Braconnier, Agathe LS 174 - A

Cabiscuelas, Sandy 17 February 2018

Calzado, Angel
Demalata, Shane

Indonesia Country Report

I.Country Background

The Republic of Indonesia is known as the largest archipelago in the world with

17,508 islands.1 In terms of population, Indonesia is the fourth most populous country in the

world after China, India, and the United States with estimated population of 252 million in

2017.2 Furthermore, Indonesia is also culturally diverse with 300 distinct native ethnic groups

and 742 different languages and dialects.3 Indonesia is rich in natural resources, such as

petroleum, natural gas, coal, gold, and silver. In terms of environmental aspects, Indonesia is

home to the world's richest biological diversity of plant and animal life, the highest marine

diversity, and the second largest area of rainforest.4

In terms of the current economic state of the nation, Indonesia is a regional and global

player, having experienced a remarkable democratic transformation and high economic

growth over the last two decades.5 Indonesia has undergone impressive economic growth

resurgence since overcoming the Asian Financial Crisis of the late 1990s. And thus,

Indonesia is considered one of the world’s major emerging economies.6

1
​Yose Rizal Damuri et al., ​European Report on Development 2015​, report, Centre for Strategic and
International Studies, Jakarta Indonesia, Definit Indonesia (Jakarta: Definit Indonesia, 2015), 2, accessed
February 13, 2018,
https://ec.europa.eu/europeaid/sites/devco/files/erd5-country-illustration-indonesia-2015_en.pdf.
2
​"The World Bank in Indonesia," The World Bank, September 19, 2017, accessed February 14, 2018,
http://www.worldbank.org/en/country/indonesia/overview.
3
Cƒ. Yose Rizal Damuri et al., ​European Report on Development 2015​, 2.
4
Ibid.
5
Cƒ. United States Agency for International Development, ​Investing in Indonesia: A Stronger Indonesia
Advancing National and Global Development​, report, Country Development Cooperation Strategy, United
States Agency for International Development (Indonesia: United States Agency for International Development,
2013), 9, accessed February 14, 2018, https://www.usaid.gov/sites/default/files/documents/1861/Indonesia
%20CDCS%20FINAL%20Version.pdf.
6
Cƒ. British Broadcasting Corporation, "Indonesia Profile," BBC News, January 14, 2016, accessed February
14, 2018, http://www.bbc.com/news/world-asia-pacific-14921239.
 Historically, before the Asian Financial Crisis in the 1990s, Indonesia was enjoying

the highest economic growth in Southeast Asia— low inflation, modest current account

deficit, rapid export growth and growing international currency reserves. The nation was then

built on its dominant agricultural sector during 1950s and 1960s. During those years, the

Government of Indonesia strongly promoted food self-sufficiency programs. During the

1960s and 1980s, the country advanced in industrialization and urbanization. This served as a

manifestation of Indonesia’s shift from a dominantly agricultural country to a more

industrialized country.7

When international oil prices fell in 1986, Indonesia started to look for a new engine

of growth. Indonesia shifted itself into a manufacturing goods country thereafter.

Furthermore, it tried to reduce trade barriers and enhance global integration. However, behind

all the above economic success, Indonesia had macroeconomic imbalances and a weak

macroeconomic foundation. This situation was further aggravated with regional shocks and

turbulence, which contributed to the crisis experienced by Indonesia. The Asian Financial

Crisis has weakened the economic and political forces that have previously supported rapid

economic growth and have enforced social stability in Indonesia. The crisis and its

subsequent events have a huge impact on economic, social, political, and environment

transformation that affecting and resulting with the current condition of Indonesia.8

Today, the country’s Gross Domestic Product (GDP) per capita has steadily risen,

from $857 in the year 2000 to $3,603 in 2016. Indonesia is now the world’s fourth most

populous nation, the world’s 10th largest economy in terms of purchasing power parity, and a

member of the G20,9 the leading forum of the world's major economies that seeks to develop

7
Cƒ. Yose Rizal Damuri et al., ​European Report on Development 2015​, 2.
8
Ibid.
9
The World Bank, "The World Bank in Indonesia".
global policies to address today’s most pressing challenges, and whose members represent all

inhabited continents, 85 percent of global economic output, two-thirds of the world's

population, and 75 percent of international trade.10

Furthermore, the nation has attracted investors due to its a large consumer base, rich

natural resources and political stability. However, these opportunities are equally deterred by

the nation’s poor infrastructure, rampant corruption and growing demands for economic

protectionism.11 In addition to those prevailing national issues, Indonesia also struggles with

fragile institutions, terrorism, and rising religious and ethnic intolerance.12

Moreover, in emphasis to Indonesia being home to the world's richest biological

diversity of plant and animal life, the highest marine diversity, and the second largest area of

rainforest,13 the country still faces significant challenges with regard to environmental

matters. Rapid environmental degradation and a high incidence of natural disasters put

Indonesia at a high risk for climate change impacts. Deforestation in Indonesia produces 80%

of that country’s annual carbon emissions, placing it among the world’s top greenhouse gas

emitters. Indonesia is vulnerable to severe climate-related stresses such as floods, fires,

droughts and storms, which account for 80% of natural disasters.14

Another prevalent challenge in Indonesia includes the health-related issues

widespread within the nation. The quality of healthcare services in the nation is lagging far

behind and rates of infectious disease remain high. As an instance to this crucial national

issue, tuberculosis kills approximately 65,000 Indonesians annually and the maternal

