Guidance

Overseas business risk: Indonesia

Updated 18 February 2021

The Department for Business and Trade’s (DBT) Exporting to Indonesia Guide provides useful information on developing your overseas trade in Indonesia.

1. Political

Indonesia is the world’s third largest democracy, the largest economy in South-East Asia, and the only member of ASEAN in the G20. Indonesia has a Presidential system of democracy. A comprehensive push for decentralisation has seen much power transferred to the regions.

President Joko Widodo took up office on 20 October 2014. He is the first leader of Indonesia to come from outside the political and military elite. In 2019, he was re-elected for his second and final term. The next presidential and national parliamentary election will take place in 2024.

Parliament is constituted by the House of Representatives and the Regional Representational Council. The House of Representatives contains 575 members from 9 different political parties. The Regional Representational Council includes representatives from each of Indonesia’s 34 provinces.

Laws are passed by the House of Representatives together with the President. The President may also issue government regulations and presidential decrees, but they need to be based on existing laws. The President has the prerogative to form a cabinet. Appointed Ministers must resign from other governmental positions i.e. Member of Parliament. Cabinet Ministers may issue ministerial regulations to implement superseding regulations.

Similar with the President, regional leaders are also publicly elected for a five year term with the possibility of one re-election term. Regional leaders consist of 34 provincial governors and 514 mayors and regents (Bupati).

2. Economic

Indonesia, has a GDP of US$1,119 billion in 2019 and is ranked 16th globally, making it the largest economy in South-east Asia and larger than that of most EU countries. It was predicted to be 7th largest economy in the world by 2030, and 4th by 2050. Pre-COVID, average annual economic growth was 5%. Over the last 5 years this has reduced unemployment (from 7% in 2010 to 5% in February 2020) and the poverty rate (from 13.3% in 2010 to 9.22% in 2019). However, the COVID-19 pandemic has caused negative growth in two quarters of 2020, triggering a technical recession, the first since 1998, ending 21 consecutive years of economic growth. Economic growth in 2020 was -2.07% (compared to 5.02% last year).

In 2020, almost all components of GDP were negative, apart from Government spending which grew by 1.94% (year-on-year). Household consumption, which accounts for over half of Indonesia’s GDP, contracted by 2.63%, reflecting the impact of lost jobs, reduced revenue and lower savings. While investment, exports, and imports contracted by 4.95%, 7.7%, and 14.71% respectively.

The government has allocated 4.38% of GDP (£34.7 billion) for COVID-19 mitigation, namely the Economic Recovery Programme (PEN). The package focuses on healthcare (12.6%), social protection (29.3%) and support for MSMEs (17.8%) and State Owned Enterprises (SOEs) (7.7%). As a consequence of this additional spending, the 2020 fiscal deficit is projected to widen to 6.3 percent of GDP in the revised final budget, from 1.8 percent in the initial budget. The Government plans to return to the budget ceiling of 3 percent of GDP by 2023.

Government revenues averaged around 11% of GDP over the last two decades, low by comparison to its regional neighbours and limiting fiscal headroom to pursue growth-enhancing spending. Fuel subsidy reform has improved public spending capacity to boost growth.

Indonesia’s economy is dominated by five sectors: manufacturing (20%), agriculture (13%), wholesale and retail trade (13%), construction (11%), and mining (7%), accounting for 64% of the economy The Indonesian economy is heavily dependent on natural resources and extractive industries. Indonesia is the largest producer of palm oil (exports were over US$15 billion in 2020) and nickel in the world. However, the Government wants to increase its share of manufacturing exports and processed commodities.

Indonesia’s macroeconomic indicators are favourable, including low and stable inflation as the central Bank Indonesia maintains an inflation target of between 3 to 5%, low budget deficits, and a low public debt ratio. Bank Indonesia cut its policy rate several times in 2020, (by February 2021 at 3.75%) on the back of low inflation. The banking system is well-capitalised and liquid. Its track record has been underpinned by solid policy frameworks, including fiscal rules, an inflation targeting regime, and, for most of the banking system, regulation in line with Basel III.

Indonesia is a country with more than 17,000 islands so logistics is a challenge. Infrastructure development has been high on President Jokowi’s agenda as his terms in office, 19% of government spending is dedicated to infrastructure spending. However, more recently, infrastructure spending has been de-prioritised. Geographical barriers also accentuate regional disparity and income inequality. Almost 60% of GDP is generated on the island of Java.

