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Essay: Indonesian economy factors

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Section 1

Cultural Differences: As the world has become globalised, countries are opening up their economies to increase trade and decreasing trade barriers to set up business in another country. So before setting business in another country it is essential for the managers to understand the cultures of host country because every country has different culture. As the Australia and New Zealand are going to do business with Indonesia. As Indonesia is the part of the Southern Asia cultural cluster and Australia and New Zealand are the part of the Anglo cultural clusters (Deresky 2011). There is lot of cultural differences between these. So before doing business foreign investors should check the cultural differences.

Cultural Dimensions by Geert Hofstede: Different sources has identified different cultural dimensions. (Phatak, Bhagat and Kashlak 2009) has identified 5 cultural dimensions that are Power Distance, Individualism, Masculinity, Uncertainty Avoidance, Long Term Orientation. But in the website resources Geert Hofstede has added six dimension that is indulgence. For the study purposes, six dimensions are discussed here.

• Power Distance: It means dealing with inequalities which occurs within cultures. It sees the superiors and subordinate’s relationship and what are power distances between them. As we see in the case, Indonesia is a highly power distance country where business relationships are paternal and maternal, subordinates think that superiors should take care of their interests as parents. They are too much dependent on the superiors and there is lot of unequal rights to both. Communication is inappropriate. While in Australia and New Zealand, the power distance is low that means they believe that everyone in the business know why they are in the organisations, what the organisations expect from them and top management feels that employees should communicate their problems to them and gain equal rewards for their work.

• Individualism: It describes the norms, cultures to focus on the relationship between individuals and groups. It sees whether people works individually and as a part of group. Indonesia has low individualism means that employees work as a group in the workplace, they give more importance to family, friends etc. They generally try to select that persons who are their favoured. Where as in western countries like Australia and New Zealand the people work for themselves and they keep their personal and professional life separate and fulfil their own contracts, needs.

• Masculinity: It means to see whether emphasis is on achievement and earning. Indonesia scores low on the masculinity as compared to Australia and New Zealand that means Asian people that they prefer quality of life and not run after material things like money while in western countries during work they give high priority to the work if they have set some deadlines they tend to achieve it on the specific time.

• Uncertainty Avoidance: It means to measure how people reacts to the unseen situations. Indonesia scores less on the uncertainty avoidance as compared to Australia and New Zealand. Indonesian believes that uncertainty is common in business and they do not take stress. They believe that managers should not use bad language for the staff they should overcome difficult situations with themselves and try to keep smiling how angry they are inside. While in western countries concept is opposite, managers become furious if they see unseen situations like targets are not met within deadlines.

• Long term orientation: These organisations generally looks towards achieving long term objectives they are generally future oriented. Indonesian culture is long term oriented, it believes on maintaining relationship and assume that employee will remain within the company for long period, while in western countries short term orientation culture is adopted. They feel that time is precious.

• Indulgence: It means how people control their own desires and children are socialised towards society. Indonesian have low indulgence as compared to Australia and New Zealand that means Indonesian people do not prefer leisure time and have control on their desires.

Section 2

Indonesia Archipalego: Indonesian archipelago is unique in terms of Asia because it has many islands and having more than 245 million population and majority of the population here is Muslim. Its culture is ethnically diverse and increasingly have urbanised population (Naafs 2013).

• Economic Structure: Indonesia Economy 2011 defines that every country has different economic systems. Initially Indonesia adopted liberal economic system in which communities perform economic activities. Thereafter socialist economic system came into existence, but in the new era socialist economic system again transformed into democracy economic system. This system continued until reformation and after reformation economic system based on social economy was adopted by government and still prevails in the Indonesia. Indonesian economy has seen very up and downs in the last few decades and it mostly depends upon the agriculture, manufacturing and service sectors. Agriculture is the primary sector, manufacturing comes on the secondary level and service sector is on the tertiary level (Indonesia economic structure 2010)

• Religion: Indonesia investments defines that six religions are recognised officially by the Indonesian government that are Muslims (87.2%), protestant (16.5%), catholic (6.9%), Hindu (4%), Buddhist (1.7%) and Confucian (0.7%). This data is collected from population census 2010.Every citizen is required by the law to adopt one of the religion because it becomes a mark of identification in passports and identification cards. About 207.2 million Muslims and 23 million Christians live in the Indonesia. So Islam is the first largest religion of the Indonesia and Christianity comes on the number second. Indonesian Christianity further classified into protestant and catholic and found in the Easter parts of it. Hinduism, Buddhist and Confucian also comes in the history of the Indonesia.

