EntErprisE survEys 65102 Country notE sEriEs indonEsia Running a Business in Indonesia 2011 R ecently obtained Enterprise Surveys data indicate that senior managers in Indonesia spend the least amount of time dealing with the requirements of government regulations when compared to countries in the same income and size groups (figure 1). However, Indonesian firms perform poorly in international trade and in the use of technology. Only 4 percent of firms are exporters. This is lower than the average in countries with similar income levels—11 percent—and population sizes—17 percent. Similarly, Indonesian firms report a lower share of sales exported and fewer firms use imported materials and goods. This finding could be the result of firm composition in the country – 77% of firms have less than 10 employees and these firms are much less likely to engage in foreign trade. Indonesian firms are also much less likely than their international peers to use their own Web site or to use e-mail. Across the firms in Indonesia, exporting and foreign-owned firms have 14 more visits or meetings with tax officials, and the managers of these firms spend a larger share of their time dealing with government regulations. notE no. The Enterprise Surveys use standard survey instruments What is the average firm in Indonesia? to collect firm-level data on the business environment in Indonesian firms have a female participation rate in a country from business owners and top managers. The ownership and management of 43 percent and 31 percent, surveys cover a broad range of topics including access to respectively. The ownership rate is close to the average for finance, corruption, infrastructure, crime, competition, labor, Country countries of the same size and income level (table 1), while obstacles to growth and performance measures. The survey the female manager rate is above average. Small firms are is designed to be representative of a country’s private non- roughly one and a half times as likely as medium firms, and agricultural economy, and firms sampled are stratified by size, nearly three times as likely as large firms—33 percent versus location1 and sector (figure 2)2 to ensure that most major 20 percent and 13 percent—to have a female top manager. types of firms are covered. Only firms with five employees Unsurprisingly, firms with a female top manager are more or more are included in the sample. In Indonesia, 1,444 than four times as likely to have female participation in firms were surveyed from August 2009 to January 2010. The ownership (90 percent) than male-managed firms (21 information collected refers to the characteristics of the firm percent). Firms with female participation in ownership, or at the moment of the survey or to fiscal year 2008. Figure 1 Indonesian firms spend less time dealing with regulatory burden World Bank Group 20 Senior management time spent in dealing with regulations (%) 16 Percent 12 Average for lower-middle-income countries 8 4 0 Indonesia Pakistan Georgia Senegal Timor-Leste Swaziland Honduras Vietnam Lesotho Nigeria Tonga Moldova Vanuatu Paraguay Philippines El Salvador Guatemala Nicaragua Kosovo Uzbekistan Ukraine Yemen Mongolia Micronesia, Fed. Sts. Samoa Ecuador Source: Enterprise Surveys. Figure 2 Characteristics of the firms interviewed Size Location Sector Sumatera Utara Sulawesi 6% Selatan 6% Bali Other Lampung 5% Banten services Large 5% Retail 10% 9% (100+ employees) 8% 20% DKI Jakarta Small 11% (5-19 employees) Jawa Timur Medium 56% 20% (20-99 employees) Jawa Barat Manufacturing 24% 20% 82% Jawa Tengah 19% Source: Enterprise Surveys. female top managers, are also more likely to employ women managers employ females in non-production jobs at about than their counterparts. Firms with female top managers twice the rate of their male counterparts. employ twice as many females (52 percent of their full-time The average firm3 in Indonesia is 15 years old (table permanent workforce), on average, than male managers (26 2). At 20.2 years on average, large firms are older than percent female). Similarly, firms with female participation in medium firms and small firms that average 16.6 years and ownership employ females at twice the rate of firms without 14.7 years, respectively. Small firms are the most common female ownership—48 percent versus 23 percent. This in Indonesia—the average firm has only 18 full-time finding extends to female non-production workers where permanent workers—and only 10 percent of firms have firms with female participation in ownership or female top more than 20 permanent employees, while 77 percent of How does