Indonesia Business System

Indonesia

Eemei Tang, Wolfgang Bardorf, Dewi Novianty, Deo Custodio, Jon

McCallum, Julian Petrescu

Contents

• Role of state and history

• Meaning (Rationale, identity, authority)

• Order (Capital, human capital, social capital)

• Coordination (Ownership, networks, management)

• Links

• Comparative Advantage

Key Historical Influences

• Pre-colonial

• Colonial Times (1511 – 1942)

• Independence (1945)

• Old Order (1945 – 1966)

• New Order (1967 – 1998)

• Financial and political Crisis (1998)

• Reformasi (1998 – 2004)

Role of the State

• Rentier, statist, patrimonial state

• Controller of licences for natural resources and 'strategic' projects

• Heavy subsidy of commodity-like products

• Strong government/business cooperation (nepotism)

Rationale

• Personal/Family/Friends’ wealth accumulation i.e. KKN (Corruption, Collusion, Nepotism)

• Protection of the elites

• Maintain stability and geographic cohesion, and prevent social unrest

Identity

• Collectivism• By Race: Pribumi vs. Chinese vs. ‘Bule’. Rule of

Thumb – The fairer the skin, the higher the status accorded.

• By Province/Dialect: Javanese, Sundanese, Balinese, Batak… etc.

• By Religion: Muslims/Christians/Hindus; schools are also divided amongst religious lines.

• For the Pribumi: Kampung & Family• For the Chinese: Business ventures and success

Authority

• Hierarchical (Islamic roots for the Pribumi and Confucian ways for the Chinese)

• Strong military influence primarily in politics, although it is slowly waning

• Wealth is a big enabler.

• Indonesians typically hold political power and Chinese hold the business influences.

Capital

• Bank lending accounts for the bulk of corporate debt

• Access to loans often tied to relationships

• FDI, foreign debt, developmental aid

• Government-guaranteed debt

• Capital from friends and family

Human Capital

• Universal education (primary only)

• Low quality

• Brain drain to US, Australia and other foreign countries

• Militant labor unions prone to violent strike and riots

• Highly mobile workforce, both domestically and overseas

Social Capital

• Low interpersonal trust– Due to ethnic and geographic fragmentation

• Low institutional trust

• Social adhesiveness provided by religious organizations

Ownership

• Strong family business groups• Cross-shareholdings (pyramidal ownership and

business group practices)• Controlling owners have the power (i.e. voting

rights) and incentives (i.e. cash flow rights) to secure investments and minimize risks

• Close monitoring through owner involvement in businesses (i.e. reducing information asymmetry)

• No market for corporate governance, expropriation of minority shareholders' rights

• Joint ventures: Foreign companies have to give up 5% ownership to locals

Networks

• Close family ties and business networks between family members prevalent in both Chinese and non-Chinese (pribumi) communities

• Network capitalism: cross-share holdings

• Outsiders distrusted

• Links not institutionalized

Management

• Two types of company– Indonesian

• Ties to military• Banakism• Sense of hierarchy

– Managers: look after employees, avoid them losing face– Employees: avoid criticism of manager– Peer level: consensual decision making

– Overseas Chinese

Links - Family

Family business

Wealth enables

Low interpersonaland institutional

trust

Family ties Family run

Friends and family

Family / business success

Family Wealth

Links – State / Military

Elite ownership

Strong military

Low institutionaltrust

Ties to military

Governmentguaranteed

debt

Wealthaccumulation and

geographic cohesion

Controller oflicenses and strong

business co-op.

Military leadershipand coups

Links – Human Capital

Wealth enables

Lots of unskilledlabor plus brain

drain

Low delegation

Wealth andbusiness success

Indonesia comparative advantage by industries, 2006(OECD STAN Bilateral Trade Database)

3.8%7.0%

2.4%1.8%1.8%

-8.8%0.7%

0.4%0.5%

-0.4%-1.2%

-4.2%-1.3%

1.0%-1.4%

-0.2%

-0.2%1.3%

1.5%-0.1%

-0.8%-8.7%

10.5%3.3%

-0.2%-4.4%

-0.7%0.0%

-0.8%-1.8%-1.7%

0.0%

-10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Food products, Beverages and TobaccoTextiles, Textile Products, Leather and Footwear

Wood and Products of Wood and CorkPulp, Paper, Paper Products, Printing and

Manufacturing not elsewhere classified; Recycling

Coke, Refined Petroleum Products and Nuclear FuelRubber and Plastics Products

Other Non-Metallic Mineral ProductsBasic Metals

Fabricated Metal ProductsBuilding and Repairing of Ships and Boats

Chemicals excluding PharmaceuticalsMachinery and Equipment

Electrical Machinery and Apparatus, not elsewhereMotor Vehicles, Trailers and Semi-Trailers

Railroad and Transport Equipment, not elsewhere

PharmaceuticalsOffice, Accounting and Computing Machinery

Radio, Television and Communication EquipmentMedical, Precision and Optical Instruments

Aircraft and SpacecraftTransportation

TravelCommunications

ConstructionChemicals and Chemical Products

InsuranceFinancial services

Computer and information servicesRoyalties and licence fees

Other business servicesPersonal, cultural and recreational services