Indonesia, Doing Business in (Encyclopedia of Business)
Indonesia is comprised of more than 6,000 inhabited islands. The nation's total land area is just over 700,000 square miles, or just under three times the size of Texas. With a population of more than 185 million (1994), Indonesia is the fourth-most populous nation in the world.
Since its independence in the wake of World War II, Indonesia transformed itself from a primarily subsistence economy, to emerge as a growing industrial and commercial force in the world economy. Indonesia's economic emergence was due in large part to the efforts of Suharto, its dictatorial president since 1966. Suharto upon gaining power introduced a proWestern policy, called the New Order, that promoted foreign investment and development in Indonesia.
In economic terms, the policy worked well throughout the 1970s; Indonesia maintained a real gross domestic product (GDP) growth rate averaging approximately 7.5 percent annually. During the collapse of oil prices in the early 1980s, that figure slipped briefly (but remained on average well over 5.5 percent), recovering by the end of the 1980s and into the 1990s to a real GDP annual growth rate of over 8 percent. Indonesia became a major site for operations of Japanese companies in the 1980s and of U.S. and Western European companies in the early 1990s.
Indonesia's strong economic performance, however, masked serious social divisions and governmental corruption. These both came heavily to the forefront in 1997; the country collapsed both economically and socially.
INDONESIA AND THE EAST ASIAN ECONOMIC CRISIS
When Thailand's currency collapsed in July 1997, an economic crisis enveloped the whole region. The economic instability spread almost immediately to Indonesia, whose political corruption and unsustainably high levels of foreign debt in private hands made it particularly susceptible to an economic downturn. The Indonesian banks unsuccessfully attempted to stabilize the rupiah, but on August 14, 1997, Indonesia gave up its attempt at a managed exchange rate and let the currency float. Almost immediately, the rupiah slipped from 2,400 to the dollar to 2,640, then continued slipping in the following days to 2,800 rupiahs to the dollar.
In response to this monetary disaster, Indonesia canceled 15 of its largest projects. While the cancellations helped conserve foreign currency, they had a domino effect on the economy as a whole, and Indonesia entered a full-scale recession.
In response, Indonesia sought assistance from the International Monetary Fund (IMF). On October 31,1997, Indonesia received a $42 billion IMF assistance package. By that point, the rupiah had fallen to 3,680 to the dollar.
Indonesia, however, refused to adhere to the reforms demanded by the IMF. This both undercut the bailout's effectiveness and further shook outsiders' confidence in Indonesia's ability to recover. Much of the reason for Indonesia's resistance to the IMF measures, however, derived from the corrupt interrelationship between the nation's business interests and the government. Through government interventions, the vast majority of Indonesia's business interest had been channeled into the hands of President Suharto's family and close friends. The IMF measures thus directly affected the private wealth of the nation's political leadership, including that of President Suharto himself. Under such conditions, it became nearly impossible for the government to agree to follow IMF reforms that would, if adopted, destroy the personal wealth of the very people who would have had to enforce the IMF measures.
As a result, while the IMF package might have staved off further disaster, little could be done about Indonesia's outstanding foreign debt since the majority of that debt lay not only in private hands but in the hands of President Suharto's family and close friends. The amount of debt itself has been subject to debate, with the Indonesian government officially admitting to just over half of what European analysts calculated. The French firm Indosuez, for example, estimated Indonesia's foreign debt in December 1997 as approximately $200 billion. Additionally, one-third of this was due for repayment in the first quarter of 1998. Consequently, the rupiah continued to plummet, falling to 80 percent of its precrisis value before stabilizing and regaining some of its strength. By 1998 the nation was in shambles, unemployment had topped 15 percent, and President Suharto began to lose control of the government.
THE GREAT FIRE OF 1997-98
As if its economic troubles were not enough, Indonesia was struck by one of the largest uncontrolled forest fires in world history. Beginning in August 1997, the same month that the economic crisis reached Indonesia, the fire burned out of control well into 1998. The fire resulted from unusual weather patterns, uncontrolled rainforest logging, and poor plantation management. The smoke haze it emitted spread over the whole nation as well as the nearby countries of Singapore, Brunei, Malaysia, the Philippines, and Thailand. The smoke was so severe that it resulted in shipping accidents and airplane crashes from reduced visibility.
