One of Indonesia's most influential business lobbies has urged the government to tighten its regulations on foreign ownership, taxation and user privacy at local digital startups to prevent domination by foreign entities. (JG Photo/Dion Bisara)

Gov't Urged to Tighten Rules on Foreign Investment in Indonesian Startups

SEPTEMBER 25, 2018

Jakarta. One of Indonesia's most influential business lobbies has urged the government to tighten its regulations on foreign ownership, taxation and user privacy at local digital startups to prevent domination by foreign entities.

Indonesia, home to more than 260 million people – half of whom are active internet users – has seen a rise in the digital economy over the past five years.

There are currently at least four unicorn startups in the country, but all are backed by foreign investments.

Ride-haling service Go-Jek Indonesia received $550 million from Sequoia Capital and Warburg, and $1.2 billion from Google, Temasek and Meituan-Dianping. Online airline ticketing and hotel booking service Traveloka received $350 million from US-based travel company Expedia, while e-commerce website Bukalapak received an undisclosed amount from 500 American startups and QueensBridge Venture Partners. Tokopedia, another e-commerce site, meanwhile received $1.1 billion from Chinese e-commerce giant Alibaba.

Over the long run, this means profit would be transferred to the investors' countries, leading to an even larger current-account deficit, further increasing pressure on the rupiah.

Bhima Yudhistira Adhinegara, an economist at the Institute for Development of Economics and Finance (Indef), warned that most of the startups still experience losses but foreign funding keeps pouring in, driving up their valuations.

"Once the valuation is at its peak, they would sell their shares for a capital gain," Bhima said.

These startups are also well placed to harvest customer data, paving the way for foreign investors to gain a foothold in Indonesia's tightly regulated payment and credit ecosystem.

"It can be seen from Go-Jek that expanded its wings into a payment system. Companies such as Alipay and WeChat Pay could enter Indonesia by funding local startups with the intention to expand their scope in fintech," Bhima said.

"Don't let them being too liberal like banks. If necessary, it might be better to introduce special regulations, such as limiting foreign ownership to 40 percent and requiring collaboration with domestic capital for the remainder," he added.

Johnny Darmawan, deputy chairman for industrial affairs at the Indonesian Chamber of Commerce and Industry (Kadin), agreed with Bhima's assessment.

"They aim for consumer data; that's why they keep investing in the startups," Johnny said.

He also questioned the fact that despite attracting huge amounts of capital, startups are still categorized as small and medium enterprises, preventing the government from imposing limits on foreign funding.

"Also, startups are often out of the tax authority's scope; that's why we must find a way to tax those that are funded by foreign entities," Johnny said.

Technology expert Heru Sutadi, a former commissioner of the Indonesian Telecommunication Regulatory Authority (BRTI), said it would be a great danger to share citizens' data with foreign entities, as it is prone to abuse.

"Citizens will be the victims. The user data belongs to citizens, while it is being exploited," he said.

The Financial Services Authority (OJK) banned hundreds of illegal foreign online lenders this year after a series of user-data abuses surfaced.

Still, other businesses beg to give startups more opportunities, pointing out that Indonesia's digital economy is still in its infancy.

"Just let startups develop. But if they start to cause chaos in economy and make no contribution to it, they must be disciplined," said Chris Kanter, secretary of the Indonesian Employers Association (Apindo). He believes the current size of foreign investment in local startups is still normal.

Shinta Kamdani, deputy chairwoman for international relations at Kadin, said that instead of limiting foreign investment, more startups should be encouraged to list on the Indonesia Stock Exchange (IDX) to allow them to attract more local investors.