Doing Business in Indonesia

This is a modified version of a report commissioned by the East Asia Analytical Unit of the Australian Department of Foreign Affairs and Trade in July 2000, as part of a book entitled Indonesia: Facing the Challenge published in December, 2000.  Views contained within this report are entirely my own and do not necessarily reflect views of EAAU, DFAT or any of its officers, past or present.

Indonesia is not the easiest place in the world in which to do business.  The ‘World Competitiveness Scoreboard’ currently ranks Indonesia at 45, only two places ahead of Russia (47), and in stark contrast to countries such as Australia (13), Singapore (2) and the US (1). Clearly, in terms of the measures used by the producers of this scoreboard, Indonesia at the moment is found severely wanting, with its potent brew of traditional cultures, bureaucracy, legal uncertainty and social instability combining to give it the appearance of being a rather hostile place for trade and business.  Indonesia is currently undergoing a radical transition towards becoming a more modern and efficient economy, and the road ahead remains uncertain.

Nonetheless, given a proper understanding of cultural, social and legal-regulatory environments, business and investment in most parts of Indonesia is relatively safe and profitable.  Many promising changes are underway in Indonesia - notwithstanding the pain being experienced by many sections of Indonesian society - and there is good reason to be hopeful Indonesia shall emerge from its present trial-by-fire to become both an attractive investment destination, and a profitable market for Western products.

This essay seeks to give an overview of those elements that are important when undertaking business in Indonesia, including the social and cultural landscape, recent developments regards ‘governance’, law and legal certainty, business structures, and labour issues.  Much emphasis is given to the issue of culture, more specifically, the perceptions, outlooks and/or beliefs that affect human interaction.  In the past, perhaps, Western business peoples understanding of ‘culture’ has been relegated to the realm of manners or etiquette, of simplistic ‘do’s and don’ts’. However, cultural misunderstanding or miscommunication is generally far more likely to occur at the level of perception and outlook, rather than etiquette.  This is not to suggest that etiquette is unimportant, but merely to attempt to shift emphasis from those external or visible cultural expressions to those expressions that are not immediately obvious, in particular as this affects communication.

The Western businessperson in Indonesia must try to remain conscious of the possibility of ‘difference’ when interacting with Indonesians.  Of all the nations of East Asia, Indonesia arguably remains the most strongly traditional in terms of its cultural characteristics and outlooks.  In the bustle of Jakarta’s traffic, tall buildings and gleaming shopping centres it is all too easy to think of Indonesia as a modern nation, albeit poor, with outlooks and aspirations that more-or-less match those of the West.  However, beneath these thin modernist veneers beats the sound of a number of ‘different drummers’. Even apparently ‘Westernised’ Indonesians, including those with a solid Western tertiary education, cannot break free from those patterns, values, attitudes and outlooks formed out of the substratum of their indigenous culture.

Westerners often forget that they too are products of culture.  Although far fewer Westerners than in the past profess Christianity, nevertheless Judeo-Christian and protestant humanist values and attitudes permeate the very essence of Western culture.  Many Westerners may subconsciously consider these values to be universal in nature, standing above and perhaps even subordinating traditionalist values and outlooks.  But whatever our convictions, when communicating with those who may not share a similar worldview, the possibility must be left open that what we believe to be self-evident and/or right may not be shared by everyone.

Java: social and cultural landscape

Politically, culturally, and geographically, Java sits at the centre of the Indonesian nation.  Without Java, there could not be an Indonesia.  The ‘Javanese’ ethnic group occupies the majority of the island of Java.  Other major ethno-linguistic groups in Java include Sundanese (West Java), Betawi (from the area around Jakarta) and Madurese.  Although Java represents only 7% of Indonesia’s total landmass, ethnic Javanese comprise about 45% of Indonesia’s total population.  Javanese attitudes and worldviews totally permeate the Indonesian bureaucracy, government and military, hence the great importance of understanding the Javanese perspective when referring to Indonesia.

The great majority of Javanese could be said to be very sympathetic to mystical dimensions of human existence.  The typical Javanese worldview is based on the essential unity of all existence, in which life itself is a kind of ‘religious’ experience existing in harmony with a universal order.  This worldview emphasises inner tranquillity, harmony and stability, acceptance, the subordination of the individual to society, and the subordination of society to the universe.  Inter-personal relations are carefully regulated by customs and etiquette to preserve this ordered state.

These, of course, are the high ideals of Javanese culture that may not always be realised in actual life, as contemporary events in Java frequently demonstrate.  In every culture, there is often a distance between ideal behaviour and realty.  Nevertheless, the concept of harmony in the Javanese community is a core concept, notwithstanding outbursts of uncontrolled emotion that may occasionally be displayed.

Javanese society and culture is by no means singular or homogenous; it is a complex amalgam of differing tendencies and apparently opposing worldviews.  This must be kept in mind when attempting to generalise about ‘Javanese culture’; it is not unitary, but rather comprises a composite of influences, both modern and traditional, religious and secular/nationalist.

Javanese society has long been analysed in terms of three major social polarities or worldviews; the abangan (the ‘commoners’), the priyayi (the ‘nobility’), and the santri (the Islamists, more appropriately referred to as muslimin). These somewhat arbitrary categories should not be interpreted to mean ‘classes’, but rather as ‘outlooks’; ways of looking at and making sense of the world.  It is very common in Java to find people of all these outlooks living together under the same roof, and of course, there are very many shades of grey; eg a muslimah may well sometimes adopt haughty priyayi attitudes when socialising with her neighbours, may well believe that manusia harimau (tiger people) inhabit her village, but at the same time be completely devout in her Islamic practice and belief.  Although the abangan-priyayi-santri schema is much criticised by academics, mainly because of its tendency to stereotype groups and individuals, its general relevance remains to this day, as the outcome of the 1999 elections clearly showed.