With a population of over 270 million people, Indonesia represents a large market with a GDP per capita of US$4,174 (2019). It’s predicted that between 2030 and 2040, Indonesia will have a “demographic bonus” as the people of productive age will represent 64% of the population. However, despite low unemployment rate (5.5%), Indonesia’s has high rates of informality in the labour market (57%), low female labour participation rate (53%) and high youth unemployment (20%). Indonesia has committed 20% of the government’s budget on education in order to turn these challenges into opportunities. Indonesia has stringent labour laws and reforming them is a politically sensitive issue. Onerous severance payments for permanent workers and restrictive dismissal procedures encourage informality. In certain provinces, rapid increases in minimum wages are not associated with productivity.

Indonesia is an open economy, but high dependence of foreign portfolio inflows (foreign investors account for nearly 40% of tradable Indonesian government bond ownership and 40% of trading value on the stock exchange), and reliance on commodity exports make it vulnerable to global economic developments notably US economic policy and declining demand from China.

The recent decision to increase foreign ownership in several sectors and to open up sectors previously closed to foreign investors has sent a positive signal for greater openness in the future. Despite a commitment from the President and some of his Ministerial Team to a pro-reform, pro-free trade agenda, there are still many challenges faced by foreign investment and imports.

A complex and dynamic legal and regulatory environment can present challenges for business. Although well intentioned, Indonesia’s 16 economic reform packages have had mixed reviews: some positive elements have simplified business licensing and cut red tape (contributing to the improved Ease of Doing Business ranking). But with many of the recent reforms having focused on the relatively easier, “quick-wins”, further progress will require a greater focus on more challenging structural and longer-term reforms. The Omnibus Law on Job Creation intended to stimulate domestic and foreign investment by removing bureaucratic red tape was passed in October 2020 and it has great potential to improve the business environment, but there may be challenges around implementation.

Indonesia has considerable growth potential for foreign businesses, despite existing challenges, and those that are present in the market generally achieve good returns.

3. Human rights and business

Indonesia was the first Asian country and the fifth country in the world to ratify all core International Labour Organisation (ILO) Conventions. Since becoming a member in 1950, Indonesia has ratified a total of 18 ILO conventions. Domestically, laws have been passed which have specific provisions referring to human rights and business including the 2007 Corporate Law which imposes mandatory duties on every limited liability corporation working directly or indirectly with natural resources to limit the environment and social impact of its activities.

There are a number of institutions responsible for human rights issues related to business. These include, but are not limited to, the National Human Rights Commission (KOMNAS HAM); Ombudsman and the Corruption Eradication Commission (KPK). KOMNAS HAM has stated that the main human right issues related to business are ownership of property and land, indigenous people’s rights, environment, health, water and labour rights. Complaints on human rights issues involving corporations are reported through KOMNAS HAM or Ombudsman. Indonesia also has National Action Plan on Human Rights asking corporations to respect human rights in line with strengthening investment and the competitive nature of business.

Trade unions are legal and active in Indonesia, but only represent a small proportion of the total workforce. Strikes and demonstrations do occur, for example on Labour Day, often over pay and working conditions. There is a statutory minimum wage which differs by province, but there are issues with compliance and enforcement of this.

Recently, the Indonesian Government passed the Omnibus Law on Job Creation. The Law is aimed at addressing issues such as ease of obtaining business permits, land acquisition for business purposes, tax, and labour. The Omnibus Law does not replace the existing laws on those topics, rather it is a supplement and revision to several articles from existing laws. The law has been subject to criticism from civil society and expert particularly on employment rights due on minimum wage, contractual obligation, working hours, land certification and land acquisition that could damage the environment.

Child rights are protected according to the constitution and several national laws including the Labour Law. The Indonesian government has ratified two out of three of the Optional Protocols to the Convention on the Rights of the Child. However, child labour is still prevalent particularly in informal employment and in the agricultural and domestic service sectors.

Women make up approximately 38.5% of the employed population in Indonesia. However, they are disproportionately represented in certain occupations, for example in the informal economy, and as unpaid family workers. Women are significantly underrepresented in senior professional and political positions, representing only 21.6% of those categories. This gap is largely because of cultural and social barriers, education attainment and lack of work experience. The National Commission on Women states that there are more than 400 local byelaws, which intentionally or in practice discriminate against women.

4. Bribery and corruption

Commercial organisations carrying on business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In such a case it would not matter whether the acts or omissions which formed part of the offence took place in the UK or elsewhere.

