BMG705 ( 16440 ) - Global Business in Context

Course Name: MSc International Business with Advanced Practice

Student: Rafiq Hussain Ganaie

Student ID: 10217117
Unique ID: B00897568
Introduction:
Today, with the long-term influence of globalization, like the big enterprises, the small and
medium enterprises (SMEs) are looking forward to expanding their business operations beyond
domestic boundaries. This report will analyse critical environmental factors of Indonesia and
their impact on internationalization process on the UK SME. It will also evaluate the entry mode
of the host country.
Siddall & Hilton Products Ltd is the UK’s largest manufacturer of welded wire mesh for high
security fencing, industrial and construction applications processing some 22,000 miles of steel
wire every month (Siddall & Hilton, 2022a; Project Shire, 2022). Established in the year 1985, it
is based in Brighouse, West Yorkshire, United Kingdom with a 60 strong workforce (Siddall &
Hilton, 2022b; The Manufacturer, 2022).

With a heritage stretching back 127 years, Siddall & Hilton Products Ltd is set to embark on a
highly ambitious strategic programme to expand into the non-European markets with the aim of
creating a high-performing, sustainable business. This decision of expansion was further
accelerated by the sharp increase in steel prices in European markets, the global supply chain
crises, COVID-19 pandemic and then the war in Ukraine. To realise this ambition, the company
has chosen Indonesia. One of the MINT countries and the founding member of ASEAN,
Indonesia is the largest economy in Southeast Asia, the eighth largest in the world as measured
by purchasing power parity and the only Southeast Asian member of the G20 (Investing in
Indonesia by KPMG , 2021). It has a strategic geopolitical location in the indopacific in one of
the most important international shipping lanes (Kalsel, 2022) with proximity to Americas,
Oceania, South and East Asia. Indonesia is the 16th largest producer of crude steel globally
(World Steel association, 2022) and is the neighbour of the largest plastic producing country
China (Statistica, 2022). With the passing of Law No 11 Year 2020 on Job Creation (known as
the “Omnibus Law”) focusing to attract and ease foreign investment followed by exponential
infrastructure development (Investing in Indonesia by KPMG , 2021) Indonesia is a favourable
destination to expand to.

In this report we will discuss critical environmental factors and their impact on
internationalisation process

Economy

The largest economy in Southeast Asia, Indonesia has recorded impressive economic growth
since overcoming the Asian financial crisis of the late 1990s (World Bank, 2022a). The Gross
Domestic Product (GDP) in Indonesia was worth 1186.09 billion US dollars in the year 2021
(World Bank, 2022b) with growth projected at 5.1 percent in 2022 (World Bank, 2022a) and
expected to reach around 1370.00 USD Billion in 2023 (Trading Economics, 2022). Indonesia is
among the world's top 10 largest economies in terms of purchasing power parity (World Bank,
2022a).

Indonesia has a stable financial system, as of April 2022, Indonesia Capital Adequacy Ratio was
measured at 24.3% (CEIC, 2022a) and Return On Asset (ROA) data was reported at 2.331%
(CEIC, 2022b) indicating a low risk of a financial crisis in the country. Indonesia experienced a
CPI of 1.6% in 2021 and a continuous fall in the inflation rates from the past eight years, while
the same for the UK has been increasing (World Bank, 2022d). The resulting Increase in
demand will bring opportunities of making good profits for businesses. Indonesian sovereign
bonds rated “Investment Grade” by the three main rating agencies (Coface, 2022)

Indonesia has a relatively large, youthful and growing population and is one of the MINT
countries (Investing in Indonesia by KPMG , 2021) with unemployment rates of 4.4% for the
year 2021(world bank, 2022c). These factors result in the availability of an ample labour force
ready to work at lower wages.
Indonesia recorded a current account surplus of USD 0.22 billion in the first quarter of 2022
(Trading Economics, 2022b) Indicating a boost in exports. The corporate income tax rate has
been reduced to 20% for the 2022 fiscal year and onwards

Indonesia is a member of Association of Southeast Asian Nations (ASEAN) and also a part of
ASEAN Free Trade Area (AFTA) policy which aims at lowering intra-regional tariff between
the members through Common Effective Preferential Tariff (CEPT) Scheme (ASEAN, 2022).
ASEAN also has other five free trade agreements (FTAs) with six Dialogue Partners, namely
China, Japan, Republic of Korea, India, and Australia and New Zealand (ASEAN Briefing,
2022). Indonesia is the only Southeast Asian member of the G20 (Investing in Indonesia by
KPMG , 2021).

Political

Indonesia has a constitutional and presidential democratic republic system of government

whereby the President of Indonesia is both head of state and head of government and of a multi-
party system (Indonesia Investment Guidebook, 2021; World Atlas, 2022). The third largest
democracy in the world and member of organisations like WTO, Organisation of Islamic
Cooperation (OIC), Association of Southeast Asian Nations (ASEAN), Non-Aligned Movement,
East Asia Summit (EAS) and G20 Indonesia maintains healthy trade and diplomatic ties with its
neighbours and rest of the world.

In 2022, Institute for Economics and Peace (IEP) ranked Indonesia 47th on its Global Peace
Index (GPI) among the list of 163 countries. The World Population Review ranked Indonesia
65th on its 2022 Crime Index. These rankings infer that Indonesia is among most safe and
peaceful developing countries.

