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Global firms remain upbeat about Indonesia’s digital economy
The Investment Coordinating Board (BKPM) revealed in July 2020 that FDI fell 6.9 percent year-on-year (yoy) to Rp 97.6 trillion (US$6,93 billion) in the April-June period. Yet, amid such a gloomy picture, it turns out that global firms are still quite upbeat about the potential of the Indonesian digital economy, particularly that of local e-commerce and financial technology (fintech) platforms.
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The COVID-19 pandemic, which has hit a lot of industrial sectors hard, has simultaneously propelled the growth of Indonesia’s e-commerce platforms, driving a lot of foreign investors to inject their capital in local platforms. (Shutterstock/William Porter)
Y
ou might have heard the bad news already: Indonesia’s economy has just entered its first recession since the 1998 Asian financial crisis, bringing two decades of economic expansion to an end as the coronavirus pandemic has caused a sharp economic slowdown, throwing millions into poverty and out of jobs.
Economically speaking, a recession is defined as contractions in two consecutive quarters, causing a significant decline in economic activity to spread across the economy, resulting in fewer jobs, people earning and spending less, as well as businesses grinding their expansions to a halt or even ceasing their operations altogether.
As a result of the pandemic, the Indonesian economy shrank 3.49 percent in the third quarter after contracting 5.32 percent in the second quarter.
In plain terms, recessions impact businesses and individuals badly.
With most businesses having to limit their operations and cut costs by cutting workers’ salaries or laying them off, as a consequence, a lot of people might lose their jobs, have their salaries cut, withhold their monthly installments or take some personal fiscal austerity measures.
Indeed, the situation sounds scary.
Therefore, to buffer the negative impacts of the economic recession, the Indonesian government is currently trying hard to push for economic recovery by attracting foreign direct investment (FDI).
When you look at the declining FDI realization in Indonesia in the second quarter this year, it does not look so encouraging: the Investment Coordinating Board (BKPM) revealed in July 2020 that FDI fell 6.9 percent year-on-year (yoy) to Rp 97.6 trillion (US$6,93 billion) in the April-June period, continuing the downward trend that had started in the first three months of the year.
Yet, amid such a gloomy picture, it turns out that global firms are still quite upbeat about the potential of the Indonesian digital economy, particularly that of local e-commerce and financial technology (fintech) platforms.
For instance, recently Google and Temasek Holdings Singapore have just injected local Indonesian technology company Tokopedia with additional capital to help with the platform’s business expansion after the COVID-19 pandemic. Therefore, both global firms have by now become Tokopedia shareholders.
In response to the investment realization, Tokopedia founder and chief executive officer William Tanuwijaya posted the following content on his Instagram account on Nov. 16: “We are deeply honored and grateful for the support they have lent to Tokopedia and Indonesia.”
Commenting on Indonesia’s current recession, William said that in each of Indonesia’s defining national crises, there would always be members of the respective generation who would stand up to the challenge and turn the situation around.
This was true for the 1945 Independence, the dawn of the Reform Era in 1998 and this is going to be true again during the current COVID-19 pandemic and the corresponding multidimensional crises that happen alongside it.
Bhima Yudhistira, an economist with the Institute for the Development of Economics and Finance (Indef), said Indonesia’s e-commerce and fintech industries showed the most promising growth compared to other sectors of the digital economy, even amid the pandemic.
“The e-commerce platforms provide people’s staple needs, including food and drink. Instead of risking contracting the coronavirus while buying their groceries outside, consumers would rather get their needs through e-commerce,” he said, explaining the sector’s resilience amid the pandemic.
“Furthermore, e-commerce platforms are the most integrated ones compared to other players in the digital economy landscape. For instance, Tokopedia has integrated OVO into its online payment system, while other e-commerce platforms also use GoSend to deliver goods to their consumers,” he continued, referring to Gojek’s delivery service feature.
Finally, Bhima said e-commerce platforms had the most impressive UX design compared to that of the local health or education technology providers.
He said that in truth, as per July 2020, e-commerce platforms constituted only 5 percent of the national retail sector share: “The number is still quite small, but it leaves a lot of room to grow.”
Outside the e-commerce and fintech realm, quite surprisingly, online travel platforms in Indonesia still remain lucrative among foreign investors. For instance, in July 2020, Traveloka received a capital injection worth US$250 million led by an undisclosed “global financial institution” as well as existing investors, including East Ventures. Traveloka revealed, as quoted by Reuters, that the capital injection sought to “help the company bolster its operations amid the coronavirus crisis and as domestic travel starts to pick up in the region of 650 million people.”
Of course, there will be a lot of skeptics out there who perceive local firms that receive foreign investment as “less nationalistic,” that FDIs are the epitome of Indonesia’s takeover by foreign countries.
In fact, besides being good to the Indonesian economy, FDIs can also impact people’s welfare more positively.
Prasetiya Mulya School of Business and Economy graduate program director Indria Handoko, for instance, said collaboration with global multinational companies could help you acquire best business practices from various countries so that you could apply them in your own firm.
In order to expand their businesses overseas, Indonesians must prepare themselves by acquiring some hard and soft-skills to become global business players. The capability of interacting with people from different cultural backgrounds, who have different values and behaviors, while being strongly rooted in the knowledge of Indonesia’s own way of doing business, is one of them, according to Indria.
She added that comprehensive knowledge of specific ways in which business is conducted in different countries was another vital requirement.
FDIs can also boost local firms’ recruitment capacities, thus absorbing more workers and improving a society’s overall welfare.
Bhima said the government still had some work to do to make Indonesia’s e-commerce and fintech sectors look more attractive to foreign investors.
“First of all, the government still needs to simplify digital economy regulations, particularly that of fintech. Secondly, the local digital economy human resources still need additional training and educational programs to boost their skills. Third, the House of Representatives should pass the private data protection bill as soon as possible,” he said.
Finally, he said policymakers should make it mandatory for state-owned lenders to lend initial capital to digital startups.
