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 Week 6

      Current economic position
   Monetary crisis in 1997
   Indonesian economy suffered from 13.1% GDP
   Inflation rate of 77% in 1998.
   Since then Indonesian economy remains growing
    albeit slowly
   Pre-crisis converted from an economically backward
    and poor country in 1970's
   To medium-income level country of more than US$
    1,200 per capita in early 1990's
   Annual average GDP growth rate of more than 7% in
    25 years.

       Current economic position
   As mid-January 2004
   The Indonesian economy will remain stable
   Rupiah`s exchange and inflation rates staying at steady
   The country to continue to have sufficient foreign
    exchange reserves
   Bank Indonesia predicts the country`s macro-economic
    stability will create a climate good enough for the economy
    to grow at a rate of four to five percent in 2004.
   Stimuli for economic growth will come not only from
    increased exports and investment but also from private
    consumption which is expected to grow at a rate of 4.2
    percent to 5.2 percent

            Culturally diverse
   Population of almost 200 million people on
    13,667 islands
   Only 35% of the population live in urban
   Over 300 distinct cultures residing within
    its borders
   Islamic 85%
   Christian 10%
   Others 5%

Characteristics of work context
   Relationship between employer & employees is moral
    rather than calculative
   Implies mutual obligations of protection from
    employer (irrespective of performance)
   Loyalty towards employer from employee
   Employees have strong obligations towards relatives
   Relationships take precedence over tasks
   Strong need for harmony and preserving face
   Paternalistic
   Acceptance of status differences
   Reluctance to plan ahead

     Engines of Economic growth
   Study (2003) based on unpublished Statistical Data
   The contribution of SMEs to total manufacturing value added
    remained relatively small
   Contribution to the Indonesian economy in terms of employment
    generation was significant
   SMEs can coexist with LEs (large-scale enterprises)
   By producing a unit of output with less capital but more labour
    than LEs
   Labour productivity in SMEs and LEs increased at a similar rate
    during the period 86-96
   Increase in labour productivity of SMEs in the machinery industry
    was faster than in other main product sectors.
   SMEs in the machinery industry also increased their TFP
    markedly, compared with both SMEs in other sectors and LEs in
    the same sector.

                   Islamic Banking
   Indonesia is primarily a Muslim country and much of its
    business culture cannot be separated from the religious

   Islamic Banking

    •   Reject the use of interest as a reward or charge
    •   Interest is conceived as usury and is unjust in the eyes of Allah
    •   Use profit sharing approach to both debtors and creditors
    •   Western banks cannot be separated from any product bearing
    •   Islamic banks cannot accept any product which bears interest

         How can Islamic banks
   Types of products offered
   Wad‟iah
   Agreement between one person who owns goods (eg
    money) and another (eg a bank) to whom the goods
    are entrusted.
   Any benefit from the goods belongs to the bank.
   But the owner can benefit from a pre-arranged non-
    withdrawl bonus.
   This is not interest, it is a pre-negotiated

        How can Islamic banks
   Types of products offered
   Murabahah (savings and deposit)
   An arrangement between an owner of
    capital (eg a bank) and an entrepreneur.
   Bank provides capital for a project.
   Entrepreneur is responsible for the
    management of the project.
   Any profit is divided into pre-arranged

         How can Islamic banks
   Types of products offered
   Qardhu ul-hasan
   A credit facility for those in financial difficulty
   Especially as a result of health care, weddings or
   The borrower only has to pay back the principal
   No interest is charged
   There is a pre-arranged administration charge
   Based on merit of the project and not current market
    value of money

    Is there an Indonesian style of
   Remember Hofstede’s analysis
   Background to Indonesian management development
   Largely Dutch based
   After overthrown of imperial power in 1949
   Lack of suitably trained managers
   Independence in 1957
   Inflow of foreign investment
   Development of government instituted management
   Universities generally Dutch/UK principles
   Growth of power of local Chinese entrepreneurs

              Unity in Diversity
   Javanese style – politically dominant
   Leaders should demonstrate
    •   Musyawarah (Mutual deliberation)
    •   Mufakat (common unanimous decision)
   Should seek consensus guided by social
   Power is never explicit
   Only a weak leader displays force or
   Important role of halus (calm serenity)

       Typical SME management
   Manager usually owner
   No long term strategy
   Important decisions made by manager/owner
   Employees and middle management seek approval
    for almost any decision from the boss
   “Father-figure” leadership role (Bapak)
   Often family are in middle management positions
   This style of management can put off foreign

