Learn about barriers to market entry and local requirements, i.e., things to be aware of when entering the market for this country.
Challenges abound for small and medium size companies wishing to gain access to the Indonesian market, ranked 73rd by the World Bank in its 2020 Ease of Doing Business report (tied with 72nd place, Luxembourg, with a DB score of 69.6). The Government of Indonesia at times has been touting plans to reduce bureaucratic red tape to facilitate investment as well as to put forth measures that achieve the opposite effect. Major challenges revolve around labor relations, intellectual property protection, transparent rules setting and implementation, standards and certification, and pricing.
Perhaps the most contentious portion of the expansive omnibus bill presented to the Indonesian legislature in early 2020 is the chapter dealing with labor issues, such as; severance pay, minimum wage, safety net and social protections. The bill also addresses rules for foreign workers and executives in Indonesia. In lieu of liberalization of the labor market and provisions to limit foreign personnel in Indonesia, U.S. firms will face challenges recruiting, compensating and retaining the most desired employees.
U.S. companies continue to identify Local Content Requirements (LCR) as one of the most significant challenges they face in Indonesia. Local Content Requirements were originally focused exclusively on the oil and gas sector but have more recently been applied to an increasingly broad range of economic sectors. Foreign operators can now face requirements to source more than 75% of the inputs for projects locally, a challenge in a market with limited advanced manufacturing. Opportunities in the pharmaceutical, medical device, renewable energy and aerospace sectors are held back by overly stringent local content requirements.
Protection of intellectual property is a key concern, with Indonesia remaining on the Priority Watch List in the 2020 Special 301 Report. U.S. exporters and businesses planning to establish a significant presence in Indonesia should be aware of widespread copywrite piracy and trademark counterfeiting, both online and in physical markets.
Indonesia’s 2016 Patent Law continues to raise concerns, including with respect to the patentability criteria for incremental innovations, local manufacturing and use requirements, the grounds and procedures for issuing compulsory licenses and disclosure requirements for inventions related to traditional knowledge and genetic resources. [See the U.S. Trade Representative National Trade Estimate 2021 for more detail.]
U.S. firms should be mindful of additional requirements for testing and certification imposed on a wide range of products. In many cases, the U.S. exporter will need to pay for an Indonesian laboratory or certification body to conduct testing for individual shipments, adding to the overall cost of bringing goods to market.
Exporters targeting public tenders will find an opaque pricing environment, and local content requirements. For example, medical device manufacturers have expressed the need for greater clarity in how pricing and reimbursement are set within the Indonesian National Formulary. Authorities enforce local manufacturing requirements to varying degrees in key industry sectors, including those considered best prospect sectors.
Manufacturers selling goods or services through e-commerce platforms, who are deemed to have a significant presence in Indonesia, will be assessed a ten percent value added tax on all transactions in Indonesia. Determination of a “significant presence” is currently based on gross sales in Indonesian Rupiah (50 million in any given month, or 600 million per year) or number of customer transactions (1,000 in any given month, or 12,000 per year).