Nominally, at least 95% of Javanese acknowledge Islam as their religion.  However caution is required when considering this fact, as Islam in Java is expressed in a diversely of ways, and depth of commitment to the religion is highly variable.  Javanese who refer to themselves as muslimin (muslimah if female) more closely identify with Islam and its aesthetics, in the case of women especially, adhering more closely to Islamic dress codes. Muslimin probably comprise about 25-30% of the Javanese population, and are themselves divided into traditionalist and modernist tendencies.

Traditionalist muslimin adhere to a syncretic and mystically-inclined version of Islam that tends to be more open and flexible in its interpretation of Islamic precepts.  Modernist muslimin, by contrast, more closely adhere to a ‘purist’ Arabian interpretation of Islam and give greater weight to literal or textual interpretations of the Quran and Islamic law.  Nevertheless, both traditionalist and modernist muslimin closely observe the five pillars of Islam, and just as importantly, both strongly identify themselves as Muslim.

Other Javanese are rather ambivalent about their official religion.  Although they will most certainly refer to themselves Muslim, they will rarely perform religious duties associated with Islam and do not structure their lives in accordance with its precepts.  This worldview, referred to as abangan, sees itself as the bearer of indigenous Javanese culture.  The archetypal abangan is rather conservative, resistant to change, and tends towards fatalism and acceptance of misfortune and their place in society.  Their outlook is often coloured by the indigenous mystical animism of Java.

The last important polarity in Javanese society is the priyayi, who in the past comprised the class of officials, military officers, and intellectuals, and is now strongly associated with the bureaucracy and ruling elite.  Whilst in the past priyayi were the descendants of nobility, these days priyayi can refer to anyone with an academic education or to anyone who simply reflects this particular outlook.  Like the abangan, the priyayi are nominally Muslim, however their worldview is highly influenced by the culture of the royal courts of Java, such as Yogyakarta and Surakarta, which are highly influenced by the aesthetics and religious ideals of the Hindu era in Java.

Javanese society is strongly patrician and hierarchical, with what appear to be great power distances between each level within a social structure.  Showing proper respect, in speech and behaviour, is an important aspect of Javanese culture.  Javanese society is highly inclusive; there is a place for everyone from the most high to the lowliest.  Hierarchy ensures that every person in society knows both their place and their obligations within the social structure.  Those in high positions should be shown respect; those in lower positions should be treated with goodwill and their welfare guarded.

For the Westerner especially, adjusting to these notions of hierarchy can sometimes be difficult.  The average Westerner in Java may often attempt to ‘flatten’ the appearance of power distance between people of differing classes or levels in any particular business or social situation by treating every person as more-or-less equal.  Unfortunately, such attempts to introduce Western-style egalitarianism into Javanese business or social contexts rarely produces the expected result, but more often produces confusion and discomfort for all concerned.  As an example, an Western manager in a workplace situation should avoid ‘pitching in’ with ‘lower ranking’ workers, obviously unless this is absolutely necessary for demonstration purposes.  Becoming ‘one of the boys’ is simply not understood, either by workers, or by other Indonesian managers, who keep their place and maintain a proper distance.  Respect and credibility may well be lost.

Javanese culture is characterised by collectivist values and by systems of patronage.  Collectivism and patronage together stress vertical axes of human relationships, in contrast to individualism and egalitarianism characteristic of the West, which stress horizontal axes.  Patronage networks form the basis of many Javanese social, political and economic relationships.  For example, a person in an Indonesian company, government department, or the military may often owe their high status, well-paid position to a certain person, to whom they will remain indebted, and to whom they must always defer.  Power distances between levels in these networks can appear great, and flexibility of movement within the network is restricted by obligations and responsibilities.  It would be very uncommon indeed for a person lower in the network to ‘overtake’ their patron in terms of rank or income.

Age is an important determinant of social status in Java.  The younger person defers to the older person, in language and in attitude, even when the age difference is negligible.  A person – especially a man – is not considered to have reached maturity until the age of 40, and persons of lesser age can sometimes be left out of decision-making processes upon this basis.  Other determinants of social status include marital status, gender and education.  Thus, a 40 year-old married male with a university education would assume a high social status in nearly all situations.  Often, the wife of such a man assumes the same relative status within the social domain, thus a wife of a man of lesser status would usually defer to the wife of the man of higher status.  It often happens that Western companies send their best and brightest person – who happens to be young – to negotiate or work with an Indonesian company, who almost immediately feel a little insulted that somebody more ‘authoritative’ was not sent to deal with them.  Of course, nothing is ever said directly to this effect; besides being impolite, Javanese would take these matters to be self-evident in any case.

Patience, for Javanese, is a high virtue, and a lot of this virtue is certainly required in Indonesia, especially when engaging with corporate or government bureaucracies.  A sense of urgency is generally absent in the average workplace.  Being late or not turning up at all at an appointed time is very common.  By contrast, time is an important issue for the average Western businessperson.

