Indonesia’s Time to Join the Digital Global Economy
Home to a population of 252 million people, Indonesia is the fourth largest country in the world. In recent years, it has become one of the fastest growing countries as well. As a result of policies that allowed for more global integration, Indonesia’s economy has become the world’s tenth largest, growing at an average rate of 6 percent per year from 2006 to 2015.
Today, Indonesia is at a crossroads as it must figure out what the future of its economy will look like and what it will be fueled by. Rules on foreign investment remain a hot topic. Many foreign investors still face regulatory uncertainties as the government continues to revise and amend these laws to attract foreign funding while protecting domestic industries. Aside from natural resource exports, what other opportunities exist for foreign investors in Indonesia? Right now, Indonesia has the opportunity to create the right conditions for tech startups to lead it into the digital economy.
Isolated No More: Indonesian Economic History
To understand Indonesia’s economic future, we must first look to its past. After gaining independence in 1945, Indonesia became known for its isolationist economic policies under the leadership of its first president, Sukarno, who prohibited foreign investment. Since then, Indonesia’s investment climate has steadily improved after a new leader, Soeharto, took power in 1967 and quickly reversed the ban on foreign investment. Money began to flow into the country, eventually causing an economic boom during the 1990s. Foreign investment flooded the country until 1997 but came to a halt when the financial crisis hit southeast Asia. The bust caused social and political upheaval, eventually ending the 30-year reign of Soeharto and beginning a new era of democratization.
As Indonesia began to democratize, its economy began to recover and experienced rapid growth. Much of this growth can be attributed to China’s massive economic boom, trickling down positive economic effects on its southeast Asian neighbors, who supplied it with raw materials. Nevertheless, continued overreliance on the export of commodities may inhibit Indonesia’s economic growth as China’s wheels are beginning to slow. The time is now for Indonesia to steer away from being reliant on export commodities and look ahead to the potential that the digital economy offers.
Revamping the Indonesian Economy: Startups, Tech, & the Digital Economy
Skyrocketing investment in startups in 2015 serves as evidence of the growing attractiveness of the country. Investment boomed from virtually nothing in 2014 to $600 million in 2015. The growth of the digital tech economy in Indonesia is important since it displays the move away from a singular focus on industrialization. While becoming an industrial power was the only feasible way to grow in the past, the digital economy offers a new set of opportunities for people, despite their socioeconomic backgrounds.
The startup ecosystem in Indonesia is new, emerging, and could potentially become the solution to the country’s plethora of institutional gaps. Structural problems such as lack of distribution of quality education; gaps in sanitation and healthcare services; and poor city planning causing severe traffic congestion plague the country, especially in rapidly urbanizing cities such as Jakarta. Startups offer the potential to simplify processes and help solve these problems. E-commerce, for example, has grown rapidly in the past two years because it helps solves efficiency issues, as people no longer have to sit in traffic for hours just to get the goods they need.
Within the community, some of the startups with the most buzz and attention from the media include Tokopedia, Go-Jek, and Bukalapak. Go-Jek was founded by Nadiem Makarim, a Harvard graduate, who successfully led his company to become the fastest growing and most talked about startup in Indonesia. Go-Jek was initially conceived by the idea of utilizing “office boys,” who are people in the Indonesian community who were underappreciated, had a lot of versatility, but were not formally employed. Demand for their services was high because they were able to fulfill tasks like picking up food for people in the office, delivering packages, and so on.
Today, Go-Jek has grown exponentially, serving about 8 million customers while providing formal employment and benefits to 200,000 drivers around Indonesia. It successfully addressed a big structural gap by introducing Indonesia to the sharing economy. Of course, the growth of Go-Jek has been met with extensive resistance: something common when a new business embraces disruptive innovation. According to Kevin Aluwi, the CFO of Go-Jek, the company deals with constant political and social pressures.
The most recent issue occurred in December 2015, when the Minister of Transportation banned ride-hailing services that operate online. However, within 24 hours, President Joko Widodo overturned the ban, acknowledging that it was important to support young entrepreneurs in the country and that regulations should not impede growth. The policy overturn highlights how the Indonesian government has polarized viewpoints on the startup ecosystem. While some policymakers recognize the importance of fostering an ecosystem for entrepreneurship to grow, others adhere to the old practices of protecting existing industries.
Another prominent issue in the Indonesian startup ecosystem is the fact that funding is still very difficult to acquire locally. According to Aluwi, unlike local investors, foreign investors provide a wealth of knowledge and deep understanding about how startups should work, mostly because they have invested in the most cutting-edge companies outside Indonesia as well. Aside from this, local venture capital (VC) firms in Indonesia have a reputation of not being entrepreneur-friendly, especially in terms of fair valuations and term-sheet clauses. Put simply, there is a lack of smart money in the nation, and the regulatory environment is still unsupportive of the growth of startups. Startups like Go-Jek still rely on foreign investors such as Sequoia and Northstar.
However, amongst the few VC firms in the country lies an exception: East Ventures. East Ventures was one of the earliest VCs to enter the Indonesian startup scene and is arguably the most successful local investor in Indonesia to date. Not only was it able to exit on a number of its investments, but it also invested in the early stages of successful local startups like Tokopedia and Traveloka. For the Indonesian team at East Ventures, the future of the startup ecosystem is bright. The VC currently has 80 companies in its portfolio, 80 percent of which are based in Indonesia. The team believes that in the next five years, the local tech market will grow exponentially.
Today, Indonesia is already the fourth largest country producing startups. However, it has a long way to go before it achieves its full potential as a booming tech hub. Some issues that need to be addressed for the startup ecosystem to grow effectively are improved network connectivity, an increase in the supply of human capital and engineering skills in tech as well as friendly regulations. Talent is a huge issue in Indonesia and the lack of engineers has caused most tech activities to be outsourced. Most people are still very risk averse and traditional, meaning that people are more interested in engaging in conventional corporate jobs. On the other hand, network connectivity is key as entrepreneurs are able to learn from each other and established mentors in the community, rather than work in isolation.
The Future Is Here, But Where Does Indonesia Go Now?
As of 2015, publicly announced investment in Indonesia hit $61.9 million in October, while India reported around $2.7 billion. For now, Indonesia lacks the financial infrastructure needed for payments and deliveries, and online sellers are waiting for a Paypal-type gateway of its own to cut costs. Additionally, regulators have yet to become fully aware of the potential digital technology can play in improving the economy.
The future lies in the support of these tech companies; for the first time, an industry that can potentially lift millions out of poverty and sway people out of the informal economy has finally emerged. The growth of tech companies will continue slowly leveling the playing field for those without access to formal employment opportunities. E-commerce firms like Tokopedia and Bukalapak enable people from all over the country to display and sell what they produce and at fair prices. Go-Jek has provided means for 200,000 people to receive a steady source of income, means to improve their lives.
Like India and China, Indonesia will see a new generation of entrepreneurs who will successfully build and exit companies and then become investors themselves. This is the key generation who will build the scene that will cultivate the growth of the startup ecosystem in Indonesia.
In the past few years, Indonesia has seen a substantial evolution in technology and venture capital investments; the traditional models reliant on natural resource exports and factory-led growth is disintegrating rapidly. Building a tech ecosystem undoubtedly takes time, but when tech entrepreneurs and investors look at the size of Indonesia’s market, they should feel hopeful. With the growth of digital technology comes potential solutions to issues that plague the country such as poverty and inequality. Indonesia has the opportunity now to create an entrepreneur-friendly environment where tech innovations and the digital economy can thrive.