The fire gutted an already battered economy, with at least $3 billion in damage to timber and agricultural production in Kalimantan and Sumatra. Additionally, the fire conservatively cost Indonesia $90 million in lost or canceled tourism. Finally, the fire was responsible not only for revenues lost, but for expenses undertaken by the government as well. Thus, Indonesia's state-run clinics and hospitals were filled beyond capacity for nearly a year with patients suffering from the effects of smoke-related illnesses. Estimates made by the Indonesian government jointly with the World Wildlife Fund and Canada's Economy and Environment Programme for South East Asia placed the fire's economic impact at a staggering $4.4 billion for 1997 alone. This amounted to 2.5 percent of Indonesia's gross national product (GNP) before the economic crisis began; occurring as it did simultaneously with the crisis, the fire was economically devastating.
Yet the economic cost was only a fraction of the overall impact of the fire. Tens of thousands of people were displaced, losing their homes and businesses. Additionally, the loss of rainforest habitat has decimated Indonesia's wildlife (the fire affected the majority of the world's orangutan population, for instance), which in turn has brought worldwide condemnation from wildlife organizations, and the loss from potential tourism and conservation funds.
THE FALL OF SUHARTO
By March 1998, faced with the economic collapse of his nation and the effects of the fire, President Suharto began to lose control of the government. Over 30,000 antigovernment demonstrators took to the streets of Jakarta to protest his rule. By the end of April, the situation had become critical, and Suharto began to fear that a concerted uprising would take place on May 21, Indonesia's National Day commemorating liberation from Dutch rule. In response, Suharto announced on May 1, 1998, that he would restructure the government.
Seeking a scapegoat for their frustrations, the Indonesian populace began to target the Chinese community. Student protests began to spread into looting of Chinese stores. On May 5, 1998, rioters burned a Chinese shopowner to death in his store in Medan. The Medan incident, however, turned out to be a predictor of coming events.
On May 12, rioting broke out in Jakarta against Chinese shopowners. Soon the rioting spread against ethnic Chinese across the nation. The looting, arson, and murder raged uncontrolled through May 15, leaving in its wake an estimated 1,200 dead, most of them ethnic Chinese. The damage to Chinese-owned businesses and homes totaled approximately $1 billion (10 trillion rupiahs).
Government forces not only made little attempt to stop the attacks, but in some cases actively contributed to them. Most notably, Indonesia received worldwide condemnation for the alleged rape of 150 ethnic Chinese women by Indonesian armed forces.
During the rioting, thousands of ethnic-Chinese Indonesian citizens fled the country for their lives. This added to Indonesia's economic woes. Before the crisis, the Chinese community dominated in the food and consumer goods distribution areas of the economy. As a result, the destruction or closing of the ethnic Chinese-owned businesses has severely compromised Indonesia's distribution network, resulting in food shortages in many parts of the nation.
Faced with massive student uprisings, interethnic violence, and a currency that had lost 80 percent of its value in ten months, President Suharto resigned on May 21, 1998. His successor was Dr. Bacharuddin Jusuf Habibie, a German-educated engineer and close political ally of Suharto.
To understand the current tensions in postSuharto Indonesia, it is necessary to address its multiethnic makeup. Ethnicity has always been a central issue of Indonesian business, not just since the interethnic violence that surfaced during the economic crisis. Indeed, since independence, and especially during the Suharto periods, Indonesia made concerted efforts to promote appreciation for ethnic diversity.
Indonesia's national motto espouses "unity in diversity" with good reason. Indonesia has hundreds of ethnic groups. Each group has its own customs, traditional dress, and usually distinctive names. Indonesians hold stereotypes of the behaviors of most groups, and know the business practices of the major ethnic groups. These stereotypes affect business expectations among Indonesians, and merit the attention of foreign business executives as an insight into Indonesian business culture as a whole.
Most ethnic groups are tied to a specific region of a particular island. Thus, the Batak live primarily in central Sumatra and the Acehnese in northwest Sumatra. The Balinese live primarily on Bali. The Ambonese live primarily on Ambon. The Sundanese are found mostly in West Java, and so forth.
