Indonesia Country Analysis International Business

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009

PESTEL analysis of Indonesia

October 3

2009

SUBMITTED TO: MR. SUNDERASAN

SUBMITTED BY: Hitesh Goyal Nirupan Chakravarthi Sainath.V MBA 12 and PGPRM-9

PESTEL Analysis of Indonesia

Page 1

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009

Introduction: Indonesia is one of the largest countries in South-east Asia, between the Indian Ocean and the Pacific Ocean which contain mainly mountainous and covered with rain forests, swamps and consists over 13000 islands. Jakarta is the capital of Indonesia. Indonesia declared its independence on 17th August 1945 from Japan but Netherlands agreed to transfer sovereignty in 1949. Susilo Bambang is the President and Muhammad Yusuf Kalla is the Vice-President of Indonesia. Bahasa is the official language in Indonesia which modified form of Malay but the most widely spoken language is Javanese. 88% of Indonesians population is Muslim. It has a very large trading environment, with several countries ranging in products from gas to textiles. 22% of its population live below poverty line. (CIA- The World Fact book)

PESTEL Analysis: Political and Legal factors: Indonesia is considered as Republic country. It declared its independence on 17 th August 1945 from Japan so 17th August is the national holiday. Indonesia’s legal rules and regulations are based on Roman-Dutch law. Their constitution has abrogated by Federal Constitution in 1949 and Provisional Constitution abrogated in 1950 which restored on 5 July 1959. Political stability: In Indonesia after every five year election is being contested for president and vice president post by direct vote of the citizenry. Last time it was held on 8 July 2009 (next to be held in July 2014). Susilo Bambang YUDHOYONO elected president and Muhammad Yusuf Kalla is the Vice-President. Similarly, Cabinet also appointed by the president. So for next 5 years there are more chances of stability of the government.

PESTEL Analysis of Indonesia

Page 2

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 Labour laws: Indonesia has one of the largest labour forces in the world which make it stand on 5th rank. So, to protect the labour rights the government has made a law called Labour laws Article 28D (2). According to this law 7-hour workdays and 40-hour workweeks, with one 30minute rest period for each 4 hours of work is legal in Indonesia. One day of rest weekly also mandatory in Indonesia. In April 1992, the Government of Indonesia signed a Memorandum of Understanding with the International Labour Organization under the International Program for the Elimination of Child Labour (IPEC) where the minimum working age is 14 years. (Labour & Social Protection in Indonesia, 2009) Labour force - by occupation: Agriculture: 42.1% Industry: 18.6% Services: 39.3% Company law: The Indonesian Company Law of 1995 is the most important framework for the current legislation on corporate governance in Indonesia. Under the Company Law, a company is a separate legal entity in which Directors and Commissioners represent the company. Every company must register their Memorandum of Act under this Company Law. (Incorporation of company Law in Indonesia) Prime lending rate: If we talk about their commercial Bank prime lending interest rate it is quiet decent which is 6.41% and their Central bank discount rate is 10.83% . (CIA, 2009) Environmental law: Indonesia Environmental Agency states Decree Laws. For instance, Municipal Noise Reduction Plan (MNRP) has noise limit such areas in housing occupancy, hospitals, schools, and religious buildings(). Business or individual tax system: Tax system has various rules and categories for example on first 25,000,000 income rate of tax is 10% then on next 25,000,000 it is 15% and on next 50,000,000 it is 30%. In the same way Income Tax on interest from Indonesian banks is fixed at a final 15% for both companies and individuals.

Economical factor: Indonesia is considered as a developing country. Due to the government policies and treasure of national resources, their GDP growth has been increasing rapidly from last few years. They PESTEL Analysis of Indonesia

