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INDONESIA COUNTRY ANALYSIS REPORT BA 0176 GBE 13/14 CA2 DAC/FT/3A/58 201 3 Singapore Polytechnic 7/12/2013 Chia Hang Siang (1101001) Tan You Zhe (1101452) Liu Hui Min Deborah (1101605) Nicole Goh (1101618) Wendy Koh Kai Xing (1162554)

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INDONESIA COUNTRY ANALYSIS REPORT

Table of ContentsExecutive Summary11.Introduction21.1Demographic Features of Indonesia21.2Geographic Features of Indonesia32.Economic and Social Analysis of Indonesia and China32.1Economic Analysis of Indonesia and China32.2Social Environment Analysis of Indonesia and China63.Financial Environment Analysis93.1 Structure of Financial System94.Political Environment Structure114.1 Indonesias Political and Legal Environment114.2Chinas Political and Legal System135Government regulations & initiatives155.1Trade Promotions and Intervention Initiatives by Government156Michael Porters Competitive Advantage Theory187Risk Analysis19Conclusion21Appendix I22Appendix II28References30

Executive SummaryIn recent years, costs have risen sharply across China, giving rise to predominant risks of investing there. The purpose of this report is to provide a recommendation if Indonesia is a viable location outside China to set up a new manufacturing operation that is worthy of Blake @ Internationals investments.After performing the analysis of the countrys macroeconomic attractiveness and comparing the two countries, Indonesia and China, the recommendation is to invest in Indonesia and the following points support this argument:1. Strong GDP growth after a remarkable recovery in the banking sector in 2012, resulting in high profitability and continued growth as well as increased stability and resilience to crises.2. Increase in GNI per capita which shows a major increase in the average wealth of the citizens which creates a potential increase in sales opportunities.3. Robust economy with an improved debt-to-GDP ratio that provide investors with more assurance about the security of the investment.4. Stable currency rate which prevents huge differences in profits to arise due to currency fluctuations.5. Ease of setting up a business due to simplified procedures to register business in Indonesia.6. Key skilled employees can be employed from other countries as rights are given to foreign investors to employ expatriates in certain positions after obtaining proper permit from the local manpower. 7. Attractive trade promotions and intervention initiatives by the Indonesian government to bring in potential investors.On the other hand, a risk analysis performed has brought forward some risks if the investment is to proceed. The risks are as follows:1. Financial Risks where Indonesia has a huge dependency on its vulnerable banking industry2. Political Risks where corruption and policy uncertainties worry investors

The report has analysed the advantages and disadvantages of investing in Indonesia as well as compared the two countries, Indonesia and China. We are confident that Indonesia is a feasible location that is worth investing in. Hence, with our proposal, we recommend you to invest in Yogyakarta (Indonesia). We will be delighted to engage in a further discussion with you to address any concerns pertaining to this investment.1. Introduction1.1 Demographic Features of IndonesiaThe Indonesian population stands at 248,645,008 as of 2012, forming the fourth most populous nation with 42.2% of the age structure belonging to the working age group of 25-54 years. Indonesia is a growing nation with almost half of the population being urbanized and a rate of urbanization of 1.7% annual rate of change. The most populated and major cities are Jakarta, the capital of Indonesia, Surabaya and Bandung. The primary language spoken in Indonesia is Bahasa Indonesia and English. The majority, 90.4%, of the population is literate. The degree of risk of major infectious diseases is high and these include food or waterborne diseases.1.2 Geographic Features of IndonesiaIndonesia is a vast equatorial archipelago of 17,508 islands extending 5,150 kilometres measured from east to west. She is strategically located between the Indian and Pacific Oceans in Southeast Asia (as seen in Figure 1.1).Indonesia is also rich in natural resources such as petroleum, tin, natural gas, nickel, timber, bauxite, copper, fertile soils, coal, gold and silver. The country is struck by natural hazards such as occasional floods, droughts, tsunamis, earthquakes, volcanoes and forest fires.Indonesia contains the most volcanoes in the world with about 76 of them being historically active. There has been significant volcanic activity occurring on the larger islands such as Java and Western Sumatra. Indonesia is also currently facing environmental issues such as deforestation, water pollution due to industrial wastage, sewage, air pollution, and smoke and haze from forest fires.2. Economic and Social Analysis of Indonesia and China2.1 Economic Analysis of Indonesia and ChinaAs seen in Figure 2.1, Indonesias GDP has been increasing consistently, except for the period during 1997 to 1998. In this period, the country faced one of the most costly financial crises in history, as nearly its entire banking sector collapsed, costing the government 50% of its GDP. This resulted in a major loss of confidence in the ability of Indonesia recovering immediately from the decline in their economy. The crisis revealed long-standing impediments to growth, which have, over time, contributed to unduly high costs for the economy as a whole. In 2012, an independent central bank was put in place and regulations substantially improved. This allowed Indonesias banking sector to make a remarkable recovery, with high profitability and continued growth as well as achieved increased stability and resilience to crises. As a result, Indonesia came out relatively unscathed with only a marginal and short-term impact on the banking sector during the Asian Financial Crisis in 2008. In response, the authorities took measures to accelerate the pace of reforms, to engage in a major review of anti-competitive practices and to restructure the banking system. The years after the drastic decline has seen Indonesia rebounding back showing clear GDP growth in each year.

