6 challenges foreign businesses face when doing business in Indonesia

Indonesia is the largest market in Southeast Asia and is one of the fastest-growing emerging markets in this region. Yet, navigating this extensive market is no easy feat!

Indonesia is the largest market in Southeast Asia and is one of the fastest-growing emerging markets in this region. Yet, navigating this extensive market is no easy feat! Indonesia is the world’s fourth-largest consumer market in the world and its ground is filled with a multitude of natural resources. In turn, the world’s largest archipelago has tremendous potential for growth, especially for foreign businesses eyeing the market. An outcome of that growth are the unicorn startups that have been started in Indonesia.

On the other hand, while there are a lot of opportunities, it’s not easy to understand and navigate Indonesia’s business environment, that’s why we wrote this article, to guide you in doing business in Southeast Asia’s largest economy.

Let’s start by understanding is Indonesia a good place to do business in 2021? What are some risks and disadvantages of doing business there?

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How challenging is it to do business in Indonesia?

Indonesia was ranked 73 out of 190 countries on the World Bank’s annual ease of doing business index. Despite the new Omnibus Law that now opens up many parts of the economy, some challenges still remain that your company might face when doing business there.

As such, we have compiled 6 important challenges that you might face when starting your own business here.

What are the primary challenges for businesses in Indonesia?

The primary challenges in doing business include a complex market, business culture, the persistence of corruption, bureaucratic inefficiency, elaborate tax system, and mobile-only population.

The 2019 Business Confidence Index shows that about 60 percent of respondents stated that they still had a positive outlook on doing business in Indonesia over the next twelve months.

However, investors are still concerned about several factors out of our control. For that, it is advisable to get local help.

1. Complex market

Indonesia is an archipelago, with more than 17,000 islands and 500 languages spoken. It is definitely a tricky place to do business in. A study done by TMF Group in 2020, shows that Indonesia was ranked first in being the most complex market to do business in.

Meaning, you’ll need to do some serious market research, validation, and study which customer segment you want to target before starting your business in Indonesia. It is crucial to test the market to get a glimpse of how things run before fully incorporating your business in a highly complex market.

There are many types of business entities in Indonesia, and the easiest way to test the market would be to incorporate a representative office or KPPA.

Contact us here to find out how we have engaged Indonesia’s best service providers, to guide you throughout your expansion!

Also read: How To Do Market Validation?

2. Business culture

In a country with such a rich culture, it is no wonder why Indonesians are so proud of their heritage and how far they have come, as they should!

Indonesia was honored to be a member of the G20, which was set up in 1999 to solve regional and global problems. Indonesia is the only representative country for the Southeast Asian region because of the size of its demographic and economic power. The G20 conference 2022 is to be hosted by Indonesia as well.  

Therefore, there are some cultural practices that you’d need to know when doing business in Indonesia. They are:

  • Build a relationship before doing business
  • Connections are everything
  • Hierarchy influencing business culture

The first two points are very related to each other whereby it is important to know that Indonesians are fond of people they know. This makes them more open to doing business when there is a strong bond between those they are familiar with. This common ground makes the process much easier when they are comfortable with you. However, do keep in mind that hierarchy principles continue to exist in the organizational structure. This also reflected in their language where honorifics are strongly abided by.

3. Corruption

Corruption and bribery still remain regular characteristics of business life.

While there have been efforts to curb corruption in Indonesia, she still ranks 37 out of 100 on the Corruption Perception Index of 2020. This remains relatively stagnant from score 40 in 2019 and 38 in 2018.

The 2019 Business Confidence Index found that 51 percent of foreign investors are worried about corruption, compared to 43 percent in 2018 and 49 percent in 2017.

Indonesia’s government has made steps to reduce bribery and collusion, such as moving many business application processes online. Regardless, investors who are unfamiliar with doing business in Indonesia should still look for guidance.

4. Bureaucratic inefficiency

Indonesia has a complex bureaucracy and red tape.

Investors will have to interact with many different organizations and ministries in the process of doing business in Indonesia. The government has tried simplifying the process – such as introducing the Online Single Submission system in 2018 – but businesses still need a few weeks before their company is ready to launch.

Also read: What are the steps to register a business in Indonesia?

However, opinions are also improving. Only 56 percent of foreign investors are worried about bureaucratic inefficiency, compared to 77 percent in 2018 and 72 percent in 2017.

The government’s push towards accepting foreign investment and developing the digital economy through Presidential Regulation 10/2021, or Omnibus Law, would also mean uncomplicating business processes in the future.

5. Elaborate tax system

There are many tax orders and compliances when doing business in Indonesia. This applies to both your company and individual. This ranges from:

  • Corporate income tax
  • Employee withholding tax
  • Value-added tax
  • Individual income tax
  • Regional tax

In general, monthly tax and annual returns should be reported to the Indonesia Tax Authority (ITA) through e-filing. Failure to comply with these tax regulations or incorrect submission could result in serious penalties and surcharges.

As such, it is advisable to be connected with a professional service provider on the ground to ensure you do not miss a tax payment.

6. Mobile-only population

Most of the Indonesian population actually jumped straight into using mobile phones instead of using computers as a medium for doing business.

Share of households owning a computer in Indonesia from 2015 to 2018, Image source: Statista 2020

As seen here on a graph by Statista, only 20.05% of the population in 2018 owned a computer.

This was also mentioned in one of Greenhouse’s Youtube videos titled ‘Business registration and operation in Indonesia’, our COO Viktor Kyosev also brought us through this point while sharing some painful lessons learned in his experience.

As such, if your business is on websites more fit for desktops and laptops, you may want to consider optimizing it for mobile phone usage.

How can businesses deal with these challenges?

It’s important to note that despite all this, the archipelago is still a prospective and popular place to do business. These challenges shouldn’t discourage investors from working in Indonesia but serve as an overview of things to watch out for.

The Indonesian government has been promising some structural reform priorities in 2021. Hence, businesses can look out for relaxation of labor regulations to reduce formality, easing barriers for investment, and strengthening institutions and regulations to fight corruption.

A good way to face these business challenges is to connect with experienced consultants on the ground. Business consultants who are familiar with the nuances of Indonesian regulations can help you navigate these obstacles and successfully build your business.

Greenhouse offers an online platform for you to procure business incorporation services and connect with market entry consultants in Indonesia.

We’ll connect you with experienced consultants on the ground who can help answer your questions about incorporating your business in Indonesia.

Start a business in Indonesia

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