M RahmanPESTEL analysis of Indonesia
This detailed PESTEL analysis of Indonesia aims to address some of the political, economic, social, technological, environmental, and legal factors that affect Indonesia today. Indonesia is the 4th most populous country in the world. It has the potential to become the next big market for tech investments after China and India.
Political factors affecting Indonesia
Indonesia is a presidential and constitutional republic with the president being the head of state, the head of government, and the commander-in-chief of the Indonesian National Armed Forces. The president’s service to the country is restricted to a maximum of two consecutive five-year terms.
There are many parties that are at the forefront of Indonesia’s politics, notably Indonesian Democratic Party of Struggle, Great Indonesia Movement Party, Democratic Party, and Prosperous Justice Party. The political landscape is characterized by a mix of nationalist, religious, and regional parties, reflecting the diverse interests of its population.
Indonesia maintains very good foreign relations with the neighbouring countries and avoids being entangled with conflicts among other countries. It is a founding member of the Association of Southeast Asian Nations (ASEAN) and the East Asia Summit.
Indonesia is also a member of the UN, the Organisation of Islamic Cooperation (OIC), and the World Trade Organization (WTO). However, it has suspended its membership of the Organization of Petroleum Exporting Countries (OPEC) after having been a member for a long time (OPEC, 2023).
Most Indonesians have confidence in their local police and feel safe while walking home at night. However, it should be mentioned that corruption is widespread throughout the country, particularly in government institutions, and businesses. Likewise, demand for independence in several provinces is also a challenge for the country. Many analysts are also concerned about the country’s political instability.
Economic factors affecting Indonesia
Economic environment is a key of discussion in this PESTEL analysis of Indonesia. Indonesia’s nominal GDP is expected to reach around $1243.00 Billion by the end of 2023 (Trading Economics, 2023). The country’s economy grew tremendously in the last two decades, though it was heavily hit by the Asian financial crisis. Similarly, global lockdowns have also slowed down the economy, though moderate recovery is evident.
Private companies and foreign investors dominate the Indonesian economy; however, it is worth noting that the government is one of the largest owners of businesses. The biggest industries in the country are agriculture, oil and gas, mining, hospitality, automotive, and hydrocarbons.
Tourism is also a big industry in Indonesia. Indonesia’s breath-taking natural beauty, vibrant culture, and rich history make it an increasingly popular destination for tourists from around the world. Bali is undoubtedly its most famous tourist destination. This tropical paradise is renowned for its lush rice terraces, pristine beaches, and vibrant arts scene, attracting millions of visitors each year.
Indonesia imports a variety of commodities from China, Singapore, Japan, Malaysia, and Thailand. Most of its exports go to China, the USA, Japan, India, and Singapore.
The corporate tax rate in Indonesia is 22% (Trading Economics, 2022). Personal tax rate is calculated in line with the residential status of individuals. The residents of the country pay from 5% to a maximum of 30% tax depending on their income. Non-residents pay a flat rate of 20% tax on their gross income.
However, income inequality remains a pressing issue, with a significant proportion of the population living below the poverty line. Furthermore, the country’s infrastructure is in need of significant investment and modernisation to support continued economic growth.
Despite these challenges, Indonesia’s economy has shown resilience and adaptability. The government has implemented a series of economic reforms aimed at improving the business environment and attracting foreign direct investment.
Social factors affecting Indonesia
The population of Indonesia is over 281 million which represents 3.51% of world population (Worldmeter, 2023). Indonesia is the largest Muslim country in the world and approximately 10% of Indonesians are Christian.
The Indonesian constitution ensures religious freedom, and the country is ethnically very diverse as well. Life expectancy is 68 years for men, while 72 years for women (BBC, 2023). Indonesian is the major language; however, the country has more than 300 local languages.
