Executive summary
This report examines Indonesia’s business environment for a client exploring market entry, focusing on trade protectionism and innovation. Indonesia has historically welcomed foreign trade and investment but has recently adopted more protectionist policies, including import tariffs and domestic manufacturing requirements, to shield domestic industries. However, Indonesia remains engaged in free trade agreements. On innovation, Indonesia needs to catch up with significant economies in R&D spending due to weak intellectual property protections and complex regulations. Still, the government has launched initiatives to promote innovation through increased R&D spending, tax incentives, and startup support. In conclusion, despite these challenges, Indonesia’s size and growth potential offer opportunities. We recommend export-oriented foreign direct investment, leveraging ASEAN supply chains, establishing long-term R&D centers, strategic partnerships, continuous monitoring of the dynamic landscape, and regulatory compliance to navigate Indonesia’s complex but promising business environment successfully.
1.0 Introduction
Companies always look for new growth prospects in international markets as the world economy becomes more interdependent (Enderwick & Buckley, 2020). Careful consideration goes into entering a new market, including Research into the target country’s economic climate, government policies, and trends. This paper delves deeply into the Indonesian market, analyzing the potential effects of trade protectionism and innovation/R&D on a client’s ability to break into the Indonesian market.
This Research aims to thoroughly examine Indonesia, illuminating current tendencies and changes in trade protectionism and innovation/R&D. To help our client make an informed decision, we will analyze how these international business concerns may affect their plans to enter the Indonesian market. This will be accomplished by synthesizing our understanding of foundational ideas and theoretical frameworks from our education with substantial Research from scholarly and popular sources.
The nation of Indonesia is the subject of our investigation; it is a multicultural and quickly developing state in Southeast Asia. It has a growing middle class, plentiful natural resources, and a central location, making it an appealing market for international companies to enter (ITA, 2022). While Indonesia has much potential, the country faces obstacles such as protectionist trade policies and a need for a robust innovation and R&D ecosystem. Companies must fully grasp these dynamics to succeed in this dynamic and challenging environment.
2.0 Protectionism in Trade: A Deep Dive into Recent Developments in Indonesia
Professional protectionism has intensely impacted Indonesia’s economic strategies, which envelops many measures intended to shield home areas against unfamiliar rivalry. Let’s explore Indonesia’s obligation to the worldwide economic alliance and the country’s set of experiences of receptiveness to foreign trade and venture.
2.1 Historical Openness to Foreign Trade and Investment
Indonesia has historically kept an open policy towards international trade and investment. Average tariffs in Indonesia have been approximately 7% in recent years, according to data from the World Bank (2021), making it a desirable location for international enterprises. The country’s economy flourished by allowing multinational companies to do business in Indonesia.
2.2 Recent Shift Towards Protectionist Trade Policies
As part of a more significant strategic realignment in its economic policy, Indonesia has moved toward more protectionist trade policies in recent years. Pursuing import substitution industrialization, a policy framework that emphasizes lowering reliance on imported manufactured goods while increasing domestic production is crucial to this change (Na & Kang, 2019). Significantly, in 2022, Indonesia increased import taxes on almost 2,000 consumer items, increasing the tariff rates from 5% to a range of 7.5% to 10% (WTA, 2010). Reducing Chinese imports and boosting domestic producers were the driving forces behind this decision. The fact that Indonesia intends to raise tariffs on electronic goods and raw materials necessary for steel manufacturing shows the country’s perseverance in its import substitution goals. Indonesia has also implemented domestic manufacturing mandates for products sold within its borders as of 2020. These products include mobile phones and automobile components. To safeguard the Indonesian economy against increased competition, President Joko Widodo and his government have recommended several protectionist measures (Negara, 2015). This home manufacturing mandate benefits the economy in two ways: it supports domestic businesses and reduces the availability of goods created elsewhere.