Indonesia 2009 compare with other countries in the same income or Table 1 population group? Lower-middle- Similarly populated income economies countries Ranking 1 assigned to the largest value (26 countries†) (13 countries ‡) Percent of firms formally registered when started operations in the country 23 11 Private domestic ownership (%)* 16 12 Private foreign ownership (%)* 22 11 Government/state ownership (%)* 17 10 Percent of firms with female participation in ownership 12 7 Bank finance for investment (%) 22 12 Percent of exporter firms 22 12 Domestic sales (percent of sales) 6 3 Percent of firms with internationally recognized quality certification 24 13 Percent of firms with annual financial statement reviewed by external auditor 26 13 Capacity utilization (%) 1 1 Percent of firms using their own Web site 26 13 Percent of firms using e-mail to communicate with clients/suppliers 26 13 Lower-middle- Similarly populated income economies countries Ranking 1 assigned to the smallest value (26 countries†) (13 countries ‡) Value of collateral needed for a loan (percent of the loan amount) 2 9 Number of power outages in a typical month 5 2 Senior management time spent in dealing with requirements of government regulation (%) 1 10 Average number of visits or required meetings with tax officials 1 4 Incidence of graft index** 21 10 Losses due to theft, robbery, vandalism, and arson against the firm (percent of sales) 3 4 Source: Enterprise Surveys. Note: This table presents a ranking out of different groups of economies for each of the listed indicators. The lower-middle- income group includes 26 countries and the similarly populated group consists of 13 countries. The numbers are ranks as opposed to the actual value of the indicator. 2 Table 2 The average firm in Indonesia 2009 Lower-middle- Similarly populated Indonesia income economies countries (26 countries †) (13 countries ‡) Age (years) 15.0 14.6 16.7 Percent of firms formally registered when started operations in the country 29.1 88.0 87.9 Closed Most common legal form Sole Proprietorship Sole Proprietorship Shareholding Co. Private domestic ownership (%)* 89.4 87.9 93.4 Private foreign ownership (%)* 1.5 9.8 4.6 Government/state ownership (%)* 0.1 0.5 0.6 Percent of firms with female participation in ownership 42.8 41.3 41.6 Percent of firms with female in top management position 31.2 20.8 24.2 Experience of the top manager (years) 13.2 16.0 17.7 Average number of temporary workers 1.8 7.8 9.0 Average number of permanent, full-time workers 17.9 31.9 58.1 Percent of full-time female workers 33.9 31.0 32.9 Source: Enterprise Surveys. firms have 10 or fewer permanent employees. This high account—well below the average in both comparator percentage of small firms might be related to the small cohorts. Firm-size is associated with the likelihood of percentage of firms formally registered when they started having a bank loan or line of credit—47 percent of large operations in the country. firms have a bank loan or line of credit, while 28 percent of Both the size and the composition of the workforce differ medium and just 17 percent of small firms do. across firm types. For instance, exporter firms and firms with Firms with female participation in ownership or a female foreign ownership4 are, on average, much larger employers top manager use bank loans less often and are 10 percent to of permanent workers—at 197 and 154 respectively—than 15 percent less likely to have a checking or savings account firms that do not export or are fully domestically owned— than their counterparts. Only 13 percent of female- at 14 and 16 permanent employees respectively. managed firms have a bank loan or line of credit compared Eighty-four percent of the firms in Indonesia that have to 21 percent of male-managed firms. five or more employees are sole proprietorships, while limited Firms in Indonesia trade relatively little with the rest of partnerships are the second most common legal form at 8 the world (table 3). Only 4 percent of Indonesian firms are percent. Private domestic ownership, as a percentage of total exporters compared to 11 percent of firms in lower-middle- ownership, in firms with female participation in ownership income economies and 17 percent in countries with similar is 85 percent. This is significantly lower than the 93 percent populations. This low participation rate in the export market exhibited in male-owned firms. Female-managed firms is mostly seen in small and medium-sized firms. Fifty-five have a similarly lower share of private domestic ownership. percent of large firms participate in export markets but Although less than 2 percent of firms have any foreign only 2 percent of small and 14 percent of medium-sized ownership participation, 1.2 percent of firms are wholly foreign-owned. The average firm has only 1.5 percent Figure 3 Small and medium-sized firms foreign-owned equity. Government participation in the have low export performance ownership of private sector firms is very low in Indonesia at 0.1 percent. Overall, 89 percent of private sector firms 60 30 are fully private domestic firms. 