Indonesia Digital Economy

Last published date: 2024-09-19

Digital Economy

National Focus: Indonesia’s government has positioned the digital economy as a cornerstone of its broader economic development strategy. Central to this ambition is the “Making Indonesia 4.0” roadmap, which aims to position the country as a leading digital economy by 2030. This plan is underpinned by significant government initiatives, including the “100 Smart Cities” program and the “National Strategy for Artificial Intelligence (2020-2045),” both designed to enhance digital infrastructure, boost innovation, and integrate advanced technologies across various sectors.

The government’s commitment is further evidenced by the Digital Indonesia Roadmap 2021-2024, which outlines specific goals for expanding digital infrastructure, increasing the digital skills of the workforce, and encouraging the adoption of digital technologies in businesses, particularly small and medium-sized enterprises (SMEs). The roadmap also emphasizes e-commerce, fintech, and the acceleration of digital transformation in public services, intending to create a more inclusive digital economy.

Indonesia’s Ministry of Communication and Information Technology (Kominfo) plays a pivotal role in driving these strategies, with a focus on expanding internet access, developing a comprehensive 5G network, and promoting cybersecurity measures. The government also plans to establish a national data center and strengthen regulatory frameworks to attract more investment in the digital sector.

Projected Digital Economy Growth: Indonesia’s digital economy is among the fastest growing in Southeast Asia, projected to exceed $130 billion by 2025, according to a joint report by Google, Temasek, and Bain & Company. The country’s rapid internet penetration—currently at 79.5% per APJII 2024 survey and a young, tech-savvy population are key drivers of this growth.

E-commerce continues to dominate the digital economy, accounting for the largest share of digital services revenue. The sector is expected to grow further as more Indonesians shift to online shopping, fueled by the pandemic’s acceleration of digital adoption. Fintech is another critical growth area, with digital payments, lending, and insurance services expanding rapidly, driven by increasing financial inclusion and a growing preference for cashless transactions.

Indonesia’s competitive digital landscape is marked by the presence of major global and regional players such as Gojek, Tokopedia (now merged under GoTo), Shopee, and Lazada. These companies are not only enhancing their services but also expanding into new areas like digital banking and logistics, intensifying competition. Additionally, the government’s push for local data centers has led to significant investments from international cloud service providers like Amazon Web Services (AWS), Google Cloud, and Microsoft Azure, which are vying for market share in Indonesia’s burgeoning cloud computing industry.

In the coming years, the digital economy’s growth is expected to be bolstered by investments in infrastructure, increasing mobile broadband access, and continued innovation in services like health tech, edtech, and agritech, which are gaining traction as key verticals in Indonesia’s digital transformation journey. However, challenges such as regulatory uncertainties, data privacy concerns, and infrastructure gaps must be addressed to fully realize the sector’s potential.

Market Challenges

Regulatory environment

Navigating Indonesia’s regulatory landscape presents several challenges for businesses operating in the digital sector. The regulatory framework is still evolving, and frequent changes can create uncertainty for foreign and domestic companies alike.

Data privacy

Indonesia’s data privacy regulations are governed by the Personal Data Protection (PDP) Law, which imposes strict requirements on the collection, processing, and storage of personal data. Businesses must navigate complex compliance obligations, including obtaining explicit consent from data subjects and ensuring that data processing activities meet local legal standards. Violations can lead to significant penalties, including fines and imprisonment.

Indonesia’s PDP Law was enacted on October 17, 2022, but it won’t be fully implemented until October 17, 2024, after a two-year transitional period. The Indonesian Government is currently drafting the PDP Law’s implementing regulation, and the draft of such regulation was circulated on August 31, 2023, for public discussion (RPP PDP). This RPP PDP will provide extensive elaboration and guidelines on certain aspects stipulated under the PDP Law.

AI regulation

While Indonesia has not yet implemented comprehensive AI regulations, Communications and Informatics Minister Circular No. 9 of 2023 on AI Ethics served as the current guideline for AI development in Indonesia, and specifically the Financial Services Authority (OJK) AI Guideline serves as a guideline to be followed for the use of AI specifically in the financial technology industry. Businesses should be prepared for potential future regulations that may include ethical guidelines, transparency requirements, and restrictions on certain AI applications, which could impact innovation and deployment strategies.

Cross border data flows

Indonesia has stringent regulations on cross-border data transfers. The PDP Law mandates that data transfers to other jurisdictions can only occur under specific conditions, such as when the recipient country has equal or higher data protection standards. This can complicate operations for multinational companies, particularly those with centralized data processing centers outside Indonesia.

Cybersecurity

Cybersecurity regulations in Indonesia are becoming more stringent as the government seeks to protect critical infrastructure and data. The National Cyber and Crypto Agency (BSSN) oversees cybersecurity policies, which include requirements for companies to implement robust cybersecurity measures and report incidents. Non-compliance can lead to severe consequences, including fines and business disruptions.

