by Prema Nakra, Ph.D.
 
The Republic of Indonesia is the largest and most populous economy in Southeast Asia with 240 million people, making it the fourth largest country in the world. Located in the heart of the economic growth in Southeast Asia, it is a vast polyglot nation that stretches more than 5,000 kilometers across the equator and is made up of more than 17,000 islands.
In the first three articles in this series, I provided an overview of Indonesia, the investment opportunities that exist, and the country’s value proposition. In this article I discuss the regulatory and environmental barriers to doing business in Indonesia.
NOT-TARIFF BARRIERS: REGULATORY AND ENVIRONMENTAL
Compared to most developing country standards, Indonesia is a low-tariff country and has been rather successfully implementing its tariff liberalization program. Since the recent global financial crisis, however, new non-tariff barriers have emerged that make doing business in this country more difficult. These non-tariff barriers include, but are not limited to, inadequate infrastructure, corruption, a complex regulatory environment, and unequal resource distribution among regions.
Complex Regulatory Environment
Indonesia has a complex regulatory and legal environment that leads many foreign and domestic companies to avoid the justice system. Companies are often advised by legal experts to resolve disputes through arbitration outside Indonesia. That is because the Indonesian judicial system operates irregularly and opaquely. In the World Bank's Doing Business survey in 2012, Indonesia is ranked 129th out of 183 countries, with particularly high scores (implying greater difficulty) in the areas of starting a business, getting electricity, enforcing contracts, and resolving insolvency.
The Indonesian government ruled in April 2012 that foreign investors must divest themselves of 51% of ownership in local mines to local entities by the tenth year of operation. The government also announced that it will ban the export of raw materials including copper, iron, nickel and bauxite by 2014.
Corruption and Bribery
Potential and current investors point at corruption, red tape and an uncertain legal environment as the main challenges for conducting business in the country. Companies continue to be concerned about concessions based on personal relationships and demands for irregular fees to obtain government contracts, permits or licenses. Bribery typically occurs during licensing procedures, as the level of bribes is positively correlated to the number of business licenses a company must obtain in order to comply with regulations.
Local Content Requirements
Another non-tariff barrier relates to local content requirements for component parts in the manufacturing sector. Component part producers in Indonesia, however, continue to produce less sophisticated and lower quality products. This barrier forces the foreign manufacturers to establish manufacturing of component parts in Indonesia. However, the high rate of investment needed to establish these facilities, combined with the atmosphere of bureaucracy and corruption, make it a challenge.
Intellectual Property Right (IPR) Violations
A study commissioned by the Indonesian Anti-Counterfeiting Society and undertaken by the University of Indonesia's Institute for Economic and Social Research in 2011 states that Indonesia loses $4 billion in potential taxes each year as counterfeit goods flood into the country. Counterfeiting affects all sectors of the economy, from designer goods to more worryingly medicines. Agriculture and healthcare are the two sectors of the economy that are most affected by counterfeiting with 15% of pesticides and 16% of medicines being counterfeit. The impact of counterfeiting is not limited to lost tax revenue. The study estimates that during the last eight years 174,000 people have lost their jobs because of counterfeit goods.
Unemployment and Poverty
The lack of a connection between education and industry in the past has led to high rates of youth unemployment. The World Bank noted that the country's youth unemployment is five-times higher than the regional average. In January 2010 the official figure stood at 68,000 unemployed graduates out of the 350,000 graduates created every year.
About 15% of the population lives below the country's official poverty line of around $1 a day, but advocates for the poor say the percentage would be larger if Indonesia set the bar a little higher, say, at $1.25. Relatively sluggish growth in labor-intensive industries has meant slow progress in curbing unemployment, which is over seven percent.
Threat of Terrorism
The investor community is cautious about investing in Indonesia due to the incidents of several major terrorist attacks in Indonesia, including the October 12, 2002, Bali bombings; the September 9, 2004, bombing of the Australian Embassy in Jakarta; the October 1, 2005, Bali bombings; and the July 17, 2009, bombings of the Ritz-Carlton and Marriott hotels in Jakarta. While Indonesian authorities have proven highly effective in disrupting terrorist plots and networks, risks of such incidents are very real and have affected manufacturing as well as tourism sectors.
Natural Hazards
Since Indonesia is located between the Pacific Ocean and the Indian Ocean in line with the equator. The country is vulnerable to the El Nino/La Nino phenomenon that includes failures in crop harvests. Natural hazards are also present: occasional floods, severe droughts, tsunamis, earthquakes, volcanoes and forest fires. Indonesia contains the most volcanoes of any country in the world. Significant volcanic activity occurs on Java, western Sumatra, the Sunda Islands, Halmahera Island, Sulawesi Island, Sangihe Island, and in the Banda Sea.
As you can see, while Indonesia offers plenty of opportunity as an international market, it has plenty of barriers to a successful entry. I will discuss the operational barriers in my next article.
  ( Vivian )22 Jan,2013

Other News:
Indonesia: An Emerging Market – Part 4
On the Future of Customhouse Brokers
Export Basics: Seven Tips for New Exporters
Latin America Outlook Part 1 - Introduction
Mixed Signals for the Global Economy
Globalization of the Media Industry Part 2 - Copyright′s International Problem
Latin America Outlook Part 2 - Latin America´s Regulatory Environment
Tuning Up the International Marketing Engine