GLOBAL BUSINESS MANAGEMENT

WINTER 2014

Indonesia - Country Study

3/11/2014

Figure 1

Ioannis Mikedis
UNIVERSITY OF LAVERNE

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Country Study - Indonesia
1.

Ioannis Mikedis

INTRODUCTION

In this present effort we will attempt to provide the reader with a guide to understand the forces
present in the economy, politics, culture and future development of Indonesia. We will combine
information collected from available government and private sources and make an effort to forecast
what the prospects for an investment in Indonesia are. To understand the mechanics of our forecasting
effort we will present first a brief summary of historical, cultural, religious, educational, civil, population,
political, and social highlights which in our opinion play role in the accuracy of any forecasting effort.
2.

GENERAL INFORMATION ABOUT INDONESIA

Indonesia is a country located between the Indian and the Pacific Ocean in Southeast Asia. It is an
archipelago of 17,508 islands (6,000 inhabited). It straddles the equator. It occupies a strategic location
astride or along major sea lanes from Indian Ocean to Pacific Ocean (CIA, World Factbook 2013).
A few general statistics will help us to set the tone.

Indonesia is the 16th-largest economy in the world.

It has 45 million members of the consuming class
53% of the population resides in cities
The urban population is responsible for 73% of GDP
There are 55 million skilled workers in the Indonesian economy
There is a $500 billion market opportunity in consumer services, agriculture and fisheries,
resources and education

Population and ethnic groups.

The population of Indonesia is 251,160,124 (July 2013) and this makes it the fifth most populous nation
in the world. In terms of ethnic groups the Indonesian population is comprised mainly by Javanese
(40.6%) followed by 15% Sundanese with about 30% of the population belonging to unspecified groups.
(Figure 2b). The Indonesian archipelago encompasses one of the most linguistically dense areas in the
world with some 731 different languages.
The population age distribution indicates that Indonesia has a significant young population. The median
age is 28.5 years.
0 to 14 15 to 24 25 to 54 55 to 64 65+

26.6%
17.1%
42.2%
7.6%
6.4%

0 to 14 years
15 to 24 years
25 to 54 years
55 to 64 years
65 and older

26.60%
17.10% 42.20%
65+

7.60%

6.40%

55 to 64
25 to 54
15 to 24

The population growth rate is 0.99% (2013). This

0 to 14
means that the population of Indonesia increase by
about 2,486,485 persons annually. (Figure 2a) The
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
mortality rate is 0.00631%. From which the life
expectancy for the total population is 71.9 years. For men is 69.33 years while for women is 74.59 years
(2013).

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Population increase 2013-2055

280,000,000
270,000,000
260,000,000
250,000,000

Ioannis Mikedis

Ethinc Groups

50.00%
40.00%
40.60%
30.00%
20.00%
10.00%
15% 3.30% 2.70% 2.40% 2.40% 2%
0.00%

29.90%
2%

240,000,000
230,000,000
2013

2044

Figure 2 - a & b

In terms of where the population is distributed according to CIA World Factbook (2013) 50.7% of the
population leaves in urban areas with a 2.45% annual rate of change of urbanization. This is translated
to 2,153,423 people per year move to the cities.
The capital of Indonesia is Jakarta located on the island of Java with population of 9.6 million. The
metropolitan area of Jakarta however has population reaching 28 million. (Figure 3 a&b)
The population density is very high on the island of Java followed by those leaving in Sumatra and
Borneo. It is important to note that population density on Java may reach up to 10 thousand per mile2.
(Figure 4). This is very critical when discussing the future prospects of Indonesia.

Population Density by
Metropolitan Area (per mi2)

30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0

12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
0.00

City Population

Metropolitan Area

Figure 3 a & b

In order to facilitate some comparisons we will state that the population density in Manhattan is about
27,400 persons per km2 and in the New York metropolitan area is about 11,000 persons per km2 . For LA
metropolitan area it is about 20,000 persons per km2.