Page 3

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 spend 23.5% of their GDP to develop their nation. According to last announced budget they had revenues $92.62 billion and expenditures $98.88 billion in 2008. They have hub of natural resources such as in Oil production, it has 23rd rank, in natural gas production and in export it is on 8th position. GDP: Indonesia has made significant economic advances through last years. Indonesia's debt-toGDP ratio in recent years has declined because of increasingly robust GDP growth which was 6.1% ($915.9 billion) in 2008 compare to 5.5% ($811.1 billion) in 2006 and compression to the world they are on 54th position in GDP growth. 14.4% of GDP earning from agriculture, 37.5% from service sector and the major part 48.1% comes from industry. (The World Bank, 2009) Per capita income: If we talk about per capita income, it was $3,500 in 2006 which was increase up to $3900 in 2008 and comparison to the world it is on the 157 th rank in per capita income. A. Average Family Income – 33 (Gina index) B. Distribution of Wealth 1. Income Class Bottom 10% of population represents 4% of wealth Top 10% of population represents 27% of wealth Exchange rate: Indonesian rupiah (IDR) per US dollar - 9,698.9 (2008) compare to 9,159.3 (2006) Indonesian rupiah (IDR) per Indian rupee- 205.97 FDI: FDI is one of the most important factors for every country. It plays a vital role in Indonesia growth rate. It is a developing country so they have good inflow of FDI. It was $67.3 billion in 2008 compare to $58.96 billion in 2007 and they are on 45th position in FDI stock. Inflation rates: Inflation rate is still high but it has come down after a high of 20.7% in 1999. It was 9.9% in 2008 compare to 6.3% in 2006. The major reason behind it is economic downturn. Import: Due to change in population, income, import and export in Indonesia are increasing every year. The total import in 2008 was $125 billion compare to $85.26 billion in 2007. The major import commodities are machinery, equipment, chemicals, fuels and foodstuffs. The major PESTEL Analysis of Indonesia

Page 4

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 import partners are Singapore 16.9%, China 11.8%, Japan 11.7%, Malaysia 6.9%, US 6.1%, South Korea 5.4%, Thailand 4.9% (2008) Export: In the same way due to economic growth improvement in productivity, government policies, export is also increasing rapidly. It was $93.3 billion in 2008 compare to $83 billion in 2007. The major export commodities are oil and gas, electrical appliances, plywood, textiles and rubber. The major export partner countries are Japan 20.2%, US 9.5%, Singapore 9.4%, China 8.5%, South Korea 6.7%, India 5.2%, Malaysia 4.7%. Balance of payment: The current account balance of Indonesia is $7.1million which was $8.8 million in 2008. The government spending has increased due to the country trying to alleviate widespread poverty and well being of the country. The government revenue has over doubled in the past 4 years while spending has increased by 3 times.

Social factor: Population: Indonesia has a large population, which is increasing at a steady rate. It is on the 5th position all over the world with total 240,271,522 populations which is growing at 1.13%. The birth rate in Indonesia is 18.84births/1,000 and the mortality rate is 29.25 deaths/1,000 populations. The total life expectancy rate is 70.76 years in which for male its 68.26 years and for female its 73.38 years. 52% of total population live in urban areas which are increasing at 3.2% every year. Age factor: Indonesia is considered as nation of young people. The total median age is 27.6 years in which for male it is 27.1 years and for female its 28.1 years Age structure: 0-14 years: 28.1% (male 34,337,341/female 33,162,207) 15-64 years: 66% (male 79,549,569/female 78,918,321) 65 years and over: 6% (male 6,335,208/female 7,968,876) Education: If a country has good literacy rate then it has bright future. Same thing apply on Indonesia. 90.4% of its populations are literate in which male are 94% and female are 86.8%. 3.6% of their GDP is spent on education.

PESTEL Analysis of Indonesia

Page 5

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 Religion: Indonesia is a multi culture and religion country where people from different religion work there. If we talk about majority it is a nation of Muslim with 86.1%, Protestant 5.7%, Roman Catholic 3%, and Hindu 1.8%,

Technological factor: Transport system: Indonesia has effective and highly developed transport system with 139 airports, railways with 8529 km and water ways covering 21579 km and major ports are Banjarmasin, Belawan, Ciwandan, Kotabaru, Krueg Geukueh, Palembang, Panjang, Sungai Pakning, Tanjung Perak, Tanjung Priok. It has one of the largest merchant moraine with 971 in which 114 is already registered in foreign country. Communication system: The communication system in Indonesia is highly developed which maintained 17.33 millions of people use landlines where as 83.3 million of people use Cellular mobiles in the same way there are 13 million of internet users which is good sign for a country. It has interisland microwave system, HF radio police net and domestic satellite communications system coverage which makes its communication system better. Broadcasting technology: If we talk about media sources it has 678AM and 43 FM channels. Similarly it has 54 local TV stations (11 national TV networks; each with its group of local transmitters)