2.3 Commitment to Reducing Non-Tariff Barriers
Non-tax deterrents to exchange have decreased in Indonesia despite the country’s new history of protectionist approaches. This devotion is displayed in the country’s support of various international alliances (FTAs) with significant exchanging accomplices, incorporating those with ASEAN nations, Australia and New Zealand, China, Japan, South Korea, and others (DFAT, 2022). Regarding regional trade liberalization and achieving the broader trade goals stated by Indonesia’s authorities, these FTAs have been crucial and complex players in Indonesia’s trade environment.
The benefits to Indonesia’s trading ecosystem from these strategic engagements in the form of FTAs are clear, and they serve as evidence of Indonesia’s commitment to international trade. That Indonesia has been able to keep its average tariff rates low compared to other developing nations is a significant benefit of these pacts (DFAT, 2021). Indonesia’s ability to maintain low tariff rates demonstrates its dedication to striking a balance between the protection of native sectors and broader regional and international trade commitments, notwithstanding the country’s concurrent adoption of protectionist measures.
Indonesia’s complicated and steadily developing trade policies are best found in the difference between protectionist measures and the country’s association with global exchange agreements (Cali, 2017). The public authority adopts an even-minded strategy to trade by utilizing protectionist measures that will significantly affect homegrown organizations while likewise partaking in international alliances (FTAs) to additional financial mix and collaboration on a worldwide scale. The significance of Indonesia’s vow to bring down non-tax boundaries to venture can’t be underlined, as it helps keep the country cutthroat in the worldwide market and lays it out as a vital participant in local and global trade. In making this promise, Indonesia guarantees that it will keep assuming a positive part in impacting the fate of exchange elements in Southeast Asia and then some.
3.0 Research and Development (R&D) and Innovation Trends in Indonesia
In the interconnected world, R&D and innovation are vital to each country’s monetary development, global competitiveness, and long-haul sustainability. Let us explore the country’s current standing, obstructions, the public authority’s momentum endeavors, and the more extensive ramifications for foreign organizations working in Indonesia, which are given below.
3.1 Indonesia’s R&D Lag Compared to Major Economies
Compared with other significant economies, Indonesia’s interest in R&D and new advancements lingers far behind the pack. Indonesia’s Gross Homegrown Consumption on Research and Development (GERD) is a small part of one percent of the nation’s Gross Domestic Product (OECD, 2021). In contrast with the OECD standard of 2.5% and the public authority’s grand objective of 1%, this number is very frustrating. Among the ten biggest economies in Southeast Asia, Indonesia positions way behind everyone concerning spending on innovative work (R&D) because of this enormous gap. And the innovation landscape in Indonesia could be better if you look at the number of patent applications locals submit. When compared to South Korea (where over 300,000 patent applications are filed annually) and Malaysia (14,000) (WIPO, 2022), Indonesia needs to catch up. The disparity is a stark reminder of the difficulties inventors and entrepreneurs face in the Indonesian ecosystem.
3.2 Barriers to Innovation
Several significant obstacles, collectively known as “Barriers to Innovation in Indonesia,” work against the country’s efforts to encourage innovation and R&D. To begin, insufficient protection of intellectual property rights is one of the major obstacles confronting Indonesia’s innovation environment (ITA, 2022). Lack of proper protection for intellectual property can discourage businesses from spending money on new technologies. Firms may be hesitant to invest in R&D due to concerns over the duplication of their innovations and the need for more protection for their intellectual property (Makam, 2023). Weak intellectual property protection hampers innovation and drives potential international investors and businesses away from the Indonesian market.
Besides, there is a significant barrier to innovation in Indonesia due to the regulatory requirements—endeavors at R&D need to be improved by the country’s broad administrative system and regulatory formality. The time, cash, and energy it takes to follow these guidelines are significant. This could deter ventures and new companies from putting resources into R&D. Particularly for fresher organizations and those on a limited spending plan, the managerial weights of consistency can be an issue. It is becoming progressively challenging for organizations to seek after and convey advancement thoughts and innovation because of the administrative limitations smothering their turn of events.
