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1 Indonesia Week 6. 2 Current economic position Monetary crisis in 1997 Indonesian economy suffered from 13.1% GDP contraction Inflation rate of 77% in.

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Presentation on theme: "1 Indonesia Week 6. 2 Current economic position Monetary crisis in 1997 Indonesian economy suffered from 13.1% GDP contraction Inflation rate of 77% in."— Presentation transcript:

1 1 Indonesia Week 6

2 2 Current economic position Monetary crisis in 1997 Indonesian economy suffered from 13.1% GDP contraction Inflation rate of 77% in Since then Indonesian economy remains growing albeit slowly Pre-crisis converted from an economically backward and poor country in 1970's To medium-income level country of more than US$ 1,200 per capita in early 1990's Annual average GDP growth rate of more than 7% in 25 years.

3 3 Current economic position As mid-January 2004 The Indonesian economy will remain stable Rupiah`s exchange and inflation rates staying at steady levels The country to continue to have sufficient foreign exchange reserves Bank Indonesia predicts the country`s macro-economic stability will create a climate good enough for the economy to grow at a rate of four to five percent in Stimuli for economic growth will come not only from increased exports and investment but also from private consumption which is expected to grow at a rate of 4.2 percent to 5.2 percent

4 4 Culturally diverse Population of almost 200 million people on 13,667 islands Only 35% of the population live in urban areas Over 300 distinct cultures residing within its borders Islamic 85% Christian 10% Others 5%

5 5 Hofstede Characteristics of work context Relationship between employer & employees is moral rather than calculative Implies mutual obligations of protection from employer (irrespective of performance) Loyalty towards employer from employee Employees have strong obligations towards relatives Relationships take precedence over tasks Strong need for harmony and preserving face Paternalistic Acceptance of status differences Reluctance to plan ahead

6 6 Engines of Economic growth pre-crisis Study (2003) based on unpublished Statistical Data The contribution of SMEs to total manufacturing value added remained relatively small Contribution to the Indonesian economy in terms of employment generation was significant SMEs can coexist with LEs (large-scale enterprises) By producing a unit of output with less capital but more labour than LEs Labour productivity in SMEs and LEs increased at a similar rate during the period Increase in labour productivity of SMEs in the machinery industry was faster than in other main product sectors. SMEs in the machinery industry also increased their TFP markedly, compared with both SMEs in other sectors and LEs in the same sector.

7 7 Islamic Banking Indonesia is primarily a Muslim country and much of its business culture cannot be separated from the religious background. Islamic Banking Reject the use of interest as a reward or charge Interest is conceived as usury and is unjust in the eyes of Allah Use profit sharing approach to both debtors and creditors Western banks cannot be separated from any product bearing interest Islamic banks cannot accept any product which bears interest

8 8 How can Islamic banks function? Types of products offered Wadiah Agreement between one person who owns goods (eg money) and another (eg a bank) to whom the goods are entrusted. Any benefit from the goods belongs to the bank. But the owner can benefit from a pre-arranged non- withdrawl bonus. This is not interest, it is a pre-negotiated arrangement.

9 9 How can Islamic banks function? Types of products offered Murabahah (savings and deposit) An arrangement between an owner of capital (eg a bank) and an entrepreneur. Bank provides capital for a project. Entrepreneur is responsible for the management of the project. Any profit is divided into pre-arranged portions

10 10 How can Islamic banks function? Types of products offered Qardhu ul-hasan A credit facility for those in financial difficulty Especially as a result of health care, weddings or education. The borrower only has to pay back the principal No interest is charged There is a pre-arranged administration charge Based on merit of the project and not current market value of money

11 11 Is there an Indonesian style of management? Remember Hofstedes analysis Background to Indonesian management development Largely Dutch based After overthrown of imperial power in 1949 Lack of suitably trained managers Independence in 1957 Inflow of foreign investment Development of government instituted management training Universities generally Dutch/UK principles Growth of power of local Chinese entrepreneurs

12 12 Unity in Diversity Javanese style – politically dominant Leaders should demonstrate Musyawarah (Mutual deliberation) Mufakat (common unanimous decision) Should seek consensus guided by social harmony Power is never explicit Only a weak leader displays force or coercion Important role of halus (calm serenity)

