Is There a Culture of Entrepreneurship in Indonesia?

The task sounds daunting. However, it is essential, not only to ensure Indonesia’s economic development but also for its sense of socioeconomic justice. However, as Indonesian governments have declared, the society sorely lacks business people.

The sum of entrepreneurs is currently only 1.6 per cent of its total population. In contrast, Singapore has 7 per cent; Malaysia, 6 per cent; Thailand, 5 per cent; and Vietnam, 3 per cent. The demand for more entrepreneurs is not an economic matter but also one of political expediency.

The main actors in Indonesia’s business landscape have long presumed to be the country’s tiny Chinese minority (only one to three per cent of the population). With ethnic, economic, political, cultural and religious factors have often mingled to the detriment of the growth of an indigenous (pribumi) business class.

What has been heartening for the government is that, in the last decade, there has been a more visible, flourishing culture of entrepreneurship amongst the pribumi. Democratic reforms, decentralisation and the deregulation of certain sectors of the economy, facilitated by information technology, have enabled a new generation of entrepreneurs to emerge outside the conventional system of political patronage.

Innovative forms of networking are taking shape within local and national business associations, networking forums and the marketing and business media. Whilst civil servant positions remain sought after because of the social prestige and the security of employment, entrepreneurship and commerce as professions are becoming popular amongst the young.

There is an increasing emphasis on entrepreneurial skills in educational institutions and universities in Indonesia, in particular amongst private institutions. This is occurring in tandem with increased attention being paid to national youth, education and development policies to the promoting of entrepreneurship as a possible solution to skill gaps and the growing number of young people entering the labour market each year.

Indonesia’s fast-growing economy and both its large consumer market and significant natural resources create strong opportunities for home-grown entrepreneurs and there are now encouraging signs of progress towards creating an environment more conducive to unleashing Indonesia’s animal spirits.

Yet, low levels of research and development (R&D) spending – that average only 0.1% of GDP – the lowest in the G-20 – suggests that Indonesia lacks a dynamic innovation scene. The reality, however, is that the majority of the countries entrepreneurs operate in sectors such as retail, food and beverage and hospitality to fishing, agriculture and mining. With low barriers-to-entry and not requiring high technological innovation or capital expenditure.

The Indonesian economy is, in fact, reliant upon these entrepreneurial firms. Which accounts for some 57% percent of GDP as of the latest 2015 figures. Also given the obvious logistical challenges faced across the archipelago’s thousands of island, there is an intrinsic difficulty for entrepreneurs in scaling national enterprises, which only adds to the dominance of entrepreneurial activity in the economy.

The Indonesian education system has specific challenges stymying its ability to create more mature entrepreneurial ventures. Its performance impacted by low enrolment rates secondary and tertiary education, yet in absolute terms, the country still has a vast number of graduates entering the labour market each year and because most entrepreneurs operate in low and mid-tech sectors.

Underpinning Indonesia’s expected future growth path for entrepreneurial opportunity is that the country has one of the vastest and growing emerging middle-class demographics anywhere on the globe which offers tantalising opportunities for entrepreneurs. However, to avoid the onerousness of regulations required in setting up and managing a company in Indonesia, many businesses opt to remain in the informal sector. Although recent administrations have been making great strides in combatting red tape and continues reforms could unleash a wave of entrepreneurship.

Some fear that the influence of politicians with vested interests appears to be growing, and taken at an aggregate level, Indonesia’s regulatory environment appears to mark the country out as a below average performer when ranked alongside rapid growth G-20 economies.

But this overlooks some of the major advances that have taken place over the preceding decade. The time taken to start a business, to cite one example has fallen, from 168 days in 2005 to around 40 days in 2017, access to venture capital has exploded and there has been a concerted and far-reaching clampdown on corruption.  

All part of a broader shift in the state’s approach to business creation since the end of the Suharto era, when the regulatory environment and financial system made it often challenging for new entrepreneurial market entrants to compete.

However, the reform process is far from accomplished, and there have been disquieting signs it has stalled in regulatory areas such as tax reform.

Yet signs of the government support for entrepreneurialism are now manifold. Such as the creation of the new entrepreneurs’ program with one aim of the central bank now mandated to encourage entrepreneurship that selects candidates to receive entrepreneurial training and run through several branches of the bank and helping to provide seed capital and mentoring during the startup process.

The Kredit Usaha Rakyat program (KUR) whereby the government guarantees 70% of loans made under the program with the central bank bearing the remaining 30% of the risk for applications up to $500 USD and with no requirement for physical collateral or lower collateral requirements for than would be expected in regular commercial loans.

The government expects this lending program to reach $2.9 USD billion this year. And the launch of a network of 445 local government “one-stop shops” should help to merge and simplify the process of applying for business permits and licences.

Both of which are seen as positive developments in a country where local capital markets lack both depth and liquidity, with a ratio of private sector credit to GDP one of the lowest in the G-20. Whilst the scale of local merger & acquisition deals (M&A) is also low.

Although despite this there are positive indications there have been some strengthening conditions for access to finance in the country and ranging from public financing, micro-financing, to private equity, venture capital and bank loans and other sources of seed funding. Yet such improvements are starting from a low base with plenty of room for continued gains.

Yet, it is important to consider that that the rising use of non bank funding reflects a shortcoming in the formal banking sector and it is bank loans that that could be the number one funding instrument that could help unlock and improve the long-term growth of entrepreneurialism in the country.

The relative lack of entrepreneurship culture in Indonesia is therefore due to its poor performance of innovation rather than any cultural inadequacy of entrepreneurial vitality. Which reflects the country’s current early stage of economic development.

Where productivity gains are made via the adoption of technologies and production methods from more mature economies. Rather than transmitting via home-grown innovation. So as the country continues to develop and move up the value chain this will need to change.

So despite the R&D-related weakness, Indonesia would seem to be very supportive of entrepreneurship. A 2014 consumer survey carried out by the British Broadcasting Corporation (BBC) found that based on people’s attitudes to setting up their own business, rated Indonesia number one country for entrepreneurship.

The simple truth being that for many poorer Indonesia’s entrepreneurship is often the most realistic alternative to formal employment. Given that a lack of educational qualifications often acts as a barrier to entry to the jobs market. Those entrepreneurs are also often held in high regard in local Indonesian society.

However, one key factor that inhibits entrepreneurship remains the high cost of insolvency with the financial implications of insolvency acting as a stark deterrence to risk taking yet there is a strong recognition amongst Indonesians that a business failure is a learning opportunity which is once more a clear cultural strength in the country’s enterprise culture.

Further sustained by Indonesia’s low-tax environment, that provides a major boost to the business environment and to entrepreneurs overall.

The Government has said Indonesia needs at least four million more entrepreneurs (2% of the population) to support the country’s economic development. On Indonesia’s current trajectory, it is likely that they will comfortably exceed that target.