Business Ethics

Master of Management - International 7

Gadjah Mada University

Business Decisions and Ethics – Starting operations in Indonesia

(PT ABC Case Study)

Group 4 (Alvian Tamba/Almas Pratama Indrasti/Teguh Prasetyo/Sebastien Gautier)

October 26, 2019
Table of contents

1 Introduction………………………………………………………………….. Page 3

2 Case Overview and Background…………...………………………………... Page 5

2.1 Initial Flow ………………………………………………………………….. Page 5

2.2 Operational Flow …………………………………………………………..... Page 11

3 Analysis and Theoretical View……………………………………………… Page 13

3.1 Business Ethics and PT ABC………………………………………………... Page 13

3.2 Decision Making Role ……………………………………………..……….. Page 14

4 Summary and Suggestions…………………………………………………... Page 15

5 Appendices…………………………………………………………………... Page 17

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1. Introduction

Indonesia, as a leading economy in the world (16th in terms of nominal GDP in 2018), with its
large population and growing middle class, is a crucial country for development for most of the
companies operating globally or wishing to operate internationally today. While significant
opportunities lie in Indonesia, it may be challenging for a foreign company to enter this market
due to differences in business practices and ethics.

Indonesia is well-known for having complex & changing set of regulations affecting businesses
operating or wishing to operate locally. Legal framework, tax scheme, ease to reach customers are
vital in assessing the sustainability of contemplated operations. Those matters are usually referred
to as the “ease of doing business” in a particular location. The World Bank every year publishes
Ease of Doing Business ranking. In its 2020 report, Indonesia is ranked in 73rd position out of 190
countries, with no progress compared to the 2019 ranking. At the same time, countries in South
East Asia seem to do much better: Singapore ranks 2nd, Malaysia ranks 12th, Thailand 21st.

Then, the complexity of the environment in Indonesia is then creating opportunities for non-ethical
practices, such as corruption, as some players can see it as the only viable option to run a business
in Indonesia. Transparency International, an independent and accountable movement present in
more than 100 countries, publishes every year’s corruption perceptions index in which it rates
countries in terms of perceived levels of public sector corruption from highly corrupt (0) to very
clean (100). In its 2018 Corruption Perception Index, Indonesia ranks at 89th place out of 180,
scoring 38 on the scale. Indonesia, far behind its neighboring countries such as Singapore (3rd),
Brunei (31st) or Malaysia (61st) (Refer to Appendix 1).

In most countries, frameworks & regulations have been issued with the aims of fighting corruption
& bribery practices (Australia, Germany, US, UK, etc.) so business practices can be healthier.
The(OECD) itself has issued the Anti-Bribery Convention. It requires its member countries to
criminalize bribery of foreign public officials in their respective countries and introduce related
measures. Unfortunately, Indonesia, despite being G-20 member, is not an OECD member and, as
such, is not committed to enforce this convention.

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Nevertheless, Indonesia implemented some regulations in early 2000 to fight corruption after the
fall of the New Order regime. The Corruption Eradication Commission (Komisi Pemberantasan
Korupsi or KPK) was established in 2002 to free Indonesia from corruption, especially at the
official level. After more than 15 years of fight, it seems nevertheless that Indonesia still has to
make progress. High profile graft convicts keep making the headlines of news and the late debate
on the necessity or not to amend the Law No.30/2002 on the Corruption Eradication Commission
illustrate that maturity has yet to be reached on such sensitive topic.

We have chosen for this Business Ethics course assignment to study one company, referred to as
PT ABC here (real name kept confidential), which decided to enter the Indonesian market and had
to face an “uneasy” environment and then had to face some situations with ethical dilemma. The
paper will present the problems encountered and our group perception from an ethical standpoint
on the decision taken by the company.

Nevertheless, what is Business Ethics? Business ethics is the application of ethics in business life.
Business ethics can be defined as the sum of ethical principles and standards guiding the behaviors
in the business world. The definition of complex behavior in terms of being right or wrong or
ethical or unethical is based not only on the values and ethics of individuals but also determined
by mG organizations, beneficiaries, and mass communication as well. Businesses do not have to
behave correctly, but, correct behavior is vital in order for them to obtain the approval of the
society.

