Running small business in Indonesia

When you talk with foreign entrepreneurs who have succeeded in Indonesia, you’ll often say them things like “Indonesia is not Asia for beginners” or “if the market would not be that big, I would not bother and just go home”.

My advice is to always take such statements with a grain of salt. In my opinion it’s a reaction to the government’s (mainly BKPMS’s) overly positive promotion campaigns that make Indonesia sound like a dream come true for ANY investor. Which it isn’t of course – you need to be wise about where and how to invest your money.

But let’s look at the three key obstacles particularly for a foreign investor who wants to run a small business in Indonesia. For the sake of clarity, let’s define small business as a business with equity less than 300,000 USD.

1# Minimum capital requirements

We often shock our clients when we say that they need to have an investment plan for 10 billion Rupiah (~1 million USD) in order to get BKPM approval for the investment. 

In a nutshell, you need to have a plan for 1 million dollars and notary statement for at least 300,000 USD that will be paid up capital.

While the law enforcement in that matter is very loose, don’t count on that forever. Even if you don’t have 300,000 USD to pay up, you should aim for raising that money while operating your business.

2# Foreign ownership restrictions

One of the key principles of the Investment Law and Negative Investment List is to protect local businesses that would be vulnerable to foreign competition. It affects especially the aspiring restaurant and guesthouse entrepreneurs, where the maximum foreign shares are in a range of 49-51%. The idea behind it is to force you to seek for a local partner.

3# Hiring foreigners

Investment law also stipulates that any company must prioritize hiring local people. In reality what it means is that commissioners and directors get their limited stay permits (KITAS) easily, while hiring foreign employees is becoming increasingly challenging.

Ministry of Labor wants to see proof that the vacancy cannot be fulfilled by local person and that the particular foreigner you want to recruit is highly qualified for that job.

As a rule of thumb, they also want to see that you hire a decent number of locals for every foreigner. Minimum ratio is subjective, but is usually between 2:1 to 5:1, which is another challenge for small business owners who hire only limited number of people.

Use local partners wisely

I don’t have statistics to back up my claim, but majority of the foreigners who want to run a small business in Indonesia are men who are in a relationship or married to an Indonesian woman. There are couple of important incentives that being married to an Indonesian gives you. Firstly, after 2 years you are eligible for permanent residence (KITAP) and secondly, you have a local person you can trust.

Whether it’s your wife, partner, friend or agent, nominee arrangements where a local person is owning the business on paper are never 100% safe. If your local nominee decides to take over the business entity, there is not much that can stop them.

We will soon publish another article on nominee arrangements, but as a rule of thumb – always be prepared for the scenario where the local nominee would decide to take over your business.

Start small, grow big

As said before, government doesn’t really check how much capital has been actually paid up. After your company is registered, you are on your own and it’s up to you how much money you actually put into your company. You need to submit investment reports every 3 or 6 months (depending on whether you already have permanent business license) but even then nobody checks whether what you claimed is actually true or not.

Therefore starting small but growing your business to a level where you have required equity is a viable option. If you run a small cafe it might be hard to achieve, so focus on businesses that have the potential to scale up.

Have legal entity in another country

In some cases your clients won’t care where your company is registered. In such cases you might want to consider starting a company in a country where starting and managing business is easier. Your challenge will be the visa of course – as a tourist you need to leave the country at least every 2 months and immigration will soon start asking questions from you.