Economic Overview of Indonesia

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Executive Summary

Executive Summary

This paper examines the economic environment of doing business in Indonesia. It takes into account several dimensions such as political, legal, economics, social and technology factors. However, economics and political factors are covered in depth as they have a greater impact on establishing advantages and challenges when a firm might decide to set up a business in Indonesia. The results show that not only legal origins have an impact on corporate finance, ownership and structure, but also politics. The poor quality of the judiciary and legal system and the bureaucracy is much more a legacy of the Soeharto government than of the Dutch colonial system (and French civil law). From the analysis of economics trends emerged that from 2002 to 2004, Indonesia’s economic has suffered as a result of a loss of policy credibility, which weakened its currency and caused high level of inflation. In such circumstances, monetary and competition set of policies have been issued to remediate the downward trends. Reductions on tariffs and interest rates decline have contributed to a rapid increase in credit expansion and new competitiveness. This paper also finds that Indonesia offers a great deal of resources such as rubber and mineral resources along with skilled labour. Although an automotive component firm might benefit from those resources, there are few implications such as weak infrastructure and corruption which would constrain foreign investors to discard investments in Indonesia. In conclusion, challenges are higher than potential advantages with regards to the automotive component industry. However, this paper outlines in its conclusion a recommendation in the circumstance whereby foreign investors will not discard investments. In order to overcome potential problems concerned with the excessive red tape and corruption, this paper suggest a joint venture entry mode with a business group such as the Salim Group. INDONESIA

1”Indonesia and its Business Environment
Business Environment
This part will focus on factors that have affected Indonesia’s economic environment in the last decade. Such factors have been firstly analyzed using indicators of economic freedom, in order to find a correlation between past policies and the fluctuation of the aforementioned indicators. Moreover, the paper takes into consideration the recent government history of Indonesia, social and technological factors that have affected and are affecting the ease of doing business in Indonesia. 1.1”Political and Legal Factors

On 17th August 1945, Indonesia declared its independence from Japan. It is now considered as a Republic country with a presidential system. Between 1949 and 1966, Indonesia suffered from political instability, which caused economic distress. Economic development restarted from 1967 with the President Soeharto. Although Indonesia was under the Dutch Colonial system and its legal origin derives from French common law, the legal system has been mostly affected by the Soeharto’s presidency. What is peculiar about Soeharto’s government, it is the creation of the franchise system. It was established and articulated into different branches: legislature, judiciary, military, bureaucracy, and state-owned enterprise (see Exhibit 1). This system was established with the purpose to eliminate the competition for privileged firms, enabling those to exploit natural resources. To support the aforementioned system, judicial corruption bureaucratic and military extortion was carried against firms and individuals that were not privileged. The bureaucratic extortion created a system, whereby not privileged firms had to bribe public officers to obtain licenses to do business and also for the provision of services. In July 2001, Megawati was elected as a new President of Indonesia. During this period, macro-economic indicators improved (Exhibit 2) as well as political stability. 1.2”Economic Factors

With regards...
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