The Western tendency to want to ‘cut through all the bullshit and get to the point’ usually ends up doing more harm than good within the Indonesian context.  Relationships must be cultivated in order for trust to be established, and this cannot be rushed.  And of course, different relationships move at different paces, depending on the individuals involved.  Some relationships move quickly, others can be excruciatingly slow. (Some relationship may well be slow to develop because one party may not be all that interested!) It is important that the relationship is not ‘forced’, as frequently seems to happen with Western businesspeople on tight schedules and planes to catch.  In addition, Westerners often overestimate the depth of their relationships with Indonesian business associates, and perhaps become overly familiar too quickly because they misread the naturally friendly and polite manner of the average Javanese.

Communicative indirection and formality are other issues that can cause discomfort or difficulty for Westerners in Indonesia.

Overview of Recent Developments

The end of the 32-year Soeharto era marked the end of a long dark period in the history of the Indonesian archipelago.  The authoritarian and militaristic ‘New Order’ regime has now been replaced by a government of a substantially different complexion [Gus Dur]. With due qualification, it is reasonable to generalise that Indonesia is now on the road to becoming a much more open and participative society, and there are many good reasons to be optimistic for its future.

Change has been a painful process for all Indonesians; the habits and thinking-patterns of a generation do not disappear overnight.  Nepotism, cronyism, and rentier-mentalities still pervade the Indonesian psyche despite the efforts of elements of the new government to eliminate such negative patterns.  To a certain extent, change in Indonesia is confronted by realities of its culture.  Without doubt, most of the problems attributed to ‘KKN’ (Corruption, Collusion, Nepotism) have their roots in culture.  This means change in Indonesia will not happen overnight, and it will require much more than just government legislation and sincere intentions.

Notwithstanding, significant changes in the business environment have already occurred since the new government came to power towards the end of 1999.  However, nearly all of the more fundamental economic and structural changes have in fact been at the insistence of the IMF and World Bank.

Poor corporate governance is considered to be amongst the main factors that caused the crisis in Indonesia and then contributed to its severity and length.  The Indonesian banking and corporate sectors lacked transparency, and seemed to live by rules of their own.

Indonesian governments have embarked on an extensive cleaning up of national legal frameworks.  Legislation covering areas such as bankruptcy, regional autonomy, competition, monopolies and consumer protection has already been proclaimed.  Furthermore, regulations covering a myriad of other areas, including foreign investment, also have undergone important changes.  Unfortunately, as praiseworthy as this legislative program has been, actual enforcement of these laws and regulations remains extremely problematic.

The openness and transparency of the ‘new’ Indonesia also has opened the way to improvements in corporate governance.  Both government and the business sector are now much more accountable to the public.  Corporate governance reform in Indonesia is still very much in its infancy and much remains to be done.  Whilst it is relatively easy to enact legislation in this regard, the proof is in the implementation and enforcement.  Law-making in Indonesia has a peculiar symbolic quality about it, and lawmakers give very little thought to how legislation will actually be implemented and/or enforced.

More than any other single factor, the principal obstacle to business activity and economic development generally in Indonesia is government bureaucracy.  In fact, there have been real and significant changes in the way the bureaucracy operates over the past few years, but it remains a formidable impediment to investment.

For the most part - and ignoring cynics for the moment - Western bureaucracies are characterised by a ‘service culture’; they exist to serve the public.  The very name given to bureaucrats, ‘public servants’, epitomises this culture.  By contrast, the Indonesian bureaucracy tends to exist to rule over the public.  Bureaucrats are referred to as pegawai negeri, or ‘national officials’. The Indonesian government official is approached with an attitude of supplication and respect.  Services are dispensed almost as if they were favours, being granted or denied at the whim of the official, with very little scope for objection or appeal on the part of the supplicant.  The Indonesian bureaucratic attitude is generally one of “What can you do for me?” rather than “What can I do for you?”

In the past, this attitude has meant that petty - and in some cases, not so petty - inducements have needed to be paid in order to get past the numerous bureaucratic toll-bridges in Indonesia.  To a certain extent, extremely low wages of government officials contributed to the culture of corruption within Indonesia.  It is hoped that recent civil service wage rises - in some cases up to 1,000% for top echelon officials - will reduce significantly the incidence of systematic corruption in the bureaucracy, though many retain their doubts about this.

It will be some years before governance reforms are fully effective on the ground.  Importantly, Indonesians themselves are no longer as passive as they once were concerning issues of corruption and social justice, and this in itself is a vital element in driving Indonesian society to greater transparency and accountability in both government and business.  Legislative reforms, long overdue, are either in place or in the pipeline, as are most of the other formal legal frameworks necessary for good governance.  The big question mark is over the government’s ability to actually implement and enforce their policies and laws, and this will remain the central challenge for government over the next few years.

Regional Autonomy

In the period just before the 1999 elections, the then-government of President Habibie rushed through a number of laws that have wide-ranging implications for business and investment.  These laws are grouped under the umbrella of ‘Regional Autonomy’, and include Law 22/1999, 25/1999, and 28/1999.  Under these laws, numerous powers will be devolved from Jakarta and handed over to the regions, along with revenue sharing formulas that keep up to 80% of provincial revenues within the province itself, including revenues derived from mining activity.  Significantly, ‘regions’ in the context of these laws includes not only the present 27 provinces, but also encompasses the more than 300 regencies (kabupaten).

In order to prevent the nation from literally disintegrating during the chaos of the immediate post-Soeharto period, President Habibie probably conceded far more than he should have in the drafting of regional autonomy laws.  There is a growing realisation in many parts of Indonesia that autonomy on the scale envisaged is quite unrealistic, even at the provincial level, much less at the level of the regency.