Environmental factor: Geographical location: Its geographic environment is one of the most complexes and varied in the world. By one count, it has situated in South-Eastern Asia between the Indian Ocean and the Pacific Ocean. It has total 1,904,569 sq km area in that land is 1,811,569 sq km and water is 93,000 sq km. Basically it is hot and humid country. At least 669 distinct languages and well over 1,100 different dialects are spoken. The nation encompasses some 13,667 islands; the landscape ranges from rain forests and steaming mangrove swamps to arid plains and snow capped mountains. Time zone: Indonesia’s time zone is UTC+7 mean seven hours ahead of GMT and 16 hours ahead of U.S. Pacific Standard Time.

PESTEL Analysis of Indonesia

Page 6

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 Natural or environmental disaster: Due to its geographic location, several times Indonesia has faced many natural disasters such as in December 26, 2004; magnitude 9.0 earthquake caused a tremendously powerful tsunami in the Indian Ocean and about 155000 people died and after this in May 26, 2006, in Feb. 2007, January 27, 2008 and many times country has faced same trouble because of its location. In the same way, due to its mountainous interior regions of Kalimantan, Sulawesi, and Sumatra, country has faced deforestation, soil erosion and massive forest fires. In 1983, about 3 million hectares of prime tropical forest worth at least US$10 billion were destroyed in a fire in Kalimantan Timur Province. The disastrous scale of this fire was made possible by the piles of dead wood left behind by the timber industry. Even discounting the calamitous effects of the fire, in the mid-1980s Indonesia's deforestation rate was the highest in Southeast Asia, at 700,000 hectares per year and possibly as much as 1 million hectares per year.

Key finding and analysis: Corruption impact on export: The word ‘corruption’ has many meanings, but economists use it

to mean ‘the misuse of public office and services for private gain. Indonesia is on 100th position in corruption. (World Audit Org. 2008) If corruption rate is high then it also affects directly to country import and export. It goes same with Indonesia. It was on 135 positions in 1997 due to high corruption where the government think this is one of the main reasons of the biggest slowdown in 1997 in Indonesia. (Inside Indonesia, 2008) Secondly, there is majority of Muslim population. After 9/11 attack on USA, all Muslim have negative image in Western countries, it also affect their business relationship with western countries. The US$ 10 million transferred from the central bank to several members of the national parliament is also one of the examples of corruption, but after 2001 there is huge amendment in term of reducing corruption. The Indonesian Chamber of Commerce launched an ambitious regional decentralisation program in 2001. Instead of being centralised, power and authority are now more diffuse. It established also the Corruption Eradication Commission which helps to control the corruption. Infrastructure issues: Indonesia’s investment climate rank poorly in international comparisons. The World Bank’s Doing Business 2007 report ranked Indonesia 135th out of 175 economies on ease of doing business, and IMD’s World Competitiveness Yearbook ranked Indonesia 54th out of 55 countries. Macroeconomic instability is still viewed as the biggest obstacle, followed by poor transportation service and corruption in electricity such as stealing. Other major obstacles PESTEL Analysis of Indonesia