By contrast, some important groups are found widely scattered throughout Indonesia. The Bugis inhabit the river port cities throughout Kalimantan and Sulawesi and on the many smaller islands off their coasts.
Similarly widely scattered are the ethnic-Chinese Indonesians. The ethnic-Chinese Indonesians, who have been scapegoated for Indonesia's economic woes, have traditionally played a large role in much of Indonesian business. While ethnic Chinese are present throughout the country, they are most concentrated in the urban areas of Java as well as the port cities of Kalimantan and of eastern Sumatra.
Whether geographically discrete or scattered, though, virtually all of Indonesia's ethnic groups are represented in large numbers in the capital city of Jakarta. The capital's multicultural mix of the various groups helps to sustain the sense of national unity in the country. As a result, foreigners conducting business in Indonesia should at the minimum attempt to familiarize themselves with as many of these groups as possible.
THE ETHNIC CHINESE.
None of Indonesia's ethnic groups are as important relative to their size as the ethnic Chinese. The Chinese are not considered an indigenous group to the nation, although they have been present in varying degrees for centuries.
The Chinese are few in number but dominate Indonesia's business sector. They represent only 2.5 percent of Indonesia's total population yet they control 60 percent of all wholesale business and 75 percent of all retail business in the country. Moreover they own or control 68 percent of the largest Indonesian-headquartered businesses.
The position of the ethnic Chinese in Indonesian society has for decades been ambivalent. Resentment against the Chinese for their business success and dominance has led to frequent outbursts of antiChinese sentiment and riots both after independence as well as during colonial times. Conversely, the Chinese have also received considerable appreciation for their introduction of business techniques. Moreover, during the Dutch and Japanese occupations of Indonesia, it was the ethnic Chinese who contributed most heavily to the independence movement of the nation.
The situation of the ethnic-Chinese Indonesians seems unlikely to improve soon. While to some degree the violent persecutions have abated since the resignation of President Suharto, his successor, President Habibie, has only added to the troubles of the ethnic Chinese. In one of his first acts as president, Habibie joined in the scapegoating of the Chinese community. Instead of attempting to encourage the ethnic-Chinese Indonesian citizens who fled the country to return, President Habibie instructed the government to give their trading licenses to what he called "indigenous Indonesians" (nonethnic Chinese).
East Timor was for centuries a colony of Portugal. When the Portuguese withdrew from East Timor in 1975, it declared independence. Disregarding this, however, Indonesia occupied East Timor in December 1975, over the objections not only of the East Timorese but of Portugal and the United Nations. While the number of East Timorese killed in the Indonesian occupation is not fully known, conservative estimates place the death toll at 100,000.
Anti-Indonesian sentiments ran high throughout the 1980s, but it was not until 1991 that violence again erupted. Indonesian troops fired on pro-independence demonstrators. This led to guerilla activities against the Indonesians. East Timor attracted world attention in 1996 when two leading East Timorese dissidents, Bishop Carlos Ximenes Belo and Jose Ramos Horta, won the Nobel Prize.
Following the collapse of the Suharto government, East Timorese resistance intensified. On June 9, 1997, less than a month after coming to office, President Habibie announced that he would grant a special status to East Timor with greater internal autonomy. This proposal, however, was rejected by Portugal. In part inspired by the Portuguese response, thousands of students held pro-independence marches throughout East Timor the next day. In response, Indonesia attempted to work with Portugal to define a workable alternative but before the two nations could agree on an action, the student demonstrations erupted into violence.
In June 1998 government troops shot a student demonstrator in the East Timorese city of Dili. This led to violent outbreaks against the troops by hundreds of students. Two days later in the East Timorese city of Baucau, another student was killed during a visit by a European Union envoy. To quiet the international condemnation of its actions, Indonesia announced that it would withdraw its troops. In return, the United Nations sponsored talks between Portugal and Indonesia over East Timorese autonomy. At the end of October, however, the situation erupted again when it became known that Indonesia had withdrawn no troops despite public statements that all troops were withdrawn months earlier.
