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Indonesia

Week 6

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Current economic position Monetary crisis in 1997 Indonesian economy suffered from 13.1% GDP

contraction Inflation rate of 77% in 1998. Since then Indonesian economy remains growing

albeit slowly Pre-crisis converted from an economically backward

and poor country in 1970's To medium-income level country of more than US$

1,200 per capita in early 1990's Annual average GDP growth rate of more than 7% in

25 years.

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Current economic position As mid-January 2004 The Indonesian economy will remain stable Rupiah`s exchange and inflation rates staying at steady

levels The country to continue to have sufficient foreign

exchange reserves Bank Indonesia predicts the country`s macro-economic

stability will create a climate good enough for the economy to grow at a rate of four to five percent in 2004.

Stimuli for economic growth will come not only from increased exports and investment but also from private consumption which is expected to grow at a rate of 4.2 percent to 5.2 percent

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Culturally diverse

Population of almost 200 million people on 13,667 islands

Only 35% of the population live in urban areas

Over 300 distinct cultures residing within its borders

Islamic 85% Christian 10% Others 5%

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HofstedeCharacteristics of work context

Relationship between employer & employees is moral rather than calculative

Implies mutual obligations of protection from employer (irrespective of performance)

Loyalty towards employer from employee Employees have strong obligations towards relatives Relationships take precedence over tasks Strong need for harmony and preserving face Paternalistic Acceptance of status differences Reluctance to plan ahead

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Engines of Economic growth pre-crisis

Study (2003) based on unpublished Statistical Data The contribution of SMEs to total manufacturing value added

remained relatively small Contribution to the Indonesian economy in terms of employment

generation was significant SMEs can coexist with LEs (large-scale enterprises) By producing a unit of output with less capital but more labour

than LEs Labour productivity in SMEs and LEs increased at a similar rate

during the period 86-96 Increase in labour productivity of SMEs in the machinery industry

was faster than in other main product sectors. SMEs in the machinery industry also increased their TFP

markedly, compared with both SMEs in other sectors and LEs in the same sector.

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Islamic Banking Indonesia is primarily a Muslim country and much of its

business culture cannot be separated from the religious background.

Islamic Banking

• Reject the use of interest as a reward or charge• Interest is conceived as usury and is unjust in the eyes of Allah• Use profit sharing approach to both debtors and creditors• Western banks cannot be separated from any product bearing

interest• Islamic banks cannot accept any product which bears interest

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How can Islamic banks function?

Types of products offered Wad’iah Agreement between one person who owns goods (eg

money) and another (eg a bank) to whom the goods are entrusted.

Any benefit from the goods belongs to the bank. But the owner can benefit from a pre-arranged non-

withdrawl bonus. This is not interest, it is a pre-negotiated

arrangement.

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How can Islamic banks function?

Types of products offered Murabahah (savings and deposit) An arrangement between an owner of

capital (eg a bank) and an entrepreneur. Bank provides capital for a project. Entrepreneur is responsible for the

management of the project. Any profit is divided into pre-arranged

portions

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How can Islamic banks function?

Types of products offered Qardhu ul-hasan A credit facility for those in financial difficulty Especially as a result of health care, weddings or

education. The borrower only has to pay back the principal No interest is charged There is a pre-arranged administration charge Based on merit of the project and not current market

value of money

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Is there an Indonesian style of management?

Remember Hofstede’s analysis Background to Indonesian management development Largely Dutch based After overthrown of imperial power in 1949 Lack of suitably trained managers Independence in 1957 Inflow of foreign investment Development of government instituted management

training Universities generally Dutch/UK principles Growth of power of local Chinese entrepreneurs

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Unity in Diversity Javanese style – politically dominant Leaders should demonstrate

• Musyawarah (Mutual deliberation)• Mufakat (common unanimous decision)

Should seek consensus guided by social harmony

Power is never explicit Only a weak leader displays force or

coercion Important role of halus (calm serenity)

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Typical SME management characteristics

Manager usually owner No long term strategy Important decisions made by manager/owner Employees and middle management seek approval

for almost any decision from the boss “Father-figure” leadership role (Bapak) Often family are in middle management positions This style of management can put off foreign

investors

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International influence FDI cannot be separated from management

development Western companies hire local employees and

managers but apply western management techniques Japanese multinationals do not hire locals but form

