Managing Business Government Relations Across China, India, and Indonesia

Variation in effective mechanisms for managing business government relations across China, India, and Indonesia

The variation in mechanism of managing business in three countries China, India and Indonesia has been covered on lines of business culture, political institutions, economy and tax regimes.
Business Culture
There are quite a lot of similarities in business culture in 3 different countries China, India and Indonesia. Business decisions are usually taken at the highest level and may take more time than one would have expected. Business can’t get a favourable decision unless they establish the trust with government. As the decision is taken at the highest level, absence of the any higher-position holder like Director or owner indicates that it is only the early stage of negotiation.
Business development largely depends upon relationship building and business relationships are based on trust and familiarity which is earned by demonstrating strong business insight, showing honesty and respect. “Guanxi” meaning relationship is considered key characteristic of the Chinese business culture. Personal contacts and networks are important in making business deals and business people will come frequently into contact officials. Having a contact act as an intermediary is important in conducting business as they will know more about the bureaucracy, legal system and local business networks.
Gifts or exchanging favours are appreciated in all societies. If businessman wish to give Indonesian official a gift, alcohol is avoided as it is forbidden in Islam. While gifts might extend to bribery in India, it is not supported in China. Chinese believe that ‘Guanxi’ should not be one sided for business to grow. In China, gift does not carry any negative implication and is always exchanged on celebrations, as thanks for assistance and even as a sweetener for future favours. However, it is important not to give gifts in the absence of a good reason or a witness.
In India and Indonesia, people use polite and diplomatic language even if they disagree. Government officials do not always say exactly what they mean and therefore it is up to the businessman to pick up on communication detail by paying attention to body language and gestures. The government officials do not rush through business negotiations and often take the time to plan everything.
Business is conducted usually in English in larger cities of India and Indonesia while it will be local language in China while it is wise to bring an interpreter in Indonesia and China. In Indonesia and China, person will do anything to save face even if it means avoiding argument or telling others what they want to hear rather than dealing with immediate issues. Businessman usually refrains from putting high pressure tactics while negotiating with the government.
Political Institutions
China's remarkable economic success is based on a strong foundation of political reform started in 1978. This reform reflects a special type of decentralization called "Chinese federalism". This form of decentralization has three consequences in Chinese business community. Firstly, it fostered competition, not only in product markets, but also among local governments for labour and foreign capital. This competition, in turn, encouraged local government experimentation and learning with new forms of enterprises, regulation, and economic relationships. Secondly, it provided incentives for local governments to promote local economic prosperity. Finally, it provided a significant amount of protection to local governments and their enterprises from political intrusion by the central government. The Chinese government is considered very strong entity with complete power to take decisions which the central party think is good for the country. The form of government have been sometime against multinationals trying to establish business in China. For example, Google has to stop their China operations because they have to abide with many government regulations on the search results which can be shown to general public.
India has democratic form of government from 1947 but from business perspective Indian politics started a new foundation in 1990s. By that time, the Nehru’s socialist ideology had lost much of its popular appeal. India has a federal system which not only creates a strong central government but also has facilitated the concentration of power in the Office of the Prime Minister. This centralization of power has been a source of considerable controversy and political tension many times. There has been time when populist political appeals activate the passions of the masses and government institutions appear less capable. Hence it’s possible to build up pressure on government through corporate lobbying. But Indian democratic form of governance has its own issues. The freedom to oppose government actions is not always for good as we have seen in the Singur case of West Bengal where Tatas were not allowed to establish their industry due to politically motivated opposition by another party which was not in government. As normally in multi-party system, the coalition government makes it difficult quite a many times to pass any industrial and business reforms because each party has its own thinking.
Indonesia's political system is a constitutional democracy. The main ideology in Indonesian politics is secular/nationalist and religious. The former has always been in the dominance and is for the most part supported by the main Muslim organisations, who guardedly accept the principle of a state that does not privilege one particular religion. Indonesia once had an authoritarian regime under Suharto but now it has switched to democratic form. The military remains an influential player in Indonesia - principally as a consequence of its territorial command structure - although it no longer has a direct role in political affairs, having lost its reserved seats in parliament after October 2004. After Suharto’s regime, macro-economic indicators and political stability improved although foreign direct investment (FDI) remained slow and unemployment very high. And on top of it, there is need to address corruption and legal reform.
Economic
After 1978, China's economy has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector. It also became a big player in the global economy. The streamlining of the economy and resulting efficiency led to a more than tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis, China in 2010 stood as the second-largest economy in the world after the US, although in per capita terms the country is still lower middle-income. By the end of 2010, more than 5,000 domestic Chinese enterprises had established direct investments in 172 countries and regions around the world. Economic development has been more rapid in coastal provinces than in other regions, and approximately 200 million rural labourers have relocated to urban areas to find work. Also a consequence of the "one child" policy is that China is now one of the most rapidly aging countries in the world.
India's diverse economy ranges from traditional village farming, modern agriculture, a wide range of modern industries, and a whole host of services. Services are the major source of economic growth, accounting for around 60% of India's output with less than 30% of its labour force. About three-fifths of the work force is in agriculture, leading the government to come up with an economic reform program that includes developing basic infrastructure to improve the lives of the rural poor and boost economic performance. The government has reduced controls on foreign trade and investment. Higher limits on foreign direct investment were permitted in a few key sectors, such as telecommunications. The economy has posted an average growth rate of more than 7% in the decade since 1997 and growing at rate of 8-9% in last few years, reducing poverty by about 10%. India has well capitalized its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers.
Indonesia has a market-based economy in which the government plays a significant role. There are 139 state-owned enterprises, and the government administers prices on several basic goods, including fuel, rice, and electricity. The Indonesian economy is driven significantly by domestic consumption, which arguably sheltered Indonesia from unfavourable external shocks. In the long run, Indonesia aims to be better integrated into regional production networks and the global economy. Indonesia's debt-to-GDP ratio has been declining steadily, its foreign exchange reserves is at an all-time high, and its stock market has been one of the best performers in the world, as global investors sought out higher returns in emerging markets. The government has introduced significant reforms in the financial sector, including tax and customs reforms, the introduction of Treasury bills, and improved capital market supervision. Indonesia still struggles with poverty and unemployment, inadequate infrastructure, corruption, a complex regulatory environment, and unequal resource distribution among regions. The non-bank financial sector, including pension funds and insurance, remains weak. Capital markets are underdeveloped. Being located on the Pacific "Ring of Fire" Indonesia remains vulnerable to volcanic and tectonic disasters.
Tax Regimes China |
India | Indonesia | * Corporate Income Tax: 24% * Tax-Incentives for high-tech industries: 15% * Tax Holidays for manufacturing industries: * Initial two years of profitability: 0 percent tax * Next three years of profitability: 50% of tax rate (This is assumed to be 12%) | Following is the tax system for India’s “Special Economic Zones” * Corporate Income Tax: 15% * First five years of profitability: 0% tax * Second five years of profitability: 50% tax (This is assumed to be 7.5%.) * Third five years of profitability: 50% of tax rate for any invested dividends that are invested back into India | * Corporate income tax exceeding 100,000,000 Rupiah is 28% Special tax rates apply to specific types of corporations: * Petroleum: 30% - 45%. * General mining: 30% to 45%, depending on the generation of their contracts with the government * Construction: 2% of gross turnover * Consultancy, other than legal and tax consultancy: 4% of gross turnover * Foreign drilling: 5.6% of their gross turnover. |

