Guidelines to `living less dangerously` in Indonesia
January-March 2018
By: Peter Verhezen, Ian O Williamson and Natalia Soebagjo

“In the West, we want answers for everything. Everything is right or wrong, or good or bad. But in the [wayang puppet] shadow play, no such final conclusion exists.” Quote from the 1982 film “The Year of Living Dangerously.”

Indonesia, the biggest economy in Southeast Asia and its only member of the G20, is on its way to becoming an extraordinary economic and political force. While the 1997-98 Asian financial crisis had a devastating impact on the country, since that time the country has significantly restructured its governance systems and experienced rapid economic growth and a good, though volatile, performing stock market.

From 1997 to 2014, Indonesia’s gross domestic product has grown at an average of 5.4 percent annually, and would have been much higher if not for negative growth during the Asian financial crisis. The stock market, meanwhile, has generated an annual return of 6.4 percent during the last five years. The Indonesian economy, blessed with an abundance of natural resources such as tin, coal and gold, continues to be one of the fastest-growing economies in the world, with GDP growth in 2015 of 5.8 percent – but just slightly over 5 percent in the third quarter of 2017. This economic surge has opened numerous business opportunities. Thus, it is not surprising that foreign direct investment into Indonesia has increased dramatically during the last five years, from a low of Rp 35.4 trillion in 2010 to a high of Rp 99.4 trillion ($7.6 billion) in 2016. This investment has come from multinational corporations across a wide variety of industries, including resources, consumer products, financial services, infrastructure and manufacturing.

Despite this recent market performance, success by companies operating in Indonesia (particularly foreign companies) is far from certain. How do international companies address specific institutional challenges and organizational obstacles when doing business in Indonesia? There are numerous examples of multinational corporations with reasonable business strategies suffering major financial and reputational failures in Indonesia. While the use of objective information about the competitive environment, the technological and sociopolitical context, and consumer preferences is important to the development of a business strategy here, specific attributes of the Indonesian market may make this information necessary but not sufficient for driving organizational success.

For example, enticed by the economic prospects in the world’s fourth-most populous nation, Cemex, the Mexican global cement giant, in 1998 bought a considerable number of shares in the largest Indonesian cement company (state-owned), Semen Gresik. However, Cemex underestimated several issues that led to a protracted dispute between its global headquarters and its Indonesian subsidiary. Eight years later, Cemex was forced by the Indonesian government to sell its 25.5 percent stake in Semen Gresik, worth more than $500 million at that time, at a loss to Indonesia’s Rajawali Group. This happened because Semen Padang, the state-owned subsidiary responsible for many of Cemex’s problems during those years, refused to collaborate under the reins of a foreign company, citing cultural differences. Misreading the cultural and legal context of Indonesia was disastrous for Cemex. 

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