THE ABILITY OF INDONESIA IN FACING ASEAN ECONOMIC COMMUNITY MARKET COMPETITION

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1 THE ABILITY OF INDONESIA IN FACING ASEAN ECONOMIC COMMUNITY MARKET COMPETITION 1 ANASTASIA PURWANTI, 2 KEVIN PRATAMA JAYA, 3 ILHAM SAUMI, 4 GENOVEVA 1,2,3,4 School of Management, Faculty of Business, President University, Indonesia 1 anastasiapurwanti@gmail.com, 4 genoveva.claudia@gmail.com Abstract Entering the free market of Southeast Asia in 2016, Indonesia as one of the countries member in ASEAN should be able to compete with the other Southeast Asian countries. This study analyzes Indonesian competitive advantage compared to other countries of Southeast Asia whichaims to provide inputs to the employers, the government and people of Indonesia. The theories used in this study are Michael E. Porter's Diamond Model (Porter, 2010) and Dong-Sung Cho 9 Element Matrix (Dong, 2010) to analyze the competitive advantage of nations. Pre-test is done by using the model of triangulation to get the same perception of the questions used. The method used in this research is qualitative, and collecting data is done through in-depth interviews with respondents from various countries and professions who are expected to represent different backgrounds and point of views. Results were analyzed using IFE (Internal Factors Evaluation) matrixand BCG (Boston Consulting Group) matrix to determine the position of Indonesia among all of the AEC members. The results showed that Indonesia still could not compete well in ASEAN Economic Community. Based on the Diamond model of Michael Porter, there are four factors which form the competitive advantage of a nation, and among all of those four factors, Indonesia only has one factor, which is not competitive enough to survive in ASEAN Economic Community.Therefore, Indonesia shouldimprove in several aspects such associal security reform, education, security from terrorism, internet based system and building more numbers of new ports. Keywords Competitive Advantage, Diamond Model, 9 Elements Matrix, IFE Matrix, BCG Matrix. I. INTRODUCTION ASEAN (Association of South East Asian Nations) is the affiliation of the ten countries in the South East Asia region focusing on cooperation in several aspects including culture, economy, social, technical, scientific, and political security. Based on the agreement at 27 th ASEAN Summit on November 22 nd, 2015 in Kuala Lumpur, ASEAN Economic Community (AEC) is conducted as a regional integrated economic system applied by ASEAN member countries starting 2015, which stands as the milestone of AEC blueprint of 2025with the four major goals of the implementation of AEC, which include the single market and production base, competitive economic region, equitable economic development, and fully integrated region in the global economy(asean, 2015). Regarding the realization of this project, Indonesia, as one of the members of ASEAN establishment, would also have to participate in the ASEAN Economic Community and compete with the other ASEAN members including the 1 st world countries such as Malaysia and Singapore. In addition, Indonesia still ranks on the fourth position among all of the ASEAN members in terms of competitiveness, while the first position is still owned by Singapore (The World Economic Forum, 2015). The problem in this case is that, is Indonesian market ready to face the stream of product, service, and capital from all other members of ASEAN? In relation with the phenomena explained above, there are the two possibilities for the future of Indonesia posed by ASEAN Economic Community which will be determined through this research of whether Indonesia will gain a good growth in their GDP while maintaining their local market survivability, or oppositely, Indonesia will fail to maintain their local market and be overwhelmed by other nation products. Figure 1 : ASEAN Competitive Index (The World Economic Forum, 2015) II. LITERATURE REVIEW 1.1 Competitive Advantage There are a lot of misconceptions on people s mind about international competitiveness. People tend to believe that international competitiveness is shaped by the resources of a nation which include human resource, capital and natural resource, while only a few of them think that those resources are just the endowment factors. Endowment factors here are only 96

2 a little fragment or parts that really affect the competitiveness of a nations. International competitiveness cannot be measured through world share only since a nation could simply gain its market share by reducing the exported goods price until below production cost, while there are a lot of other factors which might affect the competitiveness of the nation itself. Therefore, international competitiveness cannot simply be assessed only from its world share (Cho, 1994) Diamond Model of Michael E. Porter Figure 2-1: Diamond Model Source: (Porter, 1990) One of the theories of competitive advantage was formulated by Michael E. Porter, a professor of Harvard Business School. This theory, which is widely known as Porter s National Advantage Matrix, was developed in a form of framework which have been commonly used to assess