HRM Issues for German Companies Establishing a Subsidiary in Indonesia

MA-Thesis / Master von Jenny S. Lange

Introduction:

Indonesia has a strategic position on major trade routes and possessing a rich variety of natural resources. With total numbers of 17,508 islands, the Archipelago is on a crossroads between two oceans, the Pacific and the Indian Ocean, bridges two continents, Asia and Australia, and has hundreds of different languages. These factors have created a highly diverse environment and society. They influence the social, political and economic life of the country. Under such circumstances, HRM of foreign companies establishing subsidiaries in Indonesia, have numerous challenges.

Chapter 2 and 3 start identifying the overview of Indonesia and what kind of environment aspect such as politic, economic, socio-culture, technology, environment and legal of Indonesia influence Human Resource Management policies and practices in Indonesia. Furthermore, this part addresses the opportunities and threats for German subsidiaries in Indonesia regarding HRM Issues. It is an essential introduction part for German companies in order to optimize opportunities and minimize threats, when they establish subsidiaries in Indonesia.

Since international business involves the interaction and movement of people across national boundaries, an appreciation of cultural differences is essential. Research into these aspects, which is explored in Chapter 4, helps us to understand of differences the culture dimension between Germany and Indonesia that influence human resource policies and practices. The object of this chapter is to help in managing, working together and dealing with the difference in thinking, feeling, acting and reacting of German and Indonesian people. This study uses the research of GLOBE Study of culture dimension such as Performance Orientation, Assertiveness, Future Orientation, Humane Orientation, Institutional Collectivism, In-Group Collectivism, and Uncertainty Avoidance.

Chapter 5 examines the current issues of HRM in Indonesia, especially for German companies establishing a subsidiary in Indonesia, such as general condition of employment (type of employment, wages system, working hours, and worker’ social security), recruitment and selection issues, compensation appraisal, performance management, trade unions, and gender issues. In this chapter show us, how political, economical, socio-cultural, technological, environmental, and legal aspects; and culture dimension of Indonesia, strongly influence HRM policies and practices in Indonesia.

The conclusion and recommendation as the last part, summarizes all of chapters and underlines the most essential things of HRM Issues for German subsidiaries, an overview of the current challenges for German subsidiaries, and suggests a recommendation for the next research.

Problem Statement:

There are about 250 German firms, which have subsidiaries in Indonesia. One problem of their subsidiaries is Human Resources Management problems such as:

What kind of environment context strongly affect HRM in Indonesia?

What kind of ecruitment, personal selection, compensation appraisal, and performance management method should German subsidiaries use?

- How to manage Indonesian people?

- How about discrimination (gender, age, ethnic, religion) at workplace?

- How about legal system in Indonesia?

Since writing on HRM issues in developing countries have been rare, includes Indonesia, HRM literatures are more needed, especially in this case, for German companies establishing subsidiaries in Indonesia.

Purpose of Study:

The purposes of this study are:

- To address HRM issues in Indonesia for German companies establishing subsidiaries in Indonesia from environment context.

- To explore the art of managing people in Indonesia based on culture dimension aspects.

- To make a contribution to literatures of HRM policies and practice in Indonesia.

Assumption and Limitation:

This study has the following assumption and limitation:

Assumption:

Since Indonesia consists of more than 500 ethnics which have different habits, customs and etiquette, this thesis has an assumption that the results of analyze in Indonesian culture or situation are general result. The reason is because each ethnic has its own culture and it is not easy to address each difference of them. However, issues of some ethnics are addressed if there are some important points relevant to Human Resources Management practices.

In Indonesia, term Human Resources Development (HRD) is most used than HRM, because HRM is seen as much broader than HRM, which tends to be seen as ‘personal administration’. Although there is a little bit difference between the definitions of both terms, this study had an assumption that HRD is not distinguished from HRM.

As HRM practices vary across enterprise types, industries, and regions, this study just addresses the general HRM practices.

Limitation:

By analyzing PESTEL of Indonesia, it is stressed only on opportunities and threats for German companies establishing subsidiaries in Indonesia. The political, economical, social-cultural, technological, environmental and legal issues, which are not relevant to human resources management in Indonesia, would not be discussed.

Since GLOBE Study differ the regions of Germany into East Germany and West Germany, by analyzing cultural dimension, this thesis limits ‘Germany’ as ‘West Germany’.

By addressing HRM issues in Indonesia, this thesis addresses only the HRM issues in formal and private sectors. Some issues in public or informal sectors are explored, only if these issues are important to know or as a comparison to formal and private sectors.

Methodology:

This study used the following methodologies:

Science Literatures Analysis:

It was used particularly for Chapter 2, 3 and 5. The data was collected from national and international institutions; national and international newspaper, magazines, papers, thesis, dissertations, textbooks and from HRM/Management Consulting in Indonesia.

Comparative Study:

Chapter 4 used more comparative study of data collection from textbooks and some Intercultural Management Consultants.