The key element that accounts for Indonesias GDP growth over the years is an increase in domestic consumption. This alone accounted for 56% of the countrys economic activities in 2011 and has been growing ever since. Despite a predicted increase of 6.8% change in GDP growth in 2013, the Indonesian economy grew at its slowest pace in 2.5 years due to slowing private consumption, lower investments and a contraction in mining service due to the governments reduction of fuel subsidies leading to an increase of 33% in fuel prices. This undertaking by the government was aimed to reduce the countrys budget deficit and to strengthen their currency, the Rupiah, in conjunction with the upcoming election in 2014. Economic disparity is also widening in Indonesia. Most of the private consumption in Indonesia comes from the wealthy and the poor are not benefitting from it.

On the other hand, economists at Goldman expect Chinas growth to be at 7.4% in 2013 and 7.7% in 2014, down from previous forecasts of 7.7% and 8.4% respectively. This is a result of fears of Chinas banks being swarmed with bad loans made to local governments who may have made poor investments. Chinas private consumption relative to GDP is still the lowest among major economies as they have relied heavily on investments rather than domestic consumption.

China has been making reforms to have a booming economy since 1978. In previous years, their GDP stood at 9.2% in 2011 and 7.8% in 2012. GDP growth averaging about 10% a year has lifted more than 600 million people out of poverty. All Millennium Development Goals (MDG) have been reached or are within reach. Chinas main source of income comes from being the largestexporterand second largest importerof goods in the world. China also has an alarming income disparity between the rich and the poor despite having its income gap narrowing in 2012. The nationsGini coefficientwas 0.474 in 2012, reduced from 0.491 in 2008. This figure is used as a gauge for potential social unrest if it exceeds 0.4.GNI Per CapitaIndonesias Gross National Income (GNI) per capita has grown from $2,200 in 2000 to $3,563 in 2012. This shows a major increase in the average wealth of the citizens. Since Blake @ International is in the manufacturing sector, the increase in wealth of the Indonesian citizens may lead to an increase in purchasing power, which in turn, may result in an increase in the sales of Blake @ International since there will be a higher demand for their products.Chinas income per capita stands at $8,390 in 2011, showing a clear improvement from the previous year of $4,940. This shows a greater average in the wealth of the Chinese citizens. According to a report from the UN World Tourism Organization, China is now the biggest spender globally, leapfrogging countries like Germany and the United States. Therefore, the Chinese citizens are open to spending with an increased income hence benefitting Blake @ International.Debt-to-GDP RatioIndonesia has also shown a significant decline in debt-to-GDP ratio from 61% in 2003 to 24% in 2012. The debt-to-GDP percentage shows whether an economy has enough profits, derived from the production of goods and services, to pay back its debts. The drop in percentage shows that Indonesia has a high profit to repay its debts. This way, with an improved economy in Indonesia, investments made are more secure and the country will be more attractive to foreign investors.Chinas debt-to-GDP ratio stood at 23% as of 2012, declining from the previous year of 25.8%. Although it is a small margin of decline, it indicates that China has improved in terms of their profit in repaying its debts. This shows potential investors that the country is still constantly improving itself as an economy.Inflation RateAs seen from Figure 2.2 and Table 2.1, the inflation rate in Indonesia has been inconsistent in recent years. The inflation rate was recorded at 5.47% in May of 2013 due to the governments decision to ease import restrictions which had caused prices of staple foods to skyrocket at the start of the year. Since 1997, Indonesias inflation rate averaged 11.78% and reached an all-time high of 82.40% in September of 1998 and a record low of -1.17% in March of 2000. In 2010, the inflation rate was at 7%, higher than the economic growth which was at 6%. The inflation rate in January 2013 was at 4.57%, lower than the years before. Since inflation is low, it would lead to a decrease in the price of products and an increase in the purchasing power of the Indonesian population and hence, increasing domestic consumption in the country. Since the purchasing power is stronger in the country, there may lead to an increase in demand of products from Blake @ International. The inflation rate in China was recorded at 2.10% in May of 2013. Referring to figure 2.3, historically since 1986, the China inflation rate averaged at 5.9% reaching an all-time high of 28.4% in February of 1989 and a record low of -2.2% in April of 1999. Although the inflation rate of China is at 2.10%, a 3% difference from Indonesia, the labour cost of China is much higher as compared to Indonesia. This would contribute to a higher product cost, resulting in a lower profit margin in Blake @ International.2.2 Social Environment Analysis of Indonesia and ChinaLabour CostsDespite Indonesias improving economy that offers some of the cheapest wages in Asia, labour unrest has set in. Employees have started to compare their wages to overseas wages, wanting a bigger portion of the companys revenue although there are still a number of people willing to work for lower wages. According to Said Iqbal, the President of the Confederation of Indonesian Trade Union, at a press conference in December 2012, labour costs in Indonesia are still the lowest in Asia. He was quoted that National wages (are at) 2.2 million Rupiah, but it still exists in the area of the 1.5 million Rupiah. (In terms of) Wage we still lag behind other countries. This is in comparison with the average wages of workers in Thailand that reached 300 USD (Rupiah 2.7 million) per month while that of the Philippines was between Rupiah 2.5 to 2.6 million per month. On the other hand, labour costs are rising notably in China. According to a new study by the consulting firm AlixPartners, the cost of outsourcing manufacturing to China by 2015 will be equal to the cost of manufacturing in the United States. Syeve Maurer, AlixPartmers Managing Director has been quoted as saying that The Chinese manufacturing cost advantage has eroded dramatically in the last few years it was pretty common for landed cost from China to be 25% to 30% less than the cost of manufacturing in the United States. Based on our analysis, two-thirds of that gap has closed. Wage growth in China has outpaced most major emerging economies in the last 5 years, resulting in Chinas labour costs being among the most expensive in the developing world. Some consumer goods companies that traditionally use China as a manufacturing base have started to seek alternatives. Vietnam has already overtaken China to become Nikes largest manufacturing base in 2010, contributing 37% of Nikes global output compared to Chinas 36%. Employment and HealthcareOut of Indonesias voluminous population, more than 32 million