Business ethics is a contradiction in terms—an “oxymoron”—because there is an inherent conflict

between ethics and the self-interested pursuit of profit. When ethics conflicts with profits, they
imply, businesses always choose profits over ethics. It has been pointed out that a business cannot
exist unless the people involved in the business and its surrounding society adhere to some minimal
standards of ethics. First, any individual business will collapse if all of its managers, employees,
and customers come to think that it is morally permissible to steal from, lie to, or break their
agreements with the company. Second, all businesses require a stable society in which to carry on
their business dealings.

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PT ABC is a manufacturing company specialized in compression molding. PT ABC is the
Indonesian branch of ABC PTE LTD, a Singapore-based company, expanding to Indonesia in
2015.

ABC enter Indonesia Market in 2016. Their products need materials with excellent durability and
no maintenance because it is usually placed in the public area, and PT ABC base material is the
perfect choice for condition in Indonesia. It offers rust and weather-resistance factors to the
products. ABC is trying to focus on Government projects rather than companies or retailers.

ABC is facing several ethical issues with Indonesia government officers and bureaucracy when
handling the business license process and when they are doing their operational, for instance,
handling government projects. They have to choose either following the timeline given by
government officers or involve some under the table dealing with speeding up the process. If they
follow the timeline, the shareholder needs to wait longer to start a business that means burning
more money. If they speed up the process, they put aside their integrity.

2. Case Overview and Background

In this phase, we are trying to describe the thorough flow of PT ABC from starting the business,
dealing with government and investment bureaucracy, daily operational, and their business
activities. This part is divided into the initial flow and the operational flow.

2.1 Initial Flow

The initial flow describes and shows what PT ABC had been through, their management decision,
and possible ethical dilemma they encountered. It describes the process from early phases
encountered by PT ABC as a foreign-invested company until they become a legalized business
entity in Indonesia.

2.1.i IP-PMA

In 2015, ABC started their business by getting Principle Permit for Foreign Investment or Izin
Prinsip Penanaman Modal Asing (IP-PMA) published by Investment Coordinating Board or
Badan Koordinasi Penanaman Modal (BKPM) as temporary business license. Indonesian
government give all foreign company three years temporary business license to establish. Process
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to get IP-PMA at BKPM is very clear, and a company must input company information such as,
who are the shareholders, investment value, human resource plan, production & marketing plan,
land, and building plan. In three years, the company must fulfill all commitments they stated in
IP-PMA in order to get a business license.

Izin Prinsip is the entry point for a company to propose another license that needed to start the
business in Indonesia. Thus, IP-PMA cannot act as SIUP or another license. Furthermore, if the
company already finished all licensing procedures for it is operational, the company has to propose
Izin Usaha Tetap (IUT) to BKPM. These whole procedures seem to be daunting for a foreign
company to start a business in Indonesia. This is also the most significant factor that divert
investment from foreign companies to another country, such as Thailand and Vietnam.

Back in 2015, President Joko Widodo said that he wants all the local government to start a one-
stop integrated service (Pelayanan Terpadu Satu Pintu – PTSP), thus cutting down the process and
ease the procedures to induce the investment from both foreign and domestic business. From the
data we gathered, based on Global Competitive Report 2017-2018 (World Economic Forum,
2017), the two most problematic factors that Indonesia has is Corruption and Inefficient
Government Bureaucracy, putting Indonesia in 37th position out of 137 countries. If we compared
to Thailand on 32nd, Malaysia on 23rd, and Singapore on 3rd, Indonesia needs to work this out!

From our interview with the business owner, we note down some details upon the process of this
license.

2.1.ii KITAS

ABC started its business by having three foreign employees. They must have a temporary staying
permit or Kartu Izin Tinggal Sementara (KITAS) from the Indonesian Immigration Office to be
allowed to work and live in Indonesia. KITAS official payment for works license is $1200 per
individual, paid to the Ministry of Industry and Labor. The company and worker must submit the
payment receipt to the Immigration office. From the interview we had, we found that the normal
process for the KITAS to be issued is around three days, but officers in the Immigration office
offered to speed up the process become 3 hours by paying 2 Million Rupiah.