In November 1998, East Timorese rebels claimed that Indonesian troops had killed 44 civilians. Then on January 4,1999, more violence erupted in East Timor in which two people were killed in a clash between pro-Indonesian and pro-independence groups. In response, Australia became the first nation to officially announce its support for East Timorese independence (as opposed to autonomy). Violence erupted again on February 25, 1999, during which Indonesian armed forces killed three more pro-independence demonstrators. In March 1999, Indonesia agreed to allow the East Timorese to hold a referendum on independence to be held in July, but before the vote could be held, anti-independence erupted into violence, killing 17 civilians. In response, pro-independence groups announced their intention to escalate their guerilla war against Indonesia.
In November 1997, Moslems burned a Christian church in Jakarta and hacked five ethnic Ambonese Christians to death. This seemed to have sparked Moslem-Christian tensions on the island of Ambon itself.
On January 19, 1998, Moslems and Christians broke into fighting on the island of Ambon. The fighting began on a small scale but had escalated to the point that by the end of February, over 160 people were killed, and several villages had been entirely burned and thousands of Ambonese have fled. Ambon, which is approximately 50 percent Christian and 50 percent Moslem soon found itself in a state of siege. On March 3, President Suharto sent in 3,000 soldiers with orders to shoot rioters on sight. Despite this, by year's end the death toll had passed 300.
OTHER ETHNIC TENSIONS.
The scapegoating of the Chinese Indonesians and the revolt among the East Timorese, however, are not the only sources of ethnic tensions. In the 1980s, ethnic groups seeking autonomy began to surface on a small scale in many areas. The Acehnese on Sumatra's northernmost point have maintained an underground liberation front for years. Similarly, in response to Javanese immigration to Irian Jaya (the Indonesia half of New Guinea), Papuans have formed a Free Papua movement.
NAMES AND TITLES
Because of the extreme diversity of ethnic groups in Indonesia, a wide range of naming patterns exists in the country. This mix of naming systems may prove to be confusing for foreigners; nonetheless, it is especially important to use the names of Indonesians properly since, throughout the nation, most ethnic groups hold to the tradition that one's name is sacred.
The most common naming patterns follow the Javanese system. Most common people have a single name. No surname on the Western model is used. For example, President Suharto's full name is Suharto, with no first or last name attached. Indeed, the only major ethnic groups using family surnames similar to the Western pattern are the Minahasa and the Bataks. In recent times, many middle-class Indonesians in the business sphere have adopted second names roughly equivalent to the Western first and last name.
Most Indonesians, particularly in Jakarta, use titles from Bahasa Indonesia. This is common even when speaking in English. The two main courtesy address forms are Bapak for a man and Ibu for a woman. Both titles reflect considerably more respect than their rough English equivalents of Mr. and Ms. Because these honorifics reflect high respect, some English speakers use Bapak and Ibu for business equals or superiors and revert to Mr. and Ms. for subordinates of considerably lower rank.
Most academic honorifics in Indonesia are taken directly from the Dutch. These are usually never dropped in business settings. The most common of the Dutch-derived academic titles are for men Doktorandus (Drs) and for women Doktoranda (Dra) referring to any graduate degree received outside of law or engineering. The title Insingjur (male or female) is used for those with degrees in engineering. The non-Dutch title Sarajana Hukum (male or female) refers to those with law degrees.
Indonesia is home to an unequaled array of linguistic and ethnic groups. In all, more than 990 languages are native to its islands.
Bahasa Indonesia was consciously selected as the national language in an attempt to unify the nation. It is spoken as a first language by only 12.1 percent of the population. Still, an additional 58 percent of the people speak or read Bahasa Indonesia as a second language. Moreover, since Bahasa Indonesia developed as a marketplace version of Malay used throughout the islands during the colonial occupation, it has a strong history as a language of business communication. Today, all advertising and official communication must be in Bahasa Indonesia. Moreover, while Englishnd to a lesser extent Dutchemain widespread, foreigners usually find learning Bahasa Indonesia useful for the same reason Indonesians learn it: to open opportunities and demonstrate commitment to the nation. Finally, since the majority of the nation speaks Bahasa Indonesia as a second language, foreigners' proficiency level becomes less of a factor than with many other languages.
For business purposes, the use of English is widespread. Still, because English is a third or even fourth language for many Indonesians, proficiency is less common than in many countries of similar importance in global trade. Among older Indonesians, the use of Dutch as the foreign business language of choice is still fairly common.
