Executive Summary

The financial crisis in 1997 that followed by political turmoil in Indonesia had completely changed this country from one of the so-called new Asian Tigers to a poor country with a stagnant economic growth. Furthermore, security issue such as Bali and Jakarta’s Marriot Hotel Bombing added complication that discourage foreign investments in Indonesia especially in when it combined with old Indonesian problems such as widespread corruption, lack of transparency, violation of intellectual property rights and ineffective judicial system.

Despite all of those non-supporting situations, Indonesia is still a potential market for investments because of its large population, natural resources and favorable geographic position. In addition, many sectors in Indonesia are underdeveloped and very promising for companies that have a good planning and execution. Indonesia also committed to open and free market, as a member of WTO, ASEAN, AFTA, and APEC, Indonesia has actively involved in global trade and has started to deregulate some of its policies to comply with the global trade needs and also to attract new investments.

Indonesia and the United States (U.S) have an active bilateral trade; U.S had a trade deficit is about US$ 7 billion in 2003. Indonesian main imports from U.S are oilseeds, grains and other agriculture products; while Indonesia main exports to U.S are apparel and audio-video equipment. Indonesian government must ensure national security, stable and clean government as well as intellectual property rights compliance in order to attract investors especially US investors. These years, there are many big prospects in Indonesia for U.S investors especially in telecommunication equipment, industrial chemical, and franchise.

General Market Conditions

Indonesia has not recovered completely after the financial crisis that stormed Asia in 1997; the financial disaster then mingled with political turmoil created “multidimensional” crisis that make the country in a really bad shape. Following the crisis, Indonesia has been changing its president more than three times with the new hope of finding a more clean and democratic government. All those situations have made the investment climate is very poor for the last couple years which consequently affects the economic and market growth in Indonesia. Furthermore, security issues have added complication, following the New York’s World Trade Center September 11 Tragedy, there were some unfortunate tragedies in Indonesia, namely: the Bali Bombing in October 11, 2002 and Marriot Hotel Bombing in Jakarta, August 6, 2003. Some problems until recently are still under scrutiny internationally and nationally, especially related to war on terrorism (as part of global war on terrorism) and separatist issues in Aceh and Papua. Those conditions, in general, affect Indonesian market attractiveness to foreign investors especially the investors from the United States (U.S).

Despite all of those non-supporting situations, there are at least three factors that made Indonesia is attractive to be considered as an important market.  Those factors are: large population, rich natural resources, and favorable location right between Asia and Australia; the factors that are considered as Factor Conditions in Porter’s Diamond Model. [1] Having about 217 million people, based on the recent data from Indonesian Central Statistics Bureau (Biro Pusat Statistik-BPS), Indonesian population is still a big potential market. Currently, Indonesia is the fourth most populous country after China, India, and U.S, which indicates the potential market of this country, especially with so many sectors are underdeveloped. Using the same source, the 2003 GDP (Gross Domestic Products) is US$ 210 Billions (Rp. 8,500/US$), growing at 4.10 % and GDP per capita $980. [2]

One of the big challenges of marketing products in Indonesia is distribution. The country has about 13,000 islands, small and big, and spread across almost 5,000 kilometers which makes more than 50% of distribution infrastructure related to sea or river transportation.

Investment Climate and Market Attractiveness Analysis

            As previously mentioned, investment climate in Indonesia currently is not very good and the market is not very attractive. The World Economic Forum in 2003 put Indonesia’s competitiveness in rank out of 102 countries. The same report also indicates that the foreign direct investment (FDI) in Indonesia is steeply decreasing since 1997. [3]

            In addition, based on International Country Risk Guide on its September 2003 edition, Indonesia is placed in rank 108, the same place with Mozambique, slightly under Turkey (107) and above Cuba (110). [4] This risk indicator is important especially for investors because it reflects the investment risk as well as the market attractiveness since the rating determination includes economic expectations (versus reality), economic planning failures, political leadership, external-conflict risk, corruption in government, law-and-order tradition, political terrorism, and the quality of bureaucracy. [5]

            There are many concerns related to the lack of transparency, widespread corruptions, and ineffective law system. Many foreign companies have pointed out that those are the most factors that make the investment climate and market attractiveness in Indonesia is very poor. In addition, lack of awareness and law-enforcement related to violations in Intellectual Property Rights (IPR) has added some discouragement for some investors especially in software, music, and movie business.

            Indonesian government has tried to overcome the problem by some deregulation in investment policies and new laws in Copyrights, Patent and Trademark. For importing license procedures, there was a big cut from 1112 type of procedures in year1990 to 141 today. [6] Furthermore, a new Anti-Corruption Committee (Komisi Pemberantasan Korupsi-KPK) has also established for both economical and political purpose. Regarding to investment policy, the government has eliminated the limit 49% of foreign shareholding in an Indonesian company to make the market more open for competition, and also allows foreign companies to invest in distribution sector, a sector that previously restricted for foreign involvement.

