A GLOBAL / COUNTRY STUDY REPORT on “INDONESIA” Submitted to Gujarat Technological University in PARTIAL FULFILLMENT of the R
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A GLOBAL / COUNTRY STUDY REPORT On “INDONESIA” Submitted to Gujarat Technological University IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION S.R. LUTHRA INSTITUTE OF MANAGEMENT (Inst. Code: 750) MBA PROGRAMME Affiliated to Gujarat Technological University, Ahmedabad May 2013 1 Table of Contents Sr.No Particulars Page No. PART-I 1 International Trade & Trade Opportunities 2 2 Sectoral Composition & Growing Industries 11 3 Financial, Capital & Money Markets 22 4 History, Culture & Society 36 5 Manufacturing 47 6 IT, Services & Infrasructure 55 7 Geography, Topology & Natural Resources 64 8 Agriculture & Processed Foods Industry 73 9 Political & Economic Environment & Legal 80 Aspects of International Trade PART-II 1 Chemicals 91 2 Pharmacuticals 98 3 Textiles 109 4 Machinery and Equipment 128 5 Processed Food 137 6 Agricuitures 145 7 Automobiles 159 8 Petrolium 167 9 Metals 173 2 PART-I 1- International Trade & Trade Opportunities This report is designed to assist the Indian business community in intensifying bilateral trade, economic and investment relations with Indonesia. It provides basic information on Indonesia, the Indonesian economy, the profile of Indonesia’s foreign trade and major items traded between India and Indonesia. It also contains information for those intending to visit Indonesia or planning to set up business operations here through a representative office. Information related to investment is also included, together with contact details of Indonesian business entities. We hope this project will prove useful to Indian business. The Embassy of India will be happy to assist business endeavors to improve trade and investment between India and Indonesia in every way possible. Cooperation can be enhanced between India and Indonesia by investing in sectors such as energy, mining including coal, oil and natural gas both upstream and downstream, power generation, nonconventional energy, plantation, infrastructure such as toll roads, ports, railways, telecommunications and healthcare facilities. Investments can also flow in service sector such as consultancy (both legal and engineering), IT, telecommunication and tourism. Some of the Indian companies, especially in oil and natural gas and infrastructure have evinced interest in Indonesia. However, their efforts have been episodic and unfocussed. Indonesia has large untapped potential in natural resources and is a maritime neighbor of India with a strategic location. This should motivate Indian players to be more focused on Indonesia and make concerted efforts to work towards better economic partnerships for mutual interest. Boosting investment and upgrading productivity are the main current challenges for Indonesia’s economy in order to meet global challenges and reducing poverty and unemployment. 3 Foreign direct investment has also been an important element of Indonesia’s economic development process. Even though the share FDI in total GDP is relative low (check the number), FDI plays important roles both in boosting the overall productivity and export as well. However, the current trend shows that Indonesia becomes less attractive as the destination of multinational corporations. As in many other countries, Indonesia has been offered special tax incentives to promote investment. These incentives include, for example, tax holidays for new firms, tax credit for new investments, exemptions from import duties particularly capital good and also providing spesial zones for exporting companies. Proponents of such incentives argue that they promote investment and jobs, while opponents challenge that they are not effective and redundant. They have high revenue costs, distort investment, and facilitate corruption, making the tax system complicated and non-transparent. The debates over the effectiveness of tax incentives are always lively in Indonesia. This is particularly true currently since Indonesia is in the process of reforming the (already liberal) investment law together with tax reforms as part of institutional reform to improve investment climate in Indonesia. Given the growing importance of industrial competitiveness in increasing competitive global marketplace and the potential of the relationship between FDI and productivity upgrading and export promotion, this paper aims to explore the effectiveness of tax incentives policy in attracting FDI (back) to Indonesia as argued by the proponent of tax incentives. This paper starts with exploring the rationale behind providing tax incentives for promoting FDI and empirical evidences across countries. In the next section, I will briefly discuss about the recent trend of FDI in