Executive Summary
This paper provides background information on Indonesia, which is a prospective location for the expansion of Foxconn's operations, particularly for the establishment of its manufacturing facility.
Economic climate
- Indonesia incurred an economic growth of 6.1% and 6.4% in 2010 and 2011, respectively (CIA, n.d.).
- The new government administration has introduced various financial reforms that further aid economic development.
- It has managed to achieve growth even during the global economic crisis.
- It is able to maintain low levels of debt.
- Its credit rating has been upgraded to the investment grade in 2011 (CIA, n.d.).
- It has a strong domestic demand and consumption.
Political climate
- The reinstatement of democracy in 1998 paved the way for the restoration of the country’s economy.
- The country has not experienced any major terrorist activities since 2005.
- The government has put an end to insurgencies and conflicts with separatist groups.
- Indonesia’s political environment is stable, with an independent media and a strong civil society.
Foreign relations
- Indonesia maintains good relations with the U.S. and its other export partners.
- It is a member of various international organizations, which allow it to influence international security and economic issues.
- It takes an active involvement in international issues.
Demographic information
- It has a population of 245 million people.
- More than half of the country’s population is under the age of 30.
- It is projected that by 2025, about 70% of the total population will consist of the working population (emmuser, 2011).
Introduction
In consideration of Foxconn’s plans for expansion and given the current problems it is encountering with a prospective expansion in Brazil, this backgrounder aims to provide the company with information on Indonesia, which may be considered as an alternative location for the establishment of a manufacturing facility.
In this regard, this paper discusses some of the characteristics of Indonesia in terms of its economy, its political climate, the nature of its foreign relations, and its demographics. This information aims to guide Foxconn management in their decisions with regards to possible investments in Indonesia.
Economic Climate
Indonesia has been enjoying a steady economic growth in the past few years. In particular, it incurred a growth of 6.1% and 6.4% in 2010 and 2011, respectively (CIA, n.d.).
Figure 1 GDP Growth of Indonesia from 2009-2011
Source: IMF (as cited in emmuser, 2011)
The first year of President Yudhoyono’s administration saw the implementation of significant reforms in the financial sector, particularly in the following (CIA, n.d.):
- Capital market development and supervision
- The use of Treasury bills
- Tax and customs reforms
Even during the global economic crisis, Indonesia outperformed its neighboring countries by
being one of the few Asian countries – aside from India and China -- that posted a growth in 2009 (CIA, n.d.).
With the introduction of fiscally conservative policies, Indonesia was also able to achieve “a debt-to-GDP ratio, a fiscal deficit below 3%, and historically low rates of inflation” (CIA, n.d.). Among emerging markets, it should be noted that Indonesia manages to maintain low levels of external debt (emmuuser, 2011).
Figure 2 Government Gross Debt of Indonesia in Comparison to other Emerging Markets
Source: IMF (as cited in emmuser, 2011)
Furthermore, Indonesia’s credit rating has been upgraded by Fitch and Moody’s to the investment grade in December 2011 (CIA, n.d.).
In addition, Indonesia is not as trade-reliant as other Asian countries. Its exports amounted to only 25% of its GDP in 2010, compared to 71% in Thailand and 97% in Malaysia (emmuser, 2011). This implies high levels of domestic demand and consumption, which can further foster economic development.
Although the country continues to suffer from unequal resource distribution among its various regions, as well as from a complex regulatory environment; corruption; inadequate infrastructure; unemployment, and poverty, the government has initiatives that aim to improve the country’s infrastructure; thereby removing the obstructions to economic growth, eliminating its problems with labor unrest due to wage issues, and decreasing its fuel subsidy program in an effort to combat the high oil prices (CIA, n.d.)
Below is a table that provides more information about Indonesia’s economy, as provided by the CIA World Factbook (CIA, n.d.).
Political Climate
The reinstatement of democracy in Indonesia after General Suharto’s resignation in 1998 (McCulloch, 2008) introduced many changes to the country’s governance, which in turn paved the way for opportunities in public-private cooperation with regards to local investment and growth.
After the country’s first presidential elections in 2004, the new government administration had to deal with various challenges, which included corruption, social unrest, the sporadic separatism in Papua and Aceh, and the complications that came with the government’s decentralization initiatives, as well as with the efforts to restore the country’s economy (Export.gov, 2012). However, the new government can be commended for the improvements it has made with regards to fighting terrorism. It is notable that the country has not had a major terrorist attack since 2005 (Export.gov, 2012) despite the presence of extremist groups in the region. Also in 2005, the government signed a Memorandum of Understanding with GAM, the separatist Free Aceh Movement, which put an end to the conflict, in turn resulting in the group’s surrender of their weapons and their departure from the province.
