Doing business in Indonesia: 5 Challenges You Must Know

Doing Business in Indonesia: The Challenges

  • InCorp Editorial Team
  • 18 June 2024
  • 7 minute reading time

Indonesia’s business climate, as the largest economy in Southeast Asia, boasts a total GDP of over USD 888 billion and has set an ambitious target GDP growth rate of 5.2 percent. While the archipelago offers promising consumer-related market opportunities, the path to doing business in Indonesia has complexities. 

Successfully doing business in Indonesia requires understanding and overcoming several challenges. In this article, we will explore these challenges and offer insights on how to navigate them.

Challenges of Doing Business in Indonesia

When considering opening a business in Indonesia, foreign investors will encounter various challenges that can impact their success. Here are some key challenges that need to be addressed:

1. Foreign Ownership Limitations

Setting up a business in Indonesia can be tormenting for foreigners, but it’s essential to navigate to Indonesia business law and regulations. Foreign ownership limitations exist, but expats can still establish successful businesses due to the high chance of Indonesia business opportunities.

The Indonesian government allows foreigners to invest in specific sectors based on the Indonesian Positive Investment List, which outlines open sectors and the allowable percentage of foreign ownership. This list changes periodically, so it’s crucial to stay updated.

For those aiming for 100% foreign ownership, the Foreign-owned Company (PT PMA) option is available. Still, it requires a minimum investment of Rp 10 billion to be fulfilled within five years of establishment. Alternatively, a Representative Office offers a hassle-free way to set up a presence, although it can’t generate revenue and requires a parent company overseas.

2. Complex Government Regulations

Indonesia’s bureaucratic landscape can be daunting for business registration. Obtaining a principal license from the Indonesia Investment Coordinating Board (BKPM) involves multiple document submissions, including a certificate of domicile, taxpayer number proof, and Ministry of Law and Human Rights clearance. Keep in mind that regulations change regularly.

Read more: What Does Indonesia’s Upper Middle-Income Status Mean?

3. Elaborate Taxation System

Indonesia’s taxation system applies to individuals and companies, encompassing corporate income tax, employee withholding tax, value-added tax, and individual income tax. Even if a company is not generating profits, tax compliance is mandatory.

To navigate this labyrinth of taxation, consider using a third-party service like InCorp Indonesia, a leading PEO company in Indonesia. They can assist with HR-related concerns, payroll, legalities, insurance, accounting, auditing, and tax reporting.

4. Visa and Permit Processing Maze

Obtaining visas and permits in Indonesia can be a challenge. There are four types of licenses for business purposes: tourist visas (valid for 7-30 days), business visas (multiple-entry or single-entry), KITAS (allowing employment), and KITAP (permanent permit for expats married to Indonesians).

To avoid common mistakes and ensure visa compliance, seek assistance from InCorp’s visa and permit processing services. They handle the paperwork for a hassle-free stay in Indonesia.

Read more: 3 Surprisingly Nice Things Investors Should Know

5. The Language Barrier

Due to Indonesia’s business culture and numerous dialects (over 700), businesses have a language barrier. Effective marketing requires localizing products and services for specific markets. Consider hiring local employees fluent in the relevant dialects to address this challenge.

6. Infrastructure Development

While Indonesia is a growing economy, some regions may face infrastructure challenges, such as inadequate transportation networks, unreliable power supply, and limited access to high-speed internet. Businesses may need to invest in infrastructure development or adapt their operations to accommodate these limitations.

7. Cultural Sensitivity and Etiquette

Understanding and respecting Indonesian culture and etiquette is crucial. Missteps in cultural sensitivity can harm business relationships. For example, being aware of proper greetings, gestures, and the significance of hierarchy can make a significant difference in building rapport with local partners and clients.

8. Competition and Market Saturation

Indonesia’s emerging market economy attracts businesses worldwide, leading to intense competition across various sectors. Market saturation can make it challenging for new entrants to gain a foothold. 

Understanding the competitive landscape, conducting thorough market research, and developing unique value propositions are essential to succeed in this competitive environment. Building strong relationships with local partners can also provide valuable insights and help navigate the competitive market effectively.

9. Labor Regulations and Disputes

Indonesian labor laws can be complex, and disputes between employers and employees are not uncommon. Understanding and complying with labor regulations, including hiring, termination, and employment contracts, is essential. Establishing clear HR policies and seeking legal advice can help mitigate labor-related challenges.

10. Intellectual Property Protection

Protecting intellectual property (IP) rights can be a concern in Indonesia. Companies should diligently register and enforce their IP rights to prevent counterfeiting and unauthorized use of their products or trademarks. Legal assistance and IP registrations are advisable steps to safeguard valuable assets.

