How to set up a business in Indonesia
Indonesia has experienced significant growth over the past 50 years, gradually shifting from an economy based primarily on agriculture to a production and import culture since the 1960s, boosted mainly by the oil boom. As a matter of fact, the country has significant oil reserves, estimated at 0.2% of the world's reserves in 2016, or over 1 billion and 650 million barrels.
With today's mixed economy that combines private and public sector investments, Indonesia was ranked as the 17th largest economy in the world in 2021 in terms of nominal Gross Domestic Product (GDP), and 7th in terms of Purchasing Power Parity (PPP). Estimates for these two indicators of economic performance are respectively US$ 1,159 billion and US$ 3,507 billion. The GDP per capita is over US$4,000. In 2022, Indonesia has gained one spot in the ranking of the richest countries in the world, with a GDP of US$ 1.247 trillion.
As a result of this rapid economic growth, Indonesia's middle class is growing fast. Consequently, it is becoming a valuable target for investors. Purchasing power is increasing, and so are consumer trends.
According to McKinsey, "90 million Indonesians will join the middle class by 2030 ... For businesses, this will mean an additional $1 billion in annual spending from increasingly sophisticated consumers."
However, these estimates were made before the COVID-19 pandemic began in Indonesia, which had a significant economic impact on the purchasing power of the local population.
Indonesia has also climbed the ranks in the World Bank's Doing Business Index, which measures how well reforms are making it easier to do business in the country. Understandably, the attractiveness of starting a business and investing in Indonesia is on the rise. However, it is crucial to get organized and stick to the laws, no matter how confusing they may seem at times. To do this properly, it is advisable to contact a qualified agent or the Indonesian Investment Coordinating Board in advance to establish a concrete plan of action. If possible, it is also advisable to get in touch with other investors for advice.
Although doing business in Indonesia seems to get easier every year, the administrative end of things should not be taken lightly. Nonetheless, this part of the process should be viewed as an opportunity to learn more about a market where foreign competition is still manageable. For the sake of motivation, note that this bureaucratic journey will eventually open the doors to a consumer base worth $260 million for you.
Applying for and obtaining the required permits in Indonesia is a critical step toward setting up your business in Indonesia. However, keep in mind that it will cost time and money. Therefore, plan your project well in advance by considering starting your business before you have a major contract rather than the other way around.
Which are the most promising sectors for investors in Indonesia?
Nowadays, the top three economic sectors in Indonesia are services (about 47% of GDP), industry (about 39% of GDP) and agriculture (about 21% of GDP). The most interesting economic activities for foreign investors are manufacturing, tourism, e-commerce and the digital sector, and infrastructure. These four activities have been identified by the government as having the greatest potential for growth and benefit to the Indonesian people.
However, you should bear in mind that infrastructure development, and real estate in general, are still mostly reserved for local public or private capital, despite the country's recent opening to foreign investment.
Indonesia's tourism sector has been hit hard by the Covid-19 crisis, but it remains one of the country's main economic assets. The island of Bali, in particular, has a world-class tourist potential, and the island is, without doubt, the most developed in the country in terms of tourist infrastructure, hotel establishments and the number of holidaymakers from all over the world. Nevertheless, the potential of Indonesian tourism is even greater. With more than 17,000 paradise islands with beautiful beaches forming part of the national territory, there are still many opportunities for those who wish to invest in tourism in Indonesia.
Indonesia has also launched a nationwide digitization program, but it must be admitted that the performance and progress in this area are still lagging behind other countries in the region, especially Malaysia and Singapore. This is why e-commerce has been identified by the government as one of the investment sectors requiring more financial efforts, and several facilities have been put in place for investors in this sector.
Lastly, according to the government, investing in manufacturing is expected to reduce the country's dependence on imports and lower the cost of commodities. With such a statement, it hopes to attract international companies willing to set up shop locally.
Indonesia's openness to foreign investment
Indonesia has long tended to be very reticent about foreign investment, and heavily favored local investment. The country used to be one of the only nations in the world to have a Negative Investment List, a list of economic sectors closed to investors from abroad. However, following the global economic crisis caused by the Covid-19 pandemic, local authorities decided to open the country to foreign investment to promote national economic recovery.