the competitiveness of an industry, region, or a nation. As stated in his book The Competitive Advantage of a Nation, there are four determinants which could be used in assessing a nation s competitive advantages. Those four determinants include factor conditions, demand conditions, related and supporting industries, and the firms strategy and rivalry (Porter, 1990) Factor Conditions Factor conditions is one of the elements which creates the competitive advantage of a nation. In this term, it includes all factors which might affect directly or indirectly the strength of the nation itself, or a situation of a nation regarding the production factors, such as resources and technology. These production factors can actually be categorized into human resources (which include the qualification of the human resources and cost of the labors, linguistic capabilities, etc.), natural resources or raw materials, knowledge resources, capital resources, and infrastructure. It was then further explained that unlike the non-key factors or general factors which can be obtained by any company (unskilled labors and raw materials), these key production factors such as the skilled labors, capital and infrastructure were not inherited a nation; yet they are created by the nation itself. Those non-key factors could not create a competitive advantage since they can be easily duplicated by others. In contrast, those key factors would lead to the competitive advantage of a nation since they cannot be easily duplicated by the others Demand Conditions The home-country demand conditions would affect the national advantage of a country. The larger demand conditions within a nation is, the competitiveness among industries in the nation s market would also be tighter, which indirectly would push the firms to be more innovative in creating the offerings to the market. Moreover, the local trendsetting in the local market would help the local firms in anticipating the global trends that might affect the local market itself. In addition, the larger the market demand in the nation of a certain product category, it would be more attractive to the local firms related to the industry of that product category, since it is much easier for the local firms to serve the consumers needs in the local market much better than the foreign market. Furthermore, it might also lead to the competitive advantage of the nation ever since the local firms start exporting the products to the foreign countries Related and Supporting Industries The performance of related and supporting industries within the nation would allow the local firms to have a more efficient cost and innovative products or parts inputs. This fact would also lead to the greater competitiveness of the nation. These clusters of industries would create a competitive strengths of the nation itself, since most of them are associated to each other. The more synergized the related and supporting industries are, a higher value of the products and the more competitive industry would be created Firm Strategy, Structure and Rivalry The world s market is dominated by the dynamic situation, and the situation of local market will highly influence the strategy set by the local firms, especially in some particular sectors in the nation. In addition, the local rivalry firms would create a more competitive atmosphere which would indirectly push the firm to advance their performance in that particular sector or industry Dong-Sung Cho Nine Elements Matrix In the further study, a more complex theory model had been developed by Dong-Sung Cho, the president of The Institute of Industrial Policy Studies, South Korea, in his book Determinant of International Competitiveness : How Can a Developing Country 97

3 Transform It Self to an Advance Economy. This model used the Porter s diamond model as the basis, which is complemented by several additional factors which include workers, professional managers, designers and technicians, access and opportunities, entrepreneurship, and bureaucracy politicians The Previous Research Rohmah, F. (2014). The Indication of ASEAN Economic Community Impact towards the Economy of Indonesia. Sapwarobol, T. (2012). Essays on Regional Economic Integration in East Asia. Ette, J. U. (2014). The Impact of Economic Integration within the European Union as a Factor in Conflict Transformation and Peace-Building. III. METHOD Qualitative techniques were involved in both data collection stage and data analysis in this research. Indepth interviews with experts, governments and several foreign people are conducted in collecting the primary data in this study. In addition,the literatures study, books, and articles on internet are used for collecting the secondary data. Both of these two data types are expected to support each other in gaining a deeper analysis with the availability of the supporting data and theories IFE Matrix IFE (Internal Factors Evaluation) Matrix is the formulation of strategy analysis of a firm s or an organization s internal environment factors which involves the evaluation of the strengths and weaknesses within the company (Jurevicius, 2014). The strengths and weaknesses of the organization would be