VIEWS OF TECHNOLOGY AND THE ENVIRONMENT
The traditional Indonesian attitude toward technology differs significantly from that of the United States. The United States is a control culture, while Indonesian is traditionally a subjugation culture. This means that U.S. culture views technology as consistently positive and reinforces a belief that people can control their environment to conform to their needs. By contrast, Indonesian groups traditionally view technology with some skepticism and conform their behavior to existing environmental conditions. The traditional Indonesian view of technology is changing toward the culture stance in the most developed urban and industrial areas around Jakarta. These traditional norms, however, remain firmly in place in most of the rest of the country.
Social organizational factors in Indonesia affecting business include the influence of the government, the importance of religion, the concept of family, and group ties.
THE INFLUENCE OF GOVERNMENT.
The Indonesian government plays a considerably more active role in business than does government in the United States or Canada. The importance of government officials, in particular, far exceeds that of their North American counterparts in status and power. Generally, the Indonesian government official has taken over the traditional position of tua or village headman. Unlike the North American public servant, the Indonesian government official is unlikely to be seen as "serving" the needs of constituents or businesspeople. Rather Indonesian officials are public leaders served by those they govern or oversee.
The importance of the government official is reinforced, in turn, by the power of Indonesian nationalism as a force in business. Despite their ethnic and linguistic diversity, Indonesians are united by a common conception of themselves as a unified whole who in their unity were able to wrest power from exploitive foreign colonizers. As a result, Indonesians are considerably more concerned with how their business activities (particularly when conducted with foreigners) will likely affect the nation as a whole. This concern with nationalism emerges in several ways in business, including long-term coordination of business activities with government goals and protective labor laws.
Religion plays an important role in Indonesian business. While a religion is required by law, which religion is left to the individual. Hinduism, Christianity, and Buddhism all have substantial followings in Indonesia, but for the vast majority of Indonesians, religion is synonymous with Islam. As the nation with the world's largest Moslem population, Indonesian Moslems have been able to forge a national variation of the religion emphasizing the concept of rukun or societal and interpersonal harmony at the familial, community, and societal level. While rukun is universally recognized as a principle of Islam, Indonesians have blended it with East Asian concepts of harmony, conflict avoidance, and surface tranquillity to give it a greater emphasis than practiced anywhere else in the Moslem world.
Additionally, because of the influence of Hindu and Chinese spiritual beliefs, Indonesian Moslems are more likely than Moslems elsewhere to believe in ghosts and the spirit world. While remaining true to the essential monotheistic beliefs of Islam, Indonesians nonetheless recognize spiritual forces or attributes of the soul in a variety of day-to-day objects, trees, flowers, animals, and rice as well as human blood, nail cuttings, and hair. The presence of ghosts, witches, or other spiritual entities remains a real part of life for the majority of Indonesians, and the need to placate or avoid these spirits affects all aspects of life, including work. A common mistake of foreigners is to view Indonesia as a traditional Islamic society and therefore to play down the importance of these supernatural forces, to criticize such beliefs, or to mistakenly reduce their importance to that of mere superstition. Fear of ghosts or the believed presence of spiritual forces can prevent employees from coming to work or prevent the conclusion of a business deal.
Because Islam is so widespread, its major holidays are state holidays and its calendar is observed nationwide. Moreover, Islamic bans on activities (alcohol consumption, for example) affect some areas of business. Finally, the Friday service at the mosque is one of the main areas for solidifying business relationships resource often outside of the reach of the non-Moslem foreigner.
FAMILY AND GROUP TIES.
Most Indonesians hold considerably stronger and more extended kinship bonds than those in the United States. Family connections and obligations influence hiring, deal making and other business issues. Moreover, the definitions of immediate relationships reach far beyond the nuclear family to those who would be considered distant relatives in a North American conception.
For several Indonesian ethnic groups, nepotism extends beyond direct kin relationships to clan ties. This is particularly the case for the various clans of much of Indonesia's influential ethnic-Chinese communities. Finally, for such groups as the Bataks and Minahasa, preference is extended to include preference for all ethnic group members in a form of nepotism called suka-ism.
Indonesia is a high-context society and the United States is a low-context culture. This means that Indonesians are more likely to rely on implicit communication rather than on explicit messages. Indonesians as a result read more into what is said than the words themselves may actually mean. For most Indonesians, what is meant matters more than what is actually said.