10
The Group of Twenty, "What is the G20?" The Group of Twenty, January 23, 2018, accessed February 16,
2018, https://www.g20.org/en/g20/what-is-the-g20.
11
​Cƒ. British Broadcasting Corporation, "Indonesia Profile”.
12
​United States Agency for International Development, ​Investing in Indonesia: A Stronger Indonesia Advancing
National and Global Development​, 9.
13
​Cƒ. Yose Rizal Damuri et al., ​European Report on Development 2015​, 2.
14
​United States Agency for International Development, ​Investing in Indonesia: A Stronger Indonesia Advancing
National and Global Development​, 9.
mortality ratio is among the highest in Southeast Asia.15 As of 2017, the maternal mortality

rate in Indonesia is 126 maternal deaths per 100,000 live births— higher than the Millennium

Development Goal of 102 maternal deaths per 100,000 live births. Furthermore, one in three

children under the age of five suffer from stunting, or shorter height, which reflects impaired

brain development.16

Consequently, as of the same year, many Indonesians, majority of which are

urban-dwellers, have been eating healthier and exercising more. This considerable shift

fueled the demand for high-protein foods and sports drinks in the country, according to the

global marketing intelligence firm Mintel. According to Jane Barnett of Minter Asia Pacific,

“Improving health and fitness is now a key focus of consumers across Southeast Asia,

particularly through their diets and exercise. Consumers in the region show continuous

interest in protein and are incorporating more of it into their daily diet and eating regime.”17

Consequently, because Indonesia's eating culture remains in flux, eating habits are

consistently adapting to trends. The growing health consciousness among Indonesians creates

increased opportunities for healthier food products and beverages such as nutritional drinks or

cereals enhanced with vitamins and minerals. Fortified milk products have also become in

demand with weight-losers, bodybuilders and breastfeeding mothers. Furthermore,

convenience foods have also taken advantage of urbanisation and the growing office

workforce that are conforming to the current health trends. The market for ready-to-drink

coffee and tea has grown particularly fast, while fruit and vegetable juices as well as sports

and energy drinks are also performing considerably well in the present market. In general,

15
​Cƒ. Ibid.
16
​The World Bank, "The World Bank in Indonesia".
17
Cƒ. Sarah Yuniarni, "Health-Conscious Indonesians on the Rise, Growth of Nutritious Products Expected,"
Jakarta Globe, August 25, 2017, accessed February 16, 2018,
http://jakartaglobe.id/business/protein-food-sports-drinks-demand-to-climb-as-urban-indonesians-becoming-mor
e-health-conscious-report/.
Indonesian consumers are looking for fast and convenient food without significantly

compromising healthy eating habits.18

Despite these national challenges, Indonesia continues to play an important role in the

international arena. Besides being a member of the G20, Indonesia is chair of Asia-Pacific

Economic Cooperation (APEC) in 2013, chair of the Global Fund to Fight AIDS,

Tuberculosis, and Malaria (GF), and co-chair of the High Level Panel on the Post-2015

Development Agenda. At these and other international forums, Indonesia is establishing itself

as a leader in tackling global development challenges affecting its prosperity. Specifically

articulated in Indonesia’s National Development Plan is the goal for Indonesia to become

“self-reliant, advanced, just, and prosperous” by 2025. Additionally, Indonesia wants to

achieve “improved economic competitiveness of natural resources and upgraded human

resources and increasing capability to master science and technology” by 2020.19

II. Economic Facts, Statistics, Trends

Indonesia, being the current 18th largest economy in the world, is experiencing
remarkable economic growth. The current condition of the Indonesian economy is
determined by specific macroeconomic factors as seen in Table 1.

2011 2012 2013 2014 2015 2016

GDP (annual % 6.2 6.0 5.6 5.0 4.8 5.0

change)

Inflation 5.4 4.3 8.4 8.4 3.4 3.0

(annual %
change)

Public Debt (% 23.1 23.0 24.9 24.7 27.4 28.3

of GDP)

18
​Cƒ. Global Business Guide Indonesia, "Thirst Quenching: Indonesia’s Food & Beverage Industry," Global
Business Guide Indonesia, 2014, accessed February 16, 2018, ​http://www.gbgindonesia.com/en/manufacturing
/article/2014/thirst_quenching_indonesia_s_food_andamp_beverage_industry.php.
19
​United States Agency for International Development, ​Investing in Indonesia: A Stronger Indonesia Advancing
National and Global Development​, 10.
 Exchange Rate 8,773 9,419 11,563 11,800 13,389 13,309
(IDR/USD)

Current 0.2 -2.8 -3.3 -3.1 -2.1 -1.8

Account (% of
GDP)

Population (in 245 248 251 254 258 261

millions)

Poverty (% of 12.5 11.7 11.5 11.0 11.1 10.9

pop.)

Unemployment 6.6 6.1 6.3 5.9 6.2 5.6

(% of work
force)

Forex Reserves 110.1 112.8 99.4 111.9 105.9 116.4

(in billion USD)

Table 1. Macroeconomic Indicators of Indonesia

Source: ​World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)

Indonesia has one of the lowest per capita GDP of any nation in the world despite its

GDP per capita rising rapidly over the past decade. However, the per capita GDP is an

inappropriate measurement for Indonesia as a society due to high degree of inequality with

regard to income distribution. There exists a gap between statistics and reality as the wealth

of the 43,000 richest Indonesians (0.02% of the total pop.) is equivalent to 25% of Indonesia's

GDP. The 40 richest Indonesians account for 10.3% of GDP which is the same amount as the

combined wealth of the 60 million poorest Indonesians. These numbers indicate a huge

concentration of wealth within the small elite.20

The level and volatility of Indonesia's inflation rate have historically been higher than

its peer emerging nations. Whereas these other emerging markets shared inflationary rates of

between 3-5% during the period 2005 to 2014, Indonesia contained an average annual

20
“Gross Domestic Product of Indonesia”, Indonesia Investments, 14 August 2017,
https://www.indonesia-investments.com/finance/macroeconomic-indicators/gross-domestic-product-of-indonesi
a/item253
inflation rate of around 8.5% over the same period.21 Meanwhile, there has been significant

improvement in the public debt (as a share of its GDP) since the Asian Financial Crisis. From

150% of GDP in 1998, it has now declined to around 28% in 201322. This indicates a healthy

condition compared to many developed countries that are currently in trouble to ease public

debt.

