Indonesia’s Creative Industry: Set to Become the Next Economic Powerhouse

Indonesia’s Creative Economy Agency (BEKRAF) forecasts that Indonesia’s creative industry’s growth will reach new heights in 2018. This prediction is in-line with the rapid progress of the country’s e-commerce industry that has taken place in the last 5 years. Going forward, the creative economy is expected to become a new economic driver. In order to achieve this, the government has prepared a number of incentives and supporting measures which include issuing new regulations to facilitate investors who are interested in investing in this sector.

BEKRAF recently introduced a framework for Investment Readiness Levels (IRL) which will serve as a benchmark to assess investment readiness as well as to anticipate technology life cycles and market competition

Excellent growth

Indonesia’s creative industry posted strong growth in 2017 contributing 990.4 trillion IDR to the country’s GDP. The sector has been consistently recording positive growth equating to 70 trillion IDR in the last three years, from 852 trillion IDR in 2015 to 922.58 trillion IDR in 2016 which accounted for 7.44% of Indonesia’s GDP.

According to BEKRAF, the creative industry sector was able to provide employment to 16.4 million people in 2017, an increase compared to 16.2 million people in 2016.  In 2015, the creative economy sector employed 15.9% of total workers with an export value of $19.4 billion USD.

The creative industry sector’s growth is in line with the rapid growth of Indonesia’s e-commerce industry. The latter has been growing at a breakneck speed of 60-80% annually and is expected to become a major growth driver of the Indonesian economy.  Currently, national e-commerce transactions have reached $25 billion USD and are expected to soar to $130 billion USD by 2020 (See Indonesia’s Retail Sector; E-Commerce, the Next Growth Driver).

Other factors contributing to the growth of the creative economy sector in Indonesia is the change in lifestyles, especially among the millennial generation as this segment is now showing a preference for leisure over goods. This is apparent from a survey conducted by the Central Bureau of Statistics (BPS) which revealed that leisure spending, including that for recreation and lifestyle, has continued to grow from 5.5% in the first quarter of 2017 to 6.25% in the second quarter of the same year.

Meanwhile, non-leisure spending covering basic needs such as food, clothing and other physical goods during the same period has declined from 5% in the first quarter of 2017 to 4.75% in the second quarter of the same year (See Thirst Quenching: Indonesia’s Food & Beverage Industry).

Social media plays a crucial role in this changing lifestyle related trend. More Indonesians are now showing a preference for spending their income on travel to tourist destination sites, staying in hotels and resorts- specifically those that can cater towards families and social gatherings in addition to eating out at high end eating establishments and cafes (See Indonesia’s Hotel & Hospitality Industry has a Bright Future). This has proved positive for the creative industry, especially those engaged in the traditional food, hospitality, handicraft and restaurant sectors (See Indonesian Restaurant & Franchise Sector: Technology Key to Future Growth).

Financing and marketing remain major constraints

That being said, Indonesia’s creative industry still faces heavy challenges due to the lack of access to financing. Most of the players in the sector are small and medium businesses (SME) with limited capital (See Indonesia SMEs: Increased Government Support to Overcome Challenges.

Based on data from BEKRAF and BPS in 2017, around 92.37% of creative industry players in Indonesia are self-funded and have not received any outside funding such as through bank loans. As 53.49% of these businesses are not established as limited liability companies and 88.95% of their products have not obtained intellectual property rights, such small-scale companies are not desirable financing candidates.

Product development and marketing are other obstacles hampering the growth of Indonesia’s creative industry. As a result, 97.36% of its players still only market their products locally.

In 2016, BEKRAF helped facilitate bank loans amounting to 4.2 trillion IDR to 2,600 business players and investments of 96.75 billion IDR from non-banking institutions to 1,092 business players. The majority of the loans were extended to the culinary, fashion, and digital sectors (See Mobile Apps in Indonesia Clicking into Gear).

Low loan disbursement to the creative economy sector in Indonesian is mainly attributed to bankability concerns. Given these understandable reservations from commercial banks, a more appropriate funding scheme, similar to the People’s Business Credit (KUR), is needed to improve banks’ confidence in lending to businesses engaged in the creative economy (See Indonesia’s Banking Sector; Under Pressure But Staying Strong).

More government support needed

Based on the Presidential Regulation No. 6 of 2015, Indonesia’s creative economy is one of the key business sectors that need to be encouraged, strengthened, and promoted in order to improve national economic growth.

The creative economy in Indonesia is comprised of 16 subsectors: apps and game development; architecture; interior design; visual communication design; product design; fashion; movies, animation, and video; photography; crafts; culinary arts; music; publishing; advertising; performing arts; fine art; television and radio.

To further boost the growth of the sector, the government needs to overhaul its regulations. BEKRAF has engaged global research agencies such as Nielson, PwC and Intel to study Indonesia’s local creative industry and identify key areas for improvement, including within the current regulations (See Indonesia’s 14th Economic Policy Package to Kick-Start E-Commerce Industry).

Moreover, to facilitate investment, BEKRAF recently introduced a framework for Investment Readiness Levels (IRL) for fashion, handicrafts, apps and game development, in addition to the culinary subsectors. IRL will serve as a benchmark to assess investment readiness as well as to anticipate technology life cycles and market competition.

In addition, investors can use IRL as a reference to investing their money in the creative industry. In recent years, a number of non-banking institutions such as angel investors, philanthropic investor and venture capital have been aggressively approaching local startups.

Furthermore, the government, through BEKRAF, continues to provide assistance for generating a creative environment through revitalising facilities and infrastructure including communication and information technology used for creative development, exhibitions and business incubator centres.

To attract more international investors, BEKRAF and the relevant ministries and agencies plan to organise the World Conference on the Creative Economy in 2018. The event will focus on four aspects: the role of the creative economy on the future social condition of the community, new marketing paradigms where the digital economy and e-commerce become drivers of the creative economy, the lack of support from global finance, and enhancing political diplomacy and regulations.

The World Conference on the Creative Economy will be held in Bali on 3rd-4th May 2018 and will be attended by 1,500 practitioners, academicians, Silicon Valley executives and government agencies from 100 countries. Its attendants include Canadian Prime Minister Justin Trudeau, Jeff Bezos from Amazon and Jack Ma from Alibaba.

Bright future

BEKRAF predicts that the growth in Indonesia’s creative sector in 2018 will reach 6.25% and employ 16.70 million workers. Indonesia’s culinary sector will lead the charge, followed by fashion (See Indonesia Aiming to be the Islamic Fashion Capital by 2020), handicrafts, apps, game development, movies, and music.

Currently, the culinary sector accounts for 41.6% of the sector’s growth, while fashion and handicrafts account for 16% and 15.7%, respectively. Going forward, Indonesia’s creative economy sector is expected to continue its upward trend and will become one of the country’s major growth drivers.

This offers plenty of opportunity for investors seeking opportunities in this industry given the encouraging regulatory environment being set up by the Indonesian government in addition to being underpinned by the fundamentals of a flourishing e-commerce sector.

Originally published on Global Business Guide Indonesia


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