Indonesia: Why Australian business should be knocking on the door of our northern neighbour
Over the years, Indonesia has gained a not entirely unfounded reputation as a difficult place to do business. Australian and other foreign businesses often report that protectionist trade policy, red-tape and legislative uncertainty have plagued their attempts to enter the market. In recent years Australia’s economic engagement with Indonesia has been further limited by a complicated diplomatic relationship. The result is that trade and investment opportunities between the two countries have been severely undervalued, with Australian-Indonesian two-way trade at $8 billion dollars less than that between Australia and New-Zealand.
Indonesia is the world’s 16th largest economy, Australia’s second-closest neighbour and has a burgeoning middle class. These factors and the huge economic potential they create have existed for some time – so why should Australian businesses start taking note now? Australia should stand up and pay attention, because currently these forces are converging with a historical shift in Indonesia’s approach to foreign investment, to generate a plethora of economic opportunities.
Part of the reason for this shift is that government in Indonesia has traditionally been dominated by ethnic Malays, while ethnic Chinese have long been the “business brains” of the country. However, recently a notable change in generational attitudes to ethnic divisions has seen more ethnic Chinese entering the public sector and political realm, bringing with them their well-honed commercial acumen and business nous. The appointment in August 2015 of Trade Minister Thomas Lembong exemplifies this trend. A Harvard educated investment banker of Chinese descent whose wife and children reside in Singapore; the new Trade Minister is emblematic of the growing influence that business-minded ethnic Chinese are gaining in the Indonesian government. With this, a ‘sense of urgency’ has come to characterise the mood of Indonesian economic policy as the fall in commodities prices threatens growth and the ‘most reformist government’ in 15 years under President Joko Widodo, drives progress towards a more diversified economy.
As part of this diversification the Indonesian government is making leaps and bounds in addressing key obstacles to foreign investment. Examples of reform include the new foreign investment Negative List which has opened up key industries previously off-limits for investors including energy, oil and gas and transport and a new ‘one-stop shop’ set up by the Indonesia Investment Co-ordinating Board (BKPM) for obtaining government approvals. The government has also issued strong signals that initiatives are in the pipeline to address legislative uncertainty and bureaucratic complexity.
These reforms are a work in progress, but the point that any Australian business looking to internationalize should note, is that which Trade Minister Lembong, recently highlighted: ‘The trend is your friend. And if you wait until it’s all rosy and beautiful, it’s too late by then.’ Opportunities exist now, specifically in those sectors in which Australia specializes, precisely because the Indonesian economy is developing. A 45 million-strong middle class, set to grow to 135 million by 2020, according to McKinsey, is hungrily demanding services, a sector which at present makes up 70 percent of the Australian economy. The de-regulation and massive expansion of infrastructure underway in Indonesia as well as the development of the tech sector are other key growth areas that Australian businesses should be tapping into. The Australian government has recognised this potential and has, as of March 2016, recommenced negotiations on the Indonesia Australia Comprehensive Economic Partnership Agreement.
However, challenges remain. So how can your business benefit from the huge wealth of potential on offer in Indonesia? Only through ensuring that you have the commercial and cultural intelligence to succeed.
If you’re interested to learn more about the opportunities available in Indonesia and gain cultural and commercial tips from our Indonesia experts, join us for Dearin & Associates’ introductory webinar, Doing Business in Indonesia: Beyond Nasi Goreng, Wednesday, July 27 at 4:00 PM Sydney time. Click here to register.