International Business Report - Indonesia

Introduction

Indonesia is a diversified country, with great economical potential. This country is one of the emerging economies in the world, with a large pool of natural resources for Asia and the rest of the world. Being a promising economy for investors, Indonesia has seen a fair share of foreign investments as well as technological exchanges. With a wide range of industries profiteering from these investment boosts, let us take a closer look, which brings us to our main focus, into the shoe making industry, and analyze the attractiveness of both the country and this particular industry.

Nike, Adidas, Reebok, these are sporting brands on top of the list when consumers want to purchase a pair of sports shoes. Shoes have been a necessity for us ever since the need to protect our feet arose. Furthermore, a sportsman would need a set of shoes that would suit his or her sporting requirement. Through the years, after several technological advancements and testing, the shoes now can even change its settings to suit the terrain the wearer is on. Such great technology would require huge amounts of money to produce, which will ruin the company's vision to earn more profits. To minimize costing, these shoe companies have turned to various developing countries as the labor costs are not as high as their own country's. Armed with only such a simple theory is never enough, thus, we have used the PEST (Political, Economical, Social-Cultural, Technological) Model as well as the Michael Porter's Model to help us in our analysis.

Findings & Analysis

Political

Stability of Government

Indonesia has seen a fair share of riots and corruption over the past decades. The instability of the government reflects upon the country and in turn affects incoming investments. With another change in government in the recent years, it places a burden on investors as the frequent changes in laws make the business environment unpredictable and hence unattractive for foreign investors.

Terrorism has been the latest concern for Indonesian government ever since the Bali bombings. With the subsequent arrests and co-operation with other South East Asian, the US and Australian security services, as well as new anti-terrorism legislation and better intelligence, Indonesia is set to curb the terrorism threat.

Indonesia's International Relations

The Indonesian government is keen to have full military relations restored with the US, partly so as to be able to purchase US military equipment and parts. The US president also appears keen for relations to be restored, as Indonesia would be an important strategic ally given its location in South-east Asia and the fact that it is home to the largest Muslim population in the world but the restoration of full relations remains controversial and was dependent on the Indonesian authorities.

The tsunami that hit Indonesia on 26th December 2004 had brought tides of devastation to the province of Aceh. Relations with Australia have been improving steadily, partly owing to Australia's proactive response to the tsunami disaster. Australia was also quick to respond to the earthquake that hit the island of Nias, off the western coast of Sumatra, on March 28th, sending medical assistance and pledging US$1m in financial aid. During Mr Yudhoyono's (Indonesia's sixth President ) visit, he discussed a possible free-trade agreement with the Australian Prime Minister, John Howard, and talked about a comprehensive security pact covering counter-terrorism, people-smuggling, money-laundering and defense.

In early 2005 there was a marked deterioration in relations with neighbouring Malaysia over a number of issues, including migrant workers and contested territorial waters. A dispute over the Ambalat block began in February 2005, when Malaysia's state-owned oil company, Petronas, awarded production-sharing contracts to a Dutch-based energy company, Royal Dutch/Shell, in the East Ambalat offshore oilfield. Indonesia quickly claimed that the Malaysians had no right to award contracts when the block was, in fact, in Indonesia's economic zone. Tensions escalated as Indonesia sent fighter aircraft and warships into the disputed waters and anti-Malaysian protests were held in Jakarta and other major cities. Both governments subsequently moved to smooth relations, but the waters remain contested, and the issue could flare up again at any time.

Participation in International/Regional Organizations

A more pragmatic and low-key approach has been adopted with the goal of emphasizing the stability in Indonesia's international relations, thereby allowing the country to concentrate on domestic economic development. Despite theoretically adhering to the principle of non-alignment, Indonesia drew increasingly close to the West.

Until the mid-1980s Indonesia was content to focus its foreign policy within the regional context of the Association of South-East Asian Nations (ASEAN), and to permit its wider foreign policy initiatives to be taken under the auspices of that organization. Having made much progress towards its primary aim of domestic economic development, the government began to seek a more prominent international role from the second half of the 1980s. Indonesia chaired the Non-Aligned Movement from 1992 to 1995, and played a leading part in developing the Asia-Pacific Economic Co-operation (APEC) forum, hosting its second annual summit in November 1994. Financial constraints and domestic

instability have forced a period of greater introspection since 1998.

At the second Asia-Africa Conference, heads of state agreed to deepen economic and political links and to co-operate to ensure the equitable sharing of the benefits of globalization. The summit, co-chaired by Mr Yudhoyono and the South African president, Thabo Mbeki, brought together countries which encompass three-quarters of the world's population.

The Legal Environment

Weak investor confidence is mainly a result of the widespread distrust of foreign investment and ownership among the policy elite. There is a lack of compromise between the government, parliament and civil society on the issue of privatization. As a result, important initiatives to improve the investment climate for foreign investors have been delayed. Examples of such initiatives would be, the new investment law, which aims to provide a number of tax exemptions for business, provide the same legal status to domestic and foreign investors, and streamline government procedures on investment issues.

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