3.3 Government Initiatives and Challenges
Indonesia’s aggressive target for its monetary development plan from 2020-2024 (OECD, 2021) exhibits the public authority’s commitment to working on the nation’s imaginative and innovative limits. This drawn-out plan spreads out various drives that the public administration will take to energize advancement, and Research and development inside the country. The primary striking element of this approach is its drawn-out objective to raise the use of innovative work to 1.2% of the Gross domestic product by 2024. The public authority’s obligation to empower advancement across all monetary areas is reflected in this gigantic expansion in speculation. To support Research, mechanical improvement, and the formation of novel arrangements, Indonesia intends to build its spending on Research and development.
In addition, the government’s efforts rely heavily on R&D tax incentives (OECD, 2020). These tax breaks are meant to encourage companies to put money into Research and development. Some of the monetary difficulties of Research and development are intended to be alleviated by government financial benefits and alleviation offered through tax incentives (OECD, 2020). It also entices new businesses to shop in Indonesia and contribute to its growing innovation sector. Indonesia’s government also acknowledges tech firms’ critical function in promoting creative activity. Government-supported initiatives that give money, training, and assets to innovative business people can drive enterprising advancement and development. Because of this guide, creative business visionaries will want to sell their resources and administrations to the public, enhancing the development of the biological system as a whole.
Furthermore, Indonesia has begun to modify policies that foster innovation and intellectual property (IP) protection after realizing the importance of such an environment (Indra & Santiago, 2022). The key goals of these changes are to decrease administrative formality and make systems simpler to follow. The public authority trusts that working on organizational methodology and eliminating obstacles will energize innovative work and encourage an environment helpful for development. Albeit these endeavors are empowering, the pace of progress in Indonesia’s growth and Research and development has been slow. Inertia in the bureaucracy and the need for systemic improvements have been obstacles that have slowed progress. In order to successfully overcome these obstacles and realize the plan’s lofty economic growth objectives, government agencies, corporations, and other stakeholders will need to work together in concert over the long term.
4.0 Conclusion and Recommendation
Despite some restrictive measures and a somewhat underdeveloped innovation environment, Indonesia emerges as a viable market due to its large size and high development potential. Based on our Research into the state of trade protectionism in Indonesia and the state of innovation in that country, we have some suggestions for our customer who is thinking about breaking into or expanding their presence in the Indonesian market.
Embrace Export-Oriented Foreign Direct Investment (FDI): We advise the client to pursue export-oriented FDI in Indonesia because of the country’s liberal trade rules, especially in less protected industries like consumer products manufacturing. The customer can now take advantage of Indonesia’s sizable consumer market and rising middle class while avoiding many trade restrictions.
Leverage ASEAN Component Sourcing: The client might save money and time by looking for parts and supplies in the Association of Southeast Asian Nations (ASEAN). As things are, preferential tariffs among ASEAN member states can provide businesses a leg up, making regional production of goods for the Indonesian market a realistic option.
Long-Term Investment in R&D and Innovation: Despite Indonesia’s current deficiencies in innovation and R&D, the nation presents a promising long-haul venture potential for the client. It is suggested that the client set up R&D and advancement focuses in Indonesia because of the country’s ever-evolving regulation concerning the assurance of protected innovation. This proactive strategy will allow the client to gain a leg up on the competition by being the first to market with cutting-edge offerings.
Strategic Partnerships and Collaboration: Working with regional businesses, academic institutions, and tech startups can increase exposure to new ideas and provide easier access to local knowledge. The client can speed up their time to market and improve their grasp of the Indonesian business climate by forming strategic connections.
Continuous Monitoring and Adaptation: The client must constantly assess the market and adjust to keep a competitive edge. Keeping an eye on the changing landscape of trade protectionism and innovation in Indonesia and altering business practices accordingly is essential. To succeed in the dynamic Indonesian market, maintaining a high level of knowledge and flexibility is crucial.
Compliance and Regulatory Awareness: Keeping up with Indonesia’s ever-changing regulatory landscape makes it all the more important to follow all applicable rules and regulations. You should hire legal and regulatory specialists to help you negotiate potential complications and gain a complete understanding of the regulatory landscape.
Reference
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