Global Business Guide Indonesia

Indonesia
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Business Updates | Indonesia’s Competitiveness; Progress with Room for Improvement

Sized up in the World Economic Forum (WEF) Global Competitiveness Index and the World Bank Ease of Doing Business Index, Indonesia’s current business climate demonstrated marked improvements across several key aspects, including those that have long frustrated foreign and local investors alike. In what is a boost to the country’s global standing and the way it is perceived by international players looking to enter South East Asia’s largest economy, both indexes trended towards telling a positive story and expounded upon gains made in core pillars such as infrastructure, technological readiness and credit information systems.

The significance of these findings to investors, however, varies widely between each of these different factors. The reported development of Indonesia’s infrastructure, in particular, needs to be taken with a healthy pinch of salt. In truth, a comprehensive analysis of the trends spurring Indonesia’s rise up the WEF competitiveness and World Bank ease of doing business scales reveals a familiar narrative—the country has improved upon its business climate but still trails behind its regional neighbours. The true value of these reports to foreign investors instead lies in its making evident comparative advantages that facilitate successful cooperation between local players and international partners.

The Climb

Indonesia jumped from 50th to 38th in the WEF’s 2013-2014 Global Competitiveness Index; its first rise since the 2010-2011 edition of the report and one of the largest general improvements amongst all nations in this year’s rankings. The country’s rise is largely attributed to progress made in infrastructure, where it moved up 17 places to 61st and technological readiness, where it rose 10 spots to 75th.

The 2014 World Bank Ease of Doing Business Index, released in late October, produced similar results, in that Indonesia ranked 120th out of 189 countries; a noteworthy jump from 128th in 2013. Despite the fact that the country fell in terms of relative rank on the vast majority of the index’s indicators, Indonesia’s distance to the frontier (DTF), a measure that shows the distance of each economy to the highest performance observed on each of the indicators across all economies analysed in the report (World Bank), improved considerably; with notable progress taking place in the ease of starting a business and getting electricity.

The Takeaway Message

The aforementioned facts point to Indonesia’s economy becoming more competitive with fewer obstacles preventing companies from making the most of the many opportunities that the market presents. Investors, however, should be particularly encouraged by findings indicative of the country’s increased willingness to implement new technology. As is described in the WEF’s report summary, Indonesia’s substantial rise in the technological readiness pillar was driven by a private sector more aggressive in adopting the latest technology; the country’s firm-level technology absorption ranking leapfrogged 10 places to 46th. Now more than ever, Indonesian companies are looking to implement cutting edge production processes and improve upon their existing services by becoming more efficient.

In looking for new technology, local business players are increasingly open to cooperation with foreign partners capable of sharing technological knowhow and expertise; a trend supported by the fact that Indonesia experienced a 22 place improvement (from 61st to 39th) in their WEF ranking on the extent to which foreign direct investment brings new technology into the country. In addition to this, emerging trends such as cloud computing and e-commerce bode well for further investment (See The Outlook for Indonesia's ICT Sector ). The scope of opportunities available to technologically advanced firms interested in entering the Indonesian market to meet the needs of tech-hungry local companies is thus immense, especially in industries that allow 100% foreign ownership such as IT Consultancy.

Moreover, investors offering new technology and related consultancy will find that more local companies can afford their services, as a direct result of the government implementing new regulation to improve upon Indonesia’s credit information system. The central bank’s issuance of Bank Indonesia Regulation No. 15/1/PBI/2013 provides a legal framework for establishing credit bureaus, which in turn will make it easier for Indonesian companies to obtain credit from financial institutions. The primary reason for the World Bank’s optimism in assessing the country’s business climate is that this course of action advances the standard of credit information available to companies applying for financing and formal lending institutions gauging risk and is reflective of an actualised government initiative to improve upon one of Indonesia’s perceived shortcomings.

These promising findings, however, have been overshadowed by Indonesia’s reported gains in infrastructure. Upgrades to roads, ports, power plants and water management facilities have been touted as concrete evidence supporting the WEF conclusion that the country has substantially addressed its highly publicised weakness. However, it is important to recognise that several of the upgrades cited as being drivers of Indonesia’s progress in infrastructure are still in the planning stage. As such, until the many projects scheduled for completion in the not too distant future actually materialise, investors are advised to temper expectations over the extent of infrastructural development taking place in Indonesia in the short term.

Outlook

The WEF Global Competitiveness Report and the World Bank Ease of Doing Business Index on a general level indicate that, all told, Indonesia has progressed in several key fields. Expectations over a rise in rankings in both indexes should be scaled back when taking into consideration that the country still trails behind most of its ASEAN counterparts; a reality that does not bode well given the rapidly approaching ASEAN economic integration scheduled to take place in 2015.

Instead, attention should be focused on the clear emergence of trends demonstrating the willingness of Indonesian firms to invest in and absorb new technology and innovation. Indonesia is steadily developing a comparative advantage in their openness to new, more efficient production processes and machinery that is complementary to where foreign firms can provide expertise and knowhow. The country’s unique strength in the forward looking nature of its private sector businesses builds towards increased cooperation between foreign investors and local companies soon to be fuelled by easier access to credit.

Global Business Guide Indonesia - 22nd November 2013

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