Continued exchange rate flexibility and accumulate foreign exchange reserves are

essential to manage volatile capital flows and to serve as a buffer against possible external

shocks. Indonesia is able to buffer a deterioration of international financial conditions due its

foreign reserves that have been growing quickly from $51.6B in 2008 to over $100B.23 As

for the country’s current account deficit (CAD), it hit a record high at $10.1B in 2013, or

4.4% of the country’s GDP.24 A major factor that caused the deficit was the country’s

ballooning oil import bill.

There is a gradual yet steady decline in national poverty in Indonesia. However, the

Indonesian government applies a rather easy definition of the poverty line resulting in a more

upbeat picture than it is in reality. In 2016, the government defined the poverty line at

approximately $26.6 monthly per capita (IDR 354,386) which is a very low standard of living

for Indonesians.25 If the World Bank poverty threshold is used ($1.25 per day), the

percentages in the table above will rise by a couple of percentage points. Although, over the

past decade, poverty numbers have shown a steady downward trend.

21
“Inflation in Indonesia (Consumer Price Index)”, Indonesia Investments, 20 January 2017,
https://www.indonesia-investments.com/finance/macroeconomic-indicators/inflation-in-indonesia/item254
22
“Public Debt of Indonesia”, Indonesia Investments, 18 December 2017,
https://www.indonesia-investments.com/finance/macroeconomic-indicators/public-debt/item283
23
“Exchange Rate Indonesian Rupiah (IDR) and Foreign Exchange Reserves”, Indonesia Investments, 18
February 2018,
https://www.indonesia-investments.com/finance/macroeconomic-indicators/exchange-rate/item282
24
“Current Account Balance”, Indonesia Investments, 18 December 2017,
https://www.indonesia-investments.com/finance/macroeconomic-indicators/current-account-balance/item6037
25
“Poverty in Indonesia”, Indonesia Investments, 12 January 2017,
https://www.indonesia-investments.com/finance/macroeconomic-indicators/poverty/item301
 Indonesia’s high unemployment rate was due to the Asian Financial Crisis resulting to

laid-off workers to join the already large informal sectors in the rural areas, particularly in the

agricultural sector. Although Indonesia has now fully recovered from the crisis, the informal

sector, both rural and urban, continues to play a large unique role with the economy. The

macroeconomic growth in recent years has succeeded in pushing Indonesia’s unemployment

rate into a steady downward trend.26

During the last five decades, there was a remarkable development in percentage

shares of the three main economic sectors as shown in the table below. From an economy

highly dependent on agriculture, Indonesia became a more balanced economy in which the

percentage share of manufacturing in the country’s GDP immediately exceeded the

agricultural sector. This is an indicator of Indonesia’s decreasing traditional dependency on

primary exports, although it still remains relatively high today. All of these sectors underwent

rapid expansion despite contributing to Indonesia’s GDP fall (agriculture) or remaining at a

similar level throughout the indicated period (services).

1965 1980 1996 2010

Agriculture 51 24 16 15
(% of GDP)

Industry 13 42 43 47
(% of GDP)

Services 36 34 41 37
(% of GDP)

Table 2. Indonesia’s Three Main Sectors

Source: World Bank

26
“Unemployment in Indonesia”, Indonesia Investments, 18 December 2017,
https://www.indonesia-investments.com/finance/macroeconomic-indicators/unemployment/item255
 Indonesia has vast and abundant fertile soils making it a major global key producer of

a wide variety of agricultural tropical products. Although agriculture’s share of the country’s

GDP has declined during the last five decades, it still an income-providing sector for majority

of Indonesian households. The agricultural sector comprises large plantations that tends to

focus on important export commodities and smallholder production models that focus on rice,

soybeans, corn, fruits, and vegetables. The most important agricultural products of Indonesia

are palm oil, rubber, cocoa, coffee, tea, cassava, tropical spices, and rice.27

The top contributor to Indonesia’s annual GDP growth is the industrial sector. The

most important sub-sectors are mining and manufacturing, both being major pillars of

nation’s economy since the 1970s. The manufacturing sub-sector is the most popular for

foreign direct investment (FDI), followed by the mining sub-sector. Indonesia’s main mining

and manufacturing products are coal, oil, gold, automobiles, electronics, footwear, textile

products, paper products, and furniture.28 Meanwhile, contributing about two thirds of total

economic growth is the services sector which has shown rapid expansion in 2010-2011.29

III. SWOT Analysis

A. Strengths

With reference to the facts aforementioned in previous paragraphs, first of the

commendable factors that contribute to Indonesia’s advantage is the Indonesia’s ecologically

rich nature. Indonesia is home to the world's richest biological diversity of plant and animal

life, the highest marine diversity, and the second largest area of rainforest.30

27
“Agricultural Sector of Indonesia”, Indonesia Investments,
https://www.indonesia-investments.com/culture/economy/general-economic-outline/agriculture/item378
28
“Industrial Sector of Indonesia”, Indonesia Investments,
https://www.indonesia-investments.com/culture/economy/general-economic-outline/industry/item379
29
“Services Sector of Indonesia”, Indonesia Investments,
https://www.indonesia-investments.com/culture/economy/general-economic-outline/services/item380
30
​Cƒ. Yose Rizal Damuri et al., ​European Report on Development 2015​, 2.
 ​Additionally, Indonesia enjoys a demographic advantage due to dividends of a vast

labor pool, being the fourth most populous country in the world.. The country's working age

population (15-64) will make a stable labor force participation rate (~70%) and a relatively

young population will accentuate this advantage.31

Furthermore, domestic consumption in the country greatly contributes to its thriving

economic growth. In addition to its rising per capita GDP and low borrowing costs,

Indonesia's private consumption accounts for 56% of the country's economic activity in 2011.