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Figure 4

Religion
Hinduism and Buddhism came to Indonesia from the early traders and settlers from main land Asia. The
religion of Islam arrived in Indonesia as early as the 16th century AD and became the countrys major
religion. Indonesians, as with all the earlier religions adopted to suit their needs. This is the reason why
we find the adoption of Islam being so extensive however with multitudes of sects.
The Indonesian constitution guarantees the right of the freedom of religion. However the government
only recognizes six official religions: Islam (86.1%), Protestantism (5.7%), Catholicism (3%), Hinduism
(1.8%), Buddhism and Confucianism (3.4%).
Calendars
There are three different calendars in use in Indonesia. The Western or Gregorian is the official calendar.
The Islamic holidays follow the Arabic calendar (loses 11 days each year when compared to the
Western). Finally there is the Hindu-influenced Javanese calendar.
Important holidays are:

New Year
Ascension Day
Waisak Day
Isra Miraj of the Prophet Mohammad

1-Jan
9-May
25-May
6-Jun

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Eid Al Fitr
Independence Day
Eid Al Adha
Islamic New Year
Christmas Day
Bank Closed

Ioannis Mikedis

8 to 10-Aug
17-Aug
15-Oct
5-Nov
25-Dec
31-Dec

Language and literature

The official language is Bahasa Indonesia with English, Dutch and Javanese being also used. Bahasa
Indonesia is written in the Roman alphabet and evolved from the market Malay trade language used
throughout the region during the colonial era. The governments conscious decision to use Bahasa
Indonesia as the official language sprung out of their effort to unify all Indonesians being a trade
language. It did not have the literary history or prestige of other languages such as Javanese.
A notable literary figure of Indonesia is Pramoedya Ananta Toer, a well-known author won the
Magsaysay Award and was considered for the Nobel Prize in Literature. Chairil Anwar was also an
important figure in the literature world and a member of the Generation 45 group of authors who were
active in the Indonesian independence movement.

Figure 5 a&b&c

Culture.
The sober, majestic, and profound court arts of eastern
and central Java, where Javanese is spoken, include
wayang kulit shadow theatre, wayang orang unmasked
dance, and wayang topeng masked dance. Puppet
theater is very popular in Indonesia. (Figure 5 a&b&c
and 7 a&b)
The dance Bedaya Ketawang is the most sacred dance in
the Palace of Surakarta Hadiningrat, it is the mother of
other court dances. (Figure 6). Officially, Bedaya
Ketawang is only performed once a year in the karaton

Figure 6

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compound to commemorate the coronation of Sri Susuhunan Pakoe Boewono, as the King of Surakarta.
This dance is depicting the very special relation between the first ruler of Mataram, Panembahan
Senopati with Kanjeng

Figure 7 a&b

Ratu Kidul, the Goddess of the South Sea the Queen Kencanasari. She vowed to protect every King of
Mataram, the direct descendants of Panembahan Senopati as well as the country and its people.
Since the 1990 the government of Indonesia has undertaken conscious efforts to advance a national
culture.
Natural Hazards
The hazards a business may face in Indonesia are related to earthquakes and volcanic activity, tsunamis,
flooding, typhoons, and mudslides.

Figure 8

The ring of Fire

The Ring of Fire refers to a ring of volcanoes around the Pacific Ocean that result from subduction of
oceanic plates beneath lighter continental plates. Indonesia is heavily affected by the continuous

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presence of earthquakes and the threat of tsunamis. 90% of the worlds earthquakes originate for this
area. (Figure 8)
In 2010, several Indonesian volcanoes erupted and caused major damage and disruption to the
populace and to economic interests. Mt. Merapi, the largest of these eruptions, resulted in 279,000
internally displaced persons, with 141 casualties and 453 injuries. Indonesia has deployed an effective
volcano monitoring system, which has enabled the government to inform the population about
potential eruptions and to direct evacuations that prevent casualties. When Mt. Karangetang in Central
Sulawesi erupted in March 2011, 1,200 residents were evacuated with no casualties.
Observing at the seismic hazard map of the country it is evident that the highest concentration of
population is very close to volcanoes or tectonic plates or areas where may be devastated by tsunamis.
(Figure 9 a)

Figure 9 a&b

Tsunamis
According to the US National Ocean Service tsunamis are giant waves caused by earthquakes or
volcanic eruptions under the sea. Out in the depths of the ocean, tsunami waves do not dramatically
increase in height. But as the waves travel inland, they build up to higher and higher heights as the
depth of the ocean decreases. Tsunami waves may travel as fast as jet planes over deep waters,
only slowing down when reaching shallow waters.
During one such occasion on December 26, 2004 a tsunami was the result of a massive earthquake
that occurred when the India tectonic plate sub-ducted beneath the Burma plate, causing an
earthquake with a magnitude of at least 9.0 on the Richter scale. The earthquake displaced a huge
amount of water, creating waves with heights of 10.8 meters (35.5 feet). The Sumatra Tsunami
travelled around the world in just one day, devastating coastal communities and killing an estimated
230,000 people. (Figure 9b)