According to the legislation, regions not ready for autonomy by May, 2001 will be merged into adjoining regions.  Realistically, at the regency level especially, there will be extremely few regions that will be ‘ready’ by this date, or any other date in the foreseeable future, but threatened coalescence of these regions will probably not happen because of the social and administrative nightmares that would be unleashed.

Clearly some radical changes to these laws will need to be made in order to make them even remotely workable, and in fact, some remedial laws are in process of being formulated.  The government has recently issued the regulations associated with Law 22/1999.  Many of the regulations indicate a measure of back-peddling from the original intent of the legislation, indicative of the government’s concern that the legislation went too far for the majority of regions in Indonesia.

The wealthy provinces, such as Bali and Riau (which includes Batam), along with resource-rich provinces that include the problematic Aceh and Papua (formerly Irian Jaya), are particularly keen to grab as much autonomy as possible as soon as possible.  Less wealthy provinces, by contrast, are much less enthusiastic about autonomy given that it is more than likely they will lose revenue.

The implications of regional autonomy for business and investment are potentially quite serious.  The Indonesian bureaucracy represents a formidable obstacle to business even now; the added layers of complexity that would invariably arise as provinces and regencies each produce their own unique administrative systems and policies will only serve to make the present bureaucratic situation worse, if such a thing could be imagined.  Every layer of bureaucracy, every single departmental office, every regulation, every licence and permit, and every form that needs to be filled in, presents an opportunity for bureaucratic obstruction and toll-collection.  Such opportunities rarely remain unexploited in Indonesia, adding significantly to the costs of undertaking business activity.  Some observers, bureaucrats amongst them, claim that regional autonomy will do nothing more than decentralise and expand the system of corruption within Indonesia.

Indonesian Law and Legal Certainty

Numerous highly suspect legal decisions, both civil and criminal, have been handed down by Indonesian courts since the new government came to power.  The Indonesian court system has stubbornly resisted reform, and for the most part, it has been ‘business as usual’.

High-profile court cases involving prominent figures from the New Order regime have repeatedly failed.  Mysteriously, these failures have frequently been due to technical legal ‘flaws’ of a rather semantic nature in cases presented by the prosecution or plaintiffs.

The court system in Jakarta is particularly rotten, to the extent that the government plans to relocate more than 70% of Jakarta’s judges to rural areas, replacing them with judges from areas outside the capital claimed not to be as corrupt.  Payment for judgments is rampant throughout the court system.  Unfortunately, judges of any honesty and integrity were removed by the Soeharto regime.  What was left behind was a court system that used the symbolic forms and the language of law, but which dispensed precious little actual justice.

There is a critical shortage of ‘clean’, skilled judges in Indonesia, leading to the suggestion that judges be imported from Indonesia’s former coloniser, the Netherlands, to hear commercial cases.  Whilst the suggestion was not followed up, it does demonstrate the Indonesian Government’s exasperation in dealing with Soeharto’s legacy in the legal system.

Before 1998, Indonesia did not really have an effective bankruptcy process.  The weak bankruptcy laws that existed in Indonesia before 1998 dated from 1906, a legacy of the former Dutch colonial administration.  Technically, these laws only applied to non-indigenous Indonesians; Europeans, Chinese and Arabs.  Consequently, the 1906 laws were used extremely infrequently, and ‘bankruptcy’ as it is generally understood was rarely ever applied to a company or person.  The Indonesian loan-word bangkrut is used to indicate an absence of loss of money, or an inability to pay, rather than referring to a legal process to assist in meeting obligations to creditors.  The level of understanding of bankruptcy processes in Indonesia is quite low.

At the insistence of the IMF, Indonesia was forced to introduce new bankruptcy laws, which it did in April 1998.  A number of specialist commercial courts were established to hear bankruptcy cases, and judges in these courts underwent training in commercial law.  In addition, a number of ad-hoc judges from outside the court system also were appointed to these new courts.  These ad-hoc judges are lawyers who specialise in commercial law, thus competent to understand business matters.

To date, sadly, outcomes from commercial courts have been very disappointing. ‘Strange’ decisions have been common, partly because judges are still coming to grips with the concept of bankruptcy, there being few precedents naturally.  Bankruptcy laws may well have been ‘reformed’, but it seems that Indonesian courts are still reluctant to protect creditors from debt-ridden Indonesian companies, especially, it appears, when those creditors are foreigners.

The chances of a foreigner or a foreign company getting a fair hearing in an Indonesian court are not good.  Corruption, cultural misunderstanding, and a misplaced nationalism, amongst other factors, often conspire to put foreigners at considerable disadvantage should their case ever get to court.

Given the state of the legal system, one might be forgiven for giving Indonesia a wide berth as an investment or business destination.  Fortunately, absence of law does not mean an absence of order and justice.  This is due to two factors: the musyawarah, and local community vigilance, more negatively expressed in the phenomenon of mob rule.

The Musyawarah

The musyawarah is an extremely important concept in the every day life of Indonesia, but particularly in Java.  Musyawarah means to deliberate or negotiate.  Societal problems, from the highest to the lowliest, are invariably dealt with through the musyawarah process.  The musyawarah is a process of collective, consultative decision-making in which all parties who consider they have an interest in a matter talk it through until a resolution is found.  In practice, it is not uncommon for such meetings to go on for days in some cases.

Ineffectual as they might appear elsewhere, the important and useful role of the Indonesian police officer becomes apparent in the convening and smooth conduct of certain musyawarah, in particular at village or local levels.  The presence of a police officer, preferably one of higher rank, gives the meeting a formal legitimacy as well as providing a witness to what was said and what was decided.  Often, the musyawarah will end with the drawing up of a communique, stating the consensus decision that was reached.  The police officer will often have a hand in drawing up this document as well being a co-signatory.  An official materai (tax stamp) will often be affixed to give it added legal power.