         International influence
   FDI cannot be separated from management
   Western companies hire local employees and
    managers but apply western management techniques
   Japanese multinationals do not hire locals but form
   Management style influential
   Korean Chaebols are big investors
   Korean and Japanese management style is similar to
   Based on deference to authority and trust

                    SOE sector
   Still many SOEs
   Mostly former Dutch companies which were nationalised
   Recent attempts at reform
   Privatising non-profitable SOEs
   Management is limited – restricted authority

   Rise of conglomerates (konglomerat)
   Driving force behind Indonesian economic development
   Mainly Chinese owned
   Of top 25 only 5 owned by ethnic Indonesians
   Adopting new management techniques
   Reliance on informal relationships between owners and

Downside of peace and harmony
   Desire not to deliver bad news
   The philosophy of asal bapak senang
    (keep father happy)
   Subordinates do not wish to inform
    seniors of bad news

    The (sad) case of Bank Duta in
   Manager of dealing room found $US20
    million loss in FX trading
   Didn‟t say anything
   Two days later $US70 million loss
   President-director only told before scrutiny
    of year-end reports
   He did not inform the board
   Told dealing room manager to keep quiet
   Subsequent loss was $US419 million

    Indonesian Corporate Culture
   Key attributes of the Indonesian business person
   Assertiveness
   Conceal negative feelings
   Play down positive feelings
   Are typically non-assertive
   Yes means Yes (or No)
   Believe to say No invites conflict
   Therefore Indonesians will say yes when they mean no.
   How do you tell what they mean……….
   Understatement
   Indonesians will not give their opinion unless invited to do
   Deference

    Indonesian Corporate Culture
   Analytical thinking
   Education system encourages learning by rote
   Underdevelopment of analytical thinking
   Lack of individualism
   Emphasis on communalism
   Leadership
   Every leader should be a good example to their subordinates trough their
    positive attitudes, measured, wise words and exemplary behaviour
   Every leader should be disciplined, independent and creative in their
    relationship with employees
   That every leader should be known by their achievements and their sense
    of responsibility towards their employees
   Initiative
   Lack of general initiative
   Part of paternalistic approach to corporate culture

Old and New management style
   Traditional “generalised” type of Indonesian business person
   Limited knowledge and understanding of foreign cultures
   Demonstrate domestic-oriented thinking
   Great pride in Indonesian culture
   Rigid and conservative
   Many have received training at home or abroad
   Do not have good foreign language skills
   Require intermediary to communicate with foreigners

   New breed “modern” types
   Well-educated especially abroad
   Able to think globally
   Understand foreign cultures and can speak English
   Are proud of Indonesian culture but aware of political and economic

            Post-crisis recovery
   Debt-ridden corporations and failure of governance
    have affected investor confidence
   Existing risks
   New laws and regulations especially
   the „regional autonomy‟
   new consumer and labour laws
   are expected to cause new extra costs for company
   In the banking and financial sectors
   IBRA (Indonesian Bank Restructuring Agency) is still
    far behind the target milestones.

             Post-crisis recovery
   Implementation of Code of Corporate
    •   Indonesian Code of Good Corporate Governance
        issued May 2000 by NCCG (National Committee of
        Corporate Governance)
    •   Ministerial Decree of SoEs
   Based on 4 essential principles of
    corporate governance:
    •   Transparency
    •   Independence or Fairness
    •   Accountability
    •   Responsibility

                    Risk & Audit
   Company is expected to disclose material
    foreseeable risk factors, including management
    assessment of the business climate and risk factors
   Mandatory establishment of Audit Committee
    suggested by
   Jakarta Stock Exchange
   Ministerial Decree for Indonesian SoEs
   Three principal domains of role and responsibility of
    the Audit Committee:
    •   Company‟s disclosure, especially those related to
        Company‟s financial disclosure
    •   Company‟s Internal Control Practices
    •   Company‟s Corporate Governance Practices

                     Risk analysis
   Company risk is grouped into two categories:
   Financial Risk and Non Financial Risk.
   Financial Risk consists of four sub-risks:
   Market Risk, the risk of financial loss resulting from a change in
    the value of
   tradable assets.
   Credit Risk, the risk of financial loss resulting from a default of
    the counterpart.
   Operational Risk, the risk of financial loss resulting from
    operational failure.
   Reputation Risk, the risk of financial loss resulting from the loss
    of business attributable to a decrease in the institution’s

                Risk analysis
   Non-Financial Risk is viewed from two
   Micro perspective; the risk resulting from
    uncertainty due to the internal elements
   of institution such as: people, process,
    event, and system and technology.
   Macro perspective; the risk resulting from
    uncertainty due to external factors such
   as: Government, Industry and domestic
    business environment, Society, and
   international business environment.


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