Consequently, the Negative Investment List has been replaced by a Positive Investment List, and the sectors closed to foreign investment have been reduced to only six prohibited economic businesses in Indonesia, such as narcotics production, fishing of protected species and coral reef exploitation, among others. All domestic economic activities are now technically open to foreign investors, but the degree of openness differs from sector to sector.
Public/private investment in Indonesia
There is a high level of public investment in Indonesia. As many as 164 state-owned enterprises are located throughout the country. The state controls prices on many basic commodities, including rice, oil and electricity. This policy led the Indonesian government to ban the export of palm oil in 2022, of which the country is the world's largest producer, in an effort to better control the price of palm oil domestically following soaring costs and a wave of public protests. This decision has had a considerable impact on international food prices, as palm oil is used in a large number of food products.
This extensive state involvement in national economic activities has allowed the country to maintain a high rate of economic performance over time. On the other hand however, the country has also been prone to institutional corruption; a long-standing problem in Indonesia, that is now being addressed. Hence, according to Transparency International's Corruption Perceptions Index, Indonesia is slowly but surely making improvements. In 2021, Indonesia was located at 96th place in Transparency International's Corruption Perception Index ranking, improving its ranking by one place from the previous year.
Types of businesses in Indonesia
If you plan to generate income by selling products or services in Indonesia, you will need to establish a "Foreign Investment Limited Company", a.k.a PT PMA (Perseroan Terbatas Penanaman Modal Asing ). This is the legal entity through which any foreign investor is allowed to conduct business activities in Indonesia.
PT PMA can be wholly or partly foreign-owned.
Procedures and requirements for establishing a business in Indonesia
At least two shareholders are required to establish a PT PMA, and at least one of these two shareholders is required to be a foreigner. He will have to obtain a tax identification number (NPWP) as well as a work permit (KITAS).
If you decide to establish a foreign company in Indonesia, contact the Indonesia Investment Coordinating Board (BKPM). This service agency is dedicated to handling foreign investments in Indonesia.
Alternatively, if you don't want to handle all the administration by yourself, you can hire a local company that specializes in setting up PT PMAs or representative offices for foreigners. Make sure your agent is trustworthy, able to provide references, and up to date on BKPM regulations (which change periodically). Once you have chosen a reliable agent, provide them with all the required documents so that they can take care of all the procedures on your behalf with the BKPM.
In order to establish a PT PMA, you will need to meet the minimum capital requirements for foreign investment, which currently stands at IDR 2.5 billion, or just under US$200,000. In the past, the Indonesian government had set a relatively high requirement in an effort to attract large companies and investors while protecting small local businesses. Thankfully the country has recently opened its economy even more to foreign investment in an attempt to help restore growth the Covid-19 crisis aftermath (see above).
In theory, paid-up capital is supposed to constitute 25% of the above requirement, but in some industries, this amount may be higher. However, in practice, in most industries, a PT PMA is often established without the need for a foreign investor to transfer paid-up capital to an Indonesian bank account, provided that the shareholders of the PT PMA sign a capital declaration stating that paid-up capital can be transferred if necessary.
In order to set up a PT PMA in Indonesia, you will need the following documents:
- A master license and a business license from the BKPM
- A deed of establishment legalized by a notary public. This document must detail KYC information about the founding members, board of directors, board of commissioners and all shareholders.
- PT PMA's legal entity status by the Ministry of Law and Human Rights
- A letter of domicile from the local district authority
- A tax identification number (NPWP) and a confirmation of taxable business (PKP)
- A business registration certificate (TDP) for integrated licensing services (BPPT)
- A labor report and a business welfare report from the Department of Labor.
Once your PT PMA is established, be sure to file your Indonesian taxes on time. This step is monitored very closely by the Indonesian authorities.
You should also be aware that health insurance is now mandatory, and every ATP must declare their activity.
Useful links:
KEMLU - Ministry of Foreign Affairs of Indonesia
Doing Business - Starting a business in Indonesia
Indonesia Chamber of Commerce and Industry
Imigrasi dan hak manusia Asasi - Immigration Department of Indonesia