Page 7

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 include labour skills, tax administration, cost of financing, and labour regulation which raise the cost and uncertainty of doing business. In the same way out of 240,271,522 total populations only there is 13 million users of internet which is very less, but Indonesia has good natural resources because of it there export is increasing and it helps them to improve in infrastructure and transportation services due to vast investment by foreign countries. World Bank Assistance to Indonesia: Indonesia has good relationship with other nations for enhance the economic growth cooperation, for this they have maintaining co-operation with regional level and international level as well. And this country plays a vital role in WTO, and Indonesia committed strong agreements with some of the globalized organization like APEC (Asia Pacific Economic Co-operation), then AFTA (ASEAN Free Trade Area) and FTAs (Free Trade Agreement). Since 1967 the World Bank has continued an energetic occurrence in this country for sustain high economic growth with the ultimate importance of reduction of poverty. Then the World Bank allotted around US$ 24.6 billion to develop 275 financial projects and programs in 1991. Due to financial crisis in 2000 the bank repositioned itself with the lower amount of annual lending around $450 million, at the time the bank has focused more investment on different sectors like education, health, social development and environment, governance as well. By seeing the World Bank grant programs they are lending more than $2 US billion for 125 trust funds. By analysing in the pie chart they have captured high percent of other trust funds have 39%, urban development 19%, social development 12% and environment 5% respectively. Rests have the other percents for combined developments. Country Assistance Strategy (CAS) which governed the World Bank assistance to Indonesia for the year 2004 – 2008. Here they are mainly focusing all lending and grand activity by dividing into two ways which is following •

A week investment climate

•

Low quality service delivery to the poor

Apart from these two ways the CAS have other four business platforms for enhance the growth of government’s plan in Indonesia. The four major business platforms are •

Community Driven Development platform (CDD)

•

The narrow Service Platform

PESTEL Analysis of Indonesia

Page 8

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 •

The community efficacy Platform

•

National Lending Platform

On the whole, throughout the plan of CAS period of time from 2004-2008, the expected annual lending to go for CDD one of the business platform programs for about 25%. For the local services they use to lend 40%, and 15% for community efficiency, 20% for National lending program respectively. Indonesia and the future of ASEAN: This country belongs to ASEAN (Association of South East Asian Nations) group. In this group have many countries like India, Malaysia, Vietnam, Thailand, Singapore, Myanmar, Cambodia, these are the countries have membership in this ASEAN group. This group has started in 1967 8th of August from that time they have concentrated in Indonesian international co-operations. By the year of 1967 the Indonesia’s unsettling has changed. At that time this group has allowed the Indonesians to region and regional society. After that all the decisions made by the five foundation members of ASEAN. After that the group has gradually increased the peace and sustainability of the regional. This ASEAN includes the structure that Jakarta is the capital of Indonesia it was diffident adapt itself to constant frame and agreements which will enhance the functional integration. Since the Indonesia was the final member nation of the ASEAN group to squeeze complete potential economic of the organization. One of the ultimate goals for the Indonesia’s is to decrease the regional dependence on external powers like military and defence. Benefits of the ASEAN for Indonesia: •

It gradually increased the industrial production from 12.3% to 14.6%

•

The sources from ASEAN group has increased, it leads to invest more money into new business in the country

•

The scale of economies and the scope of production have increased progressively, and the base of technology also improved as well.

•

An international competitive have increased in the ASEAN industry of production.

•

At certain time the participation of private sector have increased and industrial complementation as well.

Then within the country the government allowed some schemes for the people enhance those are the plans which are implemented by the ASEAN group. They have come up with new schemes

PESTEL Analysis of Indonesia

Page 9

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 and agreements like AICO (Asian Industrial Co-operation Scheme), this leads to the country business improvement.

Sanctions history Indonesia has a $6 billion trade relationship with the United States, 40 times as much as Burma. The recent enactment of GATT gives the World Trade Organization (WTO) jurisdiction over international trade, and tries to prevent national and local governments from adopting stricter standards. Despite many legislators' assertions that it is a state's right to decide how the state spends its own money, Senate co-sponsor, Marc Pacheco of Taunton, said the bill was amended to make it conform to the WTO's Government Procurement act. The Indonesia legislation was amended to exempt individual purchasing contracts of more than $500,000 and construction contracts of more than $7 million to avoid any potential violations of the WTO act.