Indonesia. The discussion on the impact of FDI in promoting investment and productivity will be reviewed in section IV. Section V examine the Indonesia’s experiences with tax holiday regimes in 1970s and the next sequence of new modified tax incentive regime starting in 1996 up to now. Finally, in the part of this paper, we will propose better various ways to promote FDI in Indonesia. The Government’s reform program, including measures addressing corporate governance and the legal system, is changing the business culture. The Indonesian market rewards Australian businesses that take time to develop strong personal relationships and community ties. 4 Managing a business in Indonesia requires a sound understanding of the culture’s influence on hiring, training and managing staff Navigating Indonesia’s legal and regulatory system is best done with the aid of a notary; consulting a notary when setting up a company, obtaining approval for foreign investment and drafting a contract is strongly advised. The archeological evidence on the Indonesian kingdoms of the 5th century also points to the existence of trade relations between India and Indonesia since a long time. These trade relations influenced Indonesian native cultures, too. The impact of Indian culture is clearly visible in architecture, philosophy of Life, Dharma and traditions in various parts of Indonesia but, above all, in the languages of this country. Despite having 90% of Muslim population, Mahabharata and Ramayana are two epics which drive the way of life of Indonesia. Javanese, the original language of Java is 60% Sanskrit. The national language, Bahasa Indonesia, contains at least 3000 Sanskrit words in its vocabulary. Trade relations between India and Indonesia go back to ancient times, contributing to the historical and civilization affinities between the two countries. In the modern era, trade relations were formalized under a Trade Agreement signed in June, 1978 committing both countries to take all appropriate measures to facilitate, strengthen and diversify bilateral trade. Periodic discussions have taken place at the Ministerial and official levels to strengthen economic and commercial ties within the framework of this agreement. JBC/business level meetings have also been convened periodically, particularly in conjunction with high level visits. However, no forum for regular talks over a range of cooperative issues with Indonesia existed during the Soeharto years and only a bilateral Agreement on Avoidance of Double Taxation between the two countries was concluded in January, 1986. Indonesian investment India is quite low and it ranks 36th in FDI inflows to India. But now days Indonesian companies have started bidding for enegry related projects and infrastructure in India. Indian companies have also been involved in supplying equipment to and undertaking projects in Indonesia. This include STUP, TCIL, IRCON, WAPCOS, Punj Lloyd Consultancy India Ltd., and recently RITES Ltd. NIIT and APTECH, LCC Infotech, Tech Mahindra have established their IT Education Centers as well. 5 BHEL get power power project contracts in the power generation sector. TCS has also set up a respective office in Indonesia, and TCS has also been working on various projects with the local banks and some in collaboration with Microsoft and other companies. Indonesian investment India is quite low and it ranks 36th in FDI inflows to India. But now days Indonesian companies have started bidding for enegry related projects and infrastructure in India. During the visit of President SBY to India in 2005, KADIN decided to have a ‘India Committee’ which would be a specialized body for promoting bilateral economic relations between India and Indonesia and work to enhance interaction between the Chambers of Commerce and Industry of the two countries and promote individual business interests of the private sector. KADIN signed an MoU with FICCI in November 2005 to achieve this objective. KADIN India Committee was formally launched in November 2006 with Mr. S.P. Lohia as its Chairman. The Committee has three member Advisory Board and over 40 members including the Executive Office bearers. There is also an association of corporate entities which mainly consists of Indian business houses and enterprises of Indians and Indonesian Indians called “Economic Association of Indonesia and India (ECAII)”. It was established in 1977 with a view to promote development of economic relations between Indonesia and India The prevailing implementing regulations in the customs sector remain in force insofar as they are not contrary to and/or not regulated in the new implementing regulations based on the Law Customs matters that remained unsettled at the time the Law came into force shall be settled based on the provisions of customs and excise regulations that are the least