            There are several sectors (and companies) that have been continuously investing in Indonesia and today have good profitability. Companies in oil and gas industry (ChevronTexaco, BP, Shell, Total, Unocal), mining industry (Freeport, Inco, Rio Tinto), and consumer goods (Unilever, Procter and Gamble, Heinz, Coca Cola) are the example of sectors and industries that have been successful developing their market in Indonesia.

The keywords of improving the investment climate in Indonesia are stable government, effective judicial system and more deregulation. The Megawati office has been quite successful to create stability for the last two years but has not quite effective in enforcing the law and restructuring the market. With the upcoming direct presidential election (the first time in Indonesia history) next July 5^th, 2004, Indonesia again is tested to maintain its stability as the basis of attractive market and supporting investment climate.

            Indonesia in Global Trade and E-Commerce     

Indonesia is a member of World Trade Organization (WTO) since January 1, 1995, and one of the original members of Association of South East Asian nations (ASEAN) from its declaration in Bangkok on August 8, 1967. [7] ASEAN has been fully developed the ASEAN Free Trade Agreement (AFTA) and has started to reduce tariffs for all products of at least 65% ASEAN original since January 2002. Furthermore, Indonesia is also one of 21 members of Asia Pacific Economic Cooperation (APEC) which was established in 1989. The Asia-Pacific regions are considered as the future of world economic development so it is important to mention here that APEC’s vision is free and open trade and investment in the Asia-Pacific by 2010 for industrialized economies and 2020 for developing economies. Important members of APEC include US, Japan, and Canada. [8]

Furthermore, Indonesia has just concluded its relationship with International Monetary Fund (IMF) in the end of 2003. IMF has been closely worked with Indonesian government since the financial crisis started in 1997 which relationship has been considered as not very successful. Since the crisis, Indonesia is in a very big and deep debt. Its debts increase from only 27% of GDP before the crisis, to 100% at the end of 2000. Almost all the debt came form the bond issued by Indonesian government to banks and Bank of Indonesia (Indonesian central bank) to cover the costs of banking sector bailout. In 2001, the debt is decreasing slightly to 93% of GDP. [9]

In electronic commerce (e-commerce), Indonesia has not started yet even though the proliferations of personal computers and internet have been pretty fast in the last five years. The infrastructure that would enable e-commerce has not been developed well, mostly because of the average computers are old and there is no significant development in high bandwidth and fast internet connections. From the law perspective, cyber law and e-commerce law have been in parliament discussion in the last two years but there is no significant progress. This is the reason why there are many cyber crime committed by Indonesian citizens has been reported, especially carding and e-commerce fraud. Currently, many online market places, such as eBay, has banned any transactions or shipping to Indonesia.

U.S-Indonesia Trade: Current Conditions and Prospects

In general, American products are perceived positively by Indonesian market, especially the young market segment and the urban demographic segment. American products are considered as cool, trendy, sophisticated and expensive. The biggest influence of American products to Indonesian market is by television (reality shows and MTV), Hollywood movies, and music (pop, rock and hip-hop); people in rural area mainly do not very sensitive to American products because they could not afford them. The demand pattern on American products is quite clear where food franchising is very highly demanded such as McDonald, KFC, Coca Cola, Pizza Hut and lately Starbuck. Apparels are the second most popular American brands demanded by Indonesian market especially Nike’s apparels or footwear. However, there are small groups in Indonesia that have anti-American products perspective either because of ideological/religion perspective or activism (anti American corporate or anti-cheap labor activism).

To boost the investment and as part of the membership in WTO, Indonesia has dismantled many tariff barriers and convert many non-tariff barriers into tariff barriers. On the last Doha Round, Indonesian government tried to get exemptions for maintain tariff on some sensitive agriculture commodities such as: rice, soybean, and sugar. In addition, Indonesian government has continued to ban chicken part import from the U.S; that policy has raised some questions from the U.S government. However, the Indonesian government insisted to keep the restriction due to religion reason; as the biggest Muslim (Islamic) nation, Indonesian government has to ensure all the foods imported to be certified as “Halal” products (contents and process are in accordance in Islamic practices). [10]  

The lack of law enforcement in intellectual property rights has made U.S listed Indonesia under Priority Watch List again in 2003. Even though the Indonesian government has tried to fight books, music, films or software piracy with big support from Indonesian artists and police department, the lack of consistency and effective judicial system have made the piracy is still a big problem in Indonesia. This problem should be put in the first priority if Indonesia really wants to increase the foreign investments.