2.1.iii Business License

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A business license is published by the Ministry of Economy using the Online Single Submission
(OSS) system. OSS process is swift, it only takes hours to get Business License, but the company
needs to submit the City Urban Planning permit, location permit, and environment permit. The
fastest time to submit all needed documents by following Indonesia Bureaucracy is one and a half
years. It could be more if we do not have excellent communication with officials. We also can get
all documents in 3 to 4 months by providing what the officer asks under the table.

2.1.iv Urban Planning permit

This license published by Land and Urban Planning Affairs or Kantor Pertanahan dan Tata Kota.
To publish urban planning permit officer will survey the location, take aerial photos, and check
the desired land location area on their urban planning design. This location area divided into
residential areas, agricultural areas, industrial areas. The government will only allow the company
to make a factory in the industrial area. Before they go to the field, they already make sure that the
area proposed by ABC company is in Industrial Area. They inform ABC company via phone call
about this around one week after submitting the paper works, on the phone call, they also invited
company representatives to their office to talk about some issues.

At the meeting, officials explain that they can process the permit request because the area is in the
Industrial Area. However, it will take around six months to finish the process because they need
budget approval to survey the area. Officer then offered to speed up the time frame within two
weeks to process if ABC can provide them survey budget, which is 30 million Rupiah.

The Urban Planning Permit document is the primary document if a company wants to set up
factories and get a business license because it will be needed when submitting a location permit.
If ABC company wait for six months, it will make a significant amount of delay for other process
and putting more cost in the company financial matters.

ABC decided to provide the budget with a 50% down payment, and 50% after Land and Urban
Planning Affairs issued the permit. Company representatives also negotiate the survey budget to
25 Million Rupiah. The next day after the company gave a 50% payment to the officer, they start
surveying the area. Magically, it takes two weeks for them to issue an Urban Planning permit. The

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next step after having an Urban Planning permit company needs one more permit before applying
the Location permit, which is Traffic disturbance permit.

2.1.v Traffic Disturbance Permit

Traffic disturbance permit is released by City Transportation Agency or Dinas Perhubungan Kota.
PT ABC submit company documents along with Urban Planning Permit. They explain that the
company needs to hire a transportation consultant to make a transportation disturbance study. After
the company have the transportation disturbance studied, they will need to arrange a meeting to
decide the study is correct or not. Spoken meeting attended by company representative, consultant
hired by the company, Land and Urban Planning officer, Regent/City officer, District (Kecamatan)
officer, and Traffic officer. They usually held meetings twice a year every six months, at time PT
ABC submit their next closest meeting is four months.

Again, the officer offered to speed up the process in 1 month with two packages, first is 25 million
rupiah for them to take care of the study and meeting accommodation, second is 10 million rupiah
for meeting accommodation, and company hired the dedicated consultant. They gave three
dedicated consultant options. PT ABC then chooses the second option and asks a quotation from
three consultants. PT ABC hired one transportation consultant to make the study, and it cost 8
million rupiah to get the study result in a week’s time. After giving 10 million Rupiah for meeting
accommodation, they arrange a meeting next week. Furthermore, wait another one week to get the
permit. Total is three and half week to get the Traffic Disturbance Permit by taking the speed-up
route, if PT ABC follow the bureaucracy it will take more than four months or around 13 billion
Rupiah potential loss as a project from Indonesian Civil Work Department.

2.1.vi Environment permit

Upaya Pengelolaan Lingkungan Hidup (UKL) and UPL (Upaya Pemantauan Lingkungan Hidup)
is an Environment permit that is released by City Environment Agency. UKL-UPL is an
environmental management tool for decision making and is the basis for issuing permits to do
business and or activities.