of them currently live in poverty and below the national poverty line of 200,262 Rupiah (US$22) per month. Therefore, Blake @ International should take this into consideration as more than 32 million Indonesians do not have the means to purchase their products.Employment growth is also slower than population growth with an inadequate amount of public services. Although Blake @ International can aid in the employment growth by hiring local citizens in the business and offering a lower pay in terms of currency as compared to China, the company should also take note of the lack of supply of clean water and sanitation in Indonesia. Despite recent progress of the economy, Indonesias sanitation facilities remain at 68% of the population, significantly far away from MDGs target of 86%. Should the company decide to invest their new manufacturing operation in Indonesia, they should locate their business within the range that has access to good sanitation as this may turn off potential employees.Indonesia also has some shortcomings for investors in terms of their regulatory framework between central and regional governments, land acquisition, and a lack of human resources with adequate skills. Thus, Blake @ International should invest in training programmes for the local citizens should they decide to hire them. On the other hand, the Chinese government is committed to increase investment in the healthcare sector to improve public health and services. Emphasis is placed on controlling healthcare costs, implementing initiatives to improve hospital management to raise the quality of patient care, and develop plans to establish and build a national health infrastructure according to their 12th five year plan. However, a lack of access to healthcare is also present in China. Rural areas are particularly affected, with 39% of the rural population unable to afford professional medical treatment while 36% of the urban population is also finding medical treatment expensive. There is also a high percentage of the population that is uninsured based in China. Healthcare resources are neither allocated to nor used effectively by the segments of the population that need them most.China has set goals to improve the countrys air pollution problems by implementing measures to reduce emissions from heavily polluting industries by 30% by the end of 2017. However, in early 2013, air pollution levels in Beijing and a number of other cities rose to record levels described as beyond index. The polluted air in China contained a high concentration of arsenic which is exceedingly harmful to human health. This may negatively impact the health of the staff at Blake @ International, thus affecting their work performance.3. Financial Environment AnalysisA Financial System Stability Assessment (FSSA) was carried out to test the stability as well as effectiveness of Indonesias financial sector (Refer to Appendix). Initially, there was investor nervousness about Indonesias credit worthiness. However, its macroeconomic policy framework has improved significantly in the last decade. Banking fundamentals have also improved, with most Indonesian banks reporting high capital, comfortable levels of liquidity and solid profitability. Indonesias economy expanded 4.5% in 2009, placing it third among G-20 economies. G-20 (Group of Twenty Finance Ministers and Central Bank Governors) is a group of finance ministers and central bank governors from 20 major countries, including the United States, China, Brazil and the European Union. It studies, reviews and promotes high-level discussion of policy issues concerning the promotion of international financial stability, and seeks to address issues that go beyond the responsibilities of any one organization.However, Indonesian securities continue to be traded at discounts relative to regional peers and many wealthy Indonesian individuals still prefer to place their savings offshore. The financial sector lags behind comparable countries in terms of depth and contribution to the economy.Lastly, diversification of the financial sector is low. The financial sector is still highly concentrated, with the banking sector dominating. Indonesias capital markets remain small, causing a missed opportunity to diversify the source of funding for the financial sector and provide long-term investment opportunities. 3.1 Structure of Financial System The financial sector in Indonesia is dominated by banks, accounting for 50% of GDP and 80% of financial system. These banks rely on short-term funding to local companies. Within the banking system, activities are concentrated in a few large commercial banks. The top-3 state-owned commercial banks (SOCBs) account for one-third of the banking sector asset and deposit base, and the top 15 banks account for 70%. The breakdown can be seen in Figure 3.1.An analysis of the financial performance of Indonesias banking sector shows that: 1. After declining sharply following the 1997 financial crisis, annual loan growth has averaged 21% since 2003. During this time, banks reduced their holdings of government securities, freeing up liquidity for lending. The additional liquidity was channelled increasingly to the SME and retail sectors at the expense of the corporate sector.2. Following several years of strong expansion, lending growth slowed in 2009. Annual loan growth decelerated to 10% in 2009 after peaking at 38% in October 2008. Banks then became more cautious given the deteriorating global macroeconomic environment. Credit demand for working capital and investment also declined, in particular from the manufacturing industry. Foreign currency loans fell sharply across all banks, given tighter foreign currency liquidity conditions and heightened external risks in early 2009. Exchange RateThe Chinese government has been setting weaker and weaker daily fixings for the Renminbi (RMB) against the US dollar. A cheaper RMB makes Chinese exports more competitive in overseas markets while making foreign goods more costly and less affordable in China. Although a weaker RMB against the US dollar provides an edge for Blake @ International by providing competitive export pricing, the rising labour cost as well as a period of slowing growth has countered this. Since Blake @ Internationals cash flows are in USD and its payments are currently made in RMB, this can be perceived as a downward profit trend for the company based on the current USD-RMB foreign exchange rates as shown in Figure 3.2. Conversely, since the foreign exchange rate between USD and IDR has been relatively constant for the past 4 years as seen in Figure 3.3, the companys profitability might not face such a huge impact on profits, assuming the cash inflow and outflow remain the same when the company shifts its manufacturing activities to Indonesia. The official interest rate of Indonesia is the discount rate. It reached an all-time high of 12.8% in April 2006 and a record low of 5.8% in February 2012 as seen in Figure 3.4. The lowering of interest rates in Indonesia provides an advantage for Blake @ International due to lower borrowing costs, thus the company could focus on manufacturing its products to make profits instead of solely repaying its debts. 4. Political Environment StructureIndonesiaChina