The musyawarah is the indigenous way of decision-making, and of resolving social conflicts and disputes between individuals or groups, regardless of whether these conflicts are of a criminal or civil nature.  Perhaps due to the absence of a credible court system, the musyawarah remains the most important institution for conflict resolution in Indonesia, including business and ‘civil’ disputes.  Decisions arrived at in this way have a very strong legitimacy in the community, as all parties have been consulted and involved in the process.

An Australian company in central Java put a company motor vehicle up for sale.  They wanted to sell it quickly, so they did not ask for a high price.  An offer is made by a professional dealer to purchase the vehicle.  He puts down a small deposit, and says he will return with the balance later that day.  The vendor accepts this, on the proviso that the money arrives before 2pm.  That time arrives, but the balance of the money has still not been paid.  The vendor subsequently sells the vehicle to a person with cash to pay, and for a slightly higher price (Rp1,000,000) than that offered by the dealer.  Two days later, the dealer returns, expecting to pay for the vehicle and take possession of it.  He is extremely upset when he learns the vehicle has been sold to someone else.  He knows the vehicle was good value, and that he could have made a good profit from reselling it.  He calls back to the company the next day, accompanied by a businessman relative, and a friend.  He demands a musyawarah to resolve the dispute.  The head of the company calls in his Indonesian friend, a businessman, and a police officer of long-standing acquaintance.  The musyawarah begins with the dealer’s friend outlining the problem, that the dealer feels cheated because the vehicle was sold to someone else when he had already come to an agreement to buy it.  A discussion ensures concerning the events surrounding the sale of the vehicle on that day.  The vendor naturally objects vehemently, saying that the dealer clearly broke his commitment to return with the balance of the money within the agreed time.  The dealer, on the other hand, sees nothing unusual about this; he did, after all, come back eventually.  Why didn’t the vendor contact him if he was so picky about time?  After many hours of sometimes heated and emotional argument, a compromise is reached.  The vendor agrees to pay the dealer half difference between the price the dealer offered, and the price the vehicle was later sold for; an amount of Rp500,000.  No party is happy with this compromise, but the matter is settled.  All present shake hands with each other, and the musyawarah is over.

Mob Rule

There is hardly a day that goes by in Indonesia without a newspaper report of violent vigilante action carried out by a mob.  The offences are often trivial, usually involving petty theft, and few if any questions are asked.  If the unfortunate victim survives the mass beating, then, and only then, are the police called in.  This situation reflects the profound lack of faith Indonesians have in the police and legal system to protect their lives and property.  In the first three months of 2000, at least 30 people were mobbed to death by mass vigilante action in the Greater Jakarta area alone.

In March of 2000, there was a serious assault upon a high-ranking politician in Jakarta.  The politician was seriously injured before the assailants fled.  One of the assailants hired an ojek (a motor-cycle taxi) to make his escape, but was later beaten and then burned alive by a mob of ojek drivers for not paying his fare. The ojek drivers were completely unaware of the previous crime.

In the markets and streets of Java, a cry of ‘Maling!’ (‘Thief!’) is sufficient for a mob to immediately form and for ‘justice’ to be summarily meted out.  This tendency to beat first and ask questions later can have tragic consequences.  Indonesian papers frequently enough carry reports of people who have been beaten to death for chicken-stealing; hardly a capital crime, but one viewed very seriously by a society already under economic pressure and increasingly fed-up with acts of petty crime.

The Local Community

Rule-of-law, the police and the court system are altogether very weak institutions in Indonesia.  The Indonesian legal system by itself cannot be relied upon to secure contractual commitments or to secure property rights.  The law is but one instrument to secure rights, and in the Indonesian context, it should be considered secondary to other more important instruments.

Javanese will sometimes say that the most important people in their lives are not their families, but rather their neighbours.  Neighbours live close enough to be called upon in times of need, whereas family members may live very far away.  Neighbourhoods in Java are generally very controlled environments; groups of 5-40 houses are aggregated to form an ‘RT’ (Rukun Tetangga), or roughly translated, a neighbourhood council.  Groups of RT are then aggregated into an ‘RW’ (Rukun Warga), and so on.  Informal meetings of RT and RW are held regularly on a monthly basis (commonly the 17th of the month). People moving into the neighbourhood are expected to report to the Pak RT, as are houseguests or people staying overnight, though this rule is frequently ignored.  Not reporting to the RT is considered arrogant.  Naturally, new businesses establishing themselves in any area of Indonesia will invariably come under the ‘jurisdiction’ of an RT/RW, and relations should be established earlier rather that later.

Neighbourhoods form the first line of defence against acts of crime, and can provide a useful buffer against interference from certain sections of Indonesian officialdom.  Businesses in Indonesia should maintain a strong and genuine consciousness of the surrounding community.

Recent problems involving the mining industry in Indonesia invariably have had their roots in a lack of communication between local communities - or in a few cases, provincial governments - and the mining company.  Mining companies especially have generally relied too much on legal devices to secure their rights and have either ignored, or paid too little attention to, the community in which they are operating.  Concepts of traditional ownership of land are still very strong all over Indonesia, and local communities feel they have a stake in what happens in their environment, regardless of land titles or contractual rights that may have been awarded to a company by a government.  Under the Soeharto regime, local communities were often by-passed in the consultation process for projects, or were pressured to accept very unfavourable terms.  Foreign mining companies may often have been unaware of this, and some of them have good reason to feel ‘stung’ at what has been happening at their mines recently.