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Krakatoa volcano
The eruption of the volcano Krakatoa on August 26th 1883 has been the most catastrophic eruption in
the recorded history. Many consider that the eruption constitutes the loudest sound ever heard. The
result was the complete destruction of the island Rakata. The tsunami generated killed more the 30
thousand people. (Figure 10 a&b)

Figure 10 a&b

Floods and Mudslides

During the rainy season -- December to March -- floods and mudslides wreak havoc in many areas of
Indonesia, including Jakarta. Over the past year, floods were the most frequent disaster event in
Indonesia. In 2011, heavy rains on January 15-16 caused the flow of lahar (volcanic mudflow) from Mt.
Merapi in Central Java. This flow isolated 50,000 residents and destroyed 52 irrigation dams. On March
10, 2011, 21 people died after floods swept through Pidie regency in Aceh. This flashflood also has
caused hundreds of houses to be inundated with water and seven bridges to collapse. On May 8, 2011,
rains caused flashfloods that killed 12 people and inundated thousands of houses in Garut, West Java.
And on May 18, 2011, heavy rains in North Sumatra caused four people to drown and killed another four
people in the landslide caused by the rain. (US State Department)
Political and Social Aspirations
Indonesia became independent from Holland in 1945. The political system is that of a republic. The
president is also the head of state and of the government. Due to its diverse linguistic and cultural
heritage Indonesia has always suffered separatists movements. The most prevalent such movements
are those in the areas of Aceh, Kalimantan, Sulawesi, the Molucca Islands and Papua. After a
referendum and significant international pressure, East Timor received its independence in 2002.
Administratively Indonesia is separated into 31 provinces. The legal system is civil law based on the
Roman-Dutch model with customary law influences. The Chief of State is President Susilo Bambang
Yudhoyono since 2004. The cabinet is appointed by the president. Elections for the President are held
every five years.
The most popular political parties based on the results from the most recent elections are:

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Democrat Party (PK)

Functional Groups Party (GOLKAR)
Indonesia Democratic Party-Struggle (PDI-P)
Prosperous Justice party (PKS)
National Mandate Party (PAN)

20%
14.5%
14%
7.9%
6%

Ioannis Mikedis

148 seats
107 seats
94 seats
57 seats
46 seats

It total in the last elections there were 38 parties represented with only nine parties accumulating
enough seats to be represented in the parliament.
The non- parliamentary groups that exert the highest political pressure are: The Commissions for the
Disappeared and Victims of Violence or Kontras, the Indonesian Corruption Watch or ICW, and the
Indonesian Forum for the Environment or WALHI.
Recent political developments
President Susilo Bambang Yudhoyono (a former general) exhausting his terms in office has not named a
preferred successor. He is therefore becoming a lame duck president. Anyone who might be picked to
follow him will suffer from association with a party widely seen as completely corrupt. When President
Yudhoyono was re-elected with a strengthened mandate in 2009, many Indonesians hoped in his final
term will make an attempt to fight corruption. Instead, reforms have slowed and Yudhoyono's own
party has been plagued by serious scandals.
Potential challengers are trying to position themselves for the upcoming election. Foremost among
them is Prabowo Subianto, a former general accused of human rights abuses and a coup attempt, but
who has reinvented himself as a businessman and popular politician. Coal magnate Aburizal Bakrie, has
secured the Golkar Party presidential nomination. He will be a serious contender, along with the chosen
candidate from former ruling party the PDI-P.
We should anticipate a slowdown in policymaking as campaigning intensifies.
Judicial System
The judicial branch consists of the Supreme Court, Constitutional Court, the High Court of Appeal, the
District Courts and religious courts.
Resent judicial decisions effecting business
Moves in the energy industry have worried analysts and executives about the legal certainty of
production contracts. In November, the constitutional court nationalized the oil and gas regulator
BPMigas and handed its authority to the energy ministry. Government officials requested the local chief
of Exxon Mobil Corp to step down after several Indonesian firms failed to buy natural gas assets that
Exxon had put up for sale.
Banking
According to the sectors regulator, the Bank of Indonesia, there are 120 commercial banks and 1681
rural lenders in Indonesia. In reality, however, a small number of them are responsible for most of the
lending activity in the market, with 15 banks accounting for about 70% of credit. As ranked by assets,
the following are the five largest banks in the country, including three state-owned institutions. (Oxford
Business Group 2012).