As can be seen, India has introduced a tax regime that is vastly more advantageous in the Special Economic Zones than China and Indonesia. One more difference is that in the Special Economic Zones India does not differ between manufacturing and services and either can avail the above incentives, which is not the case in China. Special economic zones incentives are still evolving in Indonesia.

Changes over time in mechanisms for managing business –government ties
India
Even before India had freedom, Jawaharlal Nehru, India’s first Prime Minister, use to praise Jamshetji Tata as “one man planning commission”. Jamshetji was a great businessman, who had given India ‘Tata house’, most respected business family even now, which started with establishing textile and iron and steel industry in India even though it was British rule. After freedom as all economic resources of country were drained out of country, the first Indian government started with Democratic Socialism but private sector was not scaled down. Even though private sector was admonished, big business houses were silently accommodated as they had helped the political leadership during the freedom struggle. It was G. D. Birla who asked businessmen to be understanding when in 1953 they became restive with the terms of 1948 Industrial Policy Resolution.
To control the economy, government and the bureaucrats came up with ‘license raj’ which refers to elaborate regulations required to set up and run businesses in India. But this method in turn created monopolies and the government officials filled their pockets as the business houses kept lobbyists in Delhi to oblige government officials with money. This created a prejudiced system as new entrepreneurs could not give heavy bribes to get a license. Hence talent suffered and in the process India became a sellers’ market. License raj also controlled the production capacities and deprived businessman from the economies of scale. Due to license raj corruption reached its peak in India while the bureaucrats and politicians collected money at the cost of the prosperity of the country and better deal for the consumers. As a result, the rich became richer and the poor poorer contrary to what the Constitution promised an equitable distribution of income and wealth. All this unfair practices in the country led to formation of new demanding groups like the Forum of Free Enterprise for which some enterprising people gathered the required funds. Before that only FICCI (Federation of Indian Chamber of Commerce and Industries) which represented Business was active in pressurizing the Government. The Government had a soft corner for them as they helped the political leadership during elections and national calamities like wars and floods.
As literacy rate rose in India and people became aware about their rights they formed more pressure groups like Farmers’ lobby and Labour Unions to appropriately represent their problems to the Government. It was corporate like Tatas who implemented policies for the benefit of their employees even before government realized the importance.
After Liberalization in the Early 1990s
The actual liberalization reforms started for India in the nineties which led to end of the license raj and opening up of the Indian business to international competition. Indian business surfaced through successfully even through the age of computers and information technology. The Indian economy proved to be self-reliant in many raw materials and also unbelievable talent it had in form of millions of graduates from colleges all over the country every year. Now, the Government has confidence on the private sector and hence provide them best infrastructural facilities through the public sector enterprises. India is a developing economy and various kinds of job opportunities exist now within the country itself. This led to stoppage of brain drain and even the reverse brain drain has started especially because of the present American meltdown. Students now learn various modern subjects like hospitality management, media, engineering, biotechnology, management studies and information technology. There are so many opportunities that even millions of graduates are not sufficient to cater to demanding positions in the Indian business landscape.
China
Since 1949 the government, under China's socialist political and economic system, has been responsible for planning and managing the national economy. In the early 1950s, the foreign trade system was monopolized by the state. Nearly all the domestic enterprises were state-owned and the government had determined the prices for key commodities, controlled the allocation of investment funds, decided output targets for major enterprises, allocated energy resources, set wage levels, and guided the financial policy and banking system. As a result, this control over society led to highly standardized society with people receiving low salaries from state-owned agencies, and at the same time people spent and consumed goods as per the quotas given by the government. This hampered the business; in fact there were no large business operations or trade activities in any of the cities. The government was completely dominating the process, right from ownership, production, distribution and consumption of all business operations.
Reform, beginning in 1979
In order to encourage transformation and economic development of country, Chinese government brought policy reforms and promoted opening-up of economy during late 1970s. By now the government has taken many actions and put into practice many policies aimed at amending the role of government and to endorse business investment and production. The State implemented the contract responsibility system to promote business activities in both the rural-agricultural and the urban-industrial areas according to which the goods beyond the quota was sold in free market at unregulated prices. Government also established many special economic zones (SEZs) to provide preferential policies like lower tax rates in coastal regions to attract foreign investment.
