Well-functioning markets, adequate infrastructure and simple and clearly defined regulations are some of the
characteristics of a growth-enhancing business climate. In Indonesia, some of these elements are missing, which
challenges firms’ operations. This note discusses the main constraints that Indonesia’s manufacturing firms face,
shows that these differ depending on the nature of the firm and examines the effect of these constraints on firms’
productivity and decisions to invest. It concludes that the poor business climate has substantial costs in terms of
firms’ productivity and growth. Some broad policy recommendations emerge, and are related to improving credit
information, providing microfinance for productive start-ups, improving infrastructure particularly electricity and
logistics, incentivizing training, increasing collective action on sharing knowledge, improving tax administration
including shortening the time for VAT refunds and duty drawbacks, as well as strengthening law enforcement on
business contracts. Addressing these constraints is not merely a task for the Government of Indonesia, but also one
for the private sector. It is the Government’s responsibility to set clear business regulations, as well as improve the
business environment, but it is the private sector’s responsibility to take action on sharing knowledge and developing
its clusters.