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Bank Mandiri
Bank Rakyat Indonesia (BRI)
Bank Central Asia (BCA)
Bank Negara Indonesia (BNI)
Cimb Niaga

Resent developments in the Banking System and monetary policy

In banking, a $7.2 billion bid by Singapore's DBS Group Holdings for the whole of Bank Danamon led the
central bank to finalize new rules on bank ownership that will usually only allow 40 percent single
ownership. The deal, which would be Southeast Asia's biggest ever takeover, is still stalled as Indonesia
is now pushing neighbor Singapore to open up to its main state bank in return.
Monetary policy has been stable, though President Yudhoyono has made a surprise bid to replace the
central bank governor with his finance minister, a choice that needs to be approved by parliament. In
March, the central bank held its key interest rate steady at 5.75 percent for a thirteenth straight month
as it seeks to support domestic demand.
Health
As access to education improved throughout the archipelago, use of modern forms of health care also
improved. One of the most notable features of Indonesias health care system in comparison to other SE
Asian nations was the low level of government support. We present below some selective statistics for
infant mortality as referenced by UN WHO and the World Bank (2010). (Figure 11, 12 a&b)

Figure 11

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Figure 12 a&b

3.

ECONOMY

Indonesia has seen a +6% growth in its GDP three years in a roll which has attracted many investors
discouraged by the performance of Europe and US. Efforts have been made to introduce reforms in the
financial sector including tax and customs reforms. During the recent global economic crises Indonesia
outperformed most of its neighbors and with China and India were the only nations to post growth in
2009.
The fiscal policies are conservative resulting in a debt to GDP ratio of 25%, a fiscal deficit of below 3%
and historically low rates of inflation. Fitch and Moodys both upgraded Indonesias credit rating. As of
January 2014 Moody's Investors Service has assigned definitive ratings of Baa3 (lowest of investment
grade bonds) to the Government of Indonesia's bond offerings with scheduled maturity dates in 2024
and 2044 with the outlook being stable.
Java is the main and most developed island where almost 60% of the Indonesian population lives and
most of the business and government activities take place. The concentration of infrastructure
investment in Indonesia is mostly focused in Java and North Sumatra. (Figure 13)

Figure 13

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Figure 14

In terms of mineral reserves Indonesia is a world leader and below are a few highlights worth
mentioning. (Figure 14)

15th rank of world coal reserve: Coal resources estimated around 104 billion tons with mineable
reserve approximately 21 billion tons
7th rank of world gold reserve: Gold resources estimated around 4,163 tons with mineable
reserve approximately 3,394 tons
7th rank of world copper reserve: Copper resources estimated around 68.96 million tons with
mineable reserve approximately 41.47 million tons
5th rank of world tin reserve: Tin resources estimated around 0.622 million tons with mineable
reserve approximately 0.462 million tons
8th rank of world nickel reserve: Nickel ore resources estimated around 1,650.4 million tons
with mineable reserve approximately 585.2 million tons

(Source: Indonesian Mining Association, 2007)

In terms of some general statistics we would like to

highlight the following.

GDP Composition
39%

14%
Agriculture

GDP is $1.237 Trillion (2012)

GDP growth rate is 6.2%

Industry
47%

Services

The currency is the Indonesian Rupiah (IDR) and

the exchange rate per 1 US dollar is 11,945 (2014). Figure 15
The currency is under pressure as weak exports and
increased imports have created trade and current account deficits. Lack of spending on infrastructure
and nationalist economic and trade policies are a risk for investors. There have been recent upheaval in
the regulation of mining and energy as politicians try to control key sources of revenue ahead of 2014
elections. (N. Chatterjee, Reuters 2013)
The major economic sector in Indonesia is the manufacturing and processing sector which contributes
around 24% of the GDP.
The GDP composition by end user is predominantly composed by household consumption and
investments in fixed assets and inventories. (Figure 15)

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The GDP composition by sector of the economy indicates that in 2012 47% was in industry, 38.6% in
services and 14.4% in agriculture.
Indonesia is struggling in the areas of poverty,
unemployment, inadequate infrastructure,
corruption, very complex regulatory
environment, and unequal resource distribution
among regions. To be able to tackle future
challenges the country has to address the
infrastructure issue coupled by eliminating the
impediment to economic growth, labor unrests
over wages, and reducing its fuel subsidy
program in view of high oil prices.