50 25 How do businesses operate in Indonesia? 40 20 Percent Percent 30 15 Use of internal finance is high when compared to other 20 10 countries of similar size or income level. At 88 percent, 10 5 Indonesia has one of the highest levels of internal financing for investments and, at 6 percent, one of the lowest levels of 0 Small Medium Large 0 bank financing relative to its peers in size and income. Only ■ % of Exporter Firms (Left Axis) ■ Sales Exported Directly (% Sales) (Right Axis) 12 percent of firms use bank financing for investments; less than a fifth of firms have a line of credit or bank loan and only 51 percent of firms have a checking or savings Source: Enterprise Surveys. 3 Table 3 Choices by the average firm in Indonesia 2009 Lower-middle- Similarly populated Indonesia income economies countries (26 countries †) (13 countries ‡) Internal finance for investment (%) 88.3 71.1 67.1 Bank finance for investment (%) 6.4 15.2 18.1 Value of collateral needed for a loan (percent of the loan amount) 52.7 151.6 126.8 Loans requiring collateral (%) 83.6 79.5 68.8 Percent of firms with a checking or savings account 51.5 85.2 85.4 Percent of exporter firms 4.1 11.1 16.8 Domestic sales (percent of sales) 97.8 94.9 93.7 Sales exported directly (% sales) 1.1 3.5 4.4 Sales exported indirectly (% sales) 1.0 1.6 1.9 Sales that are pre-paid (%) 21.7 20.4 15.5 Sales sold on credit (%) 45.6 37.4 52.7 Percent of firms with internationally recognized quality certification 2.9 12.6 15.8 Percent of firms with annual financial statement reviewed by external auditor 4.0 41.1 38.9 Capacity utilization (%) 85.9 70.2 75.3 Percent of firms using their own Web site 5.7 25.8 43.1 Percent of firms using e-mail to communicate with clients/suppliers 13.2 54.6 67.2 Source: Enterprise Surveys. firms participate (figure 3). The number of exporter firms, more common among firms with global engagement—40 the share of sales exported, as well as the percentage of percent of exporting firms and 46 percent of foreign- firms using imported inputs are all owned firms own a certificate, but only 2 well below the averages demonstrated percent of non-exporting and 2 percent in countries with similar income Senior managers of domestic firms own these certificates. levels or populations. Export market in Indonesia spend Similarly, Indonesian firms are the least participation is low among firms that likely group compared to other countries have a female top manager compared the least amount of in this cohort to have their financial to firms with a male top manager (1 time dealing with statements reviewed by an external percent vs. 6 percent). Exporting small auditor. Large firms are most likely to and medium-sized firms do not trade the requirements of have their financial statements reviewed intensively. Small firms gain 0.3 percent government regulations by an external auditor at 51 percent, while of their total sales from direct exports 10 percent of medium firms and only 2 (figure 3). The values for medium-sized percent of small firms have their financial and large firms are 4 percent and 24 percent respectively. statements reviewed by an external auditor. About half of the exporting large firms export more than Indonesian firms are much less likely than their peers to 40 percent of their output. use their own Web site or to use e-mail. Some firms make Likewise, 98 percent of inputs in Indonesia are of better use of the internet than others—over 30 percent of domestic origin. Even compared to other countries with both exporters and foreign-owned firms use their own Web few importing firms—such as Nigeria, Pakistan, Uzbekistan, site compared to just 5 percent of their counterparts. These Ukraine and Timor-Leste—Indonesian firms utilize fewer patterns also hold for using e-mail to communicate with foreign inputs. Only 2.5 percent of small firms use foreign clients and suppliers—75 percent of exporter firms report inputs and these inputs correspond to just 1.1 percent of using e-mail for business compared to just 12 percent of the value of their total inputs. Firm-size is associated with non-exporters. Firms