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UKL-UPL has a simple mechanism; those are:

a. The proponent fills out the UKL-UPL form.

b. The completed form is submitted to the City Environmental Management and Impact
Control Agency.

c. Before issuing recommendations, the City Environmental Management and Impact Control
Agency coordinates with the Technical Service Agency in charge to carry out a joint
inspection of the forms, completed by the Initiator. Based on this examination, if it turns
out that it still needs improvement/refinement, then it must be given directions and input
in the context of updating and completing the form.

d. Based on these directions and input, the proponent refines the contents of the form and then
returns it to the agency. The repair period is a maximum of 7 working days.

e. If the form does not require improvement/refinement, the City Environmental Management
and Impact Control Agency issues a recommendation no later than 14 days.

f. This recommendation is used by the proponent as a tool to obtain a permanent/operational

permit. Moreover, like following the applicable laws and regulations.

These procedures seem easy to be done and only spend a month to obtain a UKL-UPL Certificate
from the responsible agency, but after two months, the is no clarity on the examination process
(process c), the process getting harder to be done and the officers offered PT. ABC to pay some
money to speed up the process on it. They offered 30 million rupiahs to finish it in 2 weeks, and
PT ABC got the environment permit one month after they paid.

2.1.vii Location permit

After the company has an Urban Planning permit, Traffic Disturbance Permit, and Environmental
permit, they can apply for a Location permit. Location permit documents that are allowing the
company to make a factory in the submitted location signed by the Major of Regent/City. When
ABC submit the documents to PTSP (Pusat Pelayanan Terpadu Satu Pintu / One door integrated
service) at Regent, the front desk then direct a representative to meet one of the department head.

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He said that the company must wait around six months for them to verify the documents and get
the sign form Regent/City Major. In this particular office, the officer never proposed the “shortcut”
terms.

The company already learned from the previous permits process that officers can publish the
permit shorter than the regular time. Next week the company representatives visit the department
head to ask about the shortcut, the officer then give 90 million rupiah offering. They ask that big
because they said a lot of prominent people involved to sign the location permit. PT ABC and
PTSP then agree on 55 million rupiah to get this Location permit in one month. Finally, they got
the Location Permit in one and a half months after paying the officials.

After PT ABC have all the documents, they apply Business License at OSS and get the business
license in one day. OSS is an excellent system, but the process before it needs improvement.

2.1.viii Factory

PT ABC started their production before they get a business license; they dare to this because they
have support and backup from Regent Officer. When they apply for Location permit, the officer
who helps them on that permit told PT ABC that they are okay to start production because they
already have 75% required documents. Officers didn’t give any letter to support, but he makes
sure that the Inspection Officer will not come to their factory.

Until they get their business license, no Inspection Officer comes to check the factory.
Furthermore, finally, they can operate 100% legal after they have a business license.

2.1.ix Building Permit

IMB (Izin Mendirikan Bangunan) is a certificate of approval and licensing issued by the head of
the local area that must be owned by all Indonesian people or business entities when they are going
to build, renovate, demolish, increase or reduce the building area based on the applicable law in
Indonesia.

ABC Company bought the factory area from DEF company, ABC needs to change IMB to their
name if they want to make some building changes. At that time, they have no plan on buildings,
but they have to change because of intimidation from an NGO.
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Somehow, the NGO knew that the IMB belong to DEF Factory, so they mad news about it on local
online news. The news is “PT ABC operating with other company IMB”. It is legally okay, but it
was affecting the company image when people google PT ABC that the news is showing up on
the first page. The owner saw this as a terrible publication for the company and commanded to
take the news down at any cost

PT ABC then decide to change IMB to their name. To change the IMB, officials required them to
build and renovate the buildings. So they decide to add one small building on the area. For this
permit, they follow the given timeline around 3 weeks’ time.

2.2 Operational Flow

The operational flow will describe and show what PT ABC had been through, their management
decision, and possible ethical dilemmas they encountered when they are running and doing their
business.

2.2.i Tender Requirement

Government tender usually requires some additional documents to apply. At that time, there is a
big chance to get around 13 Billion Rupiah project that require ISO 9001 and 14001. The deadline
is only two weeks after they know the required details.

