Innovation in Indonesia

As one of the largest island countries in the world, with many multi-ethnic groups, Indonesia includes a diverse range of business practices.

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With such great ethnic diversity, Indonesia is able to offer different businesses and multicultural interactions. Understanding how people in each of these ethnic groups conduct business is important for the EU SMEs that wish to conduct activities in the country. According to Ethical Business Cultures in Emerging Markets, published online by Cambridge University, “business entry to Indonesia remains challenging due to societal norms, cultural values, and expectations for standard business practices that differ from those held by business people in Western societies.”

Background: Indonesia is the world's largest island country as well as the 14th-largest country by area, at 1,904,569km². With a population of about 270 million people, Indonesia is home to over 300 ethnic groups and nearly 750 different dialects. Away from the major cities and areas of the dense population, there are significant differences between regions.

Indonesia is the largest economy in Southeast Asia.

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The Indonesian economy is the largest in Southeast Asia and the 16th largest in the world. Indonesia has been able to maintain consistent economic growth up to the COVID-19 crisis, recently being classified as an upper-middle-income level country. Domestic consumer buying power and investment prospects have been increasing.

Background: Indonesia’s economic strategy follows a 20-year development plan, currently spanning 2005 to 2025. This plan is divided into periods of 5-years, called the RPJMN (Rencana Pembangunan Jangka Menengah Nasional) / National Medium-Term Development Plan. The current plan is the last one and will run until 2025. This aims to boost Indonesia’s economic performance by improving the human capital and competitiveness of the country in the global market.

Manufacturing is a key growing sector in Indonesia.

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Indonesia is experiencing a transformation in its manufacturing sector with rapid growth, partly driven by growing levels of Foreign Direct Investment. The Indonesian government has established the Investment Coordinating Board of the Republic of Indonesia (BKPM) to assist foreign companies which wish to invest in Indonesia. BKPM offers a one-stop shop and online services to help foreign investors.

Background: The Indonesian government believes that the manufacturing sector can be the engine of economic growth for Indonesia. The sector contributed 33% to the overall national investment in 2020. The Ministry of Industry expects annual investment in the manufacturing sector to reach nearly €20 billion by the end of 2021.

Tourism has experienced a long-term downturn in Indonesia.

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Tourism has become one of the country's key sources of foreign currency. The government has first focused on developing and marketing priority destinations: Labuan Bajo, the gateway to the Komodo Islands; Borobudur, a UNESCO World Heritage site in Central Java that houses a 9th-century Buddhist temple; Mandalika, resort development in Central Lombok; and Lake Toba, the world's largest volcanic caldera lake in Niger. Following the impact of the COVID-19 pandemic, tourism did suffer a significant drop. The government has gradually started to re-open the tourism sector in 2021.

Background: Tourism provided nearly 5% of the country's GDP in 2019 according to the Statista research department. Tourism provides nearly 13 million jobs, accounting for 10.5% of overall employment. The Central Bureau of Statistics (BPS) reported that international tourist arrivals in Indonesia dropped by 75% in 2020 (approximately 5 million) due to the COVID-19 epidemic. Nevertheless, the government is upbeat about the sector’s projected gradual recovery.

The agriculture sector is the most important sector in Indonesia.

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The industrial sector accounts for the majority (47%) of Indonesia's annual GDP. Mining and manufacturing are the two most important sub-sectors. However, agriculture remains important in the country.

Background: Agriculture is an important part of the Indonesian economy. However, due to the industrialisation and the increased prevalence of the service sector in the last 50 years, the agriculture sector's relative contribution to GDP has declined. Indonesian farmers are facing challenges, including a lack of access to new technologies. Nonetheless, farming continues to be a key source of income for many Indonesian people.

Start-up opportunities in Indonesia are growing fast.

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The number of start-ups in Indonesia is growing rapidly. This is helping the country cement its recent move to being an upper-middle-income country.

Background: High-value start-ups are developing well in the country. As of September 2020, 52 start-ups in Indonesia had raised funding of €1.64 billion, according to Amvesindo. Indonesia accounted for over 45% of the funding deals in Southeast Asia in the second quarter of 2020, according to Deal Street Asia. Singapore was second with 33% of the deals and Vietnam followed with 8%.

Infrastructure funding in Indonesia is strongly increasing.

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The Indonesian government has pledged to invest in infrastructure. There is a significant need for infrastructure investment – including in long-distance transport.

Background: The Jokowi administration’s plan for 2015-2019 increased infrastructure funding. The priority projects for 2020-2024 now include the development of the metropolitan region and the expansion of local and long-distance public transport for Palembang, Banjarmasin, Makassar and Denpasar, with a total value of around €430 billion.

The digital economy in Indonesia is growing slowly.

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Indonesia's digital economy is expected to grow to over €107 billion per year by the end of 2025, up from €38 billion in 2020. This growth is providing excellent opportunities for new markets and start-ups.

Background: Indonesia’s population spends one of the highest amounts of time on smartphones in the world. The country has one of the fastest-growing mobile markets in the Asia-Pacific. Local companies are investing in many ICT segments, such as hardware, software and services – including software as service (SaaS) solutions and cloud computing. New features such as analytics and data centre management are also being developed. Indonesian market needs currently include equipped devices, audio ID, real-time location tracking and network sensors.