Thailand
9%
South
Korea
10%
Malaysia
10%

The main industries in Indonesia is: Petroleum

Figure 16
and natural gas, textiles, automotive, electrical
appliances, apparel, footwear, mining, cement,
medical instruments and appliances, handicrafts,
chemical fertilizers, plywood, rubber, processed
food, jewelry, and tourism.
The main agricultural products of Indonesia are:
rubber and similar products, palm oil, poultry,
beef, forest products, shrimp, cocoa, coffee,
medicinal herbs, essential oils, fish and its similar
products, and spices.

Infrastructure

Singapor
e
21%
Japan
18%

Malaysia
India 9%
10%

Japan
25%

US
12%

China
18%

South
Korea
12%

Singapore
14%

Figure 17

Infrastructure has been one of the challenges for

the Indonesian government in attracting foreign
investment. In the country there are around 391
kilometers of roads, 6,500 kilometers of
railways,, and 21.5 kilometers of waterways. In
addition Indonesia has 652 airports. The current
infrastructure needs to be significantly
developed and the governments priority is
power and energy, water and sanitation
facilities,
roads,
transportation
and
telecommunication. (HSBC, 2012)

Trade surplus/deficit
Malaysia
India
US
South Korea
Singapore
China
Japan
-10.00% -5.00%

Trading (Imports/Exports)

China
23%

US
9%

0.00%

5.00% 10.00%

Figure 18

Indonesia exports: oil and gas, electrical

appliances, plywood, textiles, and rubber. The main export partners are: Japan, China, Singapore, South
Korea, US, India, and Malaysia. (Figure 17)

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Indonesia imports: machinery and equipment, chemicals, fuels, and foodstuff. The main import partners
are: China, Singapore, Japan, Malaysia, South Korea, US, and Thailand. (Figure 16)
From the above we can conclude that Indonesia has trade surplus with: India, US, South Korea and
Japan. While it has trade deficit with: Malaysia, Singapore, and China. (Figure 18)

Figure 19 a&b

According to the US Energy Information Administration from Singapore and the Strait of Malacca
chokepoint in the southwest to the Strait of Taiwan in the northeast, the South China Sea is one of the
most important energy trade routes in the world. Almost a third of global crude oil and over half of
global liquefied natural gas (LNG) passes through the South China Sea each year. The Strait of Malacca is
the shortest sea route between African and Persian Gulf suppliers and Asian consumers. (Figure 19 a&b)
Indonesia produces about 912,100 bbl/day (2012 est.) and exports 371,400 bbl/day making it the 21
exporter of oil in the world. In terms of proven reserves Indonesia has 4 billion bbl (2013).
Resent developments in the economic policy
The government has proceeded to tax exports of mineral ores and set quota restrictions on certain food
imports. Also it is encouraging retailers to increase inventories of locally-made goods. The aim of the
government is to boost local manufacturing and upgrade the economy from a commodity producer into
an industrial powerhouse.
These policies have encouraged direct investment in areas such as palm oil and cocoa processing,
however at the cost of higher prices for imported food, and a significant reduction in the export of
metals.
Labor and Unemployment
With around 240 million people, Indonesia is the fourth most populous country in the world. The
country has a young population as around half of the total population is below the age of 30 years. This
rapidly rising population is straining the Indonesian employment market since it is estimated that
around 2 million new entrants are seeking jobs each year. Agriculture (43%) and Services (44%) are the
two biggest employing sectors. Taking those two factors in consideration, Indonesia currently contains a
large labor force; one that will grow larger in the foreseeable future.

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Figure 20

The unemployment rate has remained around 6% the last few years as it is tracked by The World bank.
(Figure 21)

Figure 21

A worrying characteristic of Indonesia is that the unemployment rate is highest for people between the
age of 15 and 24, far above the country's national average. Recently graduated students from
universities, vocational schools and secondary schools have difficulties finding their place in the national
workforce. In recent years, the share of higher education degree holders rises, while the share of those
that went to primary school decreases. (Figure 22)

Figure 22

Resent developments about Labor issues

Security risks from labour unrest have become a concern for investors in manufacturing.
Demonstrations over wages and the use of outsourcing turned violent at some industrial estates on Java
and Batam islands. Workers want a greater share of profits from the growing economy. They are likely
to keep pushing for higher wages through strikes and protests, after winning minimum wage increases
of up to around 50 percent for this year.

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Poverty
Between the mid-1960s and 1996, the number of Indonesians that lived below the poverty line eased
from over half of the total population to 11 percent. In the late 1990s when the Asian Financial Crisis hit
Indonesia it caused the poverty rate to rise up from 11 to 19.9 percent (1998).