The literacy rate in Indonesia is around 95%. The government spends heavily on both education and health care system. The middle class is growing rapidly in the country, so is the pace of change in consumer behaviour. The demands for Western food and tech products, ready meals, frozen and processed food, healthy food, and fashion are continuously rising.
However, it should be noted that Indonesia faces some massive social challenges e.g. human rights violations, corruption, nepotism, high rate of smoking, malnutrition, and poverty. These challenges need to addressed well to take the country to the next stage of development.
Technological factors affecting Indonesia
The next element to address in the PESTEL analysis of Indonesia is the technological environment. Television is the main medium of mass communication; however, the use of online platforms is also noteworthy. Indonesians are among the world’s most active users of Twitter. Other networks that are doing very well in the country are YouTube, WhatsApp, Facebook, Pinterest, and Instagram.
Indonesia has made some good progress in the adoption of technology over the years. The government has unveiled a plan, dubbed as the Making Indonesia 4.0, to increase the use of technology to stimulate growth and increase industrial capacity in five key areas i.e. food & beverage, automotive, textile, electronics and chemicals. These are the five areas where Indonesia can become a global leader in the future.
The specific tech areas where the government has focused on are the Internet, artificial intelligence, human-machine interface, 3D printing, and robot and sensor technology. These areas offer great opportunities for both local and multinational companies.
It is worth noting that technological development depends heavily on the availability of skilled labour forces which Indonesia does not have enough. Other challenges facing the country are data security, protectionist regulations, and a lack of infrastructure for payments and deliveries.
However, it is worth mentioning the Indonesian government plans to allow start-ups to hire foreign staff more easily to address the shortage of skills in the booming tech sector. It is also working on areas such as high-speed Internet, ultra-low latency, and enhanced connectivity.
Environmental factors affecting Indonesia
Indonesia is located across a chain of thousands of islands between Asia and Australia. In fact, it has around 17,500 islands; however, 7,000 are uninhabited (Encyclopaedia of Britannica, 2023). It is a beautiful country with so much to offer to both local and international tourists. Unsurprisingly, it draws millions of international tourists every year.
However, it is worth noting that the Indian Ocean tsunami killed thousands of people, and destroyed buildings, roads and farmland vastly. Apart from earthquakes and tsunamis, there are some other environmental challenges affecting Indonesia e.g. deforestation, rapid urbanisation, over-exploitation of marine resources, air pollution, traffic congestion, and water pollution.
Legal factors affecting Indonesia
The last element to address in the PESTEL analysis of Indonesia is the legal landscape of the country. However, the discussion here is somewhat limited because of the nature of legal topic.
Employment rights are protected by law in Indonesia. Companies need to give special notice to issues such as leaves, payment for over-time work, working hours, religious holiday allowance, and social security. It should be mentioned that opening a business in Indonesia by a foreign business is a complex and time-consuming process.
Summary of PESTEL analysis of Indonesia
The above analysis demonstrates that Indonesia is a nation that is rich in natural beauty, cultural diversity, and historical significance. From its breath-taking landscapes and vibrant cultural traditions to its dynamic economy and growing tourism industry, it offers a wealth of opportunities and experiences for both residents and visitors alike.
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Last update: 17 April 2023
References:
BBC (2023) Indonesia country profile, available at: https://www.bbc.co.uk/news/world-asia-pacific-14921238 (accessed 16 April 2023)
Encyclopaedia of Britannica (2023) Indonesia, available at: https://www.britannica.com/place/Indonesia (accessed 16 April 2023)
OPEC (2023) Member countries, available at: https://www.opec.org/opec_web/en/about_us/25.htm (accessed 16 April 2023)
Trading Economics (2023) Indonesia corporate tax rate, available at: https://tradingeconomics.com/indonesia/corporate-tax-rate (accessed 16 April 2023)
Worldometer (2023) Indonesia population, available at: https://www.worldometers.info/world-population/indonesia-population/ (accessed 15 April 2023)
Author: M Rahman
M Rahman writes extensively online and offline with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.