The process of community consultation does not end at the planning stages, but rather it must be ongoing and frequent, even - perhaps especially - when there are no apparent issues.  Business operations of all kinds must aim to create close and symbiotic relationships with the surrounding community so that the community feels it has a stake in protecting it.  Gestures, gifts, employment and money will not ensure good relations and security if the venture tries to isolate or distance itself from the community.

Contracts

Notwithstanding all that has been said up to this point about the legal system, contracts still have a very important place in Indonesian business, recording in written form understandings that have been reached as a consequence of proper mutual consultation between parties.

The relatively cold, contractual, legalistic nature of Western business transactions make clear distinctions between personal and business realms, not withstanding that there is, more often that not, an element of mutual personal trust between the contracting parties.  In the West, the attitude ‘a deal is a deal’ means that once an agreement has been reached and signed, it is then generally closed for further renegotiation.  Western business tends to emphasise textual agreements using the language of law where rights and responsibilities are clearly laid out in writing and binding no matter what the circumstances.

Contracts and agreements in Indonesia tend to be much less detailed, and contain much more ‘unwritten text’ relying upon the context upon which the agreement was made.  Much more emphasis is placed upon flexibility; contracts are ‘softer’, and rely upon mutual understanding of the discourse that has occurred between the parties over a period of time, and the trust and interdependency that has built up between them.  Contracts can be subject to constant renegotiation and reinterpretation.

Securing agreements and maintaining contracts in Indonesia requires more than mere written documents.  It requires maintaining relationships at as many different layers as possible; personal, business, government, and community.  Networks should be maintained at as many levels as is practical, and ideally, these networks should interweave and overlap with those with whom you do business.  Social pressure for contracting parties to act fairly and honestly towards one another is of much greater value in securing agreements in Indonesia than a wad of legal documents.

Although many satisfactory contracts can be made without the assistance of a notary, it is obvious that the more important a contract, the more important it is to secure the maximum amount of legitimacy for the agreement, whatever it might be.  A contract drawn-up and co-signed by a notary has more weight in the minds of most Indonesians than a contract drawn-up by a non-notary.  Signing ceremonies, overly formal though they may seem to the Westerner, have important symbolic power, serving to increase the prestige and legitimacy of the contract.

It should be noted that the majority of an Indonesian notaries day-to-day work is in the preparation of land titles, wills, and the drawing up of property lease agreements.  The average Indonesian notary is less than familiar with more esoteric work involving such matters as company incorporation, foreign investment laws, business licences, and residency permits.  Unfortunately, however, very few notaries will knock back the opportunity to undertake such tasks despite their lack of knowledge and experience in these areas.

Notaries abound in Indonesia, however their ability levels are highly variable as are their charges, and there is not necessarily a correspondence between the two.  A bad choice of a notary in some matters can cause considerable loss of time and money.  There are plenty of horror stories of company incorporation taking up to two years to complete at the hands of inexperienced and/or incompetent notaries.

(Indonesia-based business consultants will normally use their own notaries already proven in these fields.)

Language

Language can often present problems in Indonesia, and this has consequences for contracts.  Whilst English is fairly widely understood amongst educated Indonesians, the level is not always particularly high.  An ability to speak English is often a point of pride amongst Indonesians, indicating as it does their educated status.  It often happens, however, that an Indonesian may seem to be listening to and understanding to what is being said in English, but sometimes critical details may be missed.  Complicating the matter is that many Indonesians will rarely ask for repetition when something is unclear to them, partly because it is thought impolite, and partly because of embarrassment.  These comments also apply to professional Indonesian interpreters who might feel that they will lose face if they continually ask for repetition.

It is very prudent in the Indonesian context to often repeat important details during the course of discussions so that your meaning is completely clear.  Indonesians, and Javanese especially, will often say ‘yes’ purely as an indication that they are listening; ‘yes’ in this context does not necessarily indicate understanding or agreement with what is being said.

At higher levels of Indonesian business, contracts written in English are common enough, thus present no problems, at least for the Western side.  However, for the most part, contracts are drawn up in Indonesian, and where required, an English translation made.  For especially critical agreements it would be wise to obtain more than one translation as a double check.

Joint Ventures vs. 100% Western-owned

In the past, joint venture (JV) companies were the only practical means for investing in Indonesia.  Foreign companies were compelled to ‘match up’ with a local partner in order to get entry into most Indonesian business sectors.  The rationale behind JVs is of course one of mutual benefit; benefit to the foreign company in terms of market access and/or access to the local conditions which make the country attractive to investment, and benefit also to the local participant, who is able to scale up their operation to world standards and gain tangible benefits such as profits, technology and international business experience.

Despite their apparent popularity in the past, JVs are not always the most appropriate vehicles for Indonesian business ventures.  Whilst there are JV success stories, there are equally just as many sad stories of JVs gone terribly wrong.  It is sometimes perhaps forgotten that JVs are simply business partnerships, and as most business people well know, partnerships have their hazards.  Differences in perceptions and expectations, or less than expected performance, often can turn former sweethearts into bitter foes.  Partnerships that straddle cultures are additionally vulnerable.

Most conflict within JVs occurs at the organisational level, and if the organisational cultures of the JV partners varies too widely, then a successful alliance is fairly unlikely.  Cooperation within the JV structure is more likely to succeed where the organisational cultures are similar, and, unfortunately, a Western firm would be hard pressed to find such a company in Indonesia.