To get ISO 9001 and 14001 will take lengthy procedure and six months process at its best.
However, they find some legal agents that can provide a short cut to ISO procedure, that legal
agency only needs one week. The cost to get with six months process and 1-week process is almost
the same.

PT ABC decide to get ISOs in one week. The certificate is legit when they scan the barcode. ISO
is international certification, and we don’t know if other countries have this kind of short cut
service for ISO.

In the tender process, Officials will publish the details of product specifications without
mentioning the brand. In Indonesia, it is illegal for tender above 50 million rupiah to mention the
brand name.

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Vendors supposed to know the details of the project on the Procurement website when they publish
online, but often vendors work on the details of Kerangka Acuan Kerja (KAK/ Terms of Works)
with Procurement Officer to make sure the specification of the products locked to their
specification. For this process, the commission for an officer depends on which City and value.
Officials from some cities will ask from 2 million rupiah up to 10 million rupiah. Some will not
ask for money because they want to make sure they will get the product they want without
mentioning the brand.

2.2.ii Collecting Payment

After PT ABC got the project’s contract, one of the crucial moments is when they try to collect
payment. Collecting payment will require Signing from officials. Some officials will sign when
the products delivered in terms of works, but mostly the officials will ask some money when
signing. It will be ranged from 200 thousand rupiah up to 5 million rupiah per signature base on
contract value.

2.2.iii Thank You Letter in Jakarta and Other City

Jakarta officials will not ask money after vendors collect payment, but they hope vendors to give
“thank you letter” around 2.5 % - 3 % sum from contract value. This 2.5 % - 3 % in total for all
officials involved. If vendors do not give “thank you letter,” they will not complain, but there is a
big probability they will not use this vendor on their next projects.

Other City will use Jakarta price plus “shipment price” because PT ABC is located nearby Jakarta,
and they will be safer from the Audit Agency if using Jakarta base price. From PT ABC
calculation, the shipment cost will only add 2% - 6% to their price.

Officials will direct vendors to increase price 10 – 25 % base on their location. The excess value
from the increased price by adding “shipment price” and the actual price will be asked later by the
official. That excess value around 8% – 17% from the contract value will become their “thank you
letter”.

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3. Analysis and Theoretical View

3.1 Business Ethics and PT ABC

The development of business involves the satisfaction of the different interests held by various
groups, the so-called stakeholders. To satisfy these interests, a kind of moral contract is needed. In
order to understand who the stakeholders for PT ABC are, we can see the graph below:

In the business model of PT ABC, they are showing the ethic of care by engaging communitarian
ethic. PT ABC believed that concrete communities and communal relationships as having a
fundamental value that should be preserved and maintained. PT ABC always

As for to the end customer, in instance the community and pedestrian, PT ABC is always trying to
do the best and fulfil the fundamental duty to consumers that are (1) complying with the terms of
the sales contract and the secondary duties of (2) disclosing the nature of the product, (3) avoiding
misrepresentation, and (4) avoiding the use of duress and undue influence.

After understanding the whole business model and the problems PT ABC faced, we see that the
ethical issues confronted by PT ABC is happening on the supporting level or administrative. PT
ABC were faced with two options either staying in the normative and ethical decision by following
the time frame, bureaucracy, and exposed to the risk of losing the projects or speed up the process
and making profits. We believe every company always face the same decision that cannot fulfill
both sides. We see that almost all of PT ABC’s decisions do not harm any stakeholders. As we

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stated before, the decision to do some act of under-table agreement is merely to speed up the
process and happen because the officer proposed the idea. As for the products, PT ABC delivers
the best products in the market compared to the competitor. Moreover, its quality has been proven
by the international market as well.

3.2 Decision Making Role

The ethical role of managers is broadened beyond fiduciary responsibility when consideration is
given to the multiple stakeholders who constitute the organization being managed and to nature,
on which human civilization depends for its survival. Business decisions affect both stakeholders
and nature (Palomino & Cañas, 2011). Whenever there are impacts due to a decision, behavior, or
action that a leader or manager makes, there are ethical aspects to that decision or situation. While
some skeptics claim that business ethics is an oxymoron (as stated in the previous chapter), the
reality is that decisions and actions always have consequences and that reality implies some degree
of ethics, high or low. Thus, ethics and the managerial role cannot realistically be set apart.