The Indonesian government passed Law No 11 Year 2020 on Job Creation (or “Omnibus Law”)
focusing on attracting foreign investment (Investing in Indonesia by KPMG , 2021). By
introducing Omnibus law, the Indonesian government has opened the majority of the economic
sector to 100 percent foreign investment, eased foreign investment restrictions, relaxed labour
laws,eased construction permits, expanded land ownership and management rights, eased
environmental obligations, reduced corporate tax and simplified business licensing
(Acclime,2020). These steps indicate an end to the red-tapism and a resultant demotion of
corruption. Based on the 2020 Transparency International Corruption Perception Index,
Indonesia ranked 102nd out of 180 countries with a total score of 37 points (Investing in
Indonesia by KPMG , 2021).

In recent years, the Government has developed economic zones in order to boost economic
development throughout the region. Today, there are 19 Special Economic Zones (15 existing
and 4 new), 118 Industrial Estates, 4 Free Trade Zones, 1,360 Bonded Zones, and 91 Bonded
Logistic Center in 131 locations (Indonesia Investment Guidebook, 2021).

Social

As a country with the fourth largest population in the world, Indonesia had a population of 2021
276,361,788 million in 2021 according to the world bank (2022) data . Indonesia recorded a
population growth rate of 1.25% per year from 2010 to 2020 (Indonesia Investment Guidebook,
2021). About 70.72% or 191.9 million people are in the productive age group (15-64 years) in
2020 (Indonesia Investment Guidebook, 2021). This condition shows that Indonesia is in the
demographic bonus period. The Labor Force Participation Rate in Indonesia also increased to
68.08% in 2021 from 67.77% in 2020 according to trading economics (Indonesia Investment
Guidebook, 2021).

Hofstede (2021) classifies national culture of Indonesia into six dimensions as power distance,
individualism and collectivism, masculinity, uncertainty avoidance, long term orientation and
short term normative orientation, and indulgence or restraint. Hofstede (2021) concludes that
Indonesia is a collectivist society, moderately feminin, has a pragmatic culture, Power is
centralised and employees docile, maintaining workplace harmony is very important in
Indonesia. In Indonesia, the corporate culture of larger or more traditional organisations is top-
down, with ultimate decision-making frequently reserved for a small group of executives
(Indonesia Investment Guidebook, 2021). These factors favour the ease of workforce
management.

The urban population has experienced constant growth for the past decade, as of 2021 57.29% of
Indonesia's total population lived in urban areas (Statista, 2022). These factors indicate a
favourable trend towards availability of skilled industrial human resources.
Entry Mode Analysis

Businesses engage in international trade for reasons such as to Increased revenues, decreased
competition, better risk management and better resources. Foreign direct investment (FDI) is
when a company expands and invests its resources to carry out the commercial operations
beyond the national borders; FDI can be implemented through either acquisition, joint venture or
greenfield investment (Hill and Hult, 2020). Sharma and Erramilli (2004, pp. 3) define an entry
mode as: “a structural agreement that allows a firm its product market strategy in a host country
either by carrying out only the marketing operations, or both production and marketing
operations there by itself or in partnership with others

Indonesia has traditionally been conservative towards incoming FDI, however in recent years it
has started opening up to the foriegn investments. The government is framing immigration and
business policies that ease the FDI. A country rich in resources, strategic location, pleasant
tropical climate, low labour costs and demographic dividend, resilient banking system owing to
relatively high capital adequacy ratio, solid public finances and sound fiscal policies and
exchange rate flexibility make it all welcoming to invest in Indonesia. However the corruption
and weak legal system could pose challenges.

The three modes i.e. acquisition, joint venture or greenfield investment of FDI can be taken
Siddall & Hilton Products Ltd to expand to Indonesia. However each of the modes has its
dynamics. Siddall & Hilton Products Ltd, if it uses acquisition mode of entry, will acquire local
management already trained and aware of the Indonesian corporate culture. It will also save time
with licensing and marketing. The legal procedure and acquisition time of an already existing
firm is quite as lengthy as a new business incorporation.

A joint venture is the pooling of assets and knowledge by two or more firms who
share joint ownership and control over the results of the pooling. There is no separate legal entity
for joint ventures in Indonesia (emerhub, 2022). Emerhub (2022) recommends starting a new one
from zero as it is not easy to buy shares in an existing locally owned company.

Green field investment is in which a parent company creates a subsidiary in a different country,
building its operations from the ground up. In Indonesia the way to go for this is to incorporate a
Perseroan Terbatas Penanaman Modal Asing (PT PMA) a foreign investment limited liability
company. It is the legal entity through which a foreign investor can conduct commercial
activities in Indonesia. Other than incorporation, the investor has to take care of taxation,
licensing, leasing/buying property etc. After the passing of omnibus law the incorporation time
has been significantly reduced and an online single submission system is in place to apply for
licensing. It is the easiest and most hassle free way of entering Indonesian territory out of the
three.

Recommendation
When a firm enters another market, minimal involvement with export is desirable, according to
Pan and Tse (2000). Siddall & Hilton Products Ltd with its century long experience and expertise
in manufacturing of welded wire mesh has to be ready to cater to the domestic market in the
beginning before it starts any exports. The political, economical and social environments of
Indonesia make it a promising market for Siddall & Hilton Products Ltd business. The best mode
of entry into Indonesia would be Green Field Investment.

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