Formal JVs are in some cases entirely appropriate, but the pitfalls are numerous, and identical to those that exist in any other kind of partnership.  JVs need to be researched much more carefully than other business arrangements, as mistakes can be costly, and withdrawal difficult.  Selection of an inappropriate Indonesian business partner - whether for reasons of incapability, incompatible corporate philosophies, or simply an unwillingness of the partner to fulfil what were thought to be contractual commitments - can cripple an operation before it even commences.

Working alongside local businesses is an important part of nearly every Indonesian venture, however this does not have to mean entering into formal JV arrangements.  Long-term, performance-based contractual arrangements with Indonesian companies may in many cases be a much better option than a JV.

In 1996 the then-government opened the way for establishing 100% foreign-owned companies (referred to as 100% PMAs, short for Penanaman Modal Asing, or ‘Foreign Capital Investment’). Any company having a foreign capital component is regarded as a PMA company; 100% Indonesian companies are referred to with the acronym PMDN.  Significant further deregulation has occurred since 1996, with considerable opening-up of the range of commercial activities permissible to be undertaken by 100% PMAs.  For the most part, there are now very few areas of the Indonesian economy that are closed to foreign investment, with the proviso that some areas may require local equity partnership.  Some commercial activities, such as retailing, food and drink manufacturing and animal husbandry, require an Indonesian partner, usually with a minimum equity share of 20%. Some areas are reserved only for locals (usaha kecil; small ventures); these are mainly concentrated in the agricultural, handcrafts and informal sectors. (KP 99/1998, KP96/1998).

100% PMAs are definitely not right for every venture.  For small to medium ventures focussing on export, 100% PMAs should always be given proper consideration, and the pros and cons weighed up against those for a JV.  The investor will need to consider his/her own knowledge about Indonesian culture and language, in addition to possessing sufficient personal flexibility when handling sometimes difficult cultural issues.

Establishing a company in Indonesia is a highly bureaucratic process, but nonetheless a process that has become relatively easier over the past few years.  The fist step in this rather complex process is the obtaining of an Investment Approval from the Investment Coordination Board.  This approval process is nowadays relatively quick, and can be completed in as little as 14 days in some Investment Board offices.

Once Investment Approval is given - referred to as the SP (Surat Persetujuan, literally, ‘Letter of Agreement’) - there are a absolute plethora of licences the investor must seek from local authorities.  This can take considerable time and is often fraught with bureaucratic chicken-egg situations.  The SP also permits the investor to establish an Indonesian company, a process that will take at least two months.  However, for all practical purposes most projects can commence immediately, without necessarily having to wait for all the bureaucratic processes to sort themselves out.

Management Issues for the Western-owned Company

Management control and flexibility is obviously much greater with a PMA company in which most of the equity is in the hands of the Western investor.  In many JVs, this control is often effectively surrendered to the Indonesian partners who may have their own special management styles.  Of course, a 100% PMA company cannot be left to run itself, and Western management resources will be required.

It is probably preferable if management of Indonesian-based business enterprises is undertaken by people with a depth of knowledge of the Indonesian social, cultural, and political environments.  Indonesia is not the easiest country in which to do business, and the ever-changing business climate requires specialist attention, especially over the next few years as Indonesia pulls itself out of its many and varied crises.

Attempting to directly apply tight, highly efficient Western management styles and systems can be counter-productive.  Systems should be devised to interface as far as possible with local ways of doing things; while these appear less efficient, within the Indonesian environment they usually turn out to be more effective in the long run.  Trying to push back the tide of culture - turning Indonesians into Westerners - is not worth the effort.  Management should endeavour to work with the culture, and not attempt to fight it too much.

Labour and Labour Relations

Although Indonesian labour is ostensibly cheap, it is often not very productive relative to other economies.  Skill levels are not high by most standards, and there are skill-shortages in many areas.  While the education system in Indonesia is reasonably comprehensive, inasmuch as a large proportion of the population receive primary and lower secondary education, the quality of this education is generally low and shall probably remain so for some years to come.  It is hoped that recent increases in teacher salaries - which were very low even by Indonesian standards - will go some way to redressing this situation in the medium-term future.

Companies frequently need to train workers on the job to make up for deficiencies in formal skills or education.  Recruiting administrative or professional workers ‘raw’ from local universities is often an excellent way of inducting talent into an enterprise, however such recruits may well be a lot ‘greener’ than, for instance, the average Western graduate.  Skills considered basic, such as computing and report writing, are often quite poor, and very few graduates would have prior workplace experience.  Companies prepared to make relatively small additional investments in education and training will be rewarded with employees who will tend to be more loyal to the company, and, of course, much more productive.

Attempting to directly compare the productivity of the average Western worker with that of the average Indonesian worker is not very useful.  As an example, the average Western tradesman would generally have far greater knowledge and skill in his/her trade than the average Indonesian tradesman.  Also, the Western tradesman would be skilled in the use of a wide range of different labour-saving tools (eg, power tools) and high-tech devices; the Indonesian tradesman by contrast would rarely see, much less use, such tools and devices.  Finally, there is the effect of tropical torpor; the Indonesian worker lives and works in a hot, humid environment that quickly saps energy.  Thus, when planning, caution should be exercised not to automatically extrapolate the productivity of a Western worker with that of an Indonesian worker.

