News & Analysis

Indonesia has blocked foreign investment in ecommerce startups, and it doesn’t make sense

- October 22, 2014 2 MIN READ

In August this year, rumours spread across the Asia Pacific that the Indonesian Government was planning on adding ecommerce stores onto the country’s ‘Negative Investment List‘.

The list, well known by Indonesian and foreign investors, specifies particular industries in which Indonesian businesses within those sectors can not look beyond their own borders for capital to grow. Currently on the list are industries such as advertising and pharmaceuticals.

In an article published on TechinAsia last week, it was stated that there was both good and bad ramifications with ecommerce being added to the list:

One could argue that this is a good thing, as the ecommerce names that do rise up and become successful in Indonesia will be homegrown. Others could say that the regulation hinders the local market, as foreign investors may be more willing than their local counterparts to experiment in Indonesia, and provide funding to companies that would otherwise not get it.

Whilst these are valid points on both sides of the equation, the bigger question is, why would the Government want to do such a thing when the Indonesian ecommerce space, still in its infancy would benefit from the cash of foreign investors – at least, at this point of time when early stage competition for these types of businesses within the Asia Pacific region is fierce?

Perhaps there is a protectionist culture emerging, which would likely have been driven by the acquisitions of key Indonesian ecommerce players over the last few years. The first wave of these acquisitions included Yahoo! snapping up Koprol, Living Social buying Dealkeren.com and Groupon purchasing Disdus. The most prominent foreign investment to date though is from German-owned Rocket Internet – also a key investor in Australian ecommerce players such as The Iconic, Helpling and Ridesurfing.

Rocket Internet has launched six different ventures across Indonesia so far. Its model of hiring ex Management Consultants or MBA level Executives and hiring large teams, is something that is hard to compete with for a local cash strapped startup – so, whilst on the one hand no foreign investment stifles growth, it is only fair to say that such a law does indeed protect local interests and give those Indonesian founded businesses a fighting chance at obtaining a decent marketshare.

The other big movers in Indonesia are Japanese venture capital firms. Over the last couple of years Indonesia is seeing more and more Japanese VCs setting up local offices in Jakarta and investing heavily in local ecommerce startups.

Indonesia is classified as an ’emerging’ market and right now is extremely attractive to investors. In fact, in the Asia Pacific region, Indonesia is right up there with Japan, Singapore, Hong Kong and Australia in that it is starting to build some truly globally competitive companies. Historically, from my point of view, there has actually been very little movement by local investors in Indonesia to really back the ecommerce space with a significant amount of cash. That is why foreign investment is so prominent.

Whilst these new laws may protect startups competing for a slice in the domestic market, which is still significant in size based on the population, the big challenge these laws are going to cause is when these startup founders decide they want to look at international expansion. They will lack the skin in the game from foreign money that will help them accelerate this process, and ultimately see success outside of Indonesia.