To make decisions effectively, managers need to consider several factors as they weigh decisions
based on the principles of rights, justice, utility, or care. For example, they can consider whether
there are overriding factors in the decision. If a decision might result in the death of a person made
one way, and the unemployment of a group of persons made another way, then the overriding
factor might be the life-death decision. There are, however, no clear rules for making such
decisions, and the judgment of the decision-maker is needed to determine which of the relevant
factors should carry the most weight. Other decision-making aids for managers include thinking
about whether they would want their decision made public—for example, to appear on the front
page of a newspaper or television. If they are uncomfortable with such transparency, it would be
well to apply an ethical analysis to the decision. This case is shown when PT ABC was having an
issue with IMB. Media report was made by an unknown journalist that said PT ABC was using
another company IMB to start and build their factory.

In PT ABC case, action made by PT ABC sourced and done by their top management. There is
always coordination between the Managing Director and the owner of the business. From our
interview, the Director is the one who always in charge daily, dealing with the government,
officers, and other stakeholders. Thus, when the issue arises, he is the one who will take action. If

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the decision is beyond his authority, for instance, involving a certain amount of money, he will
consult with the owner for that particular decision. As explained in the previous chapter, ethical
dilemmas mostly happened when encountered solely for the matter of cutting down the waiting
time, which was percept by the owner as an additional cost for the business if they were going the
usual way. The cost consists of idle time for the production, money to pay the employees’ wages,
and potential loss from the inability to handle upcoming projects.

4. Summary and Recommendations

As a bottom line, we can see that PT ABC committed some actions that can be labeled as unethical,
such for example giving illegal money to government officers to speed up administrative process,
start the production without having legal document, setting up system to win the tender and giving
fee for particular individual or group to smooth their business process. These actions always bring
an ethical dilemma, which the final decisions made by either the Director or the owner himself.
The top-level management always tries to keep this decision disclose from other employees in
order to keep their morale and point of view undiluted. For the final product itself, PT ABC never
compromised the product. The owner stated that he is committed to deliver the best and
international standardized products despite the cost emerging by the additional fees from the
bureaucratic process.

The business leaders should instead understand that bribery or corruption exists in each continuum.
Especially in the construction industry, which is known for its high corruption due to the multiple
governmental departments that need to provide permits and approvals, and in a country where
corruption is quite widespread. In any country, there will be governmental officers who perform
their duty without asking for bribes or accepting them if offered; others who would not ask for a
bribe but will not refuse one either; a third group who ask for bribes but can be persuaded not to
insist; and a fourth group that don’t budge until their demands are met. Business leaders should
not assume every government official they meet is in this group.

As for the recommendations, first, PT ABC needs to minimize this kind of unethical acts because
the main risk is getting caught by the law enforcement and it would jeopardize the whole business
plan of the company in Indonesia. There has been many cases happening showing that particular
individual who was involved in arranging and receiving illegal money from projects were caught

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wet-handed. Second, the top management has to realize that they have to open a new market that
has distance from the corruption and illegal act, for example, forcing the sales guy to penetrate
private sectors or open new markets in another country and diverse their core business into
exporting the goods.

PT ABC should also consider the social costs of such practices. By “entertaining” the system, the
company is preventing the system from changing. It does not encourage administrative reforms as
people in place see it as a mean to get personal benefits. It deters the business environment and
always push other potential foreign investors. Unethical behaviors become then the social norms,
and all society suffers from it.

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5. Appendices

Appendix 1 – 2019 Corruption Perception Index

Source: https://www.transparency.org/whatwedo/publication/corruption_perceptions_index_2018

1 Bibliography
Palomino, P. R., & Cañas, R. M. (2011). Corporate Ethics And Ethical Behaviour: The
Significant Function Of Top Management Role Modelling. Review of Business
Information Systems.

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