Navigating these challenges requires thorough research, local partnerships, and a commitment to compliance with Indonesian laws and regulations. Adapting to the local business environment while maintaining transparency and integrity is key to achieving success in Indonesia’s dynamic market.

Understanding Indonesian Business Culture for Foreigners

Indonesia’s business culture is richly influenced by its core values, which are vital for foreigners to comprehend when engaging in business interactions. Here’s a comprehensive overview:

1. Group Harmony 

Indonesians prioritize the collective harmony and cohesion of the group. Business decisions often aim to maintain this harmony, emphasizing collaboration over individual interests.

2. Hierarchy

Respect for authority and seniority is deeply ingrained in Indonesian culture. Superiors are afforded deference, and their decisions hold great significance. This hierarchical structure differs from more egalitarian Western cultures.

3. Individual Reputation

Personal reputation is highly esteemed in Indonesia. Your conduct in business dealings directly influences your reputation, so upholding integrity and honor is imperative.

Business Meetings and Etiquette

1. Personalized Approach

Business is undeniably personal in Indonesia. Building strong relationships through effective communication is crucial. Face-to-face meetings are often considered the most effective way to conduct business.

2. Greetings

A common greeting involves a handshake accompanied by the word “Selamat.” Handshakes are generally light, and it’s essential to approach the eldest or most senior person first when meeting a group of people.

3. Business Cards

Treat business cards with respect. Give or accept them with two hands or the right hand, and take a moment to examine the card before putting it away. For a positive impression, consider having your business cards in Indonesian as a sign of respect.

4. Dress Code

Business attire in Indonesia is typically conservative. Women should be well-covered from ankle to neck, avoiding tight-fitting clothes. Given the hot climate, lightweight clothing, preferably cotton, is advisable.

5. Communication

Indonesians tend to speak quietly with a subdued tone. Loud behavior can be perceived as slightly aggressive.

6. Respect for Religious Practices

Many Indonesians are practicing Muslims who pray five times a day. When scheduling meetings or lunch dates, it’s important to avoid overlapping with prayer times out of respect for their religious commitments.

Working with Local Colleagues

1. Decision-Making

While senior leaders are expected to make final decisions, Indonesians value group discussions and consensus-building. Decision-making is often preceded by extensive deliberation within the team.

2. Criticism and Refusal

Saving face is a significant cultural norm in Indonesia. Indonesians tend to be polite and may find it challenging to criticize or refuse. Bahasa Indonesia offers multiple ways to express agreement or disagreement subtly, which can sometimes be challenging to interpret for foreigners.

By understanding and respecting these cultural nuances, foreign business professionals can navigate the Indonesian business landscape effectively, fostering fruitful relationships and successful collaborations.

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Tackle These Business Challenges with InCorp Indonesia

InCorp Indonesia, formerly known as Cekindo, is a leading provider of market entry and business solutions in Indonesia. They stay up-to-date with the ever-evolving regulations and offer expertise in localizing products and services.

Navigating Indonesia’s business landscape may be intricate, but your business can thrive in this dynamic economy with the proper guidance and services. For inquiries on how InCorp Indonesia can assist you in doing business in Indonesia, please contact us through the form below.

Pandu Biasramadhan

Senior Consulting Manager at InCorp Indonesia

An expert for more than 10 years, Pandu Biasramadhan, has an extensive background in providing top-quality and comprehensive business solutions for enterprises in Indonesia and managing regional partnership channels across Southeast Asia.

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Disclaimer: The information is provided by PT. Cekindo Business International (“InCorp Indonesia/ we”) for general purpose only and we make no representations or warranties of any kind.

We do not act as an authorized government or non-government provider for official documents and services, which is issued by the Government of the Republic of Indonesia or its appointed officials.

We do not promote any official government document or services of the Government of the Republic of Indonesia, including but not limited to, business identifiers, health and welfare assistance programs and benefits, unclaimed tax rebate, electronic travel visa and authorization, passports in this website.

Frequent Asked Questions

As their names suggest, the main differences between the three business kinds in Indonesia lie in the businesses and the purpose of their incorporation. Local company owners (PT) must be Indonesian citizens, as even 1 percent of foreign ownership is not allowed. This type of company is not limited to entering any business field, and restrictions on incorporation are not so tight. On the contrary, a foreign-owned company (PT PMA) is open to international investors, but the maximal percentage of foreign shares differs in various business sectors. Contact InCorp to get the most updated information on the Negative Investment List. International investors tend to open representative offices as a first step to understanding the Indonesian market before setting up a limited liability company. This type is used for marketing and promotion activities and needs the right to sell directly and receive income.

Yes, this mainly applies to import and export businesses. Instead of establishing a company, you can use an under-name import service, an importer of record.

It should take between 30 to 45 days.