32

B. Weaknesses

More than 28 million Indonesians still live below the poverty line. Furthermore,

approximately 40% of the entire population remain vulnerable of falling into poverty, as their

income hover marginally above the national poverty line.33 Indonesia secured a poor rank of

90th out of 176 countries in Corruption Perception Index 2016. In the political arena, the

Democratic Party remained tainted with corruption issues since 2009 such as an alleged

stolen government funds amounting to $170 million.34

Furthermore, despite Indonesia’s commendable economic growth, shallow financial

sector and underinvestment in infrastructure remain to be major impediments to the country’s

economic growth. Indonesia’s shallow financial sector is reflective of the relatively small size

of its banking sector and financial markets as compared to its regional peers. There is also

low penetration on the Indonesian stock and bond markets. In addition, inadequate

infrastructure spending, mainly in transportation, has caused Indonesia to lose 1% of

31
​Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
32
​Cƒ. “General Economic Outline of Indonesia”, Indonesia Investments, 11 January 2016,
https://www.indonesia-investments.com/culture/economy/general-economic-outline/item251?
33
​The World Bank, "The World Bank in Indonesia".
34
​Cƒ. Neil Thompson, “Indonesia’s Unfolding Corruption Scandal”, 3 April 2017,
https://thediplomat.com/2017/04/indonesias-unfolding-corruption-scandal/
additional GDP growth each year. Indonesian businesses also suffer from low power

generation capacity and high transmission losses.35

C. Opportunities

With regard to political opportunities in the international arena, Indonesia is

improving its relations with other Association of Southeast Asian Nations (ASEAN)

countries.

Moreover, rising investments from American companies like General Motors and

Cargill have expanded with an ambition to tap into Indonesia’s large consumer market.

Indonesia as the abode of future investments from multinational companies signifies a

provision of a new impetus for growth.36

D. Threats

One of the prevailing national issues that Indonesia faces is terrorism threats from

both domestic and international militant groups. This matter is suspected to be due to the fact

that 100 Indonesians are suspected of fighting for Islamic State of Iraq and al-Sham (ISIS) in

Iraq and Syria.37 Similarly, another cause for concern are rising ethnic violence and religious

intolerance in the country which pose serious risk to social harmony in the country.

IV. PESTLE Analysis

A. Political Analysis

The successful transition of Indonesia from authoritarian rule to democracy in 2004

led to an establishment of an institutional framework capable of forming the basis of a

35
“The 13,466-island Problem”, The Economist, 27 February 2016,
https://www.economist.com/news/special-report/21693404-after-decades-underinvestment-infrastructure-spendi
ng-picking-up-last
36
​Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
37
​Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
successful and thriving democracy that resulted to most Indonesians enjoying freedom of

expression. Another result of the transition is the depoliticization of the armed forces. After

the fall of President Suharto, a dictator, Indonesia has had five democratically elected

presidents namely, B.J. Habibie, Abdurrahman Wahid, Megawati Sukarnoputri, Susilo

Bambang Yudhoyono and the incumbent Joko Widodo38.

Indonesia is keen on strengthening its military prowess because a strong military force

is a strong deterrent making it important for Indonesia’s defense. Furthermore, a formidable

military can produce abundant diplomatic and economic dividends. Indonesia enacted a

strong defense cooperation policy that improved its security ties with countries like the

United States, Russia, China, and South Korea. In addition, Indonesia also has cooperation

agreements with the UK, India, Saudi Arabia, and the Netherlands.39

Unfortunately, Indonesia, like other countries with authoritarian history, continues to

have problems with high level of corruption. The country secured a poor rank of 90th out of

176 countries in Corruption Perception Index 201640 as it witnessed various instances of

corruption involving politicians, bureaucrats, policemen and members of the judiciary. These

are points of concern for the newly elected President Joko Widodo, who won the 2014

elections on an anti-corruption platform. There is a lack of a stronger anti-corruption

legislation that could have eliminated graft from the administrative and political machinery

and enhance the business environment.

B. Economic Analysis

38
Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
39
Ibid.
40
Cƒ. “Corruption Perceptions Index 2016”, Transparency International, 25 January 2017,
https://www.transparency.org/news/feature/corruption_perceptions_index_2016
 An advantage of Indonesia is its banking sector remains sound with strong capital

adequacy and profitability indicators in 2017 despite slow economic activity. Although the

non-performing loan ratio of the sector only slightly improved from 3.09% to 2.97% in June

2017, commercial banks are still optimistic in their ability to boost credit growth due to

consistent demand.41 Although banks' profitability and non-performing loans (NPL) have

taken a hit in 2014 due to risks stemming from higher interest rates and the adverse effects of

commodity prices42, the Indonesian banking sector continues to remain among the most

profitable in Asia and capable of absorbing shocks from slowdown in economic activity.

Another advantage is their prudent macroeconomic policies together with high

economic growth helped the Indonesian government in maintaining debt sustainability.

According to Central Bureau of Statistics, Indonesia's public debt reduce to 28.3% of GDP by

the end of 2016 from levels as high as 96.8% of GDP in 2000.43 The International Monetary

Fund (IMF) expects Indonesia's public debt to remain broadly stable in the medium-term and

has forecast a value of 23.2% of GDP in 2019. The sustainability of the debt level is expected

to boost the resilience of sovereign bonds and would help lower yields, eventually making

access to finance easier for Indonesian government and corporates.44

However, there are major impediments to the economic growth in Indonesia

specifically, shallow financial sector and underinvestment in infrastructure. Indonesia’s

shallow financial sector is reflective of the relatively small size of its banking sector and

financial markets as compared to its regional peers. There is also low penetration on the

41
Cƒ. “Banking Sector Indonesia: NPL Ratio Improved in June 2017”, Indonesia Investments, 20 July
2017,https://www.indonesia-investments.com/news/todays-headlines/banking-sector-indonesia-npl-ratio-improv
ed-in-june-2017/item8004?
42
Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
43
Cƒ. “Indonesian Government Debt: % of GDP”, CEIC Data Company,
https://www.ceicdata.com/en/indicator/indonesia/government-debt--of-nominal-gdp
44
Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
Indonesian stock and bond markets. It is very important for Indonesia to deepen its banking

services and financial markets as they form pillars of funding necessary for future economic

growth and social development. Meanwhile, inadequate infrastructure spending, mainly in

transportation, has caused Indonesia to lose 1% of additional GDP growth each year. Despite

being an archipelagic economy, port infrastructure also remains underdeveloped. Indonesian

businesses also suffer from low power generation capacity and high transmission losses.