Online harms regulation

Indonesia’s approach to regulating online content is increasingly stringent, with laws targeting misinformation, hate speech, and other forms of online harm. The Electronic Information and Transactions (ITE) Law is the primary legal instrument, and its broad interpretation has raised concerns about potential overreach and impacts on freedom of expression.

Standards development

The development of digital and technical standards in Indonesia is often influenced by the government, with limited input from the private sector. This can lead to the adoption of standards that may not align with international norms, creating compliance challenges for businesses, particularly those with global operations.

Subnational market regulation

Indonesia’s decentralized governance system means that regulations can vary significantly between provinces and municipalities. Companies must navigate a complex web of subnational regulations that can differ from national standards, creating additional compliance challenges and increasing the cost of doing business.

Market entry

Entering the Indonesian market can be challenging due to bureaucratic hurdles, complex licensing processes, and sector-specific restrictions on foreign ownership. The government has taken steps to streamline business licensing, but companies may still face delays and uncertainty when establishing operations in the country.

Public sector procurement

Public procurement in Indonesia is often characterized by a lack of transparency and complexity in the bidding process. Foreign companies may find it difficult to compete with domestic firms, particularly state-owned enterprises, which often receive preferential treatment. Additionally, the requirement for local content in procurement contracts can pose significant barriers to entry.

Digital Trade Barrier

Several digital trade barriers in Indonesia present challenges to businesses, particularly those outlined in the 2024 National Trade Estimates Report.

Data localization

Indonesia’s data localization requirements are among the most significant barriers for foreign companies. The government mandates that certain types of data, particularly those related to public services and financial transactions, be stored on local servers. This increases operational costs and can hinder the efficiency of global data processing and cloud services.

Technology barriers

Indonesia has implemented various technology-related regulations that can hinder market entry and innovation. For example, the government requires that certain types of hardware and software products be certified by local authorities, a process that can be lengthy and complex. Additionally, restrictions on foreign technology providers in critical sectors can limit opportunities for foreign firms.

Digital services companies are obligated to pay an 11% VAT rate on foreign digital products sold in Indonesia. Based on information published in February 2024, the number of digital taxpayers reach 163 major tech companies such as Amazon, Google, Meta, Netflix, Apple, and others since the introduction of the digital tax in 2020. These companies are required to generate evidence of VAT collection, such as a commercial invoice, billing, order receipt, or other relevant documents indicating the VAT collection and confirming payment.

Barriers to Internet Services

Indonesia has imposed restrictions on certain internet services, particularly those related to content distribution and social media. These regulations can limit the availability of global platforms and services, affecting both consumers and businesses that rely on these tools for digital marketing, communication, and e-commerce.

Third country bias/influence

Indonesia’s trade policies are sometimes influenced by its relationships with third countries, which can create biases in the regulatory environment. For example, preferential treatment may be given to companies from countries with strong bilateral ties, particularly in sectors deemed strategically important. This can disadvantage firms from other countries, especially in competitive bidding situations or regulatory approvals.

Digital Trade Opportunities

Cross-Sector Enabling Technologies

Indonesia’s digital transformation presents numerous opportunities across various industries, driven by the adoption of enabling technologies that enhance productivity, efficiency, and functionality. Key technologies include:

Communications and Networking Technologies

With Indonesia’s ongoing expansion of 5G infrastructure, there is significant demand for advanced communications technologies. This includes opportunities in network equipment, fiber optics, and next-generation communication protocols that support faster and more reliable internet connectivity. The government’s focus on improving digital infrastructure across the archipelago further boosts prospects in this sector.

Advance Computing

Indonesia’s digital economy is increasingly relying on advanced computing technologies to process large volumes of data and support complex applications. There is growing interest in high-performance computing (HPC), cloud computing, and edge computing solutions, particularly in sectors like finance, healthcare, and manufacturing. These technologies are vital for supporting AI development, big data analytics, and other data-intensive processes.

Advance and Network Sensing and Signature Management

This technology is crucial in sectors like defense, manufacturing, and agriculture, where precision and real-time monitoring are key. Opportunities exist in providing advanced sensor technologies, such as IoT devices and networked systems, that enhance operational efficiency and security in various industries. Additionally, smart city initiatives in Indonesia are driving demand for networked sensing solutions.

Human-Machine Interfaces

As industries in Indonesia embrace automation and robotics, there is an increasing need for advanced human-machine interface technologies. These technologies improve interaction between humans and machines, enhancing productivity and safety in environments like manufacturing, healthcare, and transportation. The development of intuitive and ergonomic interfaces will be critical in supporting the adoption of these systems.

