Emerging market Indonesia becomes increasingly attractive for foreign investment. It makes plenty of foreigner look into the possibility of starting a business in Indonesia. Let’s discuss a few points you should consider before you enter the Indonesian market.
1. Type of Business
Certain sectors or industries are prohibited from or limited to attracting foreign investment. The Indonesian Investment Coordinating Board (BKPM) maintains a Negative Investment List (DNI) of business fields and their requirements regarding investment.
Foreign ownership in some sectors ranges from 0 to 95%, in which case you could opt to find yourself a local partner. Other types of businesses allow full ownership (100%) by foreigners. Additional requirements in terms of location and licensing may also apply.
2. Type of Legal Entity
In order to protect Indonesian SME companies, the Indonesian government requires foreign companies to be registered as a Foreign Limited Liability or PT. PMA (also just named PMA). Foreign enterprises must meet requirements regarding minimum investment and paid up capital. Other options are to assign a Local PT Nominee or to register a Representative Office (RO).
3. Human Capital
Indonesia ranks fourth of most populated countries in the world and 60% of the total population is in their productive age (15-60 years old). There is however a skills gap. Not everybody has access to quality education in the geographically dispersed country. It therefore remains difficult for companies to attract quality human resources, particularly at locations outside of Java. However, hiring foreigners to do the job instead involves many requirements. Companies may therefore create good educational programs to address the lack of skills in local talent.
4. Market Diversity
Indonesia is a large archipelago with complex and fragmented markets. The many regions, languages, religions, customs, and values, indicate that no business can treat Indonesia as a single market entity. Each target group expects to be catered to its specific needs.
5. Legal Environment
Indonesia deals with complex bureaucracy, which may overwhelm foreigners entering Indonesia. The government is making improvements to address bureaucracy, including bringing processes online One-Stop-Service Centers.
The legal environment includes complex and inconsistent laws and policies. Indonesian laws and policies may change frequently, such as the Negative Investment Law and Bankruptcy Law. It is therefore important to stay up-to-date with current laws. Local lawyers in the focus area of Business Law can help you with that.
The development of Indonesia was long focused in the island of Java, which includes the provinces Capital City of Jakarta, Banten, West Java, Central Java, The Special Region of Jogjakarta, and East Java. Infrastructure and facilities are therefore concentrated in these provinces. You will therefore find a high business concentration in this same area. This does not mean there are no business opportunities in other islands, as surely your market research will tell you.
7. Resource and Materials
Indonesia is rich in natural resources. Geography and infrastructure can make distribution costly, so sourcing will affect your ideal location.