JVs Management style influential Korean Chaebols are big investors Korean and Japanese management style is similar to

Indonesian Based on deference to authority and trust

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SOE sector Still many SOEs Mostly former Dutch companies which were nationalised Recent attempts at reform Privatising non-profitable SOEs Management is limited – restricted authority

Rise of conglomerates (konglomerat) Driving force behind Indonesian economic development Mainly Chinese owned Of top 25 only 5 owned by ethnic Indonesians Adopting new management techniques Reliance on informal relationships between owners and

associates

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Downside of peace and harmony

Desire not to deliver bad news The philosophy of asal bapak senang

(keep father happy) Subordinates do not wish to inform

seniors of bad news

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The (sad) case of Bank Duta in 1989

Manager of dealing room found $US20 million loss in FX trading

Didn’t say anything Two days later $US70 million loss President-director only told before scrutiny

of year-end reports He did not inform the board Told dealing room manager to keep quiet Subsequent loss was $US419 million

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Indonesian Corporate Culture Key attributes of the Indonesian business person Assertiveness Conceal negative feelings Play down positive feelings Are typically non-assertive Yes means Yes (or No) Believe to say No invites conflict Therefore Indonesians will say yes when they mean no. How do you tell what they mean………. Understatement Indonesians will not give their opinion unless invited to do

so Deference

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Indonesian Corporate Culture Analytical thinking Education system encourages learning by rote Underdevelopment of analytical thinking Lack of individualism Emphasis on communalism Leadership Every leader should be a good example to their subordinates trough their

positive attitudes, measured, wise words and exemplary behaviour Every leader should be disciplined, independent and creative in their

relationship with employees That every leader should be known by their achievements and their sense

of responsibility towards their employees Initiative Lack of general initiative Part of paternalistic approach to corporate culture

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Old and New management style Traditional “generalised” type of Indonesian business person Limited knowledge and understanding of foreign cultures Demonstrate domestic-oriented thinking Great pride in Indonesian culture Rigid and conservative Many have received training at home or abroad Do not have good foreign language skills Require intermediary to communicate with foreigners

New breed “modern” types Well-educated especially abroad Able to think globally Understand foreign cultures and can speak English Are proud of Indonesian culture but aware of political and economic

shortcomings

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Post-crisis recovery Debt-ridden corporations and failure of governance

have affected investor confidence Existing risks New laws and regulations especially the ‘regional autonomy’ new consumer and labour laws are expected to cause new extra costs for company

operations. In the banking and financial sectors IBRA (Indonesian Bank Restructuring Agency) is still

far behind the target milestones.

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Post-crisis recovery Implementation of Code of Corporate

Governance• Indonesian Code of Good Corporate Governance

issued May 2000 by NCCG (National Committee of Corporate Governance)

• Ministerial Decree of SoEs Based on 4 essential principles of

corporate governance: • Transparency• Independence or Fairness• Accountability• Responsibility

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Risk & Audit Company is expected to disclose material

foreseeable risk factors, including management assessment of the business climate and risk factors

Mandatory establishment of Audit Committee suggested by

Jakarta Stock Exchange Ministerial Decree for Indonesian SoEs Three principal domains of role and responsibility of

the Audit Committee:• Company’s disclosure, especially those related to

Company’s financial disclosure• Company’s Internal Control Practices• Company’s Corporate Governance Practices

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Risk analysis Company risk is grouped into two categories: Financial Risk and Non Financial Risk. Financial Risk consists of four sub-risks: Market Risk, the risk of financial loss resulting from a change in

the value of tradable assets. Credit Risk, the risk of financial loss resulting from a default of

the counterpart. Operational Risk, the risk of financial loss resulting from

operational failure. Reputation Risk, the risk of financial loss resulting from the loss

of business attributable to a decrease in the institution’s reputation.

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Risk analysis Non-Financial Risk is viewed from two

perspectives: Micro perspective; the risk resulting from

uncertainty due to the internal elements of institution such as: people, process,

event, and system and technology. Macro perspective; the risk resulting from

uncertainty due to external factors such as: Government, Industry and domestic

business environment, Society, and international business environment.