Additionally, there were various policy changes such as administrative decentralization and deregulation to improve the huge administrative system and to get rid of bureaucratic inefficiency. The decentralization strategy refers to distribution of decision-making powers by the central government to local units. As a result, local governments became quite involved in economic activities and local officials supported business with required policies. The deregulation strategy consists of both process and structure changes. A major process change was the reform of China’s new venture approval system to support business development. The structural changes included the separation of economic enterprises from administrative agencies such as the reform of state-owned enterprises (SOEs). The SOEs reforms happened in different stages such as from 1978 to 1992 there was more freedom in their autonomy rights for decisions related to production, and then it transformed into the modern enterprise system between 1992 and 1997. Laws like Competition Law and a Company law of 1993 were passed and effective corporate governance was established to address issues related to financial and social security. As a result, there was much more improvement in China’s macroeconomic performance and business development. China’s gross domestic product (GDP) has grown at marvellous average rate of 9.9 percent a year since the reform and its GDP has risen from Rmb 362.4 billion in 1978 to Rmb 39.8 trillion in 2010. Also there was increase in people’s income, with annual GDP per capita going up from Rmb 379 in 1978 to Rmb 27,933 in 2010.
But this success of China’s economic reform brought along some tricky issues that affected government business relations. There were issues related to the consumer safety problems which included many food safety incidents reported at different levels. One important concern on which disagreement persists is related to environmental problems, in terms of soil contamination, river stoppage, water pollution and air pollution. In the end, even labour safety and protection concerns have been raised. One of the major factors behind China’s economic development is availability of plenty of low-cost labour which both domestic and foreign companies took advantage to produce cheap products. But the condition of these labours have been ignored for long and they suffered many problems in their working places, such as no labour contract with employers, long working hours, below minimum wages, no medical insurance and social welfare services, workplace injuries, and personal humiliation from supervisors.
Indonesia
After independence, from 1950 to 1957 government followed many policies to support the natives through financially support from the state-owned Bank Rakyat, or People's Bank, and by limiting certain markets to locals business. During 1957, workers instigated takeover of Dutch enterprises, which led eventually to state control of around 300 firms in business areas such as plantation, mining, trade, finance, and utilities. In 1958-1965, growth rate was hampered due to political instability and inappropriate economic policies. The government under Sukarno aimed at self-sufficiency, import substitution and pushed away the suppliers of western capital by showing sympathies for communist.
Suharto’s Regime
Following the downfall of Sukarno, the new government under Suharto took financial assistance from IMF and implemented many balancing measures to improve the economy by facilitating private market development. But at the same time, government increased regulation because of growing concerns over foreign economic control, limited national industrial base, and the call for ‘pribumi’ financial development. In 1970s government earned through oil revenues, so they wanted to invest that money for expanding country’s domestic industrial base by empowering basic industries, such as steel and concrete, and protecting them from foreign competition by raising trade barriers. In spite of all regulations, the Indonesian economy developed in 1970s, and the GDP grew annually at an average 8 percent rate.
Few large conglomerates, mostly Chinese minority-owned, dominated the private sector as they had adequate capital and expertise to help out government in large-scale modernization projects. The two top conglomerates, the Astra Group and the Liem Group, had significant holdings in private firms spanning across all sectors from manufacturing to services. These conglomerates kept growing as they had close relations with government. The government provided them monopoly privileges on production and imports of key industrial products, while they helped government achieve its industrialization goals by taking up important investment projects. By the mid-1980s, about 35 percent of imports were imported either by licensed importers or controlled through a quota system. As a result, firms were able to sell their products at a higher cost as they were protected from foreign competition which in turn increased burden on whole economy because these imports were often key inputs for many manufacturers.
Public anger grew as they knew that this system benefit only a privileged Chinese minority and members of Suharto's family who were profiting by owning import monopolies. When oil prices crashed down in 1986, the small private businesses which could get benefits raised their voices against the direction of trade, industrial policy and high-cost economy of monopoly. Hence a group of smaller businesses structured the Chamber of Commerce and Industry in Indonesia (Kadin). In 1987, Kadin became the official means of communication between business and government. Indonesia relied on international lenders which helped the government with balance of payments difficulties resulting from the decline in oil revenues. These groups also began to pressure the government for trade reforms and these reforms, introduced in the mid-1980s, separated government from the marketplace and promoted growth of new export industries. Many benefits that led to growth of large conglomerates earlier were reduced, but the conglomerates adapted rapidly to the new environment. Large, state-owned enterprises faced greater competition, thus several measures were undertaken to prepare for possible eventual privatization, including a thorough independent assessment of the profitability of each enterprise and a review of management compensation in relation to performance criteria. During the thirty years of president Suharto's government, Indonesia's economy grew from a per capita GDP of $70 to more than $1,000 by 1996.
After Suharto
In the aftermath of the 1997-98 financial crisis, the government took custody of a significant portion of private sector assets via debt restructuring, but subsequently sold most of these assets, averaging a 29% return. Indonesia has since recovered, even if slower than some of its neighbours, by recapitalizing its banking sector, improving oversight of capital markets, and taking steps to stimulate growth and investment, particularly in infrastructure. By 2004, real GDP per capita returned to pre-financial crisis levels and income levels are rising.