in the retail and other services sectors the intensity of firms’ usage of foreign inputs—12 percent use Web sites and e-mail more frequently than the firms in of medium-sized firms use foreign inputs for 6 percent the manufacturing sector. In the retail sector, 22 percent of of total inputs, while 56 percent of large firms import 31 firms use e-mail and 15 percent use a Web site. In the other percent of theirs. services sector, 46 percent use e-mail and 21 percent have a Indonesia ranks well below average on international Web site. However, in the manufacturing sector these values quality certification. Out of 26 countries in the lower- are quite low—8 percent for e-mail and 3 percent for Web middle-income group, Indonesia ranks above only two site usage. countries on this indicator—Uzbekistan and Timor-Leste. Having internationally recognized quality certification is 4 Table 4 Constraints on the average firm in Indonesia 2009 Lower-middle- Similarly populated Indonesia income economies countries (26 countries †) (13 countries ‡) Number of power outages in a typical month 2.1 9.8 4.8 Senior management time spent in dealing with requirements of government regulation (%) 1.6 7.8 12.4 Average number of visits or required meetings with tax officials 0.2 1.7 1.6 Percent of firms expected to pay informal payment to public officials (to get things done) 14.9 29.5 29.5 Incidence of graft index** 27.0 17.1 15.7 Losses due to theft, robbery, vandalism, and arson against the firm (% of sales) 0.4 1.4 1.0 Percent of firms paying for security 23.5 56.9 57.3 Source: Enterprise Surveys. What constrains firms in Indonesia? time spent in dealing with regulations also varies across firm-size. Managers in large firms spend 6.9 percent of their Senior managers in Indonesia spend the least amount time on this task— five times more than small firms and of time dealing with the requirements of government twice as much as medium-sized firms. regulations compared to the other 25 countries in the same Large firms are more severely affected by corruption in income group. Indonesia (at 1.6 percent) is followed by Indonesia. Thirty-five percent of large firms are expected Pakistan and Georgia with values of 1.9 percent and 2.1 to pay informal payments to get things done, while 13 percent. The top ranking position of Indonesia also holds percent of small and 28 percent of medium-sized firms when comparing countries that have similar population are expected to make these payments. Large firms face the sizes (table 4). same difficulties when getting an electrical connection or a The activities of globally-engaged firms (either through construction permit. Moreover, the share of large firms that exporting or having foreign ownership) are affected believe the court system is fair and uncorrupted is lower more by regulations and visits of government officials than the share of small firms (52 percent vs. 71 percent). when compared to non-exporting and domestic firms in Firms in Indonesia have few power outages in a typical respective order (figure 4). The data show that both groups month when compared to countries in the same income of firms have more visits or meetings with tax officials and group. Indonesia ranks fifth after Philippines, Moldova, the managers of these firms spend a larger share of their Vietnam and Tonga in this indicator. Close to 60 percent time dealing with government regulations. The managers of large manufacturing firms own or share a generator of exporting firms spend almost four times more time and almost 8 percent of their electricity is produced by relative to non-exporting firms (5.7 percent vs. 1.5 percent) generators. These values are higher than the values for and managers at foreign-owned firms spend five times small manufacturing firms (3.7 percent of generator usage more time than domestic firms (7.6 percent vs. 1.5 percent) and 1.3 percent of electricity production). Among all firms dealing with regulations. Around 20 percent of exporting in Indonesia, large firms suffer fewer power outages in a and foreign-owned firms spend more than 10 percent of typical month (1.4 outages) compared to small and medium their time on this task. In addition to global engagement, Figure 4 Globally-engaged firms are visited more often by government officials and spend more time dealing with regulations 8 0.7 7 0.6 Number of visits 6 0.5 5 0.4 Percent 4 0.3 3 0.2 2 1 0.1 0 0.0 Non-exporter Exporter Domestic Foreign Non-exporter Exporter Domestic Foreign ■ Senior management time spent in dealing with requirements of ■ Average number of visits or required meetings with tax officials government regulations Source: Enterprise Surveys. 