Altogether, high transportation costs, low port capacity and below par power infrastructure

undermine firms' competitiveness, and make it difficult for producers to keep in line with

final consumer demand.

Indonesia can still look forward to the rising investments from American companies

such as transnational giants General Motors, Cargill, Coca Cola, Chevron, General Electric,

General Atlantic, DuPont, American President Lines, Black & Veatch etc.45 These companies

have been exploring investment possibilities in diverse areas such as heavy engineering,

consumer goods, chemicals, logistics, farming and construction and infrastructure in

Indonesia. A host of future investments from multinational companies bodes well for a

resource rich country, which is likely to provide a new impetus to its growth. ​Additionally,

Indonesia enjoys a demographic advantage due to dividends of a vast labor pool, being the

fourth most populous country in the world.. The country's working age population (15-64)

will make a stable labor force participation rate (~70%) and a relatively young population

will accentuate this advantage. A vast pool of labor is important to contain wages and

improve competitiveness in the international market; especially in light of rising wage costs

in China.46

45
Ibid.
46
​Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
 C. Social Analysis

Indonesia has implemented cash transfer programs and provided healthcare and

education facilities to raise the income levels of poor households, consequently reducing the

poverty levels in the country. However, Indonesia has a poor performance in terms of social

parameters with the country ranking 113th out of 188 countries in 2016 Human Development

Index published by the United Nations, which is lower than many of its neighbors, including

Singapore (ranked 5th), Malaysia (59th) and Thailand (87th).47 This indicates that the

government has much to do in order to improve the social landscape.

A move for improvement was the implementation of a universal social security

system in 2014 which intends to cover all Indonesian residents under a universal healthcare

system by 2019 and a common employment benefits system by 2029. This new Social

Security Law provides for pensions, national health insurance, work injury insurance, death

benefits, and severance payments for laid-off workers. A strong social protection system will

provide the country with immense social support, contributing towards the development of

the nation. It should be noted, however, that despite the country’s population in moderation

and mostly maintains the separation of politics with religion, there is a radicalized population

that seems to endanger the pluralism in the country which consequently endangers the state of

affairs for minorities in the country.

D. Technological Analysis

In technological and innovation parameters, Indonesia has a recorded marked

improvement placing 36th out of 148 economies in the World Economic Forum’s Global

Competitive Index 2017-18.48 As of 2017, the social network penetration of Indonesia is 49%

47
Cƒ. “Human Development Reports: Indonesia”, United Nations Development Programme, 2016,
http://hdr.undp.org/en/countries/profiles/IDN
48
Cƒ. “Indonesia Improves in WEF’s Global Competitive Index 2017-2018”, Indonesia Investments, 27
September 2017,
of the total population being active in social media49. The amount of spending for higher

education was increased by the government to improve innovation output and performance

given that Indonesia is behind other ASEAN nations in terms of technological infrastructure.

A challenge for the country is the declining export share in high-technology products.

According to the World Bank as cited by MarketLine, the country’s high technology exports

stood at a dismal 7.3%, further below Philippines (48.9%), Malaysia (43.7%), China (26.3%),

and Thailand (20.5%).50 Indonesia’s exports will be less vulnerable to price competition if it

had high-end technological innovation.

Innovation in the country is impeded due to low research and development spending

amounting to less than half a percentage point of its GDP. Low R&D expenditure indicates

the government’s necessary adoption of innovation. Indonesia also has high levels of

software piracy that deters foreign investment and dampens investments in innovation. The

only industry that seems to thrive is the fast growing aerospace industry due to manufacturing

of parts for civilian and military planes.

E. Legal Analysis

Indonesia is an attractive economy due to its effective competition law and low total

tax rate. The country's first competition law, Concerning Prohibition of Monopolistic

Practices and Unfair Business Competition, was enacted on March 5, 1999. The law, which

has been in effect since February 2000, prohibits any single domestic company from

controlling more than 50% of the market. The Commission for the Supervision of Business

Competition (​Komisi Pengawas Persaingan Usaha ​[KPPU]) was established immediately

https://www.indonesia-investments.com/news/todays-headlines/indonesia-improves-in-wef-s-global-competitive
ness-report-2017-2018/item8231?
49
Cƒ. “Penetration of leading social networks in Indonesia as of 3rd quarter of 2017”, The Statistics Portal,
2017, https://www.statista.com/statistics/284437/indonesia-social-network-penetration/
50
Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
after the passage of the law. Although it has been criticized on various occasions, the KPPU

has been credited with countering a large number of cartels. Meanwhile, Indonesia's total tax

rate (includes profits taxes, labor taxes and other taxes) of 30% is lower than the East Asia &

Pacific average of 33.9% according to the World Bank's 2017 Doing Business Report.

Further, it is lower than its neighbors, Philippines (42.9%) and Malaysia (39.2%).51 A low

total tax rate bodes well for an emerging economy to attract investments.