In Indonesia, meaning is usually communicated indirectly, especially in the delivery of bad news. As a result, Indonesians are likely to agree to things with which they disagree, allowing the context of the discussion or past relationship to convey their disagreement. This is clear to Indonesians but to those from low-context cultures such as the United States, such indirect communication is often misread as dishonesty. Conversely, the direct style of communication practiced by most U.S. businesspeople in Indonesia is perceived as rude and often causes others to lose face.
Indonesians, as a high-context culture, place a strong value on face-saving, while most North Americans place little emphasis on face-saving. The Indonesian conception of face-saving takes the form of the avoidance of malu, or shame. Most low-context U.S. business practice is controlled by the following of the law and adherence to written agreements. Indonesians are considerably less bound by the law and the specific terms of contracts. Instead, Indonesian business practice is controlled by the desire to avoid malu. In other words, one holds to a contract to maintain appearances rather than from fear of a lawsuit. The North American businessperson in Indonesia is thus viewed as lacking honor, having no sense of malu (and therefore dangerous to deal with) and being foolishly litigious. The Indonesians in turn are viewed by their North American counterparts as dishonoring their contracts and ignoring their own laws. In reality both perceptions are accurate when viewed through the context of the values of the other's culture.
Still, to succeed in business in Indonesia, the foreigner will need to view contracts and other legally binding arrangements as ongoing rather than definitive. Moreover, the foreigner will have to be willing to allow some inconsistencies to stand at times to maintain appearance and avoid forcing malu on the Indonesians who would otherwise terminate the business relationship.
Indonesian business is conducted in a strict hierarchy. The traditional management system, known as bapakism, consists of heavily paternalistic control in the form of a benevolent authoritarianism that tolerates little direct questioning of authority. The basic tenet of bapakism is summarized in the commonly repeated phrase apal bapak senang ("keep the boss, father, or headman happy"). Bad news is rarely shared with superiors directly or is toned down to the level that it may be incomprehensible for many nonIndonesian managers. Moreover, no two people are equalveryone has a relative status of higher or lower to any other person. One's boss (bapak), therefore, has a boss as well. Heads of companies have bosses in the form of government leaders, and so on.
Related to this is the responsibility for the bapaks to defend and protect their subordinates. The bapak's authority rests in his power to take care of his employees. The price for this protection is their unquestioning respect and the outward honor they show him.
Indonesian custom demands that all managers or bapakshether foreign or Indonesianorgive any subordinate who sincerely apologizes, regardless of the offense. Indeed, the national holiday of Lebaran is a formal day for granting apologies, although the practice is far from limited to that day alone. Moreover, a boss must accept an apology without bringing shame (malu) on the employee, or the manager (not the employee) will risk losing all authority over others by losing their respect. Since this is diametrically opposed to the custom in many Western countries, foreign managers often find this mandatory forgiveness difficult. It remains nonetheless necessary to succeed in a managerial role in Indonesia. While the strict Indonesian labor laws would in any case prevent firing in such situations, it is customary after an apology is accepted that the manager and subordinate must never again raise the situation directly. The effect of maintaining such appearances is as essential to authority conception as the act of forgiveness itself.
Indonesia is a polychronic culture. Time is more fluid than in monochronic societies such as the United States. The Indonesians value friendship, personal commitments, and the completion of tasks at hand at the expense of preset schedules.
The Indonesian term for this polychronic orientation is jam karet or "rubber time." Time is seen as malleable. Appointment times are approximate. Work hours are variable. Consequently, the monochronic foreigner needs to adjust his or her concepts of scheduling, deadlines, and other time-linked activities in Indonesia.
[David A. Victor]
Draine, Cathie, and Barbara Hall. Culture Shock: Indonesia. Portland, OR: Graphic Arts Center Publishing, 1990.
Jackson, Karl D., and Lucien W. Pye. eds. Political Power and Communication in Indonesia. Berkeley: University of California Press, 1978.
Maclntyre, Andrew. Business and Politics in Indonesia. North Sydney, Australia: Allen & Unwyn, 1991.
Palmier, Leslie, ed. Understanding Indonesia. Brookfield, VT: Ashgate Publishing, 1985.