Doing Business in Indonesia and Malaysia
Indonesia and Malaysia are countries with the fastest growing economies in the world. Together with Singapore, Thailand, Philippines and Vietnam, Indonesia and Malaysia are the top performers in the Association of Southeast Asian Nations (ASEAN) region. Despite the slowdown during the financial crisis in 1997, ASEAN economies are starting to pick up again. This is because of their strong emphasis on industry and services while an export-led growth strategy is complemented by efforts to improve business environments and to realize the potentials of a relatively young and educated labor force.
The strong economic performance of Indonesia and Malaysia (See Figure 1) is the reason why it belongs to the countries dubbed as the ASEAN “crouching tigers”. Figure 1. Real Gross Domestic Product (GDP) growth in % of leading ASEAN countries (Source: Euromonitor, 8 November 2006). In the overall, doing business in Indonesia and Malaysia remains satisfactory.
These countries are benefiting the strong growth in their region as the Economic Intelligence Unit (EIU, 10 October 2007) reported that Asia and Australasia has been the world’s fastest-growing region economically for much of the past 25 years, and its share of world GDP (at purchasing power parity) has risen from just over 20% in the
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The ethnic groups tend to be derived from the Malay ethnolinguistic groupings, including the Javanese, which make up almost half the population, as well as Sundanese, Madurese and coastal Malays, among others. A substantial minority of European and North American expatriates are also living in Indonesia, along with some people of Dutch extraction who are descendants of the colonists. Since independence, the national language, called Indonesian – a form of Bahasa Malaysian – has spread throughout the country and become the language for most written communication, education, government and business.
Many local languages remain important in several areas, the most significant of which is Javanese. While English and Dutch are two non-native languages also used in Indonesia, English is the most widely spoken foreign language. Because of their culture, the U. S. Commercial Guide for Indonesia (2007) emphasized that Indonesians do not conduct business transactions or make decisions in the same direct fashion Americans do, so U. S. business people should be prepared to spend a good deal of time with clients before getting down to the business transaction.
Traditional Javanese culture puts emphasis on harmony and the word “no” is rarely used. Thus, this attitude can make it difficult for a Westerner to ascertain exactly how a business proposal is being received. However, patience and the development of personal relations can be a good virtue in doing business in Indonesia. On the political side, the Indonesian government prided its medium-term development plan for 2005–2009 envisages annual average GDP growth of 6. 6% in order to reduce unemployment and poverty significantly.
It focuses on four broad objectives: creating a safe and peaceful Indonesia, creating a just and democratic Indonesia, creating a prosperous Indonesia, and establishing a stable macroeconomic framework for development (AsiaPulse News, 31 July 2006). However, this plan has been largely criticized to be ambitious. There are still risks in Indonesia due to the repeated terrorist attacks in Bali and Jakarta set back foreign investment and the tourist industry but both began to recover in 2007 (Beech, 5 March 2007).
On the legal side, Indonesia issued a government policy that encourages private sector-led growth and foreign investment. It has eliminated many restrictions on foreign investment in retail and wholesale operations (Aswicahyono & Hill, 1995). Foreign firms are now allowed to invest directly in both wholesale and large-scale retail trade sectors (generally interpreted as shopping centers, malls, supermarkets, and department stores), with the condition that they enter into a cooperative agreement with a small-scale enterprise.
In addition, many foreign firms use franchising, licensing, and technical service agreements to distribute their goods. However, corruption and red tape are routinely cited by foreign businesses as factors hindering their operations in Indonesia (Robison & Hadiz, 2004). Malaysia Compared to Indonesia, Malaysia is doing better in terms of economy. With a population of 24 million (CIA World Factbook, 4 October 2007), Malaysia today prides as one of Southeast Asia’s most vibrant economies as a result of decades of rapid industrialization and political stability.
Like Indonesia, Malaysia has a great diversity in its ethnicities, linguistic groups, cultures and religions. The population of Malaysia can be divided into four major ethnic groups: the Malays, the Chinese, the Indians and the indigenous people. In addition, there are Europeans, Americans, Australians, Eurasians, Middle Easterners and Thais, as well as people of mixed ancestry. Ethnic Malays and other indigenous peoples comprise 58 percent of the population. They are the largest, as well as the most homogeneous ethnic group, in the country in terms of culture, language and religion.
Its people share a common culture and speak a common language – Malay – the official language of Malaysia. Almost all Malays are Muslims, and adherence to the religion is seen as an important factor distinguishing a Malay from a non-Malay (Kheng, 2002, p. 186). The U. S. Commercial Guide for Malaysia (2007) indicated that Malaysia has a better business culture than Indonesia. In fact, it reported that business customs in Malaysia do not differ fundamentally from those of the U. S.
As personal relations are vital, frankness, openness, and punctuality are valued traits in business negotiations and dealings. However, visitors should be aware of religious and cultural traditions, which differ for each ethnic group. For example, Malay Muslims may feel uncomfortable in business or social functions where alcohol or pork is served, and visitors should take note that items (such as business cards) should always be presented or received using the right hand. On the political side, the stability of the government is relatively stable.
However, Malaysia has come under pressure from the US to cooperate more closely on anti-terrorism measures (Xinhua News Agency, 16 November 2005). The country also rejects a claim by the Philippines for the sovereignty of Sabah. Malaysia is pressing Indonesia for the return of two islands, Sipadan and Ligitan, and is one of many claimants for the Spratly Islands in the South China Sea. Recently, a top European diplomat in Malaysia made remarks deemed critical by the Malaysian government.
At issue was the view expressed by the head of the European Commission delegation in Malaysia, Thierry Rommel, who described the country’s pro-Malay political spectrum as being discriminatory and its economic policies toward foreign entities as being protectionist. In response, the Malaysian Foreign Ministry called for a meeting with Rommell to discuss the matter, which drew the ire of many Malays in this ethnically-diverse country. After the meeting, Rommell noted that he had clarified his views (Netto, 29 June 2007).
With regards to the legal side of establishing business, the Malaysian government is supportive of foreign direct investment, particularly in export-oriented manufacturing and high-tech industries, but retains considerable discretionary authority in approving individual investment projects. Most existing foreign-owned manufacturing firms are required by their licenses to export a certain percentage of their production. However, these export requirements for existing manufacturing projects have been temporarily eased.
Also, Malaysia offers a number of fiscal incentives to foreign manufacturing investors (Edwards, Ahmad & Moss, 2002). Historically, these incentives have been linked to performance criteria such as export-percentage requirements, as specified in individual manufacturing licenses.
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