used as the basic indicators or factors in the IFE Matrix, in which each of them will then be assigned a weight which has the scale ranging between 1 until 10 which represents the level of importance of the factor to the success of the organization or nation. Further step would involve the rating of each of the factor, which each of the numbers describes how strong or weak that particular factor in the firm, industry or the nation. The final result would be obtained through multiplying the weight with the rating which results in the weighted score and accumulated to get the total weighted score (MaxiPedia, 2015). This IFE Matrix is considered to be the best analyzing tool to be used for this study since it would help the researchers to determine the highest factor to be developed and which lowest factor that is need to be improved. Furthermore, in this study, this IFE Matrix is also used by researchers in order to compare the current factors of each of the nation members of ASEAN Economic Community, in order to formulate the competitive advantage of the nation, which in this case is Indonesia BCG Matrix BCG Matrix is a business portfolio diagram developed by Bruce D. Henderson at Boston Consulting Group in 1970s. BCG Matrix analysis involve the combination of two elements which could indicate the profitability, which include the growth rate and the market share. The market growth here serves as a proxy for industry attractiveness, while relative market share serves as a proxy for competitive advantage. Through the combination of both elements, there are four categories which can be used as the base position of the product or the firm in the market. Those four categories include dog, question mark, star, and cash cow. BCG Matrix is one of the analyzing tools used by the researchers in this study in order to map the Indonesia in term of the GDP (Growth Domestic Product). Through the analysis of the Indonesian GDP, the researchers expect to have a better view on the current Indonesia position compared to other ASEAN nation members Triangulation Qualitative research data which include the collected words, sentences, statements, behaviors and events have to be tested for its accuracy. The method used for the qualitative research is the triangulation technique, which means comparing and re-checking the trusted level of the obtained information from different time and tools (Purhantara, 2010). Triangulation method consists of four models, which include triangulation of method, triangulation of source, triangulation of situation, and triangulation of theory (Hamidi, 2004; Moleong, 2012). The triangulation model used in this research is the triangulation of sources which researchers have conducted several activities involved in and therefore the accuracy of data and information in this research is considered to be accurate. IV. DATA ANALYSIS 4.1. Factors Condition Indonesia is a nation with a big potential to compete in ASEAN Economic Community. However, those potentials might haveor have not been fully developed due to so many internal factors that affect it. Human resources in Indonesia may be large in number, yet low in quality. It means Indonesian people could compete well in the job market due to their low salary expectation, but in the working environment, the employer demand a good productivity from each of their employee, which put Indonesian people to a disadvantage in this competition, yet still Indonesian people together with its resources are still in development stage. Therefore, Indonesia will still cling to its title of a nation of potential for a while. Figure 4-1: Human Development Index Source : Indonesia Statistic Bureau, 2015

4 4.2. Demand and Market Condition Indonesia ranks number 4 th in the world in terms of its population with numbers around 250,000,000 peoples as Indonesia Citizen. This number shows that the market in Indonesia is so large and dynamics, especially in purchasing FMCG goods and chemical based manufactured goods. In this case, the increasing number of population is also followed by the increasing number of demand for basic needs good such as, food, and beverages; garment; and pharmacy. Therefore, Indonesia acts as the biggest market in ASEAN Economic Community Related and Supporting Industries In terms of supporting Industry Indonesia does not short of supporting Industries, but the facts that there is so many hindrance in Indonesia put the Supporting industry to not-fully utilized. Government and operations in the company always cause many unnecessary problems, or trouble surrounding about money, and bribery. Therefore, purely speaking there is no notable issue within Indonesia supporting Industry, but the problems come from the external of the industry itself Firms Strategy, Structure and Rivalry Government which also held a role in determining Indonesian competitiveness, does not really gives the right support for Indonesia to compete well. Indonesian government has a great governmental system, which gives Indonesia a better efficiency in their conducts. However, Indonesia s positive point stops there as soon as Indonesia gets into the list of one of the country with high corruption rate. Many businessman wishes to invest in Indonesia, but they fear that their investment would be in a great uncertainties due to the government performance. This causedindonesia to be left behind by the competing nations such as Philippine, Thailand, and Malaysia. 