Indonesia is an emerging economic superpower in the ASEAN region as well as the global scale. Its startup ecosystem is still fairly young – the real startup “boom” only began 4-5 yearsbuy research paper ago.

Progress is set to increase as the country shifts towards a new age of technology, innovation and entrepreneurship. This, along with its huge VC market, makes Indonesia a growth story that closely follows the footsteps of China.

Population - the engine of growth

It is fair to assume that large populations mean large markets and, with a population of over 263 million, the Indonesian market is one of great potential. As the 4th most populated country in the world, and with over half of the population under 30 years old, Indonesia is set to become a major economic powerhouse in South East Asia. According to the latest statistics and predictions it is already on its reflection paper example way to doing so. Currently, Indonesia is the 15th largest economy in the world and by 2030, it is expected to be the 5th largest.

What is driving this growth? The economy is primarily fuelled by consumption and spending from an increasingly affluent middle class. As living standards improve, a more of the population is moving towards the “middle class and affluent” status, otherwise known as MAC. In 2013, only 74 million were classified as MAC and this is expected to double by 2020.

This increasing wealth is complemented by the decrease in the cost of living. Inflation rates have almost halved in the last 5 years – falling from 6.4% in 2013 to 3.49% in 2016.

Economic growth

Historically, Indonesia has had a fairly strong and stable economy. With a GDP of US$900 billion, it is the highest in South East Asia. Indonesia’s GDP growth has remained steady over the past 15 years, even maintaining 5% throughout the Global Financial Crisis. By some standards, Indonesia is outperforming several Western countries, Australia included.

Digital connectivity in Indonesia

By simply looking at the statistics on digital connectivity at face value, the numbers are comparable to most other countries in the ASEAN region. However, if we factor in Indonesia’s enormous population, the true prevalence of technology in the country becomes much more compelling.

Social media is, in fact, an area where Indonesia stands out in the region. On a global scale, the country records the highest mobile Facebook usage with approximately 63 million users in 2015. Jakarta, Indonesia’s capital city, is also branded as “the world’s number one Twitter city”.

The state of the startup ecosystem

The most popular industries for Indonesian startups are no different to other ASEAN countries. E-commerce verticals and marketplaces attracted the most funding – over US$700 million, followed by FinTech, media and big data startups. The estimated value of the e-commerce sector is expected to reach US$130-150 billion by 2025. With hugely popular e-commerce startups including Tokopedia, Lazada and Matahari Mall as precedents, it is no surprise that this sector has received the most attention.

Funding for startups has been gaining traction in recent years, amplified by the success of unicorn startups GoJek, Traveloka and Tokopedia. The number of seed funding and later stage deals have seen a 3x and 8x increase respectively. Although deal quantity has considerably improved for both early and later stage startups, there has not been a commensurate improvement in deal size. Funding has primarily been sourced from foreign investors – 72% in 2016 and now, the government is looking to further attract foreign interest through international collaboration.

The state of the startup ecosystem

The Indonesian government is focusing on 2 key areas that are hindering the advancement of the startup ecosystem.

First, is the promotion of economic stimulation and the simultaneous eradication of outdated regulation, bureaucracy and corruption. 12 policy packages aimed at doing so were released over the course of 2015 and 2016. So far, the efficacy of these have been debatable.

There has been progress made, albeit very slowly. For instance, Indonesia’s ranking for ‘ease of doing business’ has only improved from 129th in 2011 to 91st in 2016.

Indonesia also has a relatively inexperienced talent pool, and the government is looking at outsourcing foreign help to build its human capital. The growing presence of incubators, accelerators and VC firms should enable and facilitate the transfer of knowledge and thus, increase the quality of Indonesian startups. In addition, the government is in talks with Malaysia and the USA in regards to mentorship development.