In the bilateral trade, U.S trade deficit is about US$ 7 billion in 2003; total Indonesian exports to U.S is $ 9.5 billion and total Indonesian imports from U.S is $ 2.5 billion. See Table 1 and Table 2 for the top ten of product categories on bilateral trade.

Table 1: Ten Major Category Products Indonesian Exports to US in Million $ [11]

No	Category	2001	2002	2003
1	Apparel	2,264	2,066	2,149
2	Audio & Video Equipment	1,072	1,088	850
3	Forestry Products	331	405	596
4	Footwear	725	729	576
5	Miscellaneous Manufactured Commodities	502	533	528
6	Household & Inst Furniture & Kitchen Cabinets	472	510	495
7	Computer Equipment	500	387	352
8	Fruits & Tree Nuts	212	241	340
9	Oil & Gas	376	396	302
10	Fish, Fresh/Chilled/Frozen & other Marine Prod	271	264	302
	Total Indonesian Exports to US (all products, not only the top 10 above)	10,105	9,644	9,520

Table 2: Ten Major Category Products Indonesian Imports from US in Million $ [12]

No	Category	2001	2002	2003
1	Oilseeds & Grains	362	304	373
2	Other Agricultural Products	208	211	263
3	Basic Chemicals	228	187	167
4	Grain & Oilseed Milling products	197	136	156
5	Aerospace Products & Parts	125	269	149
6	AG & Construction & Machinery	187	290	135
7	Soaps, Cleaning, Compounds & Toilet Preparations	45	63	88
8	Resin, Syn Rubber, Artificial & Syn Fibers	68	78	77
9	Meat Products & Meat Packaging Products	48	55	76
10	Other General Purpose Machinery	106	88	70
	Total Indonesian Imports from US (all products, not only the top 10 above)	2,499	2,581	2,520

US investments in Indonesia are still below investment of United Kingdom (U.K), Japan, Singapore, Taiwan, Hongkong, and Australia. The investors from U.S must explore the opportunities and prospects in Indonesia because it is huge. According to US Commercial Service, there are some sectors that is forecasted to be the best prospects of U.S exports to Indonesia in 2004, namely: telecommunications equipment, industrial chemicals, security and safety equipment, electrical power system, oil and gas equipment, franchise, retail, aircraft and parts, computer and peripherals, pollution control equipments, and health food supplements. [13]

            Conclusion

            Indonesia is still a big opportunity and under developed market for U.S investors. There are many prospects widely open for success investment. Security, stable, and clean government, as well as  intellectual property rights complioance are the most critical issues that must be taken care seriously by Indonesian government to attract foreign directs investments from U.S.

Bibliography

Works Cited

“2004 Best Prospects of U.S. Exports to Indonesia.” Accessed 14 April 2004 from US Commercial Office website <http://www.buyusa.gov/indonesia/en/122.html>

APEC official website. Accessed 24 April 2004 from <http://www.apecsec.org>

ASEAN Secretariat official website. Accessed 24 April 2004 from <http://www.aseansec.org>

“Brief Information about BPS and Statistical Highlights.” Leaflet of BPS-Statistics Indonesia. Accessed 14 April 2004 from <http://www.bps.go.id/leaflet/leaflet-apr04-eng.pdf?>

“FY 2003: Country Commercial Guide-Indonesia>” Accessed 7 April 2004 from The Embassy of The United States of America in Jakarta  website <http://www.usembassyjakarta.org/ccg/ccg.html>

Jeannet, Jean-Pierre, H.David Hennessey. Global Marketing Strategies 6th ed. New York: Houghton Mifflin, 2004.

“National Trade Estimate Report 2004.” Accessed 14 April 2004 from The Embassy of The United States of America in Jakarta  website <http://www.usembassyjakarta.org/>

Porter, Michael E. The Competitive Advantage of Nations. New York: Free Press, 1990.

“US Exports to 25 Major Countries by Product-2003 Data.” Accessed 14 April 2004 from International Trade Administration website <http://www.ita.doc.gov>

“US Imports from 25 Major Countries by Product-2003 Data.” Accessed 14 April 2004 from International Trade Administration website <http://www.ita.doc.gov>

WTO official website. Accessed 24 April 2004 from <http://www.wto.org>

Works Consulted

“Indonesia: Punching the White Snout.” The Economist April 10^th 2004.

Shari, Michael. “Indonesia: Consumer Heaven?” Businessweek Online 24 March 2003. Accessed 24 April 2004 from <http://www.businessweek.com/magazine/content/03_12/b3825112_mz033.htm>