Aside from the government’s challenges in the provision of development benefits to its citizens; in the restoration of the country’s economic momentum; and in the consolidation of the country’s democratic transition, other political issues that may have implications in the country’s economy include the presence of the regional terrorist group Jemmaah Islamiyah; the demands for greater autonomy in Papua; the regular occurrence of communal violence around the country; and the weaknesses in the rule of law across the country (Export.gov, 2012).
Nevertheless, it should be noted that Indonesia has generally made great leaps in achieving stability and in becoming a democratic country with an independent media and a strong civil society (Human Rights Watch, 2012).
Foreign Relations
Indonesia has maintained good relations with the U.S. in the past few decades (Export.gov, 2012). It has also maintained good relations with its neighboring Asian countries, which has contributed to the stability and peace in the region. Moreover, these good relations have been fostered by Indonesia’s participation in various organizations, such as the following (Export.gov):
- APEC (Asia-Pacific Economic Cooperation
- ASEAN (Association of Southeast Asian Nations)
- ASEAN Regional Forum
- OIC (Organization of Islamic Conference)
- NAM (Non- Aligned Movement)
Indonesia’s membership in these organizations enables it to influence various economic and security
issues. It has also expressed willingness to become involved in international issues, which was further emphasized by its non-permanent membership in the United Nations (New Zealand Ministry of Foreign Affairs & Trade, 2009). Moreover, Indonesia maintains strong relationships with its major export markets, which include Australia, the European Union, the United States, ASEAN countries (particularly Singapore) and Japan (New Zealand Ministry of Foreign Affairs & Trade, 2009).
Demographic Information
Indonesia is characterized by its young population. With a total population of 245 million people, more than half of this is under the age of 30 (emmuser, 2011). This can be good for businesses as young people tend to consume more and they tend to put less pressure on public finances, such as those allotted for healthcare and pensions. This would result in more dividends for the government across time. Moreover, with this young population, the United Nations forecasts Indonesia’s working population to increase to 70% of the total population by 2025 (emmuser, 2011).
Conclusion
This paper provided information on the economic and political climate in Indonesia, as well as information on its foreign relations and demography. This aimed to provide Foxconn with a comprehensive overview of the country, which is a potential investment location.
In particular, this paper showed that Indonesia’s economy has been enjoying a robust growth. It has also managed to maintain low levels of debt and was one of the few Asian countries that still achieved growth during the global crisis. In addition, Indonesia's economy does not rely solely on the export industry as it has high domestic demands and consumption, which further spurs economic development.
On the political front, Indonesia has undergone progressive changes since the resignation of General Suharto in 1998. With democracy being reinstated and with the country’s first president being elected in 2004, more changes occurred with regards to restoring the country’s economy and ensuring peace within the country. Although social unrest and communal violence still exists, the government continues to strive to find solutions to these problems.
As well, Indonesia maintains good relations with other countries, particularly with its export partners and its neighboring Asian countries. Its membership in various organizations also enables it to influence decisions on international security and economic issues.
Finally, with a young population, Indonesia is very suitable for foreign businesses as young populations have higher consumption levels than the older populations. This young population will also make up majority of the future workforce, which will make up about seventy percent of the future population.
Overall, the outlook for Indonesia as a location for expansion is good. With the country's robust economy, stable political environment, friendly foreign relations, and young population, a company such as Foxconn can easily thrive and flourish in this country. With all the benefits that Indonesia has to offer, a manufacturing facility in this country will surely be an added asset to Foxconn's growing enterprise.
References
CIA. (n.d.). The world factbook: Indonesia. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/id.html.
emmuser (2011, November 18). Indonesia: Ugly duckling no more. Retrieved from
http://emergingmarketmusings.com/2011/11/18/indonesia-ugly-duckling-no-more/. Export.gov. (2012, December 19). Political and economic environment. Retrieved from
http://export.gov/indonesia/doingbusinessinindonesia/politicalandeconomicenvironment/index.asp.
Human Rights Watch. (2012). World report 2012: Indonesia. Retrieved from http://www.hrw.org/world-report-2012/world-report-2012-indonesia.
McCulloch, N. (2008, December). The political economy of the investment climate in Indonesia.
Retrieved from http://www.ids.ac.uk/idsproject/the-political-economy-of-the-investment-climate-in-indonesia.
New Zealand Ministry of Foreign Affairs & Trade. (2009, February 24). Indonesia foreign relations.
Retrieved from http://asean.fta.govt.nz/indonesia-foreign-relations/.