Presidential Representative Democratic RepublicSemi-presidential representative democratic republic

President of Indonesia is both head of state and head of governmentDual Leadership system -President is head of state and the Premier as head of government

Executive power is exercised by the government. Legislative power is vested in both the government and the two People's Representative Councils.Executive power is exercised by the government Legislative power is vested by Government and Parliament. The Judiciary is independent of the executive and the legislature.

4.1 Indonesias Political and Legal EnvironmentIndonesia is a multi-party presidential republic in which supports democracy. The Indonesian political system is based on the Trias Political which consists of the legislative, executive and judicial powers. The legislative power is supported by the People's Consultative Assembly (MPR) that consists of two houses namely the House of Representatives (DPR) which includes representatives of political parties, and Regional Representatives Council (DPD) which comprises of representatives from each province in Indonesia (Refer to Appendix).As mentioned earlier under the Financial Environment Analysis in the report, the FSSA had found that there are still worries about Indonesias weak enforcement of the rule of law, transparency and governance issues. Thus, such weaknesses in the legal and governance framework undermine investor confidence. The most critical gap in the oversight of financial system is therefore the absence of legal protection for financial sector regulator and supervisor. This allowed the public questioning of and political interference in supervisory actions, slowing down decision making and occasionally paralyzing the prudential system. There is also legal uncertainty about timeliness, consistency of judicial support for supervisory interventions.Political Policies and RiskGeneral Investment PolicyForeign banks are playing an increasingly important role in the Indonesian banking sector. There is a liberal foreign investment regime put in place for foreign investors to fully-owned local financial institutions in the absence of branch limits. The Indonesian government also sold its stake in many of the intervened banks to strategic foreign investors. a) To attract foreign investors, Indonesia offers equal treatment of domestic investors and foreign investors. However, certain national interests must still be considered, by imposing limitations on investment in certain strategic sectors.b) To shorten the length of time required in establishing business in Indonesia, the government developed a one-stop integrated service to simplify the licensing process. Online application system has also been developed to submit applications easier and conveniently. It would benefit companies such as Blake @ International to move their manufacturing plant to Indonesia as the duration to register business in Indonesia is shorten and procedures is simplified. Online application systems also reduce the chance of fraud such as bribery and applications are approved professionally. c) Rights are given to foreign investors to employ expatriates in certain positions after obtaining proper permit from the local manpower. It benefits Blake @ International as the company is able to employ key skilled employees from China to work in Indonesia to reduce disruptions of operations and helps to shorten training durations of the new employees. d) The foreign investors are also ensured the rights of repatriate profits from Indonesia in form of payment of dividends, reduction of capital, payment liquidation proceeds or payment of royalties or technical .The Indonesian government, however, has the rights to prevent the repatriation of profit if the foreign investor has outstanding amount of unsettled liabilities.Corporate Income Tax PolicyFrom 2010, a flat rate of 25% applies to corporate taxpayers. The standard tax period is January to December. If corporate taxpayers use a different tax period, for example from June to July, the taxpayers require obtaining approval from the Director General of Tax and maintaining the approved tax period consistently. After-tax profits are subjected to withholding at 20% regardless of the profit remitted to the home country. However, in order to attract more foreign investors, reduced withholding tax rate is applicable. Tax Incentives are also available to investors such as tax discount of 5% off the standard rate for public companies that met the requirement and also up tax reduction of up to 50% off for small companies whose annual turnover do not exceed $5.4 million US dollar. When less amount of tax being paid, companies can expand their business more boldly without worrying of being taxed at high rates. A list of tax incentives is shown below with more to be covered at the later part of the report:i. Extension of tax losses carry forwards for up to ten yearsii. Reduction of the withholding tax rate on dividends paid to non-residents to 10%iii. Acceleration of fiscal depreciation deductionsTax administration such as tax liabilities periodically or yearly must be paid to the State Treasury and accounted for at the tax office by filling required tax returns. Return must be filed annually by the end of the fourth month after the end of the book year. Late tax payments incur penalties of 2% per month and late reporting the administrative incurs fines up to IDR 1,000,000.4.2 Chinas Political and Legal SystemThe Communist Party of China (CPC) being the party in power has both central and local organizations. At the top is the Central Committee and, while when it is not in session, the Political Bureau and its Standing Committee are able to exercise the power of the Central Committee. Both Bureau and Committee are elected by the Central Committee (refer to Appendix).Political Policies and RiskGeneral Investment Policya. In order to attract foreign investments, the Chinese government has set up a relatively complete legal system, and constituted a foreign investment policy system, which mainly includes industrial policies, regional policies, tax policies and financial policies.b. As a country that promotes Free Trade