• Social Institutions: Sharia (Islamic law) prevails in the Indonesia and it governs the family relations. Every country establishes a limit for marriage age and in Indonesia archaeology it is 16 years for women and 19 years for boy. Forced marriages are forbidden by Islamic law but in certain parts of Indonesia, parents force their children to get married. Registration of marriage is compulsory. If the marriage is not registered then it is crime under law. If a person’s wife is unable to give birth to child, physically disabled he is entitled to have multiple wives. Islamic law gives the privilege to women to initiate divorce and after divorce man can immediately remarried but to women they have to wait for 40 days, law also impose some restrictions on the movement of women and have reserved some quotas for enhancing women participation in politics (OECD Development centre).

• Level of Industralisation: Indonesia which is ranked fourth in the world for higher population has got independence in the post 1945. Through to the 1960 Modern Industrialisation process had started. Indonesia has left behind other Asian neighbours. In this period industry has earned about third quarter of half as per capita income. In 1960-67 import was the main reason for rapid industrialisation. Since 1970 diversified industrial structure came into existence by shifting dominance of simple consumer goods and resource processing. From the mid 1980 industries started exports to enhance its growth. Major exports driver in that period were textiles, garments and footwear. Due to the major state investments a substantial growth was recorded in the heavy industries. But in early 1990, due to the higher competition in the markets, slower growth rate was recorded in the industries. In 1997 Indonesia faced crisis and between 1998 to 2004 Indonesia has elected five presidents and major modifications was recorded in the political structure. Indonesia recovered soon from the crisis. Now Indonesia has lots of jobs in service sector and technological advancements and deregulations has become the reasons for fastest growth occurrence (Aswicahyono, Hill & Narjoko 2011).

Characterstics of Indonesia Workplace: In Indonesian workplace relationship between superiors and employees are of paternal and maternal nature. Employees believe on their managers and superiors so much that they think whatever they do will be good. They are too much satisfied with the working conditions, co-workers, supervisors and superiors. They hesitate to communicate bad news to the superiors, so the communication is very less in the Indonesia workplace (Wulandari, Pia & John 2011). But in the western workplace, relationship and work is kept aside, targets are communicated to the employees. Employers expect that employees should share their problems with them and also come to the employers for further improvements in the business. Communication should be open from both sides. Due to large number of industries in Indonesia, cases of accidents at the workplace also has increased due to the wrong level of the machines, now Indonesian firms and Governments are arranging the machines according to the male and female posture levels. They are doing so for the well-being, health and comfort of the employees (Sutalaksana & Widyanti 2016). Indonesia has ranked fourth in the consumption of the cigarettes and as it has bad effects on the health of the people, So the WHO Framework Convention on Tobacco Control has taken initiatives for the safeguard of the people by banning this in the workplace and public places and in transportation. This is done by passing various laws.(Byron et al. 2013)
Social Stratification: In nineteen centuries, people was divided into various status system on the basis of races in Java. But in twentieth century, due to the economic changes and upgrading of western education the status pattern largely altered. Now discarding racial distinctions, education created the new status system like class of intellectual and non-intellectuals. These new classes challenged the European superior descents and also threatened the nobility status of Indonesian group. People are also stratified on the basis of religion like Islam, Arab Saudi and Kafir (White man). In previous years the people born in the Indonesia tried to hide their nationality but now have higher rank than Indonesian European and Indonesian Chinese. In present, people of European and Dutch nationality are not able to get good jobs and compete in Indonesia because of loss of status but some totok European and Americans are able to get good job if they not come in the category of labour market. Whether Peasants come in the large majority of Indonesia but actually merchant, intellectual and non-intellectuals come in the higher status system in the Indonesia (Wertheim 1955). JBR (Jakarta Bandung region) has largest urban population that is about 26.5% of the total population and has new infrastructure due to largest investment by domestic and foreign investors in the industry and service sector (Fireman 2009).

Section 3

Business Opportunities in Indonesia: Due to the slowing economic growth and falling government revenues, now Indonesian government is trying to increase the value of foreign investments for enhancing economic growth and making infrastructure modern according to the needs. To encourage investments, the government is planning to extend tax exemptions and holidays for new sections. The government has plans of $450 billion to build the much needed infrastructure for five years up to 2019. The government has opened up opportunities for foreign investments in new six refineries, 15 airports and in 35000Mv electricity capacity (Chilkoti 2015).

