Indonesia - Background
Officially known as the republic of Indonesia, Indonesia is a sovereign state made up of approximately 17,508 different islands. The fourth most populous country in the world, Indonesia has a population of around 238 million and is the 16th largest economy in the world by nominal GDP.
The economy of Indonesia is classified as an emerging market economy and is the largest economy in South East Asia. Although classified as a market economy, the country’s government does play a significant role with its state ownership of some enterprises as well as the administration of prices in goods such as rice, fuel and electricity. Following the financial crisis of 1997, the government also took control of many private sector assets through debt restructuring and the acquisition of some banks. The effect of the 1997 financial crisis in Indonesia was severe. By the end of 1997, public debt reached US$60bn which forced the government to pull back on all public spending and real GDP contracted by 13.1% and by 1998, inflation had reached a high of 72%.
More recent years however, have seen a marked improvement in the economy of the country and efforts have been made by the government to improve both regulation and the climate for foreign investment. In 2010 Indonesia rose from 129 to 122 in the world banks list of countries in its ‘Doing Business’ survey which is a rating of how straightforward it is for foreign companies to carry out business in a country. Indonesia’s ranking however is still below that of neighbouring countries and barriers to foreign investment still exist. There are still laws and regulations in place that actually deter foreign investment. For example, foreign members of staff of overseas companies are not allowed to hold an Indonesian bank account.
Despite the crisis of 1997, the economy of Indonesia has been growing again in recent years and the country has experienced a steady growth in GDP. The poverty rate in the country has fallen significantly, though according to an estimate in 2010, over 13% of the population still remain below the poverty line. Even though Indonesia was one of the hardest hit countries in the 1997 Asian financial crisis, it is now a stable country both politically and economically.
Today, Indonesia is attracting a large number of foreign investments into the country and some analysts are hailing it as the next big opportunity in Asia. The country is the world’s third largest democracy with an economy worth over 1.3 trillion and is now displaying one of the strongest growths in the world with an average rate of increase in GDP of 6% in the past few years.
The country’s demographics are in its favour too with most of its population being in the productive age group of between 25 years old and 60 years old and a growing middle class of primarily relatively wealthy younger people who are willing to spend their money is creating an expanding and strong domestic demand for products across the board.
Indonesia - Opportunities
Despite its turbulent past and the impact of the 1997 Asian financial crisis, Indonesia’s growth potential is now seen as a significant opportunity for foreign investors. The country is forecast to become the tenth largest economy in the world by the year 2025 and by then, it will also have around 90 million new domestic customers for foreign businesses to target too.
The current steady economic growth combined with the ever growing consumer demand along with the country’s abundant natural resources have caught the attention of many countries seeking trade and investment partnership agreements with Indonesia including India and Australia. Sectors that have been of interest have been textiles, mining and the automotive industry. Future investment opportunities in the country are forecast to be in financial services, telecommunications and infrastructure projects as well as consumer products.
The Indonesian government lays out its own investment priorities in its medium-term development plan every five years and the governments stated priorities for the years 2010-2014 are: Oil and Gas, Infrastructure and Transportation, Power, Mining, Manufacturing and Agriculture and Telecommunications.
There are, however, a number of sectors in which foreign investment is prohibited in the governments published ‘negative investment list’ which can be found on Indonesian government websites. This list ranges from survey companies to casinos but the length of the list is gradually being reduced. This list, which completely prohibits foreign investment in some sectors and limits the percentage of ownership allowed in others, is updated on an on-going basis so any potential investors in the country should check the up to date regulations before planning any investment.
The government of Indonesia is now actively seeking foreign investment and do offer numerous incentives to overseas businesses including free trade zones and exemption from import duties and tax. Such incentives are subject to conditions such as the location of the business, the level of research and development undertaken and the numbers of local employees.
Indonesia may be hailed as a land of opportunity by some but investors there also face some serious challenges as well such as the poor infrastructure, weak institutions, excessive bureaucracy as well as corruption. Some analysts have also expressed concern about the long term sustainability of the country’s economic growth.
Despite these doubts, Indonesia is currently a rapidly growing economy and the country has a range factors that make it attractive to foreign investments. Concerns, however, over a fragmented local government structure, corruption and still evolving institutions mean that, for the country to maintain its growth and achieve its potential, the government will need to continue putting in place the appropriate policies.
Indonesia – Setting up In Business
Foreigners may own business in Indonesia and local Indonesian partners are not a requirement in all business sectors. Special attention should be paid however to the current ‘Negative Investment List’ which prohibits foreign investment or restricts the amount of equity that may be owned by a foreigner on certain industry sectors.
Creating a business in Indonesia is a fairly complex process and the paperwork required can vary depending on the type of business and even the location of the business so obtaining local, qualified assistance with the process is always advised.
Although not a requirement in many business types, working with a local partner in some circumstances can be a distinct advantage. For example, if a business were to sell products locally through a distribution channel, local knowledge and contacts would be of assistance.
A business may set up a non-trading representative office in the country which would be entitled to carry out marketing and procurement but it would not be allowed to make any sales. Joint ventures with other local stakeholders are also permitted as is a 100% foreign owned company or ‘PMA’ so long as it meets the criteria with regards to the ‘Negative Investment List’. Documentation and licences for all formats of trading in Indonesia by foreign companies may be required but here we focus on the formation of a 100-% owned company (PMA) the steps of which are as follows:
1. Obtain clearance of the company’s name at the Ministry of Law and Human Rights, Obtain the standard company deed form and arrange for a notary.
The company name must be unique and conform to certain statutory requirements such as not contravening public decency, not being similar to another existing company’s name and not conforming to the businesses actual trading activities.
2. Notarise the company documents before a notary public
3. Obtain a Building Management Domicile Certificate
A certificate must be obtained from the Building Management Office by companies locating to a building in Indonesia before applying for a Certificate of Company Domicile.
4. Apply for a Certificate of Company Domicile
All limited companies in Indonesia require a Certificate of Company Domicile which is issued locally.
5. Make payment to the State Treasury for the non-tax state revenue (PNBP) fees for legal services.
6. Apply to the Ministry of Law and Human Rights for approval of the deed of establishment
7. Apply for the permanent business trading license (Surat Izin Usaha Perdagangan, SIUP) and the company registration certificate (Tanda Daftar Perusahaan/TDP)
8. Register the company with the Ministry of Manpower
Companies employing more than 10 employees or with a total monthly payroll of over 1 million Indonesian Rupees must be registered with the Ministry of Manpower.
9. Apply for the Workers Social Security Program.
Companies employing more than 10 employees or with a total monthly payroll of over 1 million Indonesian Rupees must apply for the Workers Social Security Program.
10. Obtain a taxpayer registration number (NPWP) and a VAT collector number (NPPKP)
As with foreign investment in any country, it is always advisable to seek assistance from a reputable local legal firm to ensure that all of the current legal requirements for a company formation are met.