Table of Contents:

	Acknowledgments	iii
	Table of Contents	iv
	List of Figures	vii
	List of Tables	viii
	Abbreviations	x
1.	Introduction	1
1.1	Problem Statement	2
1.2	Purpose of Study	2
1.3	Assumption and Limitation	2
1.4	Methodology	3
1.5	Definition of Terms	4
1.5.1	Human Resource Management	4
1.5.2	Human Resource Management Issues	5
2.	Indonesia in Overview	6
2.1	Geographical Framework	7
2.2	Climate and Resources	8
3.	PESTEL Analysis of Indonesia	9
3.1	Political Analysis of Indonesia	9
3.1.1	Political System	10
3.1.2	International Relations	10
3.1.3	Terrorism Issues	11
3.1.4	Internal Conflict Issues	12
3.1.5	Corruption Issues	12
3.1.6	Military Politics	14
3.2	Economical Analysis of Indonesia	14
3.2.1	Foreign Trades	15
3.2.2	Foreign Direct Investment	16
3.2.3	Currency and Banking	17
3.2.4	Job Growth and Unemployment	17
3.3	Socio-cultural Analysis of Indonesia	18
3.3.1	Demographics	19
3.3.2	Ethnic Groups and Religion	20
3.3.2.1	Ethnic Groups	20
3.3.2.2	Religion	21
3.3.3	Languages	22
3.3.3.1	Regional and National Language	22
3.3.3.2	Official Language	23
3.3.4	Education	23
3.3.5	Health	25
3.3.6	Human Development	26
3.4	Technological Analysis of Indonesia	27
3.4.1	Intellectual Property Rights	27
3.4.2	Research and Development	28
3.4.3	Maturity of Technology	28
3.4.4	Telecommunication	29
3.4.5	Transportation	29
3.5	Environmental Analysis of Indonesia	30
3.5.1	Environmental Issues	30
3.5.2	Environment Regulation	31
3.6	Legal Analysis of Indonesia	32
3.6.1	Legal System	33
3.6.2	Labor Law	33
3.6.3	Tax System	35
4.	Comparison: Cultural Dimension between Germany and Indonesia	37
4.1	Performance Orientation	38
4.2	Assertiveness	40
4.3	Future Orientation	42
4.4	Humane Orientation	43
4.5	Institutional Collectivism	45
4.6	In-Group Collectivism	45
4.7	Uncertainty Avoidance	46
5.	Human Resource Management Policies and Practices in Indonesia	49
5.1	General Condition of Employment	49
5.1.1	Type of Employment	49
5.1.2	Disability and Older Workers	49
5.1.3	Wages System	50
5.1.4	Working Hours	52
5.1.5	Worker' Social Security	52
5.2	Recruitment	53
5.3	Personnel Selection	58
5.4	Compensation Appraisal	60
5.5	Performance Management	64
5.6	Trade/Labor Union	66
5.7	Gender Issues	70
6.	Conclusion and Recommendation	72
	Reference	75
	Appendix A	82
	Appendix B	83

Text Sample:

Chapter 3.4.1, Intellectual Property Rights:

Since Indonesia signed ‘the Trade Related Aspect of Intellectual Property Rights and Counterfeit Goods (TRIP’s)’ in 1994, Indonesia has some laws related to the copyright, patent and trademark (Laws Number 14 and 15 of 2001 for patent and trademark respectively, while copyright law was revised in 2002 by Law Number 19).

However, Intellectual Property (IP) Registration in Indonesia is very complicated, inconvenient and expensive. While Japan and the United States are using application with paperless system due to the great support of the development of information technology, Indonesia is still using manual typing with 25 copies and the process has a lot of bureaucracy process. The official payment for registration is not overly expensive, however, because all of the processes related to the application and registration take place in Jakarta, additional costs arise and application becomes more expensive that the first official payment. Official payment for a trademark registration is only Rp.450,000, or equivalent to US$ 45.00. But, when an applicant completes the process of application, the costs are higher than this amount. Taking into account the official fee for the service, transportation and accommodation expenses, the cost actually totals around Rp.1.500.000 or equivalent to U.S. $150. This total assumes that there are no problems with the registration process.

In addition, Indonesia still battles against society’s low understanding of IP registration, IP laws and IP rights, as reported in Global Competitiveness Report 2008-2009 , that Property Right in Indonesia was poorly defined and not protected by law. Indonesia ranked 117 out of 134 countries. Besides, IP protection in Indonesia was very weak and not enforced. Indonesia was only rank 102 out of 134. Therefore, Indonesia still needs more time to introduce the new laws to people so they can better understand the laws and the meaning of IP for businesses.

Research and Development:

Human Development Report 2007/2008 reported that Indonesian expenditure for Research and Development (R&D) is only 0.005335% of GDP (2000-2005) with 207 R&D researchers per million population. It indicates that R&D in Indonesia is lower than Malaysia, which has R&D expenditure 0.69% of GDP with 299 researchers per million population. With this limited R&D budget, the Ministry of Research and technology decided the priorities on research science and technology in these such areas: energy, agriculture and food, ocean, land and space, information technology, biotechnology and manufacture.

Maturity of Technology:

According to Investment Law Number 25/2007 Article 10, foreign investors in Indonesia are required to improve the competence of workers of Indonesian workers through work trainings and to provide trainings and transfer of technology to Indonesian workers.

Industrial technological development in Indonesia lags behind or is off course in comparison to other ASEAN countries. This is reflected in the large number of industries still engaged in low-tech, traditional, small-scale and low-productivity activities.

In terms of the Technology Achievement Index (TAI), Indonesia was ranked 11 out of 12 East Asian countries in 2004 with TAI 0.175, Technology Creation Index (TCI) 0.004, ranked 7 out of 12 East Asia countries, diffusion of recent innovations 0.174, diffusion of old innovations 0.130 and human skills 0.392. It indicates that technological activity in Indonesia is still at the bottom of the technology ladder.

In summary, industrial technological development in Indonesia is still weak, at least in the large manufacturing sector and this may be one reason behind the country’s low and even negative productivity growth. The government, therefore, needs to do a great deal to promote industrial technology development. This could be done, for instance, by harmonizing the openness towards trade and investments in the country.