As Indonesia has faced 1997 Asian financial crisis but now has become politically stable. Lots of factors available in the Indonesia like strong consumer needs, steady economic growth etc. are now providing many business opportunities in Health, Agriculture, Financial services, Infrastructure and Telecommunication. Australian Prime Minister Tony during his visit to the Indonesia has said that he is looking various opportunities for trade in investments and by 2025 it will be world’s 10 biggest economy. He also said whether lots of opportunities are available but to face the diverse culture of 600 ethnic races is also a challenge for foreign investors (Global Indonesian Voices, 2013).
Foreign investment and company establishment, 2015 defines that to establish a business in Indonesia is not an easy task. If the foreign company does not want to invest in the local entity and establish an independent identity, he first has to select a agent and distributor or open a representative office in the Indonesia. If the business shows the sign of growing, then foreign investor will apply for a company status. The foreign investor will establish the office according to the line of business and the government will open essential licences, the main disadvantage of opening representative office is that they cannot conduct direct sales and issue bill of lading.

Entry Strategies: The foreign countries can take advantage of various business opportunities by adopting various entry mode strategies. Different writers describe different entry mode strategies. According to Cullen and Parboteeah 2011, entry mode strategies are Exporting, Strategic Alliance and Foreign Direct Investments. (Phatak, Bhagat & Kashlak 2009) defines exporting, licencing, countertrade, contract manufacturing, non-equity strategic alliance, equity based joint venture, wholly owned subsidiaries. While (Meyer, Estrin, Bhaumik & Pen 2009) has described Greenfield, Acquisition, Joint Venture as three entry strategies in the emerging markets. Here I am going to describe three viable strategies:

Three Entry Strategies:

Equity Based Venture: In this strategy, a company can enter into foreign market by holding equity ownership and control of company through foreign direct investment. These type of ventures are useful in that countries where the risk is low, markets are stable. These can be done for various purposes like to obtain raw materials, to make products for export to home country. Equity based ventures are further divided into wholly owned and joint venture (Phatak, Bhagat & Kashlak 2009).

Wholly Owned Subsidiaries: Subsidiaries in which foreign countries has full control and ownership in the host countries are called wholly owned subsidiaries. These are of two types:

Greenfield: Greenfield means set up a new entity in foreign company from scratch by using locally available sources.

Acquistions: It means to capture the existing business running in the foreign country.

Joint Venture: It means to establish a subsidiary in foreign company by two or more companies by sharing resources. It is effective when the amount of capital invested or risk is huge, a single company cannot afford it, markets are unstable and lot of risk is available in the host country. As Indonesia has lots of oil reserves and these requires lots of capital, joint venture is an effective way to enter that market (Meyer, Estrin, Bhaumik & Pen 2009).

Section 4:

Shell Indonesia: Shell Indonesia is a global company established in 1890 having headquarter in Jakarta. But it started its operation in Indonesia in 1884 when a Dutch Man found oil in Sumatra of Indonesia and started drilling by taking permission from Sultan Langkat. Shell Indonesia deals with oil and gas products. It has currently 79 sites in the Indonesia.

Shell operations in Indonesia: Shell plays an important role in lubricant, fuel and bitumen market. To satisfy requirements of mining, cement and electric power generator, it provides lubricant products to marine business. Shell lubricants like shell helix and shell advance are rising considerably in Indonesia. Shell helix is designed for 4 wheeled vehicles and shell advance is for 2 wheeled vehicles.

To provide quality products and services, shell Indonesia has opened up many fast flowing pumps. It also promotes very activities for community and peoples working in it.

Shell Australia: Shell Australia came into existence in 1901 and Perth has its Headquarters.

Shell operations in Australia: It primarily deals with the exploration and production of oil and gas and aviation fuel. Its functions also include sale of liquefied natural gas to the western Australia and liquefied petroleum gas to other markets. Generally, about one thousand flights a day gets fuels from here.

Shell’s Organisational design for its subsidiaries: Shell Indonesia’s organisation structure is divided into three steps: upstream, downstream and project & technology

Upstream: Upstream business includes extraction of crude oil, natural gas, conversion of natural gas to liquids and then sale of these. It also includes production of electricity from wind power.

Units of Upstream Business: There are two organisational sections that are

1 Upstream America: Whole America comes under this section.

2 Upstream International: Whole of the world except America comes under second section.

Downstream: Refined products are manufactured here by converting crude oil. For this shell has established their manufacturing unit to get energy products and marketing unit to sell these products.

Project and Technology: These centres are established across countries to support the upstream and downstream businesses technically. These also provide technological capabilities.

Strategic alliances:

With Indonesia:

1 A plan of opening lubricant centre in Indonesia was initiated by shell global. It will be in the Maruna centre and use 75000 square metre land. Shell global will hold full control over here and lubrications will be imported from shell global. It will not cause any harm to the environment and will protect the society from environmental effects.

2 Shell bitumen will be used for the growth in Indonesia. It is a waterproof material used in construction. To enhance the connection between Indonesian archipelago, shell bitumen will be used to make roads, infrastructure and airports.