Artificial Intelligence (AI)

AI is a rapidly growing field in Indonesia, with applications across multiple sectors, including finance, healthcare, retail, and government services. Opportunities abound for AI solutions that offer predictive analytics, machine learning, natural language processing, and other capabilities that can optimize operations, improve decision-making, and personalize customer experiences. The Indonesian government’s focus on AI within the “Making Indonesia 4.0” initiative further underscores the importance of this technology.

Others

Quantum Computing: Though still in its nascent stages, quantum computing holds potential for solving complex problems in finance, logistics, and cryptography. Companies that offer quantum technologies could find early-stage opportunities in research collaborations and pilot projects in Indonesia.

-Open Radio Access Network (ORAN): ORAN is gaining traction in Indonesia as part of the broader 5G rollout. The government and private sector are exploring ORAN solutions to improve network efficiency and reduce reliance on proprietary systems, opening doors for companies specializing in open and interoperable network solutions.

-Information Communication Technology (ICT): ICT continues to be a foundational element of Indonesia’s digital economy, with ongoing investment in infrastructure, software, and services that support digital transformation across all sectors.

-Internet Access, 5G and 6G: As Indonesia expands its digital infrastructure, there is strong demand for technologies that enhance internet access and pave the way for 5G and future 6G networks. This includes equipment, software, and services that support the deployment and operation of these networks.

-Sub-sea Cables: Indonesia’s strategic location and its vast archipelago make it a critical hub for sub-sea cable networks. Opportunities exist for companies involved in the planning, construction, and maintenance of these cables, which are vital for improving international connectivity and supporting the growth of the digital economy.

Specific Industry Sub-sectors

Quantum Technologies

While still emerging, quantum technologies offer significant potential in Indonesia for applications in cryptography, secure communications, and complex data processing. Opportunities exist for companies to collaborate with local research institutions and government initiatives focused on quantum computing and its applications.

Financial Technologies (fintech)

Indonesia’s fintech industry landscape continues to show dynamic developments after facing tech winter and global economic volatility. Fintech innovation continues to grow due to supportive regulatory facilitation, especially after implementation of the Financial Sector Development and Strengthening Law (UU P2SK) and its implementing regulations. Digital payments in Indonesia experienced an increase of 10% in 2023 compared to the previous year and are expected to grow by 15% in 2025. In fact, the overall fintech industry, including P2P lending, is also expected to grow.

The 2023 and early 2024 are good years for the fintech industry’s growth. Several important notes need to be considered by the fintech industry, namely the ratification of the Law on the Development and Strengthening of the Financial Sector (UU P2SK) and its various implementing regulations, Law number 1 of 2024 which is the latest law regarding the regulation of Information and Electronic Transactions (ITE), the transition of crypto assets oversight, the development of the cross-border Quick Response Code Indonesia Standard (QRIS), and development artificial intelligence (AI), as well as the implementation of anti-fraud strategies.

Cybersecurity

As Indonesia’s digital economy grows, so does the need for robust cybersecurity solutions. There is strong demand for cybersecurity products and services that protect against threats such as data breaches, ransomware, and cyber espionage. Companies offering advanced cybersecurity technologies, training, and consulting services are well-positioned to capitalize on this demand.

Internet of Things (IoT) and Smart Cities

Indonesia is investing heavily in IoT and smart city technologies as part of its urban development strategy. Opportunities are particularly strong in areas like smart transportation, energy management, waste management, and public safety. Companies providing IoT devices, platforms, and analytics solutions can find significant growth potential in this sector.

Software and Digital Services, and Telecommunications

The software and digital services sector in Indonesia are experiencing rapid growth, driven by the widespread adoption of cloud computing, enterprise software, and digital platforms. Telecommunications also remain a key area of investment, with ongoing upgrades to mobile and broadband networks. There are opportunities for companies offering software as a service (SaaS), digital transformation consulting, and telecommunications equipment and services

Digital Economy-related trade events

Engaging in digital economy-related trade events in Indonesia offers valuable opportunities to connect with potential partners, showcase technologies, and gain insights into the local market. Key events include:

- Indonesia Digital Innovation Conference & Expo: This annual event brings together industry leaders, government officials, and tech innovators to discuss the latest trends and opportunities in Indonesia’s digital economy.

- Smart City Expo Indonesia: Focused on smart city solutions, this event highlights the latest technologies and innovations in urban planning, infrastructure, and IoT.

-Fintech Festival Indonesia: A premier event for the fintech industry, offering a platform for networking, showcasing new technologies, and discussing regulatory developments.

- Cybersecurity Indonesia: An event dedicated to cybersecurity, this conference and exhibition provide insights into the latest threats, solutions, and best practices in securing digital assets and infrastructure.

- Indonesia ICT Expo: This trade show features the latest in ICT products and services, attracting businesses