Recruitment of workers of all levels must be undertaken with care, as termination of employment can be problematic. ‘Incompetence’, or unsuitability for a certain job, is not sufficient reason to terminate a worker in Indonesia.  It is, however, usual to engage employees on a pre-agreed trial basis of one to three months.  Technically, a worker can only be dismissed for misconduct, and only after receiving three separate warnings spaced three months apart.  This means, of course, that it can take up to a year to dismiss an unsatisfactory or unsuitable worker.  In practice, it is unnecessary to go through this legalistic procedure if management is attuned to culturally acceptable ways of handling such problems, which invariably involve negotiation, face-saving exit, and sometimes, money.

The Department of Manpower, known by its Indonesian abbreviation, ‘Depnaker’, is the government body that regulates all employment practices in Indonesia, including conditions of employment and labour-employer relations.  It also provides employment services for lower skilled workers, including day labourers.  Work contracts are very common in Indonesia and must be registered with Depnaker for approval.  Typical work contracts are for one year, but may be for up to three years.

Absenteeism can be a major problem for certain companies in Indonesia.  This invariably points to management failure.  More than any other factor, a poor or inappropriate social environment in the workplace can lead to productivity problems.  A factory or office lacking a ‘family’ atmosphere will be much more likely to experience absenteeism problems.  For many Indonesians, work is very much an extension of their social life, and they like to feel certain about their place and role within an enterprise.  Attempting to establish a clinical Western-style business, with its relatively strict separation of home and work realms, is inappropriate in the Indonesian context.

Remuneration packages for Indonesian workers usually have several components, and are paid on a weekly or monthly basis.  The primary component is the ‘basic wage’ (gaji pokok). Commonly added to this are daily allowances for transport, meals, attendance, and occasionally, productivity.  Married men with children sometimes get an additional sum, though this practice seems to be declining.  Indonesians frequently expect foreign-owned companies to pay higher wages than local companies.  Annual bonuses equal to one month’s wages are paid either just before Lebaran (the annual Islamic celebration), or Christmas, depending on the individual worker’s religion.

Minimum wage rates, referred to with the Indonesian acronym UMR, are set on a regional basis.  Each province, and sometimes divisions within provinces, has its own UMR.  The UMR can be used as a parity benchmark for most low to medium skilled work.  A limited number of industry sectors also have their own minimum wage rates, varying from province to province.  The ‘going rate’ for a particular trade or skill can usually be found by asking around in the locality concerned.  Failing that, regional offices of Depnaker can sometimes be of assistance.

Worker insurance still is very underdeveloped in Indonesia.  Jamsostek, the government-backed insurance scheme provides only a nominal protection for workers, including cover for accident, health, and old age pension.  Premiums add from 7 - 11% to the total wages bill.  However, in the event of accident or sickness, the caring employer will top-up the insurance, as the payout rarely is sufficient to properly cover medical or living expenses.

Conclusions

An adequate understanding of the cultural environment is essential in order to successful undertake business in Indonesia.  Practical day-to-day business requires entry into a multiplicity of human interactions, all of which have some basis in culture.  Even before language, an understanding of cultural assumptions is fundamental to proper communication, which in turn is fundamental to good business.  Stories of cultural collisions and misunderstandings of Westerners in Indonesia can make for entertaining anecdotes, but in business, mistakes due to such miscommunication can be quite expensive.

Time spent acquiring knowledge about Indonesian’s social and cultural environment is not time wasted; it is as important as studying the economic climate or researching a business plan.  A measure of cultural knowledge will greatly assist the Westerner in dealing with and accommodating the significant cultural differences that exist in Indonesia to achieve successful business outcomes.

Bibliography and References

Mark Baird (2000), “Corporate governance in Indonesia”, Jakarta Post, 28 April.

Cho Youn-Mee (2000), personal communication (currently undertaking doctorial research into the phenomena of ‘people’s justice’ in Java), Yogyakarta, 14-16 May.

Gary Dean (1999), “Joint Venture or 100 per cent Foreign-Owned?”, OzIndo, Vol 5 No 1

Depnaker (Departemen Tenaga Kerja) (1997), Himpunan Peraturan: Penyelesaian Perselisihan Hubungan Industrial dan Pemutusan Hubungan Kerja, Yogyakarta.

Vaudine England (2000), “Lynch mobs, gangs rule streets in Jakarta”, South China Morning Post, 10 April.

Clifford Geertz (1976), The Religion of Java, Chicago UP.

The Jakarta Post (2000), “More suspected thieves killed by residents”, 08 April.

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Robert Kyle (1995), Rethinking Javanese Mysticism: A Case Study of Subud Mysticism, honours thesis, ANU, Canberra.

Law No. 22/1999 concerning Regional Government.

Law No. 25/1999 concerning Financial Balance between the Central Government and the Regions.

Law No. 28/1999 concerning the Operation of a Clean Country, Free from Corruption, Collusion, and Nepotism.

Richard Mead (1998), International Management: cross-cultural dimensions (2nd edition), Blackwell Publishers, Malden.

Franz Magnis-Suseno (1997), Javanese Ethics and World-view: the Javanese Idea of the Good Life, PT Gramedia, Jakarta.

Paul Stange (1981), The Sumarah Movement In Javanese Mysticism. Ann Arbor: UMI.

Straits Times (2000) “Jakarta removes 5 district judges in legal cleanup”, 12 April.

Gunawan Widjaja (1999), Kepailitan, PT.  Raja Grafindo Persada, Jakarta.

IMF (2000), World Competitiveness Yearbook, 2000, WEF, The Global Competitiveness Report, Geneva, 2000.

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