Agreement, removal of tariffs, import quotas, and preferences for certain and all are implemented within a year of the completion of the FTA. Without trade barriers allows many companies to use this advantage to sharply reduce supply chain costs, and to attain price competitiveness with no additional cost incurred.c. MNCs able to open representative offices or branches of their business in China however, these branches do not enjoy the legal status of a Chinese individual, their scope and authority to undertake profitmaking activities are limited.d. Few business structures to choose from such as joint ventures, Equity joint ventures, foreign enterprises, joint stock companies, and wholly foreign-owned enterprises (WFOE).Corporate Tax PolicyOn 1 January 2008, Chinas corporate income tax system was modified and went into effect, in order to complement Chinas policy of promoting growth by attracting foreign investment, the income tax system applies to all foreign investment enterprises within China and all domestic Chinese enterprises and are more simplified.Resident enterprises are taxed on their worldwide income; non-residents are taxed on China income and income connected with their establishments in China. The Enterprise Income Tax is set as a flat rate of 25%. The tax year is the calendar year and companies are required to file for tax every quarter. Late payment surcharge of 0.05% is imposed on daily basis for any outstanding tax. Penalties may also impose aside than fines and also on transfer pricing to avoid foreign companies of any attempt of tax adjustments. Custom duties taxes rate may be exempted on the imports of machinery and equipment for personal use if the company meets the specified requirement. In 2008 10% withholding tax on dividends paid to non-resident companies. Previously, dividends paid by a Chinese company with at least 25% foreign participation were exempted. The 10% withholding tax may be reduced under an applicable tax treat. Interest is generally subject to a 10% withholding tax unless the rate is reduced under an applicable tax treaty. Interest from certain loans made to the Chinese government or state banks is exempt. A 5% business tax also applies to interest payments.5 Government regulations & initiativesIn Indonesia, manufacturing plays an important role in the growth of the nation dating back to the 1980s. It remains as the major economic sector in Indonesia which contributes around 24.3% of the GDP. Even after the Asian Financial Crisis, the average annual growth of manufacturing in the following years was 11.6%. In this chapter of the report, we will look through the regulations put in place by the Indonesian government to attract foreign investments.For such prosperous growth to occur, the Indonesian government considers one important factor that affects outside investors to be interested in investing in Indonesia. This includes methods to bring in potential investors will be by government regulations and initiatives that provide incentives attractive enough to compete with other countries. Such incentives will include tax credit for new investments, tax holidays for new companies, exemptions from import duties particularly capital goods, and providing special zones for exporting companies.5.1 Trade Promotions and Intervention Initiatives by GovernmentTax Incentives for Foreign InvestorsIndonesia provides foreign investments with tax incentives that are regulated in Law No.25 of 2007. Due to the manufacturing nature of Blake @ International, it will be considered labour intensive which falls under the list of investments eligible.Furthermore, there are also other tax incentives provided for investment facilities that are provided by the government, such as: Reduction of net income tax, depending on the total investment amount made within a specified period; Import duty exemption or relief for production capital goods, machinery, or equipment not yet produced in Indonesia; Import duty exemption or relief on import duty for production of raw materials or components for a specified period upon fulfilment of specified requirements; Value Added Tax exemption or deferment for a specified period for importation or production of capital goods or machinery or equipment not yet produced in Indonesia; Accelerated depreciation or amortization; and Land and Buildings Tax relief for specified business fields in specified regions or areas or zones.Export ManufacturingThere are also incentives provided for exporting manufacture products. Some of these are as follows: Restitution (drawback) of import on the importation of goods and materials needed to manufacture the exported finished products. Exemption from Value Added Tax and Sales Tax on Luxury goods and materials purchased domestically, to be used in the manufacturing of the exported products. The company can import raw materials required regardless of the availability of comparable domestic products.Exemptions from Import DutiesAll investment projects of foreign as well as domestic which are approved by the Investment Coordinating Board or by the Office of Investment in the respective districts will be granted of such facilities too: Relief from import duty so that the final tariffs become 0 %. Import duties which are mentioned in the Indonesian Customs Tariff Book (BTBMI). This is stipulated in the Ministry of Finance's Decree No. 176/PMK.011/2009 dated November 16, 2009 which is effective from December 2009.- On the importation of capital goods namely machinery, equipment, spare parts and auxiliary equipment for an import period of 2 years, started from the date of stipulation of decisions on import duty relief.- On the importation of goods and materials or raw materials regardless of their types and composition, which are used as materials or components to produce finished goods or to produce services for the purpose of two years full production (accumulated production time).- However, the decree as above mentioned is not applied to the assembly of cars and motor bikes except for its component industries. Exemption from Transfer of Ownership Fee for ship registration deed or certificate made for the first time in Indonesia.5 Michael Porters Competitive Advantage Theory

