The entry of U.S. firms into Indonesia's franchise industry largely ground to a halt due to the 1997 economic crisis in Indonesia. The depreciated and fluctuating rupiah made it difficult to pay franchise royalties in foreign exchange. The Indonesian franchise industry, however, began to recover in late 1999 with the entry of a number of new foreign franchisers. At present, there are approximately 260 foreign and 70 local franchisers operating in Indonesia covering a wide range of franchise sectors. American franchisers dominate the Indonesian market.
Franchises facilitate the transfer of know-how and managerial expertise to the franchisee companies while simultaneously allowing the franchiser to quickly establish a presence in the country. Under a typical franchising agreement, the franchiser receives royalties and fees as stipulated in the contract. In exchange, the franchisee has the right to use (and manufacture) copyrighted, patented or service-marked materials identifying the enterprise. The franchiser typically provides training and organizational guidance in return for a guarantee that the franchisee will follow these operational directions.
With the release of the Government Regulation (PP) No.16 of 1997, the Indonesian franchise industry had, for the first time, a foundation in Indonesian’s law. Recently, the Government of Indonesia (GOI) replaced PP No.16 of 1997 with PP No.42 of 2007. This regulation came into force when the implementing regulation, Ministerial Decree No. 31/2008, issued in August 2008. The new regulation sets criteria that franchisors must meet prior to selling their franchises. Although many local franchisors see the new regulation as a barrier to growth, the GOI argues that the regulation will set an industry standard and protect potential franchisees.
Indonesian law requires that a franchise agreement between a franchisor and a franchisee must be written in Indonesian and be subject to Indonesian law. The GOI has limited the operation of large franchise businesses to provincial capitals. Only small and medium-scale enterprises, or licensed non-small-scale entrepreneurs, may operate franchise businesses in smaller cities or rural areas. This regulation was designed to insulate indigenous small and medium-size companies against competition from foreign franchisers, and to encourage local companies to develop their own franchise concepts.
The regulation obligates every franchise business to obtain a registration certificate, namely the STPUW (Surat Tanda Pendaftaran Usaha Waralaba or Franchise Business Registration Certificate), from the Ministry of Trade. The registration, which is to be renewed every five years, should be made within 30 days after the date of the franchise agreement. The regulation further stipulates that priority should be given to the use of domestic goods and / or products as long as they meet the required quality standards.
For more information on franchising regulations in Indonesia, please contact:
Mr. Jimmy Bella
Director for Distribution and Market Development
Directorate General for Domestic Trade
Ministry of Industry and Trade
Jl. M.I. Ridwan Rais No. 5
Tel: (62-21) 385-8210
Fax: (62-21) 385-8214