One of the most common questions we receive is: “We understand that Indonesia is an attractive market, but what are the associated risks and key considerations?”

It is often said that risk and return go hand in hand. The more attractive a market, the more crucial it is to understand and prepare for potential challenges.

In this article, we provide a concise summary of the key risks and considerations we regularly discuss with our clients regarding business expansion into Indonesia.

Risks of Expanding into Indonesia

Risk 1: Complex Regulations and Legal Framework

Indonesia’s regulatory structure is highly complex, with laws and regulations enforced by multiple authorities, including the central government, local governments, and specialized agencies overseeing specific sectors. The diversity of these regulations, coupled with frequent legal changes, makes compliance even more challenging.

Navigating these complexities is not just difficult for foreign businesses—local government officials themselves often struggle with regulatory interpretations. As a result, it is common for companies to receive varying responses depending on which official they consult at a government office.

Risk 2: Strict Foreign Investment Regulations

In Indonesia, the minimum paid-up capital required to establish a foreign-owned company (PMA) is set at $600,000 USD.

Until recently, companies were allowed to deposit only 25% of this amount into a bank account at the time of incorporation. However, in 2021, the regulation was revised, requiring foreign investors to deposit the full $600,000 USD. upfront. This change has made it more challenging to establish foreign-owned businesses in Indonesia.

Moreover, foreign companies must allocate this $600,000 USD. investment per business license, not per company. This means that businesses engaged in multiple sectors may need to secure billions more in capital, further increasing the financial burden on foreign investors.

Additionally, Indonesia maintains a Negative Investment List, which restricts or prohibits foreign ownership in certain industries. Some sectors allow foreign investment but impose ownership caps, limiting the percentage of foreign shares allowed. These restrictions add another layer of complexity for foreign businesses looking to enter the Indonesian market.

Risk 3: Intense Market Competition Post-Entry

Indonesia is well known for its large and rapidly growing market, making it an attractive destination for businesses. However, this very attractiveness leads to intensified competition, as more companies seek to enter the market.

In addition to Japanese firms, businesses from other countries are also expanding into Indonesia, further increasing competitive pressure.

This means that merely entering the Indonesian market is not the end goal—it is just the beginning of the real challenge. Companies must be prepared to differentiate themselves and establish a strong competitive edge to succeed in this dynamic business environment.

Risk 4: Employment Restrictions for Certain Professions

Indonesia imposes restrictions on foreign employment in specific professions, meaning that foreign nationals are prohibited from holding certain positions, such as accounting and human resources (HR) roles.

As a result, when a Japanese company expands into Indonesia, it must hire local professionals to handle these critical functions.

Since accounting and HR are essential to a company’s growth and stability, businesses should not take a casual approach to recruitment simply because they are required to hire local employees. Instead, it is crucial to invest time and effort in hiring qualified local talent to ensure the company’s long-term success.

Risk 5: Rising Minimum Wages

Indonesia’s minimum wage increases annually, often creating challenges for businesses operating in the country.

For example, according to local media reports, then-Governor Anies Baswedan announced a 5.11% increase in Jakarta’s minimum wage for 2022, raising it from IDR 4,453,945 (approx. JPY 35,632) to IDR 4,641,854 (Kompas, December 19).

Typically, labor unions advocate for higher wages, while business associations and chambers of commerce oppose sharp increases. However, wage hikes continue to be implemented despite resistance from the business community.

Ideally, wage increases should be accompanied by improvements in labor productivity, but in many cases, the discussion focuses solely on wage hikes, leaving productivity concerns unaddressed.

Key Considerations for Expanding into Indonesia

Key Consideration 1: Severe Traffic Congestion

Indonesia is known for having some of the worst traffic congestion in the world, with Jakarta often mentioned alongside cities like Bangalore, India, as one of the most gridlocked urban areas.

One of the main reasons behind Jakarta’s severe traffic conditions is its underdeveloped transportation infrastructure. In cities like Tokyo, Japan, an extensive subway network allows people to travel efficiently without relying on cars. In contrast, Jakarta’s mass rapid transit (MRT) system is still in its early stages of development.

Given the slow progress in infrastructure expansion, Jakarta’s traffic congestion is expected to remain a major issue for at least the next 10 to 20 years. Those planning to live and work in Jakarta should carefully consider how commuting challenges may impact their daily schedules and business operations.

Key Consideration 2: Cultural Differences

It goes without saying that Japan and Indonesia have vastly different cultural backgrounds, which can significantly impact workplace dynamics and management styles.

For example, Indonesians strongly dislike being reprimanded in front of others. Public criticism can be deeply humiliating, and in some cases, employees may even choose to resign as a result. Therefore, if an employee makes a serious mistake, it is essential to discuss the issue privately in a separate room rather than addressing it in front of colleagues.

Another important cultural aspect is Islamic prayer times. Many Indonesian employees are Muslim, and they are required to pray five times a day. Prayer is a fundamental religious practice, and in Indonesia, employers cannot prohibit employees from taking breaks for prayer.