Figure 23

Here we wish to note that the Indonesian government has altered or softened the definition of what is
poverty level. The Indonesian government defined the poverty line at a monthly per capita income of
233,740 rupiah or approximately USD $25 ($0.83/day). Applying however the poverty threshold as is
used by the World Bank, which classifies the percentage of the Indonesian population living on less than
USD $1.25 a day ($37.50/month) as poor, the percentages of the population living in poverty will rise
significantly. According to the World Bank, when taking into account the percentage of the Indonesian
population that lives on less than USD $2 a day, the figure for 2009 rises to 50.6% of the population. We
wish therefore to point out that a large proportion of the Indonesian population is in fact near poor.
One remarkable characteristic of Indonesian poverty is that there is a major difference in terms of
relative (% of population) and absolute poverty in relation to geographical location. While in absolute
terms over half of the total Indonesian poor population lives on the island of Java in relative terms the
provinces of eastern Indonesia show far higher numbers of poverty. (Figure 23, 24 a&b)

Figure 24 a&b

Looking at the extreme wealth the below list is what Forbes Magazine recognizes as the top ten richest
persons in Indonesia (2013).
Indonesias 10 richest men (Forbes, 2013)
Rank Name
Net Worth
1
R. Budi & Michael Hartono
$15,000 M

Age
-

Source of Wealth
Banking, Tobacco

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2
3
4
5
6
7
8
9
10

Eka Tjipta Widjaja & family

Anthoni Salim & family
Susilo Wonowidjojo & family
Chairul Tanjung
Sri Prakash Lohia
Boenjamin Setiawan & family
Peter Sondakh
Mochtar Riady & family
Sukanto Tanoto

$7,000 M
$6,300 M
$5,300 M
$4,000 M
$3,700 M
$3,000 M
$2,700 M
$2,500 M
$2,300 M

90
65
58
51
61
80
61
84
64

Ioannis Mikedis

Palm Oil, Self-made

Diversified, Self-made
Tobacco
Diversified, Self-made
Polyester
Pharma, Self-made
Investments, Self-made
Diversified, Self-made
Diversified, Self-made

Threat to business
Piracy - 2013

Figure 25

Maritime piracy in Indonesian waters continues, although incidents have decreased steadily in recent
years. (US State Department) (Figure 25)
Terrorist attacks
Terrorism has not left Indonesia unaffected. When such an event
takes place they are typically from militias that politically opposed
to Indonesian government interest. There are a number of
separatist movements operating in Indonesia. Some of the most
important are the Darul Islam (Indonesia), Fretilin (East Timorese
independence militia during Indonesian occupation of East Timor),
Gerakan Aceh Merdeka, and Organisasi Papua Merdeka. Recent
terrorism in Indonesia can in part be attributed to the al-Qaedaaffiliated Jemaah Islamiyah Islamist terror group. Since 2003, a
number of 'western targets' have been attacked. (Figure 26)
Terrorism intensified in 2000 with the Jakarta Stock Exchange
Figure 26
bombing, followed by four larger attacks. The deadliest killed 202
people (including 164 tourists) in the Bali resort town of Kuta in 2002. Many of the leaders of these
organizations have been captured and many killed, most notably Imam Samudra, Amrozi, Abu Dujana,
Azahari Husin, and Noordin Top.