13 13 Typical SME management characteristics Manager usually owner No long term strategy Important decisions made by manager/owner Employees and middle management seek approval for almost any decision from the boss Father-figure leadership role (Bapak) Often family are in middle management positions This style of management can put off foreign investors

14 14 International influence FDI cannot be separated from management development Western companies hire local employees and managers but apply western management techniques Japanese multinationals do not hire locals but form JVs Management style influential Korean Chaebols are big investors Korean and Japanese management style is similar to Indonesian Based on deference to authority and trust

15 15 SOE sector Still many SOEs Mostly former Dutch companies which were nationalised Recent attempts at reform Privatising non-profitable SOEs Management is limited – restricted authority Rise of conglomerates (konglomerat) Driving force behind Indonesian economic development Mainly Chinese owned Of top 25 only 5 owned by ethnic Indonesians Adopting new management techniques Reliance on informal relationships between owners and associates

16 16 Downside of peace and harmony Desire not to deliver bad news The philosophy of asal bapak senang (keep father happy) Subordinates do not wish to inform seniors of bad news

17 17 The (sad) case of Bank Duta in 1989 Manager of dealing room found $US20 million loss in FX trading Didnt say anything Two days later $US70 million loss President-director only told before scrutiny of year-end reports He did not inform the board Told dealing room manager to keep quiet Subsequent loss was $US419 million

18 18 Indonesian Corporate Culture Key attributes of the Indonesian business person Assertiveness Conceal negative feelings Play down positive feelings Are typically non-assertive Yes means Yes (or No) Believe to say No invites conflict Therefore Indonesians will say yes when they mean no. How do you tell what they mean………. Understatement Indonesians will not give their opinion unless invited to do so Deference

19 19 Indonesian Corporate Culture Analytical thinking Education system encourages learning by rote Underdevelopment of analytical thinking Lack of individualism Emphasis on communalism Leadership Every leader should be a good example to their subordinates trough their positive attitudes, measured, wise words and exemplary behaviour Every leader should be disciplined, independent and creative in their relationship with employees That every leader should be known by their achievements and their sense of responsibility towards their employees Initiative Lack of general initiative Part of paternalistic approach to corporate culture

20 20 Old and New management style Traditional generalised type of Indonesian business person Limited knowledge and understanding of foreign cultures Demonstrate domestic-oriented thinking Great pride in Indonesian culture Rigid and conservative Many have received training at home or abroad Do not have good foreign language skills Require intermediary to communicate with foreigners New breed modern types Well-educated especially abroad Able to think globally Understand foreign cultures and can speak English Are proud of Indonesian culture but aware of political and economic shortcomings

21 21 Post-crisis recovery Debt-ridden corporations and failure of governance have affected investor confidence Existing risks New laws and regulations especially the regional autonomy new consumer and labour laws are expected to cause new extra costs for company operations. In the banking and financial sectors IBRA (Indonesian Bank Restructuring Agency) is still far behind the target milestones.

22 22 Post-crisis recovery Implementation of Code of Corporate Governance Indonesian Code of Good Corporate Governance issued May 2000 by NCCG (National Committee of Corporate Governance) Ministerial Decree of SoEs Based on 4 essential principles of corporate governance: Transparency Independence or Fairness Accountability Responsibility

23 23 Risk & Audit Company is expected to disclose material foreseeable risk factors, including management assessment of the business climate and risk factors Mandatory establishment of Audit Committee suggested by Jakarta Stock Exchange Ministerial Decree for Indonesian SoEs Three principal domains of role and responsibility of the Audit Committee: Companys disclosure, especially those related to Companys financial disclosure Companys Internal Control Practices Companys Corporate Governance Practices

24 24 Risk analysis Company risk is grouped into two categories: Financial Risk and Non Financial Risk. Financial Risk consists of four sub-risks: Market Risk, the risk of financial loss resulting from a change in the value of tradable assets. Credit Risk, the risk of financial loss resulting from a default of the counterpart. Operational Risk, the risk of financial loss resulting from operational failure. Reputation Risk, the risk of financial loss resulting from the loss of business attributable to a decrease in the institutions reputation.

25 25 Risk analysis Non-Financial Risk is viewed from two perspectives: Micro perspective; the risk resulting from uncertainty due to the internal elements of institution such as: people, process, event, and system and technology. Macro perspective; the risk resulting from uncertainty due to external factors such as: Government, Industry and domestic business environment, Society, and international business environment.

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