How to Start a Business in Indonesia

With a current political and economic climate supporting foreign investments, Indonesia has become a lucrative target for many foreign investors. So, how to start a business in Indonesia has frequently come to our minds.

In this article, we would like to discuss what every foreign investor should consider before starting a business in Indonesia.

How to Start a Business in Indonesia as a Foreigner

Starting a business in a foreign country can be both exciting and challenging. With its vibrant economy and diverse market, Indonesia offers promising opportunities for foreign entrepreneurs. If you’re considering venturing into this dynamic landscape, follow these comprehensive steps to navigate the process of starting a business in Indonesia as a foreigner.

Plan Your Business Expansion

Before embarking on your entrepreneurial journey, conduct thorough research about the Indonesian market. Identify potential gaps in the market, understand local consumer preferences, and analyze your competitors. Formulate a solid business plan that outlines your objectives, target market, value proposition, and revenue projections. Having a well-defined plan will not only guide your actions but also demonstrate your commitment to Indonesian authorities.

Choose the Right Business Structure

Selecting an appropriate business structure is crucial. As a foreigner, you can opt for a Limited Liability Company (PT PMA), which allows foreign ownership. Collaborate with a legal consultant to determine the most suitable structure for your business. Register your business name and obtain a unique tax identification number (NPWP).

Capital and Investment

Indonesia mandates minimum capital requirements for foreign-owned businesses. Prepare the necessary funds and deposit them in a local bank account. Your investment plan should align with the regulations the Indonesia Investment Coordinating Board (BKPM) sets. Prepare financial statements and a feasibility study to demonstrate the viability of your business.

Obtain Necessary Licenses and Permits

Navigating the regulatory landscape in Indonesia requires acquiring the appropriate licenses and permits. Work closely with legal experts to secure necessary approvals from relevant authorities such as the BKPM and local government agencies. Joint permits include the Business License (Izin Usaha) and Location Permit (Izin Lokasi).

Employment and Visas

If your business requires hiring local employees or bringing in expatriates, you must comply with Indonesia’s labor laws. Obtain the necessary work permits and visas for your foreign employees. Consider partnering with a professional employer organization (PEO) to streamline the employment process and ensure compliance with employment regulations.

Things to Consider Before Starting a Business in Indonesia

Before you decide to start your investment in Indonesia or to start opening a business in Bali or anywhere else in Indonesia, you need to know step by step how to create a company, and you need to consider the following things:

1. Type of Business

Please note that some sectors or industries are prohibited or limited to foreign investment. The list is written in the Positive Investment List. In the list, some sectors limit foreign ownership from zero (0) to ninety-five (95) percent. This will lead you to a further question: Should you find a local partner(s) or not? However, foreigners can fully own some businesses (100%).

2. Type of Company

Since the government of Indonesia wants to protect its micro, small, and medium enterprises, there is a policy stating that to open a business in Indonesia. The company needs to be registered as a foreign limited liability or PMA. To start a business in Indonesia as a foreign company, it must meet requirements regarding minimum investment and paid-up capital.

Read more: How to establish PT PMA in Indonesia

3. Human Resources Issue

Although Indonesia is listed as the fourth most populated country in the world, with over 60% of the total population in their productive ages (15-60 years old), not all have sufficient skills to participate in the industrial and commercial world.

The education sector does not spread equally in its large territory. This condition causes companies to face difficulties in finding talent pools, especially in areas outside Java Island.

On the other hand, hiring foreign talents also requires complex requirements. This will become a challenge that every PMA needs to solve. Some successful PMAs in Indonesia address this issue by providing considerable training to fill the talent shortage gap.

Therefore, you must selectively choose human resources based on your needs to avoid more costs by hiring unskilled or unsuitable people.

4. Diverse Markets

Indonesia is not only the biggest archipelago nation in the world but also the most complex and fragmented market. Considering that there are many races, languages, religions, customs, and values, you cannot treat Indonesia as a single market entity. Every target group has its own needs that the business needs to address.

