Indonesia

1
Indonesia

• Week 6

2
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.

3
Current economic position

• As mid-January 2004
• The Indonesian economy will remain stable
• Rupiahs exchange and inflation rates staying at
  steady levels
• The country to continue to have sufficient
  foreign exchange reserves
• Bank Indonesia predicts the countrys
  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

4
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

5
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

6
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• Study (2003) based on unpublished Statistical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.

7
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

8
How can Islamic banks function?

• Types of products offered
• Wadiah
• 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.

9
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

10
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

11
Is there an Indonesian style of management?

• Remember Hofstedes 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

12
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)

13
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

14
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

15
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

16
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

17
The (sad) case of Bank Duta in 1989

• Manager of dealing room found US20 million loss
  in FX trading
• Didnt 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

18
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

19
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

20
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

21
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.

22
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

23
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
• Companys disclosure, especially those related to
  Companys financial disclosure
• Companys Internal Control Practices
• Companys Corporate Governance Practices

24
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 institutions reputation.

25
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.