Unfortunately, Indonesia has rigid labor law and a weak judicial system that poses as

a challenge in its economy. Indonesia’s rigid law restricts hiring and firing becoming a

prominent issue for foreign investors. According to the World Bank as cited by MarketLine,

severance costs in Indonesia are as high as 58 weeks of salary. Another problematic matter

for foreign investors is wage setting due to significant increases in the past few years like the

44% increase in minimum wage in 2012. Renegotiation of contracts can be carried out

despite straightforward labor contracts but, local courts side with Indonesian citizens in labor

disputes forfeiting the contracts. The judicial system is not only biased but it is also weak for

it can be easily influenced or manipulated by the political and business elite often perceived

as discriminatory of foreign interests.

A better business environment is in the prospect of Indonesia due to President

Widodo’s prioritization of issues on corruption, inefficient government bureaucracy, and

inadequate infrastructure, all of which are considered problematic issues for conducting

business in Indonesia. Foreign companies face significant risks due to legal uncertainty,

where there is arbitrary intervention of the Indonesian government, and economic

nationalism, such as protectionist policies. The country’s arbitrary policy reversals along with

its protectionist policies are definitely going to hurt investor sentiment.

51
​Cƒ. “Total Tax Rate”, The World Bank, 2018, https://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS
 F. Environmental Analysis

Indonesia has a rich biodiversity with 515 species of mammals, 39% of which are

endemic; 511 species of reptiles, 150 of which are endemic; 1,531 species of birds, 397 of

which are endemic; 270 amphibian species, 100 of which are endemic; 75 species of

psittacine birds, 38 of which are endemic; and 35 species of primates. The country is also in

the top five on plant diversity, with an estimated 38,000 higher plant species; it leads the

world list in palm diversity with 477 species, 225 of which are endemic; and has over half of

the 350 species of dipterocarp trees, with 155 endemic in Kalimantan. Indonesia ranks behind

only Brazil in freshwater fish diversity, with around 1,400 species.52

On the other hand. Indonesia has an increasing rate of forest loss. On average, around

2 million hectares per year are deforested since 1996. One of the main reasons for

deforestation in Indonesia is the corrupt political and economic system, which regards natural

resources—especially forests—as a source of revenue to be exploited for political and

personal gain. The rising demand for palm oil has motivated further deforestation. A step

made to reduce deforestation to some extent, the government of Indonesia approved

Reducing Emissions from Deforestation and forest Degradation (REDD) in 2012. This

agreement would get Indonesia $1 billion from Norway for not cutting down trees to make

way for palm plantations.53

Conservation of orangutans is a priority in Indonesia for they play a significant role in

the fight against climate change and forest regeneration, as it disperses seeds that help

regenerate fruit trees, which in turn help keep the forest healthy and able to reduce

greenhouse gases such as carbon dioxide. A 10-year action plan has been made by the

52
​Cƒ. PESTLE Analysis Indonesia. Ebook. London: MarketLine, 31 January 2017. Accessed 2 February 2018.
kupdf.com_pestle-analysis-indonesia.pdf
53
​Ibid​.
government in conjunction with non-governmental organizations to stabilize the orangutan

population and habitat.

As for the topic of Indonesia’s energy, the prices for energy is highly distorted. The

price of scarce energy does not take into account the environmental and social costs which

also inhibits the development of green technology. The lack of a market-driven pricing

mechanism becomes an obstacle to emission reduction.

V. Hofstede Cultural Analysis

To deeply understand the Indonesian context and Indonesian environment, it is

important to be aware of all the cultural aspects which have an impact of the way of doing

business. Hofstede Cultural Analysis is a tool that allow us to highlight the important points

that we need to completely understand before doing business in Indonesia. Hofstede’s

Cultural Analysis is divided into 6 dimensions:

 A. Power Distance

Power distance is defining by the distribution of power inside the society and if the

inequalities are widely accepted or not. Indonesia scores high for this dimension (78). That

means that Indonesia is really dependant on hierarchy: superiors are inaccessible and are

directive, management controls and delegates. Power is centralized and there are unequal

rights between power holders and non power holders. Communication is indirect and

negative feedback hidden. Co-workers expect to be clearly directed by boss or manager:

classic guru-student kind of dynamic.54

B. Individualism

This dimension is defining by the degree of interdependence a society maintains

among its members. There are two types of society: collectivist and individualist.

Indonesia scores very low on this dimension (14). Indonesia is a collectivist society. Having a

preference for strongly defined social framework result to individuals being expected to

conform to the ideals of the society and the in-groups to which they belong. There is a strong

child-parent commitment that leads to a big importance of family loyalty.55

C. Masculinity/Femininity

This dimension is to understand if a society is more feminine or masculine. What

differentiates a masculine society of a feminine one is what motivates people, wanting to be

the best (masculine) or liking what you do (feminine). Indonesia has a score of 46 on this

dimension: it is low on masculine. Low in masculinity indicates a cultural perception that

status and visible symbols of success are important, but not necessarily the material gain that

brings motivation. The position that a person holds is more important because of an

54
Cƒ. Hofstede Insights, "Indonesia Country Comparison," Hofstede Insights, accessed February 16, 2018,
https://www.hofstede-insights.com/country-comparison/indonesia/.
55
​Cƒ. Ibid.
indonesian concept called “gengsi” which means outward appearances. Strongly maintaining

a “gengsi” implies an action to impress and create the aura of status.56

D. Uncertainty Avoidance

This dimension is defining by the fact if a society feels threatened by unknown or

ambiguous situations and have created systems or institutions that try it to avoid these.