4.5 IFE Matrix Table 4.1 : IFE Matrix professions who are expected to have the different point of views. This IFE Matrix used the factors in Michael E. Porter s diamond model as the basis. Hence, other factors such as national security, currency power, etc. are not considered in this analysis. Based on this data, Indonesia has an opportunity to shine and rise in ASEAN Economic Community due to its low cost for human resources and the availability of large amount of natural resources which are considered as the comparative advantage, not competitive advantage BCG Matrix Table 4.2 : GDP Growth Rate Source : Indonesia Statistic Bureau, 2015 Table 4.3 : World Export Numbers in ASEAN Source: (Trading Economics, 2015) Figure 4-2: BCG Matrix of Indonesia Source: Researchers Development Source : Reseachers Interviewees FC: Factors Condition DC: Demands Condition RSI: Related and Supporting Industries FSSR: Firms Strategy, Structure &Rivalry The IFE Matrix above had been filled by the interviewees from different backgrounds and The BCG matrix above uses GDP growth rate and number of exports as the basis in determining Indonesia position among ASEAN members. The GDP growth rate is use to determine Indonesia market growth since GDP could represent the income of the nation, while export shows the market share, represent the amount of Indonesian exports to the world. Indonesia is placed at the lower question mark which means that Indonesia has the potential to grow to be better, yet the development must be carried out 99

5 very carefully.however, Indonesia is in danger of moving to dog, as Indonesia has the potentials, yet its development depends on the way they are utilized. CONCLUSION AND RECOMMENDATION Conclusion Based on the findings in this study, Indonesia still cannot compete well in ASEAN Economic Community. Using the Diamond model of Michael Porter there are four factors, and among all of those four factors Indonesia has only one factor, which is not competitive enough to survive in ASEAN Economic Community. Even though Indonesia still cannot compete well, it does not mean that Indonesia has a zero percent chance to improve and it will be after AEC have been going for a long time. Recommendation Indonesia is still not yet ready to face AEC, therefore here are several recommendations to minimize the risk of failing in AEC competition as follows: Social security reform, by accelerate reform of the pension to improve transparency, and quality Increase the chance of obtaining education for low-income class Increase the security of Indonesia in terms of terrorism Start using Internet based system such as e- budget to increase the transparency and increase supervisory on government cash flow. Start building more number of ports in Indonesia to support the trade activities in Indonesia. REFERENCES [1] Aaker, David (2013), Strategic Market Management,Tenth edition, New York : John Wiley & Sons. [2] Ansari, Alisha (2013), What Is The Scope Of Competition Law In The UEA? A Comparative Study with Developed and Developing Nations, Electronic Thesis and Dissertation Repository : Western University. [3] ASEAN(2015). Retrieved from ASEAN: [4] Balakrishnan, Melodena Stephen (2009), Approach To Emmerging Market : A UEA Case Study, research Online : Wollogong University. [5] Cho, D.-S. (1994). The Competitive Advantages of Far Eastern Business. Great Britain: Frank Cass and Company, Ltd. [6] Colak, berna (2014), Generic Competition and Price Regulation In The European Union Pharma-ceutical Market : A case of Cardiovaskular Medicine, Shcolar Commond : Universoity of South Florida. [7] David, Fred R (2015), Strategic Management Concept and Cases : A Competitive Advantage Approach, New Jersey : Pearson Education.Inc. [8] Fukunaga, Yoshifumi (2013), ASEAN Regional Coperation on Competition Policy, Wollogong University. [9] Hamidi. (2004). Qualitative Research Methods : A Practical Application Proposal Preparation and Research Reports, Malang: UMM Press. [10] Indonesia Statistic Bureau (2015). Retrieved from Badan Pusat Statistik: link TabelStatis/view/id/1796 [11] Jurevicius, O. (2014, October 12). Strategic Management Insight. Retrieved from Strategic Management Insight: [12] Moleong, L. (2012). Quantitative Research Method.Bandung: Remaja Rosdakarya. [13] Park, Hyeon Seok (2012), Partisan Politic and Corporate tax Competition For Foreign Invesment, Iowa Research Online : University of Iowa. [14] Porter, M. E. (1990). The Competitive Advantage of a Nation. New York. [15] Purhantara, W. (2010). Quantitative Research Metdhod For Business,Yogyakarta: Graha Ilmu. [16] The World Economic Forum. (2015). Retrieved from weforum: [17] Trading Economics. (2015, November). Retrieved from Trading Economics: economic.com/ [18] Yuliana, Primadiana (2015), Analyzing Asean Economic Integration Development To Enforcement of Asean Economic Community (AEC) 2015, Online Public Access Catalog : Univesity of Gajah Mada. 100