PESTEL 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 the country’s politics, notably Indonesian Democratic Party of Struggle, Great Indonesia Movement Party, Democratic Party, and Prosperous Justice Party.
Indonesia maintains very good foreign relations with the neighbouring countries and avoids being entangled with conflicts among other nations. It is a founding member of the Association of Southeast Asian Nations (ASEAN) and the East Asia Summit. It is also a member of the UN, the Organisation of Islamic Cooperation (OIC), and the World Trade Organization (WTO). However, it suspended its membership of the Organization of Petroleum Exporting Countries (OPEC) in 2016 (Asmarini & Jensen, 2016).
According to the 2018 Global Law and Order Report by the US-based research organisation Gallup, 69% Indonesians have confidence in their local police and 68% feel safe while walking home at night. This gives Indonesia one of the highest law and order ratings in the world (Asian Correspondent, 2019). 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
Indonesia is the 16th largest economy in the world. Its nominal GDP in 2018 was $1.02 trillion. The GDP per capita for the same year was $3,871 which was $14 less than that in 2017 (Country Economy, 2019). The country’s economy grew tremendously in the last two decades, though it was heavily hit by the Asian financial crisis in 1997.
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. 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 25% (Trading Economics, 2019). 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. The unemployment rate in Indonesia is 5.78 %. This is an average rate which is calculated by considering the data available for the last two decades.
Social factors affecting Indonesia
As of December 2019, the population of Indonesia is 271,936,596 which represents 3.51% of world population (World Meters, 2019). Indonesia is the largest Muslim country in the world and approximately 10% of Indonesians are Christian. The constitution ensures religious freedom and the country is ethnically very diverse as well. Life expectancy is 67 years for men, while 71 years for women (BBC, 2018). 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.
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 (Oxford Business Group, 2019).
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.
Environmental factors affecting Indonesia
Indonesia is located across a chain of thousands of islands between Asia and Australia. It is a beautiful country with so much to offer to both local and international tourists. Approximately 15.8 million foreign tourists visited the country in 2018; however, the government’s target was 17 million. The reasons why the target was not met are mostly attributed to multiple earthquakes and tsunamis.
The Indian Ocean tsunami in 2004 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.
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Last update: 15 December 2019
Asian Correspondent (2019) Indonesia given one of the highest law and order ratings in the world, available at: https://asiancorrespondent.com/2018/06/indonesia-given-one-of-the-highest-law-and-order-ratings-in-the-world/ (accessed 10 December 2019)
Asmarini, W., & Jensen, F. (2016) Net oil importer Indonesia leaves producer club OPEC, again, available at: https://www.reuters.com/article/us-opec-meeting-indonesia/net-oil-importer-indonesia-leaves-producer-club-opec-again-idUSKBN13Q3M7 (accessed 14 December 2019)
BBC (2018) Indonesia country profile, available at: https://www.bbc.co.uk/news/world-asia-pacific-14921238 (accessed 25 November 2019)
Country Economy (2019) Indonesia GDP, available at: https://countryeconomy.com/gdp/indonesia?year=2018 (accessed 10 December 2019)
Oxford Business Group (2019) High-tech revolution to improve Indonesia’s industrial competitiveness, available at:https://oxfordbusinessgroup.com/news/high-tech-revolution-improve-indonesia%E2%80%99s-industrial-competitiveness (accessed 14 December 2019)
Trading Economics (2019) Indonesia corporate tax rate, available at: https://tradingeconomics.com/indonesia/corporate-tax-rate (accessed 12 December 2019)
World Meters (2019) Indonesia population, available at: https://www.worldometers.info/world-population/indonesia-population/ (accessed 14 December 2019)
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Author: M Rahman
M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He is a graduate of Leeds Metropolitan University and London South Bank University.