Legal or political barriers: Tariffs For doing the international trade business we have to know about the tariff and non tariff defence. Here for this country they have huge changes in their international trade policy progression. Licensing for import and export, then tariff, have been considerably decreased exploring domestic business to high international competitive business. •

The tariff for import has reduced faintly up to maximum of 5% in the year 2001 from 20% • Whereas for the year 2003 again it has reduced 10% from 20%, with an transitional target of 20% in 2000 • This tariff will differ from products, the excluded import tariff as follows – A definite agriculture product can be committed in GATT/WTO which usually synchronized individually – At some of the time particularly an automotive products will be regulated individually – In 2003 the tariff reduced up to 10% for the chemical products, plastic goods, and metal as well. With the respect to export taxes, the country still sustain the export taxes for palm oil products, even though it reduced significantly the extent and tax rate level, these are all now reduced. Regional and social factors:

Indonesia has majority of Muslim religion. So, during festival like Ramzan, in Indonesia, consumption and the import of meat products decrease rapidly because people in Indonesia eat PESTEL Analysis of Indonesia

Page 10

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 only one time in a day and restaurant and shops open 5 PM to 10 pm but in Western Countries it is entirely different from it such as consumption and imports of foods and beverage and electronic gadgets increase during festival like Christmas. According to The Indonesian Chamber of Commerce the meat import is increasing rapidly but there is less import of meat in Ramzan time. In the same way if people are educated, it will help to boost the economy growth because they have knowledge about latest technology which helps them to maximize their output at low cost with effective use of input. 90.4% of Indonesia’s populations are literate in which male are 94% and female are 86.8%. 3.6% of Indonesia GDP is spent on education. Conclusion: After analysing PESTLE analysis of Indonesia, we came to know it has some advantage and disadvantage in term of legal policy, economic factor, social, geographic and technological factor. Where growth rate, labour force, foreign reserve, water resources and natural resources such as gas, crude oil are more in Indonesia they have less per capita income, huge population, high inflation and unemployment rate. In Indonesia FDI is restricted in most of the sectors and the business environment is not good because of persistent corruption and natural disaster but it is recovering very fast and in next 4 or 5 years Indonesia would be in better position.

QA

PESTEL Analysis of Indonesia

Page 11

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009

Reference: Karim, S., Lee, M., & Gan, C. (2007, December). Real Effects of Monetary Policy in New Zealand. Australian Economic Review, 40(4), 385-401. Retrieved September 4, 2009, doi:10.1111/j.1467-8462.2007.00478.x Bourgeois, R., & Kusumaningrum, D. (2008, August). WHAT CEREALS WILL INDONESIA STILL IMPORT IN 2020?. Bulletin of Indonesian Economic Studies, 44(2), 289-312. Retrieved September 6, 2009, doi:10.1080/0007491080216903 Commerce. (n.d.). Retrieved 08 29, 2009, from Indonesiacommerce: http://www.indonesiacommerce.com/front/ Economy. (2008). Retrieved 9 3, 2009, from Indonesia-tourism: http://www.indonesiatourism.com/general/economy.html Fry, E. (2009, 06 26). Indonesia GDP improve for fifth quarter. Retrieved 08 26, 2009, from FT: http://www.ft.com/cms/s/0/dad55046-61f4-11de-9e03-00144feabdc0,dwp_uuid=b2e7f792-b6a611db-8bc2-0000779e2340.html?nclick_check=1 Global etiquette. (n.d.). Retrieved 08 28, 2009, from Kwintessential: http://www.kwintessential.co.uk/resources/global-etiquette/new-zealand.html Index of economic freedown. (2008). Retrieved 08 05, 2009, from heritage: http://www.heritage.org/Index/Country Indonesia. (n.d.). Retrieved 08 30, 2009, from IISG: http://www.iisg.nl/w3vlindonesia/ The world fact book. (2008). Retrieved 08 29, 2009, from Cia.gov: https://www.cia.gov/library/publications/the-world-factbook/geos/id.html#top Key Issues in Indonesia Private Sector, Retrieved from The World Bank: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/IND ONESIAEXTN/0 Corruption position of Indonesia, Retrieved on October 2008, from The World Audit Org.: http://www.worldaudit.org/democracy.htm Corruption inside Indonesia, Retrieved on 2009 from: PESTEL Analysis of Indonesia

Page 12

[PESTEL ANALYSIS OF INDONESIA] October 3, 2009 http://www.insideindonesia.org/content/view/1082/47/

PESTEL Analysis of Indonesia

Page 13