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Indonesia's Widodo promises a tech industry boom to buoy the economy

JAKARTA   After a bruising year of economic retrenchment, Indonesian President Joko Widodo has latched onto technology as a potential game changer for the country's lackluster economy.

     Widodo has promised to lift growth to an average of 7% a year and sees the technology industry as one of the drivers in years to come, claiming that Indonesia can become Southeast Asia's largest digital economy by 2020 -- with turnover of $130 billion a year, compared with $18 billion now. To achieve that goal, the government is introducing an e-commerce road map and 10 economic policy packages, and is providing access to financing for small and midsize businesses and information technology startups. Limits on foreign investment in e-commerce have been loosened, allowing overseas companies to take 100% ownership of enterprises valued at more than 100 billion rupiah ($7.61 million).

     The last move was welcomed by Indonesian E-Commerce Association Chairman Daniel Tumiwa, who said the industry should always have been exempt from investment controls to encourage "smart money" from people with experience in the more developed e-commerce landscape overseas.

     The government previously closed off foreign investment in business-to-consumer e-commerce companies under its negative investment list. The regulation could be circumvented through tactics such as investments in the form of debt instruments convertible into equity, but the ban sent a strong signal that Indonesia was not keen on foreign investment in the sector.

     Under Widodo, Indonesia's attitude toward foreign investment is changing rapidly. "There are still many excessive permits, licenses and restrictions to which we will say, 'Hasta la vista, baby,'" Widodo said at a summit between the U.S. and the 10-country Association of Southeast Asian Nations in California in February.

     Moves are also afoot to make it easier for young technology companies to raise domestic capital. The Indonesia Stock Exchange and the Indonesian Chamber of Commerce and Industry plan to set up incubators in Jakarta and Bali by July to help startups prepare for initial public offerings by helping them find lawyers, accountants, venture capital investors and consultants.

     The stock exchange is also in talks with the financial regulatory agency, known as OJK, to set up a special listing board for startups. In an interview with DealStreetAsia, a Singapore-based financial news site, the exchange's President Director Tito Sulistio said the stock market wants startups and small and medium-size enterprises with net intangible assets as low as 5 billion rupiah to be able to register for initial public offerings.

     Steven Vanada, vice president of Japan-based venture capital fund CyberAgent Ventures, said these moves are indications that the government is becoming friendlier toward foreign investors. Nevertheless, he said, there is a long way to go before foreign investors will feel that government policy is stable for the long term.

     Vanada said the government has more work to do on the listing plans. "The most important thing is not only to loosen the IPO requirements, but making sure to educate [retail] investors on the potential of the startups," he said. "Being able to [make an] IPO but not being able to keep enough interest from investors won't yield a good effect."

STARTUP LISTINGS   Aryo Ariotedjo, managing partner of Grupara, an Indonesian venture capital company, said many startups filing for IPOs would need support from venture capitalists or strategic investors. "The VCs will help the company grow," whereas public investors will only give support in the form of money, he said.

     Bhinneka, an Indonesian e-commerce business, recently said it plans to pursue a listing in the country by 2019. To help achieve its ambitions, Bhinneka received $22 million in investment from Ideosource, a local venture capital company, in November.

     At the national level, Widodo is looking to produce 1,000 technology entrepreneurs by 2020. During a Feb. 17 visit to Silicon Valley, he won a commitment from Google to help train 100,000 mobile-phone app developers by the same year.

     The plan is to provide a semesterlong Android development curriculum for computer science students in their final year of college, delivered through university partnerships. Google will also translate its nonprofit Udacity courses into Bahasa Indonesia and hold developer mentorship programs called Google Developers Study Jams in five major Indonesian cities.

     Prior to Widodo's visit, Google had started several other initiatives to help Indonesian developers thrive. These include Google Developer Group events, which bring together like-minded programmers, in six cities, and the Launchpad Accelerator, which provides up to $50,000 in equity-free funding plus mentorship to local tech entrepreneurs.

     Widodo also courted Facebook and Twitter during his U.S. trip, asking them to ramp up activities in his country while helping spread tolerance in the nation, which was recently the target of an attack by Islamist terrorists. The president also visited Plug and Play, one of the biggest technology accelerators in the U.S.

Students from six vocational schools learn about smartphone repair basics. (Photo courtesy of DNA Initiative)

     The Ministry of Information and Communication Technology and the Ministry of Education and Culture have also agreed to introduce a coding curriculum into Indonesia's 11,000 vocational schools this year. Students will be taught to build mobile apps, games, 3-D models and robotic mechanisms. If successful, the curriculum may also be introduced in 12,000 high schools.

     The technology startup scene in Indonesia has blossomed in the past few years. In 2014, e-commerce marketplace Tokopedia received $100 million in investment from Sequoia Capital of the U.S. and SoftBank Group of Japan. Last year, MatahariMall, an online shopping site, raised $500 million. Go-Jek, an app for hailing motorcycle taxis, reportedly raised about $200 million.

     Other venture capital funds are eyeing startups, including Mandiri Capital Indonesia, which has received $25.2 million from its parent, Indonesia's state-run Bank Mandiri; and Venturra Capital, formerly known as Lippo Digital Ventures, which has a $150 million fund.

TAX SCRUTINY   However, while it is easing investment regulations, the government is planning a fresh approach to taxing foreign technology companies. The ICT ministry is drawing up a regulation that will require all Internet companies to establish permanent business entities in Indonesia and pay taxes, or face service blockages.

     Internet giants such as Google and Facebook could face greater scrutiny over taxes. According to Reuters, communication minister Rudiantara estimated that the nation's digital advertising industry was worth up to $800 million last year but escaped taxes because of regulatory loopholes.

     "Google has an office in Indonesia, but digital-age transactions do not go through that office. That is what we're looking to straighten out," Rudiantara told Reuters.

     U.S.-based Fenox Venture Capital said Indonesia is going through a major technology makeover that is bound to include changes in regulations. "As is true for most countries in such a period, regulation is playing catch-up," said Anis Uzzaman, general partner and CEO. "From the face of it, it is fair that businesses earning money in a country pay that country the appropriate taxes; this is just a way of enforcing that."

     Local technology businesses are also likely to support Rudiantara's move to ensure that foreign companies pay taxes. "This is also to help local companies have a fighting chance against more established foreign companies," Ariotedjo said.

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