Corruption remains a challenge for Indonesia and acts as a major deterrent to business and investment. Bribery and bribing public officials is against the law in Indonesia and the Indonesian Government is publicly committed to tackling all forms of corruption. The Corruption Eradication Commission (KPK) not only monitors the potential of political corruption, but also interactions between companies and their staff and government officials related to the delivery of public services, such as the issuing of business permits or provision of other business documentation. The Government of Indonesia has streamlined licensing procedures and transitioned to online systems to reduce the potential of illegal payments.

Indonesia is ranked 102nd in Transparency International’s Corruption Perception Index (CPI) for 2020 with a CPI score of 37, a decrease from 2019 where Indonesia ranked 85th with a score of 40. The large scale decentralisation of government since 2000 is thought to have increased corruption despite a Presidential push to reduce it.

Indonesia´s rank in the World Bank Ease of Doing Business (EDOB) has improved to 73 out of 190 countries in 2020 from 91 out of 189 in 2016. The government says the improvements made in recent years are the result of streamlining its licensing procedures and delivering more services online. Indonesia’s progress since 2016- a 12% improvement- makes it among the most improved economies in the region compared to Malaysia (4%) and Philippines (8%).

Read the World Bank’s more in-depth publication on the issues of doing business in Indonesia.

Foreign businesses should be aware that the risks of encountering bribery or attempted bribery are relatively high in Indonesia. Visit the business anti-corruption portal for advice and guidance about corruption in Indonesia and some basic but effective procedures you can establish to protect your company from the corruption risks.

Read the information provided on our website on bribery and corruption.

5. Terrorism threat

Please read the information provided on the terrorism page of the FCDO travel advice.

6. Protective security/organised crime

Please read the information provided on the safety and security page of the FCDO travel advice.

7. Intellectual property

Intellectual Property Rights (IPR), as intangible assets, are a key factor in the competitiveness of your business in the global economy. IPR can protect your innovation from competitors and can also be an important source of cash flow through licensing deals or selling Intellectual Property (IP). IPR infringement can lead to loss of business, revenue, reputation and competitive advantage unless you take steps to protect your IP both in the UK and abroad.

When exporting to Indonesia, it is essential to register your rights in Indonesia as soon as possible in order to be able to defend and enforce them. IP rights are territorial in nature which means that registrations in the UK or another country’s jurisdiction are not automatically enforceable in others.

Indonesia has been a member of the World Trade Organisation (WTO) since 1995. Indonesia is also a signatory to a number of international intellectual property (IP) treaties administered by the World Intellectual Property Organisation (WIPO):

• signatory to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) - sets the international standards for various aspects of IP
• the Paris Convention – protection of industrial property
• the Berne Convention - relating to the protection of copyright
• the Patent Cooperation Treaty (PCT) - provides for a common patent filing system
• the Madrid Protocol - protection of marks in the territories of the System’s other members

Indonesia has accordingly enacted laws covering patents, copyright, trademarks, industrial designs trade secret, plant varieties, integrated circuits and traditional knowledge to implement its obligations under the international treaties.

Please find here a full list of WIPO references to Indonesia.

Generally speaking Indonesia’s IP legislation is comprehensive and in accordance with international standards, however two challenges remain: lack of public awareness of IP and lack of law enforcement IP infringements. Those mechanisms still need to be strengthened.

7.1 IP top tips for businesses

• be aware of ‘bad faith’ registration of trade marks (intentionally registering someone else’s pre-existing IP). Cancellation of bad-faith registration can be expensive
• be aware of corruption. The government is taking steps to address this however it is worth discussing potential corruption risks with your attorney when enforcing your rights through the authorities
• indonesia works under a first to file system, meaning he first person to file an IP right there will own that right when granted. This means an earlier user may find they are infringing a later filed registration
• Indonesia is part of the ASEAN Patent Examination Co-operation (ASPEC), a regional patent work-sharing programme among 9 participating ASEAN Member States (AMS). The purpose of this programme is to share search and examination results between the participating offices to allow applicants in participating countries to obtain corresponding patents faster and more efficiently. ASPEC is free of charge and operates in English

Businesses are generally encouraged to learn more about IP issues relevant to their specific industry sector and to consider defensive measures early in their plans to enter the Indonesian market.

The UK Intellectual Property Office has an IP attaché team based in Singapore with specific focus on providing support and advice to UK companies in Indonesia and SE Asia.

7.2 Useful information

• Intellectual Property Office – a UK government agency providing free and impartial advice on protecting and registering your IP in the UK and abroad
• Guidance on protecting your UK intellectual property abroad
• Director General of Intellectual Property.

8. Contact us

Contact the DBT team in Indonesia for further information.

9. Useful links

For more information on UK relations with Indonesia.