Reference:
The CIA World Factbook, U.S. Department of State, Area Handbook of the US Library of Congress

James Heitzman and Robert L. Worden, editors. India: A Country Study. Washington: GPO for the Library of Congress, 1995

William H. Frederick and Robert L. Worden, editors. Indonesia: A Country Study. Washington: GPO for the Library of Congress, 1993
Robert L. Worden, Andrea Matles Savada and Ronald E. Dolan, editors. China: A Country Study. Washington: GPO for the Library of Congress, 1987
An Article on Indian economics by Lynus Misquitta, Ph.D in Political Science at the University of Mumbai

Paper on “Reform and Transition in Public Administration Theory and Practice in Greater China, 1978-2008,” presented at Faculty of Social Science, University of Hong Kong

Indonesia Investment and Business Guide by USA International Business Publications

China Investment and Business Guide by USA International Business Publications

India Investment and Business Guide by USA International Business Publications

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[ 1 ]. http://en.wikipedia.org/wiki/Licence_Raj
[ 2 ]. http://en.wikipedia.org/wiki/Household-responsibility_system
[ 3 ]. http://en.wikipedia.org/wiki/Special_Economic_Zone
[ 4 ]. http://en.wikipedia.org/wiki/Economy_of_the_People's_Republic_of_China
[ 5 ]. Native Indonesian http://en.wikipedia.org/wiki/Native_Indonesians
[ 6 ]. http://www.indonesia-pretoria.org.za/content.php?Label=BUSINESS%20AND%20TRADE&Px=100&Py=20&X=101&Y=5