5 firms (1.95 and 2.91, respectively). However these outages Notes last longer for large firms than small firms (4.4 hours vs. 2.1 1. The following are the nine Indonesian regions sampled: Lampung, hours). For a quarter of large firms that had an outage, it Sumatera Utara, Banten, DKI Jakarta, Jawa Barat, Jawa Tengah, Jawa lasted more than 6 hours. The duration of power outages is Timur, Bali, Sulawesi Selatan. also more severe for foreign-owned businesses compared to 2. This figure presents the unweighted distributions by size, sector and location of the firms interviewed without any inferences to the whole domestic firms (4.4 hours vs. 2.2 hours). economy. In Indonesia the cost of securing firms’ premises is low. 3. The term “average firm� is used to convey the average firm Indonesia has the second lowest percentage of firms paying characteristics from the Indonesia 2009 Enterprise Survey. The for security and third lowest losses due to theft, robbery and sample of firms interviewed is representative of the manufacturing and services sectors of the economy. For more information on the vandalism among the countries in the same income group. survey methodology please consult http://www.enterprisesurveys. It ranks at the top and in second place in those indicators org/Methodology/ among countries with similar populations. Almost half of 4. Firms with ≥ 10 percent of foreign ownership are defined as foreign-owned firms pay for security—slightly more than foreign-owned. twice the share of domestic firms. Similarly, exporting * The ownership variables represent the average ownership composition within a firm. These variables do not represent the firms are more likely to pay for security than non-exporting ownership composition across firms. firms (57 percent vs. 23 percent). Paying for security is ** The Incidence of Graft Index is the percentage of instances in which more common among both the retail (44 percent) and a firm was either expected or requested to provide a gift or informal other services (49 percent) sectors than the manufacturing payment during solicitations for public services, licenses or permits. This Index uses data from 6 survey questions for each firm. For sector (19 percent). However, among the firms that pay for purposes of Index computation, a refusal to answer a particular security, manufacturing firms pay a higher share of their survey question is considered an affirmative answer. This Index is sales (2.1 percent) relative to firms in the retail sector (0.6 a modified version of the Graft Index defined in A. Gonzalez et al. percent). 2007. World Bank Policy Research Working Paper #4394. The analysis performed in this note reveals several † Comparator countries in lower-middle-income group: Ecuador2006, El Salvador2006, Georgia2008, Guatemala2006, Honduras2006, important areas of improvement for policy makers. The Indonesia2009, Kosovo2009, Lesotho2009, Micronesia, Fed Sts. use of external finance for investment purposes, which 2009, Moldova2009, Mongolia2009, Nicaragua2006, Nigeria2007, is crucial for firm growth, is quite low in Indonesia Pakistan2007, Paraguay2006, Philippines2009, Samoa2009, when compared to its peer countries in size and income. Senegal2007, Swaziland2006, Timor-Leste2009, Tonga2009, Ukraine2008, Uzbekistan2008, Vanuatu2009, Vietnam2009, Moreover, Indonesia has a low share of trading firms, and Yemen2010. the firms that export generate only a small share of their ‡ Comparator countries with similar population size: Argentina2006, revenues from exporting. Finally, the use of an international Brazil2009, Colombia2006, Indonesia2009, Kenya2007, Mexico2006, quality certification, which has a positive impact on the Pakistan2007, Philippines2009, Poland2009, Russian Federation2009, Turkey2008, Vietnam2009, Ukraine2008. quality of production and productivity, is low in Indonesia. Developing an improved business environment starting with these areas should lead to more job creation, faster growth, and sustained economic development in Indonesia. The Enterprise Surveys measure the business environment in over 100 countries in the world. A standardized questionnaire, universe under study, and implementation methodology is used to make sure information is comparable across countries and time. The full data and documentation explaining the methodology are available at www.enterprisesurveys.org. The Country Notes are a product of the staff of the Enterprise Analysis Unit. The findings, interpretations, and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 6