International Joint-Venture in Indonesia

Introduction :
Indonesia is a country that offers lot of business opportunities but also tremendous challenges. Indeed, it can be difficult for a foreign company to establish itself and navigate through the local business climate, this difficulty is reflected in the country’s ranking of 109th out of 189 countries in the World Bank Doing Business Report of 2016. Restrictive legislation, bureaucracy as well as Indonesia’s diverse cultural are several entry barriers for foreign companies seeking investment opportunities. Often, it is necessary to find a local partner to enter the Indonesian market, and to form an international joint-venture can is one of the way to enter the marketplace.
Even though it remains difficult to enter the Indonesian Market, the government started to implement measures to facilitate foreign investments since 2007:
• Making it easier to start a business: Indonesia introduce online procedures to create a business structure
• Reduced regulatory complexity: Indonesia introduced an online system for filling and paying social security contributions.

International Joint Venture in Indonesia :

In Indonesia, it is necessary for any foreigner who want to start a business, including a joint-venture, to conduct his business activity through a foreign investment company, called PMA (Penanaman Modal Asing). The PMA is regulated under the Indonesian Company Law. The contract signed by the two parties of the JV, setting out the respective rights and obligations of both parties is called a JVA (Joint-venture agreement). Concerning management obligations, it is important to underline the role of company director. Indeed, the company director is held personally responsible for losses caused by negligent errors of management.

To put it in a nutshell, it is strongly recommended to spend time to do advance planning and negotiations, including worst case scenarios with the local partners before forming a joint venture.

Steps and timeline to create a Joint-Venture in Indonesia :
1. Approval for the name : 7 days approximately, application is submitted electronically.
2. Registration of the PMA : 2 weeks maximum. 3. Signing of the Deed of Establishment : The execution of the Deed of Establishment in front of a notary public in Indonesia usually takes 3 days. The Deed must be written in the Indonesian language.
4. Certificate of Company Domicile (Surat Keterangan Domisili Perusahaan or “SKDP”) : Takes 5 days.
5. Taxpayer Registration Number (Nomor Pokok Wajib Pajak or “NPWP”) : 5 days. The application for the NPWP is to be submitted to the Tax Office.
6. Opening of the Bank Account : 5 days
7. Approval of the Deed of Establishment : In practice, it can take as long as 1 month.
8. Registration at the Company : 14 days
9. Announcement in the State Gazette of the Republic of Indonesia : It is the last step, takes between 1 and 2 months.

Advantages and drawbacks of forming a joint venture in Indonesia :

Advantages :
- Access to expertise and contracts in Indonesia
- Reduced market and political risk
- Shared knowledge and resources
- Economies of scale
- Overcomes Indonesian government restrictions
- May avoid local tariffs/non-tariffs
- Shared risk of failure
- Less costly than acquisition

Drawbacks :
- Bureaucracy : Indonesian government requires a lot of legal documents before being able to form a JV.
- Cultural differences, especially “familyness” (kekeluargaan) : Important concept in Indonesian cultures, family members form part of the business network. Tendency to hire people from the same family and put them at strategic management positions.
- Layoffs : Hard to fire an employee : Labor regulations states that incompetence is not a legal reason to fire someone.
- Management differences : “Bapak”, means father in Indonesian. Very hierarchical relationships within a company. Indonesians need to show respect to their elders. Can be a problem because employees follow the manager’s instructions to the letter (no more and no less).

Starting an international joint-venture is one of the easiest way to overcome Indonesian bureaucracy, as well as to quickly integrate a marketplace where networks matters. Even though the procedure to form a joint venture is complex and time-consuming, the local government is implementing measures that facilitates foreign investments, such as online registration of business. Indonesia is a land of opportunities in many business areas, but we strongly recommend you to select your potential joint venture partner carefully. Indeed, the management is very different from the French management, and you will need to be prepared for all the possible scenarios.

Some companies had been successful at creating an international joint venture in Indonesia, such as Telstra (see Appendix 1), while others have failed (Walmart).

Sources : http://jakartaglobe.beritasatu.com/archive/wal-mart-seeks-re-entry-into-indonesian-market/ www.businessinsider.com http://www.afr.com/business/telecommunications/telstra-plans-to-use-indonesia-joint-venture-as-model-for-asian-expansion-20151123-gl5vb3 http://www.limcharoen.com/publication/indonesia/Joint%20Ventures%20in%20Indonesia.pdf http://www.hfw.com/Proposed-joint-venture-in-Indonesia-October-2014 http://www.jurispub.com/Indonesia-International-Joint-Ventures-Second-Edition.html http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB16-Full-Report.pdf http://www.gbgindonesia.com/en/main/business_advisory/finding_a_local_partner_joint_ventures_and_investment.php