5. Complicated Bureaucracy and Inconsistent Laws

Before starting your business in Indonesia, you must highlight that the bureaucracy in Indonesia is so long and complex, including international trade in Indonesia. And make any foreigners who are new to this environment feel overwhelmed.

Although the government has already started some online systems and a One-Stop-Service Center to cut the bureaucracy, there are still some complex processes.

Read more: Easy Investing in Indonesia

On the other hand, the policies or laws are often inconsistent and changed (for example, regarding the Positive Investment List and the Bankruptcy Law). This should be put into your awareness that keeping up-to-date with the recent laws and policies is very important to start a business in Indonesia.

6. Unequally Shared Infrastructures

The development in Indonesia has long been focused on the area of Java Island (6 Provinces: The Capital City of Jakarta, Banten, West Java, Central Java, The Special Region of Jogjakarta, and East Java). All the infrastructure and facilities are highly concentrated on this Island. Therefore, doing business in these 6 Central Java provinces has been a trend for so long.

However, there are also some other big cities on other islands that foreign investors target. All you need to consider is researching to match your business with the places with the most significant potential to support your company.

7. Plenty of Natural Resources and Raw Materials

Indonesia has plentiful and diverse kinds of natural resources. If you need natural resources and raw materials to run your business, make sure you know where you can get them quickly. Consider that Indonesia consists of islands that are spread over a vast territory. The distribution of goods can be extremely costly.

Regardless of the business sectors, many foreign companies expect to run profitable businesses in huge markets with fast-growing economic conditions.

You may wonder what business entity you should choose to legally operate your business in Indonesia. Further, we will help you understand Indonesian Company Law.

Read more: Overview of Business Setup in Indonesia

Which Company Type Is The Most Suitable for Your Business?

Suppose you have seen the potential of this archipelago country and considered taking part in its business sector. In that case, you need to know what kind of investment you can perform in Indonesia to set up a company in Indonesia.

To start a business in Indonesia, you can open a representative office or make a direct foreign investment (PT. PMA).

A Representative Office

The representative office (RO) is set up for specific purposes, such as promotion, marketing, buying-selling agents, or market research. You will generally get an operational license for two years as an RO.

A Foreign Direct Investment (PMA)

To invest directly in Indonesia, you must establish a limited liability company. And it’s owned wholly or partly by a foreigner(s) that is called PT. PMA (or simply PMA). There are many legal documents to prepare and some requirements the company should meet.

The establishment of PMA is governed by Law No. 25 year, 2007 (Investment Law) and Law No. 40, 2007 (Company Law).

Before establishing an RO or a PMA, you must also know about the Negative Investment List. This is because some industries in Indonesia are strictly closed or partially closed to foreign investment.

The list is subject to revisions by the central government of the Republic of Indonesia, so you have to keep yourself up to date about it.

For the sectors or industries that are partially closed to foreigners, you still can run your business or PMA in Indonesia with the existence or co-partnership with Indonesian citizens.

After Process

After you have understood the negative investment list and decided the type of investment you want to have. You can start preparing some prerequisite documents to establish your company so that you can start running a business in Indonesia.

You must know that the bureaucracy is somewhat complex because the company registration process deals with various government institutions. And it comes to deals from the lowest level to the ministry level.

Contact the Indonesia Investment Coordinating Board (BKPM) for the first step. Even though BKPM already had a One-Stop-Service Center (OSS-C) to improve its services and cut bureaucracy.

You may be overwhelmed by the small details if you are a new person and also because you are unfamiliar with the local rules and language.

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Start a Business in Indonesia with InCorp’s Assistance

Considering the many legal requirements and documents needed in every phase of company registration, our professional team will help you establish a legal business entity in Indonesia. Please fill out the form below and let our expert consultants help your business in Indonesia.