making the mining sector pivotal for the country’s exports and economic growth. It is one of the world’s leading coal, tin, nickel, and gold producers. The government’s approach to mining and mineral regulation focuses on the sustainable development of these resources while attempting to balance economic growth with environmental protection.

Manufacturing and Industry

Indonesia’s manufacturing and industry sector includes diverse industries such as textiles, automotive, electronics, and pharmaceuticals. Robust domestic demand and a strategic location in Southeast Asia attract foreign investment. This sector is a crucial driver for Indonesia’s economic development, emphasizing moving up the value chain to produce higher-value goods.

Incentives and Special Programs

Indonesia offers economic incentives and special programs to attract investment and stimulate business sectors. These benefits are targeted and robust, often tailored to specific industries within designated areas.

Special Economic Zones

Indonesia proactively establishes Special Economic Zones (SEZs) to drive foreign investment and industrial activity. These zones offer a range of tax and non-tax incentives, including a 50 percent corporate income tax reduction for investments within specific capital ranges for a defined period. Additionally, businesses operating within SEZs may be granted customs and excise advantages and ease of land acquisition.

Omnibus Law Benefits

The recently enacted Omnibus Law paves the way for a more encompassing and streamlined regulatory framework. It simplifies the investment process and provides various fiscal incentives, particularly in regional and underdeveloped areas. This law intends to minimize bureaucratic hurdles and improve the ease of business in Indonesia.

Aviation and Shipping Incentives

Indonesia recognizes the strategic importance of the aviation and shipping industries. Tax holidays are a 100% corporate income tax exemption, applicable for 5 to 20 years based on the investment amount. After this period, companies benefit from a subsequent 50% tax reduction for two additional years. These incentives are intended to bolster growth and competitiveness in these sectors.

Connectivity and Infrastructure

Indonesia’s commitment to bolstering its connectivity and infrastructure is pivotal for its business landscape. The nation’s strategic location and ongoing transportation and communications enhancements are a bedrock for robust economic growth.

Transportation and Logistics

Indonesia’s geography, comprising thousands of islands, requires a solid transportation structure to promote national cohesion and economic activity. The government has made significant investments in building and upgrading roads and toll roads, vital for moving goods and services across the country. Core projects like the Trans-Java Toll Road have dramatically increased land transport connectivity, reducing travel time and cost.

The country’s ports and airports are also vital, with improvements intended to enhance Indonesia’s strategic position as a global maritime axis. The enhancement of port infrastructure aims to streamline logistics, reduce dwell times, and increase the efficiency of the sea transport system.

Communications Infrastructure

The communications infrastructure in Indonesia is rapidly advancing, focusing mainly on digital telecommunications. The ongoing expansion of physical, digital infrastructure to support the burgeoning digital economy and broader Internet governance measures. The collaboration between the Asian Infrastructure Investment Bank and PT Satelit Nusantara Tiga to develop, launch, and operate a new telecommunications satellite will enhance connectivity for approximately 45 million people in remote regions.

Moreover, investment in ICT infrastructure and startup support resonate with Indonesia’s strategy to become a leading digital energy in Southeast Asia. The nation’s initiatives have prepared the groundwork for a competitive environment conducive to the growth of micro, small, and medium-sized enterprises within the digital sector.

Cultural Insights

Indonesia is a highly populous country with a culture emphasizing social hierarchy and group harmony. Understanding and respecting these cultural dynamics is crucial for successful business in Indonesia. The Indonesian business environment values formality and courtesy, demonstrated through polite communication and patience during negotiations.

In meetings, engaging in small talk before discussing business is common. This practice helps build a rapport and is a testament to the relationship-oriented nature of the culture. Business cards should be given and received with both hands as a sign of respect.

Hierarchical Structures

• Seniority is revered; always address the most senior person first.
• Decisions are often made at the top, with little input from lower ranks.

Communication Style

• Indonesians may communicate indirectly to avoid confrontation.
• Non-verbal cues are substantial; pay attention to body language and tone.

Indonesia’s middle class expands, creating emerging consumer markets and investment opportunities. However, this growth is accompanied by a shift in local business operations, which requires foreign businesses to adapt and collaborate closely with their Indonesian counterparts.

Key Considerations

• Building trust and nurturing long-term relationships are pivotal.
• Understanding and practicing local business etiquette can open doors to better collaborations.

Entering Indonesia’s business sphere means navigating these cultural nuances, ensuring respect and alignment with local customs.

Additional Resources

An array of resources is available to provide guidance and legal know-how to entrepreneurs and businesses looking to engage economically in Indonesia. Utilizing these resources can offer valuable insights into effectively navigating the Indonesian business landscape.

Government and Legal Resources

• Indonesia Investment Coordinating Board (BKPM)
  • Acts as a central gateway for foreign investors, providing detailed information about legal procedures in Jakarta.
• Law and Regulation Repository
  • The official repository for legal documents relevant to business operations, addressing norms ranging from general business conduct to specific sectoral laws.

Business and Investment Guides

• Comprehensive Business Guides
  • PricewaterhouseCoopers (PwC) Germany offers a guide on navigating the investment environment in Indonesia.
  • Deloitte’s guide provides a perspective on doing business in Indonesia, drafted explicitly for a global audience.
• Regional Focus
  • ASEAN Briefing provides tailored guidance for insights within specific regions, such as Malaysia or Singapore.

Upcoming Webinars

• Scheduled Learning Opportunities
  • Potential investors and business professionals can register for webinars focusing on the Indonesian market. These often include sessions hosted from various locational perspectives, from Boston to Ho Chi Minh City.