To further substantiate our claim of choosing Indonesia over China, we will be using Michael Porters model to cover the key defining areas. We specifically chose the province of Yogyakarta as it ranks the top out of other provinces in the ease of starting a business.Factor Conditions-EducationYogyakarta has the highest number of institutes in Indonesia, being home to more than 100 institutions of higher education. Thus, there will be no worries of a lack of educated workers in the region of the companys facilities.-InfrastructureYogyakarta has a well-defined infrastructure equipped with an International Airport that provides international flights to countries such as Singapore and Malaysia; furthermore the city is located on one of the two major railway lines across Java between Jakarta/Bandung and Surabaya. Therefore, transportation will not pose a problem as even importing of raw materials can be accessed through the extensive transport choices. There will also be easy accessibility as the materials and products are easily transported internally and externally.Demand ConditionsIndonesias growing markets include the renovation and construction of regional and municipal infrastructure and water systems. This would require precision-machined components and state-of-the-art technologies which is what Blake @ International specialises in. As Southeast Asias largest economy, the demand for this market is still continuing to expand.In 2012, BASF, the worlds leading chemical company, invested into Indonesia by launching new laboratories for Polyurethanes at its Cimanggis site there. Polyurethanes are used in the manufacture of foam seating, microcellular foamsealsandgaskets as well as hard-plastic parts. This investment reflected a need for innovative materials and solutions in Indonesia to support its continued consumer market growth in the worlds fourth-largest country.Supporting IndustriesAs Blake @ International is a manufacturer of a wide variety of machine components and products requiring high technology, there will be many industries that will be related in producing the final product. BASF, also the leading supplier of Polyurethane Solutions for systems, specialties and PU basic products, is one company situated in Indonesia that provides fast local support, from technical service and sales to production during development of customised solutions. This is especially needed for Blake @ International as the company customise plastics solutions. BASF serve as an alternative supplier of raw material for manufacturing rather than importing from other countries. In long term it helps the company to decrease time consumption in transporting and the cost of goods manufactured would be lowered.6 Risk AnalysisEconomic & Social Environment RiskIndonesias growth rate is high but issues such as poverty, weak infrastructure, environmental degradation and institutional weaknesses deter fast development of the country. Bureaucratic, administrative and labour market obstacles also hinder growth. However, Indonesia potential cannot be underestimated. There are favourable factors that contribute to Indonesias growth such as rapid urbanization, a demographic dividend from a young population, and strong commodity prices.The Indonesian economy also displayed considerable resilience during the recent global financial crisis and now has highest growth rate in Asia after China. Results have also shown that Indonesia is coping well in Chinas slowdown and euro crisis. This is due to well-balanced and diversified trade profile and its well developed macroeconomic management and financial sector policies.Financial Environment RiskBased on 2012, Indonesia showed improvement in sovereign risk as evidenced by the decline in the public debt ratio and the fiscal deficit. Meanwhile, in 2012, foreign exchanges reserves will remain at satisfactory levels (six months of imports) with the country consequently left with very limited exposure to a sudden flight of portfolio capital. Indonesia banking sectors showed good results with the Indonesian banking system outperforming with high capitalization and profitability ratios and an improved rate of non-performing loans. Bank inter-mediation is still considered weak when compared to the rest of Asia. However, the banking industry is still on the rise, dominating the Indonesias financial sector. Investors will need to note that the banks, although doing well at the moment, are vulnerable to credit, interest rate and liquidity risks.Foreign direct investments (FDIs) are still rising strongly, particularly in sectors related to household consumption and investment. Therefore, the rupiah can still be expected to remain stable even in a high risk scenario with the central banks high levels of foreign currency reserves.Political RiskOver the years, President Yudhoyono of the Democrat Party experienced criticism about his perceived ineffective leadership of the Democrat Party. The political rating has been unstable with a slight drop in the past years. Presidential and parliamentary elections in 2014 will be something to keep in mind of for investors. Due to the recent policies such as the increase in electricity prices, fuel subsidy cut, limiting mining ownership, it has further upset investors and residents of Indonesia and caused a rising level of policy uncertainty.Corruption is also one major factor that rocks the stability of the political sector of Indonesia. The most recent in the history of Indonesia is under President Suhartos authoritarian New Order Regime (1965-1998). It allowed investors to predict extra costs and bribe in order for their businesses and investments to proceed smoothly. However, corruption harms investments and fosters the existence of continued injustice in society.Although the past of Indonesia may seem to be plagued with corruption, the Indonesians have urged to eradicate corruption fully on this present day. This gives future politicians something to promise their voters. Therefore, the political risk ratings of Indonesia will be expected to improve gradually from the current 43 out of 100 to 49 in just 5 years time.Risk OverallAlthough there are huge external shocks since the 2008 Financial crisis, Indonesias economy has proved to be resilient over the years. It has also highlighted its reduced vulnerabilities by constantly strengthening its fundamentals and pursuit for macroeconomic stability. From the combined ratings of Indonesia, we can also see a 6-point improvement in 5 years (as seen in Figure 7.1). Therefore, even with the threat of Eurozone crisis and slower Chinese demand, Indonesias risk classifications are expected to be stable.ConclusionIn conclusion, Indonesia has an edge over China in terms of ease of doing business, economic policies, and the ease of remittance and security. Even though China is one of the major economies and fast-paced growing countries, Indonesia has shown great potential in terms of its booming economy. We have also assessed the labour costs issue which was recognised to be a problem for the company. Research has thus shown that Indonesia gains the upper hand along with many incentives for businesses to further cut down on costs. Putting together all the information that we have gathered in this report, we have come to the conclusion of recommending Blake @ International the move to Yogyakarta (Indonesia).

