Indonesia Business System

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A brief overview of the Indonesian business system. Oh, Banak is Bapak! And we forgot to mention the dukun.

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  • Indonesia Business System

    1. 1. Indonesia Eemei Tang, Wolfgang Bardorf, Dewi Novianty, Deo Custodio, Jon McCallum, Julian Petrescu
    2. 2. Contents <ul><li>Role of state and history </li></ul><ul><li>Meaning (Rationale, identity, authority) </li></ul><ul><li>Order (Capital, human capital, social capital) </li></ul><ul><li>Coordination (Ownership, networks, management) </li></ul><ul><li>Links </li></ul><ul><li>Comparative Advantage </li></ul>
    3. 3. Key Historical Influences <ul><li>Pre-colonial </li></ul><ul><li>Colonial Times (1511 – 1942) </li></ul><ul><li>Independence (1945) </li></ul><ul><li>Old Order (1945 – 1966) </li></ul><ul><li>New Order (1967 – 1998) </li></ul><ul><li>Financial and political Crisis (1998) </li></ul><ul><li>Reformasi (1998 – 2004) </li></ul>
    4. 4. Role of the State <ul><li>Rentier, statist, patrimonial state </li></ul><ul><li>Controller of licences for natural resources and 'strategic' projects </li></ul><ul><li>Heavy subsidy of commodity-like products </li></ul><ul><li>Strong government/business cooperation (nepotism) </li></ul>
    5. 5. Rationale <ul><li>Personal/Family/Friends’ wealth accumulation i.e. KKN (Corruption, Collusion, Nepotism) </li></ul><ul><li>Protection of the elites </li></ul><ul><li>Maintain stability and geographic cohesion, and prevent social unrest </li></ul>
    6. 6. Identity <ul><li>Collectivism </li></ul><ul><li>By Race: Pribumi vs. Chinese vs. ‘Bule’. Rule of Thumb – The fairer the skin, the higher the status accorded. </li></ul><ul><li>By Province/Dialect: Javanese, Sundanese, Balinese, Batak… etc. </li></ul><ul><li>By Religion: Muslims/Christians/Hindus; schools are also divided amongst religious lines. </li></ul><ul><li>For the Pribumi: Kampung & Family </li></ul><ul><li>For the Chinese: Business ventures and success </li></ul>
    7. 7. Authority <ul><li>Hierarchical (Islamic roots for the Pribumi and Confucian ways for the Chinese) </li></ul><ul><li>Strong military influence primarily in politics, although it is slowly waning </li></ul><ul><li>Wealth is a big enabler. </li></ul><ul><li>Indonesians typically hold political power and Chinese hold the business influences. </li></ul>
    8. 8. Capital <ul><li>Bank lending accounts for the bulk of corporate debt </li></ul><ul><li>Access to loans often tied to relationships </li></ul><ul><li>FDI, foreign debt, developmental aid </li></ul><ul><li>Government-guaranteed debt </li></ul><ul><li>Capital from friends and family </li></ul>
    9. 9. Human Capital <ul><li>Universal education (primary only) </li></ul><ul><li>Low quality </li></ul><ul><li>Brain drain to US, Australia and other foreign countries </li></ul><ul><li>Militant labor unions prone to violent strike and riots </li></ul><ul><li>Highly mobile workforce, both domestically and overseas </li></ul>
    10. 10. Social Capital <ul><li>Low interpersonal trust </li></ul><ul><ul><li>Due to ethnic and geographic fragmentation </li></ul></ul><ul><li>Low institutional trust </li></ul><ul><li>Social adhesiveness provided by religious organizations </li></ul>
    11. 11. Ownership <ul><li>Strong family business groups </li></ul><ul><li>Cross-shareholdings (pyramidal ownership and business group practices) </li></ul><ul><li>Controlling owners have the power (i.e. voting rights) and incentives (i.e. cash flow rights) to secure investments and minimize risks </li></ul><ul><li>Close monitoring through owner involvement in businesses (i.e. reducing information asymmetry) </li></ul><ul><li>No market for corporate governance, expropriation of minority shareholders' rights </li></ul><ul><li>Joint ventures: Foreign companies have to give up 5% ownership to locals </li></ul>
    12. 12. Networks <ul><li>Close family ties and business networks between family members prevalent in both Chinese and non-Chinese (pribumi) communities </li></ul><ul><li>Network capitalism: cross-share holdings </li></ul><ul><li>Outsiders distrusted </li></ul><ul><li>Links not institutionalized </li></ul>
    13. 13. Management <ul><li>Two types of company </li></ul><ul><ul><li>Indonesian </li></ul></ul><ul><ul><ul><li>Ties to military </li></ul></ul></ul><ul><ul><ul><li>Banakism </li></ul></ul></ul><ul><ul><ul><li>Sense of hierarchy </li></ul></ul></ul><ul><ul><ul><ul><li>Managers: look after employees, avoid them losing face </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Employees: avoid criticism of manager </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Peer level: consensual decision making </li></ul></ul></ul></ul><ul><ul><li>Overseas Chinese </li></ul></ul>
    14. 14. Links - Family Family business Wealth enables Low interpersonal and institutional trust Family ties Family run Friends and family Family / business success Family Wealth
    15. 15. Links – State / Military Elite ownership Strong military Low institutional trust Ties to military Government guaranteed debt Wealth accumulation and geographic cohesion Controller of licenses and strong business co-op. Military leadership and coups
    16. 16. Links – Human Capital Wealth enables Lots of unskilled labor plus brain drain Low delegation Wealth and business success

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