Indonesia has a score of 48 for this dimension that means it has a medium low preference for

avoiding uncertainty. Indonesians have a strong preference towards the Javanese culture of

separation of internal self from external self: it is very important for them to maintain

workplace and relationship harmony. In case of conflict, they do not like direct

communication, it will be a threatening and uncomfortable situation. They would prefer to

use a third party intermediary: intermediary removes the uncertainty associated with

confrontation. There is no economic or status uncertainty because of the indonesian concept

“Asal Bapak Senang” (keep the boss happy).57

E. Long term Orientation

This dimension is defined by how every society has to maintain some links with its

own past dealing with the challenges of the present and the future. Indonesia’s high score of

62 indicates that it has a pragmatic culture thus people believe that truth depends very much

on situation, context and time. Furthermore, they show an ability to adapt traditions easily to

changed conditions, a strong propensity to be financially responsible savings, investment, and

thriftiness, as well perseverance in achieving results.58

F. Indulgence

56
​Cƒ. Ibid.
57
​Cƒ. Ibid.
58
​Cƒ. Ibid.
 Indonesia, having a low score of 38 in this dimension shows that it has a culture of
Restraint. Societies with a low score in this dimension have a tendency to be cynicists and
pessimists. Restrained societies also do not put much emphasis on leisure time and typically
control the gratification of their desires. A culture of Restraint contributes a perception that
their actions are restrained by social norms and that indulging themselves is something seen
as negative to society.59

V. Firm Analysis (Indofood CBP Sukses Makmur)

Indofood CBP Sukses Makmur is the Food and Beverages arm of the Indofood

Sukses Makmur PT and is one of the leading companies in the food and beverage sector. The

company offers products such as noodles, nutrition and special foods, beverages, snack foods,

dairy and food seasonings. In addition, the company also has its own packaging business

which supports the company’s main businesses. Indofood CBP Sukses Makmur otherwise

known as ICBP or the Indofood Group is found in over 60 countries. The highest contributor

to the company’s growth is their line of instant-noodle products which are exported across

Australia, Africa, the United States, Europe and Asia.60 In the October 2017 Financial Report

of ICBP, it showed that the Noodles contributed 63% to the net sales for the period which

ended 30 September 2017. On the other hand, Dairy contributed 20%, Snack Foods with 7%,

Food Seasonings with 3%, Nutrition & Special Foods with 2% and Beverages Division 5%.

The consolidated net sales grew 3.6% to Rp 27.34 billion in the end of the September 2017

period.61

Indomie and the Instant Noodle Market

59
​Cƒ. Ibid.
60
​“ICBP at a Glance,” Indofood CBP Overview, accessed 15 February 2018.
http://www.indofoodcbp.com/company/icbp-at-glance
61
​“Consolidated Statements of Financial Position,” Indofood CBP Financial Position, accessed 15 February
2018. http://www.indofoodcbp.com/uploads/statement/ICBP%20Web_2Q17%20Financial%20Analysis.pdf
 As the product that has the largest contribution to net sales, the focus of this part of

the paper will be on the Noodles Division of the Indofood Group. The Instant Noodles line

that will be focused on is called Indomie and it comes in 10 varieties for the Indonesian

market alone. Other brands of instant noodles from the Indofood group include Super Mi,

Sarimi, Sakura, Pop Mie, Pop Bihun and Miet Telur Cap 3 Ayam. The Indofood Group

dominates the instant noodle market with shares amounting to percentages not less than 70%

in the recent years. Given the cheap price, a variety of flavours, and the easy preparation,

instant noodles have become one of the highly popular purchases by Indonesian households.

An annual study released by Kantar Worldpanel entitled Brand Foodprint reports that

Indomie ranked number one as Indonesia’s most chosen brand. According to the study, an

Indonesian consumer would purchase the brand three to four times in one month within the

year 2016.62 In addition, Indomie ranked 8th in the “Ten Most Purchased Brands in the

World” category in 2015.63 With its success in the Indonesian market, Indomie has expanded

globally since then reaching as far as Australia, New Zealand, Nigeria, the United States of

America, the Netherlands, Dubai and the United Kingdom.

In Nigeria, Indomie has 74% market share in the Instant Noodle market. Until 2006,

Indomie had 100% market shares in Nigeria. According to Indomie Nigeria’s website, there

are sixteen other brands competing for the top position in the instant noodle market.64

However, since Indomie was the first to create a market for instant noodles in Nigeria, many

consumers still stay loyal to the brand which in turn gives Indofood Group a large amount of

shares generated from Indomie. On the other hand, the instant noodle markets are more

62
​Fanny Murhayati,“Brand Footprint Launch 2017” last modified May 31, 2017. ​https://www.kantar
worldpanel.com/id/News/Brand-Footprint-2017-Press-Release
63
​Hannah Roberts, “The ten most purchased brands in the world” last modified December 30, 2016.
http://www.independent.co.uk/news/business/ten-most-purchased-brands-world-lays-pepsi-coca-cola-maggi-a75
02406.html
64
​“Brand Legacy,” Indomie Nigeria, accessed 15 February 2018. http://indomie.ng/page/about
diverse in Australia and New Zealand. Indomie entered into the markets in the early 1990s as

one of the first brands to also introduce the Indomie Goreng variety into the Instant Noodle

Market. As with Nigeria, the primacy of the Indomie brand consolidated the consumers to

become loyal to the Indomie brand.

Porter’s Five Forces: An Analysis

Threat of New Entrants (Low)

The instant noodle market is a crowded space with several competing brands.

However, Indomie is consistently the dominant player in this market with shares that range at

most 70% in the current market. Other brands are Super Mi, Sarimi, Sakura, Pop Mie, Pop

Bihun and Miet Telur Cap 3 Ayam. In addition, the company excels with the vertical

integration because it is able to utilize its parent company’s large network of suppliers to

expand the product’s reach into other markets and locations.

Substitute Products (Low)

Even though there are several substitutes available in the instant noodle market, the

threat of substitute products is still low largely due to the primacy of the brand in the market.