Appendix I

Figure 1.1 Extract of World MapSource: Index Mundi, 2013. Indonesia Location [Online]. Available from: http://www.indexmundi.com/indonesia/location.html [Accessed 5 July 2013]

Figure 2.1: Percentage Change in GDP of Indonesia* The drastic plunge in the GDP was caused by the sudden withdrawal of international investors from Asian financial markets in late 1997. In addition, Indonesia was facing internal developments such as the growing uncertainty about economic, social and political stability.Month/YearInflation (%)

Jan-087.36

Jun-0811.03

Jan-099.17

Jun-093.65

Jan-103.72

Jun-105.05

Jan-117.02

Jun-115.54

Jan-123.65

Jun-124.53

Jan-134.57

Table 2.1: Indonesian Inflation Rate (Continued)Source: Bank of Indonesia. Inflation Report (Consumer Price Index) [Online]. Available from: http://www.bi.go.id/biweb/Templates/Moneter/Default_Inflasi_EN.aspx?NRMODE=Published&NRNODEGUID=%7bC6BDA4D3-9471-4D99-A3B7-3A2ADE59E98C%7d&NRORIGINALURL=%2fweb%2fen%2fMoneter%2fInflasi%2fData%2bInflasi%2f&NRCACHEHINT=Guest [Accessed 9 July 2013]