3 A gas project will be opened by the government in the java to fulfil the demands of commercial and domestic people. It is a joint venture started between 4 partners that are PT Perlamina, EP Cepu, Mobil Cepu Ltd and local government.

With Australia:

1 Shell has started Pluto LNG Australia in the western part of Australia by doing indirect investment of 13.6%.

2 Shell is the founder of North West Shelf Venture in Australia. It has started it by taking the help of five other partners like BHP Billion Petroleum, BP Development Australia, Chevron Australia, MIMI, Woodside. This venture meets the demand of Australia, Asia Pacific, Global markets by providing oil and gas.
3 Queensland Curlis LNG is a production company which firstly explore natural gas from coal seams then produce LNG from this natural gas. It is maintained by Shell Global.

4 acquisitions of Bragil and Australia oil and gas projects is done by Shell to establish a simple Shell and BGA profitable company.

5 In 2014 Shell global decided that downstream businesses running in Australia will be sold to Vitol.

6 Wheatstone Liquified Natural Gas unit was established in the western Australia and Shell has 6.4% interest in it and 8% equity interest in joint ventures. Shell has sold its share to a Petroleum Exploration Company of Kuwait.

References:

Aswicahyono, H, Hill, H & Norjoko, D, 2011, ‘Indonesian Industralisation’, A Latecomer Adjusting to Crisis, Working Paper No. 53, United Nation University.
Byron, MJ, Suhadi, DR, Hepp, LM, Avila-Tang, E, Jingyan, Y, Asiani, G, Rubaeah, Tamplin, SA, Bam, TS & Cohen, JE 2013, ‘Secondhand tobacco smoke in public venues in three Indonesian cities\’, Medical Journal of Indonesia, vol. 22, no. 4, pp. 232-7.
Central Intelligence Agency, 2016, data retrieved from <https://www.cia.gov/library/publications/resources/the-world-factbook/.
Chilkoti, A, 2015, ‘Indonesia Struggles to boost Foreign Investments’, Financial Times, Sotheby’s International Health.
Cullen, JB & Parboteeah, P, 2011, Multinational management: a strategic approach, 5th edn, Thomson, Australia.
Deresky, H, 2011, International Management: Managing across borders and cultures, 7th edn, New Jersey, Pearson Prentice Hall.
Firman, T 2009, \’The continuity and change in mega-urbanization in Indonesia: A survey of Jakarta–Bandung Region (JBR) development\’, Habitat International, vol. 33, no. 4, pp. 327-39.
Foreign Investment and Company Establishment, Last updated December 17,2015, ALP Consulting, http://www.expat.or.id/business/companyestablishment.html.
Global Indonesian Voices, 2013, Growing business opportunities and foreign investments in Business < http://www.globalindonesianvoices.com/10257/growing-business-opportunities-and-foreign-investments-in-indonesia>.
Hofstede, G, The Hofstede centre, last assessed on 21 March 2016, data retrieved from https://geert-hofstede.com/indonesia.html.
Indonesia economic structure, 2010, retrieved from <http://www.economywatch.com/world_economy/indonesia/structure-of-economy.html>.
Indonesia Economy, 2011, Economic system of Indonesia, data retrieved from <https://mulheanita.wordpress.com/2011/05/26/economic-system-of-indonesia>.
Indonesia Investments, population consensus 2010, data retrieved from http://www.indonesia-investments.com/culture/religion/item69.
Meyer, KE, Estrin, S, Bhaumik, SK, Peng, MW, 2009, ‘Institutions, Resources and Entry Strategies in Emerging Economies’, Strategic Management Journal, Wiley.
Naafs, S, 2013, ‘Youth, Gender and the Workplace Shifting Opportunities and Aspirations in an Indonesian Industrial Town’, The Annals of the American Academy of Political and Social Sciences, Vol. 646, pp. 1233-260.
OECD Development centre, Social institutions and gender index, last assessed on 3 April 2016, < http://www.genderindex.org/country/indonesia>.
Phatak, AV, Bhagat, RS & Kashlak, RJ 2009, International Management, Managing in a Diverse and Dynamic Global Environment, Second Edition, McGraw-Hill Irwin.
Sutalaksana, IZ & Widyanti, A 2016, \’Anthropometry approach in workplace redesign in Indonesian Sundanese roof tile industries\’, International Journal of Industrial Ergonomics, vol. 53, pp. 299-305.
Wertheim, WF,1955, ‘Changes in Indonesia’s Social Stratification’, Pacific Affairs, vol. 28, no. 1, University of British Columbia.
Wulandari, Pia, M & John, B, 2011, ‘The linkage between Trust, Communication openness in the workplace and employee job satisfaction: An Indonesian Case Study’, Employment Relations Record, vol. 11, issue 2.

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