Indonesia is one of the most attractive markets in Southeast Asia for tech investment. According to data by Google and A.T. Kearney, tech investment in the country has grown from US$1.4 billion in 2016 to US$3 billion in January-August 2017 alone.
The numbers are also expected to grow, with Alessandro Gazzini, a Partner at A. T. Kearney, predicting that it will pass the country’s investment in oil and gas sector, which was at US$5 billion in 2016.
But for foreign startups looking to enter the market, expanding to Indonesia can be challenging. In fact, a spokesperson from the local chapter of Silicon Valley-based accelerator Plug and Play once told e27 that a number of its participants decided to resign from the programme when they realised their own unpreparedness to enter the market.
Your Indonesia expansion begins with setting up your company in the country. To help you get started, we are laying down the basics on how to set up shop in the world’s largest archipelago.
Limited liability companies in Indonesia require at least two shareholders, which can be either individuals, corporates, or a combination of both.
The legal entity which enables foreign individual or corporate investors to conduct businesses in the country is called Perseroan Terbatas Penanaman Modal Asing (PT PMA). With its establishment being regulated by the Law No. 40/2007 regarding Limited Liability Companies (Company Law), a company will be considered foreign-owned even if there is only one per cent of foreign ownership in its shares.
To find out more details about the limit of foreign ownership in a particular industry, you can check the regularly revised negative investment list.
What is a negative investment list? Simply put, the list is of industries in the country that are being closed to foreign ownership. Even if foreign investors were allowed to invest in these industries, the number of investors and their shares will be limited by the law. Exact details about these numbers can be seen in the link pasted above.
The negative investment list is reviewed every three years. One important point to note is that Indonesia applies the grandfathering principle. It means that if your industry is being put under the negative investment list AFTER you begin operations for some time, there is no need for you to sell your shares to a local investor.
How about tech investment?
In the negative investment list, tech investment is generally open for foreign investment with several requirements on foreign ownership. Here are some examples of tech industries and the limitation of foreign ownership:
1. Online marketplaces, daily deals sites, and classified ads sites with investment value under IDR100 billion (US$6.8 million) are allowed a maximum of 49 per cent foreign ownership
2. Venture capital firms are allowed a maximum of 85 per cent foreign ownership
3. Research and development of genetically modified crops and resources are allowed a maximum of 49 per cent of foreign ownership
The minimum investment required to set up PT PMA is IDR10 billion (US$750,000) with minimum paid up capital of IDR2.5 billion (US$190,000).
The next big question about expanding to the Indonesian market would be: Should I set up a PT PMA, or would having a representative office (Kantor Perwakilan Perusahaan Asing, KPPA) be a better alternative?
The answer depends on what you want to achieve. If you aim to generate income from local activities then you should set up a PT PMA. But if you only aim to perform marketing, promotional activities, market research, or a business opportunities review, then a KPPA would be sufficient.
To set up a KPPA, a business needs to have already been incorporated in another country. The benefits of establishing a KPPA in Indonesia is that, unlike PT PMA, there is no restriction on foreign ownership.
Many companies began their expansion to Indonesia by setting up a KPPA first, to get a deeper understanding of the market, before setting up a PT PMA.
Another important point to for opening a business in Indonesia is deciding the location.
Many foreign startups opt to set up base in Jakarta. As the capital city of Indonesia, Jakarta provides opportunity with an estimated population over 10 million (2016). It is also the centre of economic and political activities.
The Provincial Government of DKI Jakarta and BKPM has also signed an MOU to highlight their commitment in providing ease for tech companies to set up businesses in the city.
Carlson Lau, CEO of coworking space chain COCOWORK, explains to e27 why the company chose Jakarta as its base.
“Jakarta is a good congregation point for businesses and other regulators, which makes the setting up and running of businesses faster as a first port of call,” he writes in an email.
This does not mean other cities are not attractive.
Bali, particularly in the town of Ubud and Kuta, has been a favourite of startups working in the cryptocurrency sector. This is related to the bustling tourism sector of the island province; foreign tourists who came to visit Bali might have been familiar with the concept of cryptocurrency in their home country.
Though living costs in Bali is almost as high as Jakarta, with comparable traffic congestion issue, its tourism industry provides a unique opportunity for startup founders to network. Example of leading Indonesian startups coming from the province is Tokobagus, which was acquired by OLX in 2014.
Another important point related to location is the office address. While regulations vary between cities, it is important to know that in Jakarta, businesses are not allowed to use residential address to register their business.
The good news about setting up business in Indonesia is that this year, the government has launched a one-stop service portal for foreign investors to register their business.
Called the Online Single Submission (OSS), the platform significantly reduces the time it takes to register a business from five months to just seven weeks.
Launched by the Investment Coordinating Board, OSS enables investors to submit all the necessary requirements to a single platform instead of having to visit different desks at various ministries like before.
Before using the OSS, business owners need to complete the business incorporation process on the Ministry of Law and Human Rights’ AHU Online platform.
They will also need a Single Identity Number (Nomor Induk Kependudukan, NIK) of the main director to create a user ID on OSS. If they do not have an NIK, they can create one by using a passport number, for example.
Once this process is done, business owners can create a user ID (preferably using the company’s business email address) and log in to the OSS platform. Fill in the data to obtain a Single Business Number (Nomor Induk Berusaha, NIB).
Once the NIB is secured, businesses can start applying for other registration documents such as tax number, universal health care certificate of membership (BPJS Kesehatan, BPJS Ketenagakerjaan), Approval Letter of Foreign Employee Utilisation Plan, fiscal incentives, and business licenses.
Another question that is often asked is, “Should I use the help of an agent or consultant in this process?”
The answer can be both yes and no. Using an agent or consultant can help minimise the time one needs to familiarise themselves with the system, but at the other hand, it will require an extra cost that might be a burden for many startups.
“As a coworking space, we have a network of trusted lawyers, one of whom helped us with the business registration process. Would strongly recommend using a lawyer as there are a number of startups who have experienced the same process before, and would be good to adopt the same best practices,” Carlson Lau said, explaining his company’s experience.
The CEO definitely recommends working with a partner when handling one particular matter: Dealing with government officials.
“Work with a good local partner who can work jointly to navigate the system in Indonesia,” he closes.