Figure 2.2: Indonesia Inflation RateSource: Trading Economics. Indonesia Inflation Rate [Online]. Available from: http://www.tradingeconomics.com/indonesia/inflation-cpi [Accessed 1 July 2013]

Figure 2.3: China Inflation RateSource: Trading Economics. China Inflation Rate [Online]. Available from: http://www.tradingeconomics.com/china/inflation-cpi [Accessed 6 July 2013]

Figure 2.4: Average Wages of CountriesSource: Chen, S., 2011. China Remains Competitive in Manufacturing Despite Rising Labor Costs [Online]. Available from: http://blog.frontierstrategygroup.com/2011/08/china-remains-competitive-in-manufacturing-despite-rising-labor-costs/ [Accessed 10 July 2013]

Figure 3.1: Financial System of Indonesia in 2009IMF, 2010. Indonesia: Financial System Stability Assessment [Online]. Available from: http://www.imf.org/external/pubs/ft/scr/2010/cr10288.pdf [Accessed 9 July 2013]

Figure 3.2: USD/RMB Exchange RatesSource: Trading Economics. Chinese Yuan [Online]. Available from: http://www.tradingeconomics.com/china/currency [Accessed 10 July 2013] Figure 3.3: USD/IDR Exchange RatesSource: ChartOasis. USD/IDR exchange rate chart, past 5 years [Online]. Available from: http://www.chartoasis.com/forex/1/usd_idr/5_years.html [Accessed 30 June 2013]

Figure 3.4: Indonesia Interest Rate (Jan 08 Jan 13)Source: Trading Economics. Indonesia Interest Rate [Online]. Available from: http://www.tradingeconomics.com/indonesia/interest-rate [Accessed 9 July 2013]

Figure 7.1 Indonesia Risk RatingsSource: BERI, 2013. Indonesia [Online]. Available from: http://www.beri.com/Library/BRS/PDF/Indonesia-B.pdf [Accessed 11 July 2013]

Appendix II3 Financial Environment Analysis: Findings on FSSAThe findings were as follows: 1. A decisive and successful response together with a decade of sound policies and structural reform helped Indonesia recover quickly from the 2008 global crisis. However, there are lingering concerns over weak enforcement of the rule of law, transparency and governance issues.2. The banking system is generally healthy. Banks are, however, vulnerable to credit, interest rate and liquidity risks, though high capital and earnings has provided a cushion against macroeconomic volatility. Development of viable capital markets will help avoid an over-reliance on banking sector funding.3. Banking supervision and regulation have improved substantially, but gaps remain in dealing with problem banks and crisis management.4. Indonesia is planning a major change in the regulatory architecture by creating an integrated supervisory agency. This may hamper the quality of supervision. Bank Indonesias financial position should be reinforced. 4.1 Background of Indonesias Political and Legal SystemThe executive branch comprises of the president, vice president and the cabinet of ministers. The president and vice president are elected by votes of citizens for five- year terms. When elected, the President of Indonesia is elected for a maximum of two five-year terms. As the cabinet in Indonesia is presidential form, the president is involve in decision making and do not represent any political parties in the parliament.The Supreme Court, the Judicial Commission, and the Constitutional Court, including the administration of the judges administered the judicial powers. Court Process may be time consuming court process for a dispute settlement. Most disputes are heard before the courts of general jurisdiction, with the State Court. While appeals from the State Court are heard before the High Court and the Supreme Court can hear a final appeal from lower courts. To handle insolvency cases and other commercial matters, the Commercial Court was established.4.2 Background of Chinas Political and Legal SystemCPC is the sole party exercising political leadership in this system of multi-party cooperation. Although the CPC and the democratic parties are totally equal under the Constitution, but politically, the latter are subjected to the leadership of the former. The CPC's leadership over other parties features political leadership focusing on political principles, political orientation and major policy decisions. Democratic parties maintain close cooperative ties with the CPC politically and act as a opposition force to counter policies and practices that are not established fairly.Democratic parties representatives are invited to attend the CPC congress as non-voting delegates. The Chinese People's Political Consultative Conference (CPPCC) serves as a channel and arena for cooperation between the CPC and other parties.Chinas current legislation structure has its own characteristics. In China, the power of legislation is not held by a single power organ. Therefore, it is not regarded as a category of a singular legislation structure. China has multi legislative powers, including at national level, which for administrative laws and local laws, each subjected to different organ authority. This also means that these authority organs do not hold the same legislative power and as such does not belong to a compound legislative structure either. Decision of National Peoples Congress (NPC) was followed by president and publicizes laws. This power was excluded from the premier.Administrative laws and regulations are established corresponding to the laws passed by the NPC; local laws and regulations shall not go against the national laws and administrative regulation. The NPC has the power to withdraw administrative laws and local regulations that is not favourable to the law passed.

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