The distance between the top two companies with the largest market shares’ percentages are

far. The Indofood Group maintained 70%-72% of the market shares throughout 2011-2014

while the Wings Group which came in second, garnered 14.6%-14.9% of market shares in

those years as well. Succeeding groups and companies only have market shares below 3%. 65

Threat of Supplier’s Bargaining Power (High)

65
​“Instant Noodles Market Indonesia: Difficult to Compete with Indomie,” Indonesia-Investments., accessed
15 February 2018. https://www.indonesia-investments.com/news/todays-headlines/instant-noodles-market-
indonesia-difficult-to-compete-with-indomie/item6397?
 Given that the other competing brands of instant noodles are also housed under the

Indofood group, the threat for the Supplier’s Bargaining Power is high. The space is

dominated by several companies which are all under the Indofood group and they also offer

the same type of products. These brands can also be substitutes to the widely acclaimed

Indomie.

Threat of Buyer’s Bargaining Power (Low)

The Buyer’s Bargaining Power is low due to the diverse range of buyers as well as

differentiated products sold by the company itself. The Buyers do not have enough

bargaining power to lower down prices and force higher quality because the company has

already provided the market a diverse range of products in varying price ranges, packages and

flavors.

Rivalry among Existing firms (High)

The Rivalry among existing firms is high. Given that Indomie is isolated at the top,

the other brands for instant noodles clamor to earn at least a significant percentage in their

market shares.

SWOT (Analysis)

Strengths

The Indofood CBP has expanded its market globally and has become a highly popular

product in the international markets. With the large networks of its parent company, Indofood

Sukses Makmur PT, it is capable of exporting its products across the globe. The company

also deployed a good strategy by becoming the first company to penetrate the foreign markets

with the unique Indonesian flavors.

Weaknesses
 The Indofood group has several varieties of the same product. Given the resources

spent for each brand and the profits earned, only the Indomie brand seems to be taking off.

Opportunities

There is a continuous increase in profit and market shares both in the domestic and

international levels. A growing demand for instant noodles and other products offered by the

company in new markets emerged.

Threats

Exportation of raw materials is still largely dependent on external suppliers and

foreign locations. This will hamper the growth of the economy especially when

complications start to emerge from the exportation since raw materials are not forever

guaranteed to come in the same quantities.

VI. Conclusions and Key Recommendations

Given the underinvestment in infrastructure as well as the dependency on the exports

of commodities, a recommendation for future managers who would establish businesses and

companies in Indonesia could focus on these two sectors. First, there is a large potential for

the development of infrastructures especially since there are several growing industries and

companies based in Indonesia. Underdeveloped infrastructures causes higher costs for

operations and logistics and have hindered several companies and firms to maximize their

operations. Given that, businesses focusing on the development of these infrastructures are a

recommended path especially since there are little efforts to pursue this kind of venture.

Second, it is also recommended to focus on developing human resources to mitigate the high

dependence on exporting raw materials. With the development of human resources, new

avenues and spaces could be created for employment as well as the establishment of human
resource centered companies and firms. Lastly, since the regulations and policies of the

Indonesian government are continuously being updated, it is recommended that an in-depth

analysis of the labor policies and regulations be made before entering into the Indonesian

market.

In the past fifty years, Indonesia has gone through astonishing transformations in

terms of development. The nation has suffered extreme and widespread poverty, harsh

authoritarian rule, minimal infrastructure, and among other challenges. However, today

Indonesia stands as a rising economic power, vibrant democratic state, and leader of several

prestigious international organizations.

Moreover, contributing to the various milestones and downfalls of the nation are the

specific cultural nature of the society. For instance, ​power distance scoring high for Indonesia

signifies that hierarchy is highly regarded by all, power is centralized, and there are unequal

rights between power holders and non-power holders. This may contribute to the

never-ending setbacks in the country due to corrupt undertakings of higher-up officials of the

country. In addition to that, it is relevant to say that Indonesia being a collectivist society can

be seen as a negative attribute due to the factors like rigid labor laws, corrupt judicial system,

frequent contract reversals, and various protectionists policies that intend to safeguard and

prioritize Indonesian workers but, in consequence, discourage foreign investors to venture in

the different industries of the Indonesian economy. The collective character of Indonesia is

portrayed in the cohesive nationalistic efforts of the government which strictly protects its

citizens through the formulation of laws that favor the locals only and taxing laws that

usually double-cross the foreign investors thus discouraging them from investing into

Indonesia’s stock and bonds market.

 And with regard to the Indofood Group, the firm has taken the most advantage of the

eating habits of Indonesians that are consistently adapting to trends. The growing health

consciousness among Indonesians, as mentioned in the opening section, created increased

opportunities for healthier food products and beverages. In general, Indonesian consumers are

looking for fast and convenient food without compromising healthy eating habits. In that

case, Indofood CBP has offered Indonesian consumers healthy and cheap products that meet

the requirements of the those conform to this health trend. In fact, Indofood Group dominates

roughly 70% of the the instant noodle market. The Indomie Group being the dominant player,

given that they have the biggest share, is very likely to lose incentives to innovate and

produces other offerings. In the event that newer products from other firms will be available

as better alternatives to instant noodles as healthy and affordable meals, it is likely for the

Indomie Group to face the consequences of the decline. Moreover, with this apparent

imbalance in the market for noodles, it is very possible for the Indomie Group to be able to

set the prices they want for their products, as well as to those of similar kind.

Furthermore, numerous factors greatly contribute to the development of Indonesian

economy. Indonesia may lack in various important factors and failed to address challenges

properly in the past, but many efforts have been made to remedy inadequacies. In reference to

the data presented, development in Indonesia will fundamentally begin with fundamental

bureaucratic reform, melioration of economic institution, and strict implementation of rule of

law. The delay of action towards development will increase uncertainty and insufficiency of

many fundamental elements needed for a flourishing economy. The holdback will eventually

reduce the economic capacity of the nation and impede economic growth. Consequences will

then be lack of necessary opportunities that will affect the government’s ability to provide the

necessities of the citizens for better livelihood of the whole population.

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