These are just a few examples of the many cultural differences that foreign businesses must navigate. Successful management in Indonesia requires an understanding and respect for these cultural nuances to foster a harmonious and productive work environment.

Key Consideration 3: Different Work Ethic and Priorities

In general, Indonesian employees are less likely to work overtime compared to their Japanese counterparts. This is because work is not their top priority in life—many Indonesians place greater importance on personal time and family.

For example, rather than staying late at the office until 10 or 11 PM, most employees prioritize going home on time to have dinner with their families.

Additionally, job-hopping is more common and widely accepted in Indonesia compared to Japan. Due to the country’s rapid economic growth, many professionals believe that changing jobs frequently is the fastest way to secure higher salaries rather than staying with one company for an extended period.

Understanding these differences in work culture is crucial for retaining talent and managing employees effectively in Indonesia.

Key Consideration 4: Shortage of Mid-Level Managers

Many Japanese companies operating in Indonesia have expressed concerns about the lack of experienced mid-level managers. This talent gap poses a significant challenge, as a strong mid-management layer is essential for maintaining operational efficiency and business competitiveness.

The shortage of qualified mid-level managers directly impacts a company’s ability to grow and compete effectively in the market. However, this is not an issue that can be resolved overnight. Businesses must take a long-term approach to talent development, focusing on training, mentoring, and internal promotions to gradually build a capable mid-management workforce.

Key Consideration 5: Employee Ethics and Integrity

Cases of embezzlement and fraud are not uncommon in Indonesia. For instance, there have been reports of accounting staff creating fake employees and using their authority to transfer salaries to non-existent workers.

Additionally, some Japanese companies in the food and beverage industry have struggled with cash handling discrepancies, where daily transactions do not reconcile properly.

A lack of strict ethical standards among employees can become a serious concern, as some may think, “It’s just a small amount, so it should be fine,” or “No one will notice.”

Businesses expanding into Indonesia must implement strong internal controls, regular audits, and clear ethical guidelines to mitigate financial risks and ensure operational transparency.

Misconceptions About Expanding into Indonesia

Misconception 1: Frequent Bombing and Terrorist Attacks

Some people with limited knowledge of Indonesia may associate the country with frequent terrorist attacks, similar to those seen in certain regions of the Middle East or Africa, where armed conflicts and bombings occur regularly.

However, in reality, the likelihood of such incidents occurring in Indonesia is relatively low. Major terrorist attacks are rare, and even in Jakarta, the capital city, such incidents happen at most once or twice a year—if at all.

According to data from the Public Security Intelligence Agency (PSIA) of Japan, Indonesia does experience occasional security incidents, just as Japan does. Crimes such as homicides or kidnappings occur worldwide, and Indonesia is no exception. The overall safety level in most urban areas is comparable to that of many other countries.

For businesses and expatriates, being cautious and staying informed is always advisable, but the perception of Indonesia as a country plagued by frequent terrorist attacks is largely exaggerated.

Misconception 2: Islam is Indonesia’s State Religion

While Islam is the dominant religion in Indonesia, with approximately 86.69% of the population identifying as Muslim, it is not the country’s official state religion.

According to Indonesia’s Ministry of Religious Affairs (2019 data), the country’s religious composition is as follows:

• Islam: 86.69%
• Christianity: 10.72% (Protestant: 7.60%, Catholic: 3.12%)
• Hinduism: 1.74%
• Buddhism: 0.77%
• Confucianism: 0.03%
• Others: 0.04%

Indonesia officially recognizes six religions (Islam, Protestantism, Catholicism, Hinduism, Buddhism, and Confucianism), and freedom of religion is protected by law.

This religious diversity and tolerance are among Indonesia’s defining characteristics, making it a unique and inclusive society despite being the world’s largest Muslim-majority nation.

Misconception 3: Pork and Alcohol Are Completely Banned in Indonesia

While Islamic dietary laws prohibit the consumption of pork and alcohol, this restriction does not apply to followers of other religions in Indonesia.

As mentioned earlier, Indonesia officially recognizes multiple religions, and as a result, pork and alcohol are legally available for those who consume them.

In major cities like Jakarta, where there is a significant population of non-Muslims and expatriates, it is relatively easy to find bars, restaurants, and supermarkets that sell both pork and alcohol. Many international hotels and licensed establishments also serve alcoholic beverages.

However, availability may vary depending on the region. In provinces with a higher concentration of conservative Muslim communities, access to alcohol and pork may be more restricted.

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Company Formation in Indonesia

Conclusion

In this article, we have outlined the risks and key considerations associated with expanding into Indonesia. However, it is important to note that every country presents its own challenges and risks when entering a new market.

Despite these challenges, many companies continue to explore opportunities in Indonesia—a testament to the country’s strong market potential and economic appeal.

We have extensive experience supporting Japanese companies in their expansion into Indonesia. If your company is considering entering the Indonesian market, we would be happy to assist you. Please feel free to reach out to us for more information.