Indonesia has much to offer prospective business owners and investors. The country is an emerging economic power, while still presenting much untapped growth potential. Indonesia is also blessed with extensive natural resources and a sizeable domestic consumer class.
Although Indonesia's infrastructure had suffered from previous neglect, the country's leadership is working to make improvements in this area. These factors have helped Indonesia attract an increasing amount of foreign direct investment (FDI). In 2012, Indonesia's FDI jumped 22.4 percent from the previous year.
Why Indonesia is attractive for business
There are a variety of reasons why Indonesia is an intriguing market for outside business owners and investors. The country economically outperformed its regional counterparts during the recent global recession, then experienced rapid growth in subsequent years.
Indonesia's gross domestic product (GDP) growth reached 6.1 percent in 2012, according to the World Bank. The country's economy was stimulated by strong performance in the manufacturing and industry sectors, along with growth in agriculture, forestry, mining, and hotels and restaurants. Indonesia's per capita GDP is projected to reach $8,883 by 2020.
Possessing the tenth largest economy in the world, Indonesia is quickly securing its position as a major global player. The country's economic engine is driven by a large domestic consumption base with an emerging middle class. Boston Consulting Group, a global management consulting firm, is estimating this growing middle class will continue to expand, nearly doubling by 2020, from 74 million to 140 million.
Finally, Indonesian firms have access to a young and growing pool of labor. Half of the country's citizens are 29 or younger. This ready workforce, along with the country’s geographic proximity and its massive natural resources, have helped Indonesia become a valued economic partner with China, India and other high-growth economies.
The challenges of doing business in Indonesia
While Indonesia has many attractive qualities for outside investors, it also presents some specific challenges.
Beginning a new business venture in the country can be a thorny proposition. Indonesia was ranked 128th in the world for ease of doing business by the World Bank and International Finance Corporation. This ranking is due in part to the exhaustive processes required to start a new business.
It takes, on average, nine steps to start a business in Indonesia. This stands in contrast to the Organization for Economic Cooperation and Development (OECD) average of just five steps. The entire process can take 47 days for most businesses to complete. New business ventures must interact with the State Treasury and the Ministry of Law and Human Rights, among others.
Registering property is also a time-consuming and expensive undertaking. It takes 22 days and six steps to register a property in Indonesia. This includes acquiring a land certificate examination and paying tax on the acquisition. The cost of registering property in Indonesia is significantly higher than the OECD average.
Indonesia also features a huge, complex tax system businesses must navigate. A total of 51 tax payments must be made annually, requiring 259 hours of business time to complete, on average. Indonesia has a corporate tax rate of 25-percent, which typically requires 75 hours to process. Social security contributions and VAT combine to add another 184 hours.
Finally, Indonesia suffers from a lack of transparency and strong corporate governance. The country also has significant corruption and organized crime. Local businesses frequently cite the difficulty of resolving industrial disputes, meaning extensive due diligence should be followed before signing any contract.
Conclusion
The challenges of operating in a new country are often daunting—regulations are constantly evolving and no business landscape remains static. Without a solid grasp of the issues at hand, businesses are exposed to tax penalties, and even the prospect of civil or criminal litigation.
If you are considering entering the Indonesian market, it is critical to have an experienced partner with a global footprint. CT has a worldwide network of offices and partners who will make sure your local needs are met, accurately and on time.
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