Week 2 - Case Discussion Questions- Answer Key

1. What political factors explain Indonesia's poor economic performance? What economic
factors? Are these two related?
2. Why do you think foreign firms have been exiting Indonesia in recent years? What are the
implications for the country? What is required to reverse this trend?
3. Why is corruption so endemic in Indonesia? What are its consequences?
4. What are the risks facing foreign firms that do business in Indonesia? What is required to
reduce these risks?
Answer 1:
Indonesias poor performance is explained by political and economic factors. Indonesia is the worlds
most populous Muslim nation and also one of the most culturally diverse. The wealth of Indonesia is its
diversity, but it is also a weakness. It can easily trouble the nation with ethnic rivalries. The transition from
autocracy to democracy led to many economical uncertainties. Although Indonesia is now under a
democratic rule but many problems accumulated after living for 30 years under the rule of a autocrat_
Suharto. Although the economy is growing but there are a lot of factors contributing for Indonesia poor
performance.

Unemployment is still high at around 10% of the working population.

Growth in labor productivity has been nonexistent for a decade. Foreign capital is fleeing the

country,
It takes approximately 151 days on average to complete the paperwork necessary to start a

business. It's the sort of environment foreign investors withdraw from

High level of corruption from government bureaucrats
What makes an international business even worst is the extremely poor infrastructure. Indonesia
is an example of how political and economical factors are closely related and how they impact the
international business. The challenge for the Indonesian government is to keep the economy
certain while attracting foreign investments.

Answer 2
The excessive red tape has driven foreign firms away. It takes 151 days for the paperwork to go through
to open a business. The country will suffer because the economy is not being motivated by would be
businesses. The strict policies will have to change in order for Indonesia to thrive. After Suharto,
Indonesia moved rapidly toward a strong democracy, culminating in October 2004 with the appointment of
Susilo Bambang Yudhoyono, the countrys first directly elected president. The economic front has also
seen progress. Public debt as a percentage of GDP fell from close to 100 percent in 2000 to less than 60
percent by 2004. Inflation declined from 12 percent annually in 2001 to 6 percent in 2004, and the

economy grew by around 4 percent per annum during 2001 to 2005. In turn, the excessive red tape
translates into long lines of government bureaucrats, whose low salaries make it attractive for them to
seek a bribe at every step of the business transaction, further distracting and detracting the entrepreneur
from lawful business pursuits.
Answer 3:
Transparency International, which studies corruption around the world, ranks Indonesia among the most
corrupt, listing it 137 out of the 158 countries it tracked in2005. Government bureaucrats, whose salaries
are very low, predictably demand bribes from any company that crosses their pathand Indonesias
weakness for bureaucratic red tape means a long line of officials might require bribes. The police have
been known to throw the executives of foreign enterprises into jail on the flimsiest of pretexts, although
some well-placed bribes can secure their release. One reason is that government bureaucrats income is
extremely low. They result to bribes to make more money. Also the police are throwing foreign business
owners in jail for the littlest things to make a profit off of bribes. This is driving businesses away.
Answer 4:
Jail time, loss of income to bribes, and long waits to establish a business are the risks that foreign firms
are facing. A radical change is required to reduce these risks. Indonesia has an anticorruption drive which
may or may not work Indonesia, like many other developing countries, aside from presenting attractive
opportunities also presents a variety of potential risks to which investors may be showing and exposed.
These risks range from six years of political and economic turmoil, a history of civil unrest, religious
conflict and the threat posed by Islamic extremist groups, socio-economic issues and the resulting effect
of increased unemployment, which is estimated now to be as high as 40% of a population of 220 million
and as a result rising crime.
The road system is a mess, half the countrys population has no access to electricity, and 99 percent of
the population lacks access to modern sewerage facilities. The tsunami that ravaged the coast of
Sumatra in late 2004 only made matters worse This is in addition to having to work within an environment
which for the unprepared can not only is costly, but also challenging in terms of: A poor regulatory
environment and lack of transparency; An ineffective and corrupt legal system; and An increasingly
militant labor force, with manpower laws heavily in favor of the workforce. Indonesia remains an attractive
country in which to do business in for many. In order to reduce weakness to the numerous of risks it
presents; companies must take a pro-active approach to security and risk management. Doing so
naturally reduces the chances of a company becoming a victim, but also minimizes the likely argue in the
event an incident was to occur.