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Since these attacks, Indonesia has effectively pursued counterterrorism efforts through legislation and
law enforcement. In 2010, security forces arrested more than 100 individuals on terrorism-related
charges. However, violent elements in Indonesia continue to demonstrate a willingness and ability to
carry out violent attacks with little or no warning.
Regionally, terrorist cells and insurgents have targeted police stations and officers. In October 2012, two
police officers were found assassinated in Poso, Sulawesi. In November 2012, there were various armed
attacks on police stations and officers in Central Java, including a bomb found in Pasar Kliwon Police
Precinct, Surakarta. Fortunately, many of these attacks failed due to Indonesian National Police (INP)
intervention. (US State Department, 2014) (Figure 27)
Civil Unrest
Demonstrations are common in Jakarta and
throughout Indonesia. Common areas for
protest activity in Jakarta include both the
Hotel Indonesia traffic circle and the U.S.
Embassy. While these demonstrations are
usually peaceful and police presence is
normally sufficient to maintain order,
demonstrations have occasionally become
violent, particularly when involving issues
related to religion. In the past, anti-American
Figure 27
demonstrations at the Embassy have been
sparked by U.S. foreign policy towards the
Israeli-Palestinian conflict and other issues related to the Middle East, Iraq, and Afghanistan.
Crime
Crime can be a problem in some major metropolitan areas in Indonesia. Crimes of opportunity such as
pick-pocketing and theft occur throughout the country. Criminals in Jakarta regularly rob customers in
taxis painted to look like taxis from reputable companies; booking taxis by telephone directly from the
company or through hotels is the best way to avoid falling victim to this scam.
Armed car-jacking, theft of vehicles and non-violent residential break-ins do occur in Indonesia. Personal
and "snatch-and-grab" robberies are the most common type of crime, and have occurred regularly, to
include targeting expatriates and embassy personnel.
Credit card fraud and theft is a serious and growing problem in Indonesia, particularly for Westerners.
Additionally, organized crime is also a problem in Indonesia including illegal logging and fishing,
trafficking-in-persons, the sale of illicit and counterfeit drugs, and corruption.
Doing Business in Indonesia
Taxation
Under the current laws a company is treated as a resident of Indonesia if it has its establishment or
place of management in the country. A foreign company will basically have to assume the same tax

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Country Study - Indonesia

Ioannis Mikedis

obligations. The tax rate since 2010 is 25% and the tax period is January to December. Branch profits are
subject to the same 25% rate. The after tax profits are subject to a withholding tax of 20% regardless of
whether the profits are remitted to the home country. Personal income tax follows the escalation model
with the first 50 million IDRs taxed at 5%, the next 50 million IDRs taxed at 15%, the next 250 million IDR
at 25%, and on anything more than 500 million at 30%. Additional taxes are the VAT (value added tax) of
10%, a land and building tax at 5% of the government determined sales value, and the stamp tax of 3 or
5,000IDRs.
Employment Law
Indonesian Law accepts verbal as well as written employment agreements. There are fixed term and
permanent employment agreements. The fixed-term is used for seasonal jobs. On bilingual contracts
and where there is a dispute the Indonesian version prevails. The working hours are 7 hr/day or
40hr/week for 6 working days in a week, or 8 hr/day and 40 hr/wk for 5 working days in a week.
Anything over than that is considered overtime except for persons in management position.
Employees are entitled to minimum of 12 days a year vacation. The law permits additional days for
death in the family, marriage or maternity leave.
Government medium term strategy
The Indonesian government is targeting and actively promoting a $222 billion dollar foreign investment.
Efforts are underway to improve the regulatory framework, simplifying the licensing process and
improving the business infrastructure. Some highlights of their efforts are:

4.

the equal treatment of domestic and foreign investors

shortening the length of time to do business by the introduction of an one-stop integrated
service
by allowing foreign investors to employ expatriates in some positions
by ensuring the right of foreign investors to repatriate profit in the form of payments of
dividends, reduction of capital, liquidation proceedings payments, royalties or technical fees
by granting tax facilities based on numbers of local employees
FORECAST ON FUTURE GROWTH

Indonesia is a far more diversified economy than one would think from being on the outside.(HSBC)
Macro economically Indonesia has a strong position being the 16th economy in the world, inflation
falling to single digits and a government Debt to GDP ratio far better than a lot of advanced economies.
Indonesia has a young population and the urban proportion of the population is increasing improving
individual incomes. As it is projected Indonesia will see about 90 million additional consumers entering
the market with the second strongest spending-power in the world after China.

BUS 685 - Global Business Management. Win 14

Country Study - Indonesia

Ioannis Mikedis

Tail Winds
The rise of the Asian consumer will
be a significant positive factor for the
future of Indonesia because the rise
in demand will be for a range of
resources and commodities supplied
by Indonesia such as palm oil, coal,
and oil.
Urban population increase will drive
the development of new cities or
metropolitan areas and facilitate the
increase of the Indonesian GDP.

