Thu, 10 Jul 2008
From: The Jakarta Post
By Yanto Chandra, Amsterdam
The Academy of International Business (AIB), which celebrated its 50th anniversary this year in Milan, just concluded a few days ago. More than 1,100 scholars presented their work and gurus gave impressive talks about the past, present and future of international business.

A loud and well-told message from this event is the rise of two new species in the "zoology" of IB: Multinational enterprises from emerging economies in Asia, Eastern Europe and Latin America, and born global firms, i.e. small and young firms that are active in international markets shortly after inception.

Unfortunately, Indonesia was practically missing from the overall story in this IB event. Multinational firms and born globals flying the Indonesian flag are still a rare species in the global market.

Some would argue that the large size of Indonesia's domestic market distracts its firms from internationalizing. Although this sounds true, it is not well justified given the many economic and non-economic benefits of internationalization, either through outward foreign direct investment (FDI), international joint ventures, licensing, franchising or sub-contracting.

One possible reason to explain this phenomenon is the "Red Queen" effect. This refers to Lewis Carroll's Through the Looking Glass, where Alice notices that she appears to be stationary even though she is running a race. The Red Queen's response is that Alice must be from a slow world, since in a fast world one must run just to stay still.

The fact is that relative to other emerging economies, Indonesia is not only not evolving fast enough forward, but perhaps is going backward in certain aspects.

The Red Queen effect here is related to three barriers to internationalization: institutional barriers, ownership disadvantages and incorrect policies on small and medium enterprises (SMEs).

Institutional factors in the form of weak institutions are a critical barrier.

Recent democratization in the post-Soeharto era only led to the democratization of corruption and collusion opportunities. While these opportunities become the new toy for many, little attention and effort has been made to stimulate local firms to venture abroad.

In contrast, governments in emerging economies like India, China, Russia and Mexico have actively supported their local firms to "multinationalize". Marleen Dieleman, a research fellow at NUS Singapore, conducted a historical study of Indonesia's top 20 business groups and concluded that many of these groups' attempts to internationalize were considered capital flight, despite the nation's integration in the global economy. This creates a negative perception of outward FDI. Even worse, internationalization has never been high on the national security agenda.

Many large Indonesian firms are handicapped by "ownership disadvantages". The institutional forces prevent firms from building their competitive advantages in technology, managerial competence and product quality to compete globally.

As a consequence, few local firms develop the strong ownership advantages needed to overcome the liability of foreignness associated with internationalization.

This is a consequence of more than 35 years of a relationship-based rather than market-based model of doing business in the country. That is, one gets a deal based on whom he/she is connected to rather than what he/she is capable of doing. Not surprisingly, a top CEO in the country often says "all business is good business".

Academic literature and popular press further suggest that the competitive advantages of large Indonesian firms are primarily based on "arbitrageurship", or Kirznerian entrepreneurship -- one that is characterized by strong capabilities in sensing misalignments in the market and exploiting them through buy-low, sell-high logic. This is opposed to Schumpeterian entrepreneurship -- one that is characterized by strong capabilities in making new innovations at the product, organization to technology level.

Many of Indonesia's SMEs are based in non-knowledge based industries such as crafts, food, etc. These types of products are less "universal" or more culturally grounded and thus provide few opportunities to go global.

Prior studies show that knowledge-based firms such as those in information communication technology, biotechnology, high-tech manufacturing and chemistry are more easily "pulled" into global markets due to the nature of the product, which is low in cultural grounding and universal to quickly fill global opportunities.

Strangely, policies, media exposure and support for international exhibitions in the past 10 to 20 years in Indonesia favor the former rather than the latter type of firms.

Hardly any born globals emerge through selling sombreros, Chinese calligraphy or Indian curries. They sell electronic goods, software, wine corks and medical devices to global markets. What global opportunities await out there for cassava chips, batik shirts, stinky shrimp paste or goat's milk soap?

There is urgency to break the "barriers" above. Despite the Red Queen effect, there are avenues that can be pursued.

The Indonesian government needs to develop policies to quickly "push" many of its large local business groups and large firms to internationalize. Prior research shows that many smaller firms cannot survive in international markets due to constraints in resources, managerial and technological capabilities, and intangible assets like brands and legitimacy. Thus, large business groups are "safer bets" for Indonesia.

Having successful multinationals is important to create a sense of national pride and to inspire the next tiers of firms to jump on the bandwagon. The Koreans are proud of their Samsung and LG, Chinese of their Haier and Huawei Technologies and Indians of their Tata and Mittal. What are Indonesians proud of?

The government should re-orient its policies to focus more on the internationalization of SMEs in knowledge-based industries, given the logic mentioned above. This is about creating the tip-of-the-iceberg "crack" in international markets and hopefully more "cracks" will occur.

It is unfortunate that a high proportion of engineering and science graduates in the country work as administrators in banks or broader social sciences. There needs to be policies to create, let's say, 10,000 new high-tech ventures in the next five years through innovative and supportive policies such as one-day new firm registration, tax breaks, grants, national recognition in the media, etc.

Indonesia needs to look no further than neighboring Australia, particularly how Austrade and other Australian institutions foster the internationalization of Australian SMEs and groom candidates for "born globals".

There is an urgent need to fix the institutional barriers. This is not an easy task but needs to be listed at the top of the national security agenda. Quite importantly, there is urgent need to develop IB research in Indonesia, which is utterly lacking and still considered an "alien" discipline in any higher education institution in the country.

Indonesian multinationals and internationalizing SMEs should bring new advantages gained abroad to the home market and be named as the new patriots and idols. In this way, Indonesia can mitigate the Red Queen effect and "run" along with the rest of the emerging economies.

The writer is an assistant professor in the Department of International Strategy and Marketing, Amsterdam Business School, University of Amsterdam, the Netherlands. He can be contacted at y.chandra@uva.nl



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