Figure 28

Working population growth will generate according to estimates as much as 2.5% to the overall
Indonesian GDP.
Technology driven and digital based applications will proliferate even more facilitating production
flexibility, efficiency, communication, and in the final analysis the faster, cheaper, better products and
services.
Head winds
There are however three very significant issues facing Indonesia. The first is the productivity required to
maintain a 7% growth. The second is the uneven distribution of growth across the dominion and rising
inequality. The third is the infrastructure and resource constraints.
Recommendations for addressing the challenges
In order for Indonesia to face the issues addressed above it is our view that it needs to tackle each
challenge methodically, with clear strategy, as a long term effort that extends over a number of
administrations and in a form of a national rather than political effort.
To address the need to boost productivity Indonesia needs to work with sense of urgency in removing
barriers to competition.
As a very important first step the government needs to boost the telecommunication and broad band
internet areas. This will provide a medium for the consumers new and existing to reach the market of
products and services avoiding physical barriers. At the same time the government needs to mitigate the
barriers to higher productivity. In the case of financial services the present regulation is quite complex.
In the case of retail trade, the government should limit areas of protectionism which prevents
companies from adopting more efficient practices and may limit competition. In the areas of
transportation the government needs to address the aging and to some extend still nonexistent
infrastructure.

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Country Study - Indonesia

Ioannis Mikedis

With the rapid increase in the affluent middle classes of India, China, and domestically resulting in high
demand for food and agricultural products we recommend that Indonesia should study ways of boosting
the productivity in agriculture and fishing industry. The challenge here as we have described above
Indonesias population more and more is leaving the farm lands for establishing a leaving in urban areas.
According to some studies the required increase in productivity in agriculture has to reach 60% from
3tons per farmer to five tons in 2014. We fear that the rapid deforestation in order to boost productivity
by making more land available rather than utilizing more modern and efficient methods of farming will
generate negative environmental implications. In our view Indonesia needs to work in three fronts in
the area of agriculture productivity. The first is by boosting yields. The second is to shift production to
more profitable crops. The third is to reduce waste in the process of handling the products after harvest
and through the supply chain.
As we have said before with rapid urbanization Indonesia is already in an era of high demand for energy,
rough materials, water and other critical to growth resources. It has therefore to work in the area of
intelligent resource allocation. We expect that the government will have to significantly expand the
network of water supply that is safe and adequate. Notwithstanding water supply we expect that basic
sanitation will be a critical challenge one however that Indonesia needs to address with priorities in
areas that have very high population densities.
We recommend that in order to address the high demand for energy resources Indonesia needs to take
advantage of other not so conventional energy sources. We refer to geothermal energy, biofuels,
biomass while at the same time strive to modernize their conventional energy source utilization. Some
studies estimate the savings from utilization of more efficient methods of generating energy, by
improving transportation, and retrofitting and constructing more energy-efficient buildings by 2030 to
be as high as 15%.
To support all of this growth it is evident that Indonesia needs and will need in the future significant
numbers of skilled labor force. Human capital is a challenge Indonesia would most expeditiously have to
address since it is an effort which requires not only time but also intelligent incentives and a grass roots
approach. Some studies suggest that in order for Indonesia to reach and maintain the 7% growth that
they target the demand for skilled labor from todays 55 million in 2030 need to become 113 million.
Increasing the female participation to the work force will only add so much (estimated at an additional
20 million). It is the view of the World Bank and others that by 2030 Indonesia will face a 9 million
workforce shortfall. In our view Indonesia needs to address the issue of teaching standards with
investment in buildings and teaching material coupled by designing a curriculum that will address the
future demands in skills.
5.

CONCLUSIONS

Indonesia is no doubt a fascinating country that has accomplished to come out of the colonial rule with
success. It has a very favorable geopolitical location, a population that urbanizes and increases in size
and aspirations while entering the middle class. The challenges Indonesia is facing in the area of income
disparity, shortage of skilled labor and efficiency in resource allocation, energy consumption, and

BUS 685 - Global Business Management. Win 14

Country Study - Indonesia

Ioannis Mikedis

investment stimulation. Potentially Indonesia is a 1.8 trillion dollar investment market and we consider
Indonesia a very persuasive scenario for investment under the understanding the governments efforts
will present a firm, consistent and intelligent focus on addressing the issues presented.

BUS 685 - Global Business Management. Win 14

Country Study - Indonesia
6.

Ioannis Mikedis

REFERENCES

CIA Factbook 2013

https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
HSBC - Commercial Banking and PwC, 2012. Doing Business in Indonesia.
Neil Chatterjee, Reuters, FACTBOX-Key political risks to watch in Indonesia. 22-Mar-13.
http://uk.reuters.com/article/2013/03/22/indonesia-risks-idUKRISKID20130322
Oxford Business Group. Country Profile - Indonesias Leading Banks
http://www.oxfordbusinessgroup.com/news/closer-look-profiles-country%E2%80%99s-leadingbanks
US State Department - Bureau of Consular Affairs - Indonesia - Safety and Security
http://travel.state.gov/content/passports/english/country/indonesia.html