When Indonesian President Suharto’s 32-year reign collapsed in 1998 amid widespread riots and economic chaos, multinational companies operating in Indonesia faced a stark reality: the political playbook they had relied on for decades was suddenly worthless. The centralised corruption network that had previously offered predictable – if ethically questionable – pathways to business success fragmented overnight into hundreds of competing local power centres, each with their own demands and expectations.

For Western European multinationals with substantial Indonesian operations, this wasn’t simply a matter of adjusting to new regulations or leadership changes. It represented a fundamental shift from what researchers call “pervasive corruption” – where bribes functioned like an additional business tax – to “arbitrary corruption”, where payments became unpredictable and outcomes uncertain.

The challenge: From predictable payoffs to chaotic demands

New research published in the Journal of Business Ethics examines the fall of former Indonesian President Suharto and how multinationals subsequently evolved from reactive survival tactics to proactive ethical strategies. “What struck us was how quickly the rules of the game changed,” said Dr Christiaan Röell, a lecturer in the School of Management and Governance at UNSW Business School and lead author of the study.

“Firms went from operating under a predictable – though deeply flawed – system to facing chaotic and fragmented demands overnight. The real surprise was that many companies didn’t just adapt to survive; but over time they found ways to move beyond bribery altogether. That’s what makes this research valuable for industry – it shows that ethical strategies can be a viable alternative, even in the toughest environments.”

The research, based on 65 face-to-face interviews in Jakarta between 2018 and 2025, examined how four major Western European subsidiaries navigated this transformation. Conducted by Dr Röell together with Professor Felix Arndt from the University of Waterloo, Professor Wilson Ng from IDRAC Business School, and Professor Tazeeb Rajwani from Surrey Business School, the study employed multiple data collection methods, including archival research and extensive fieldwork, to trace the evolution of corporate political activities across three distinct periods of Indonesian political development.

Under Suharto’s authoritarian regime, foreign companies understood the rules of engagement, even if those rules were morally compromising. Entry costs were paid to the regime, and businesses could operate with relative certainty once they had secured the appropriate political connections. “In those years when a multinational made a lot of profit, the Suharto family would knock on your door for their stake,” said one former country leader who was surveyed in the research. “Dealing with the government in Indonesia is like dealing with organised crime. Extortion. If you don’t pay, you can close your business, just like with the mafia.”

When Suharto fell, Indonesia’s transition to democracy brought decentralisation reforms that transferred authority to 34 provincial governments and 416 district governments. Suddenly, multinationals found themselves dealing with many separate authorities, each setting its own rules and seeking its own benefits. “Before, we just had to deal only with the central government, but now it’s much more challenging,” explained one government affairs manager in the research paper. “Our factories are in at least a dozen regions, and maybe 6 provinces. That means we must deal with each of these governments, who each have their own rules.”

The transition: Leveraging networks and outsourcing risk

During the chaotic transition period following Suharto’s fall, multinationals adopted what the researchers term “transitioning strategies.” These involved three key approaches: leveraging external networks, drawing on internal expertise from other volatile markets, and outsourcing ethically suspect activities to local partners.

Companies began collaborating with competitors in unprecedented ways, pooling resources to hire lawyers and create industry associations capable of managing rapidly changing regulations. They also turned to their home country's diplomatic networks for support. As one manager recalled: “When we needed to extend our licences, our factory outside Jakarta became part of another province. We had many issues with extending our permit. At some point, the new mayor of a large city asked us to help him fund an Indonesian football team, which should put his region on the map in Asia. Of course, we couldn’t pay for that. We got the ambassadors as well as Dutch ministers involved, who eventually helped lobby the government, and as a result, we got the licences.”

Learn more: The wrong influence: the risks of mixing business with politics

This period also saw the strategic use of local partners to handle sensitive government interactions. “For that, you had third parties. That was the only way,” one electronics company manager explained in the research paper. “These things were done through the installers or advising agencies, but directly we couldn’t do that.”

“Relying on local intermediaries was far from an ideal solution,” explained Dr Röell. “But in the messy reality of regime transition, some companies used these partners as a buffer. It was a survival mechanism – one that kept operations going when formal rules broke down – but it also highlighted why firms needed to eventually find more sustainable, ethical approaches.”

The solution: Embedding through ethical partnerships

The most significant finding from this research concerns how multinationals eventually developed ethical alternatives to corruption through deeper community embedding. Rather than simply reacting to demands for bribes, successful companies began proactively supporting government priorities and building long-term community relationships.

This “embedding strategy” involved three main elements: sustainability-focused government partnerships, political alignment with national goals, and strategic local hiring. Companies began working directly with government agencies on environmental and infrastructure projects, positioning themselves as partners in national development rather than foreign extractors.

One dairy company manager explained their approach: “We have developed cross-sector partnerships with many government departments; our CSR team supports the government’s sustainability objectives. By doing so, we have direct access to high-level government officials. We normally provide the funds, but the minister will speak at the opening events, and we can meet with him any time because we support their constituents.”

“What’s powerful about these partnerships is that they change the conversation,” said Dr Röell. “Instead of negotiating one-off payments or favours, firms positioned themselves as contributors to national priorities. By aligning with government development goals and investing in local communities, multinationals not only reduced pressure for illicit demands but also built reputations as long-term, trustworthy partners.”

Building sustainable business-community relations

The most successful multinationals discovered that corruption demands diminished significantly when they became genuinely embedded in local communities. This involved hiring local managers familiar with regional cultures and investing in long-term community development projects.

“Local governments are always more challenging to deal with,” noted one government affairs director. “So, we need people in these regions with a lot of patience and good communication skills. We have tried to manage this with our people from Jakarta, but it did not work. So, we decided to hire people locally because it is easier for them, because of language and culture.”

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Companies found that supporting government initiatives – such as increasing electricity access in rural areas or helping farmers improve production methods – created goodwill that reduced both corruption demands and community tensions. These partnerships demonstrated corporate citizenship whilst advancing legitimate business interests.

“Building trust at the community level doesn’t happen overnight. It required patience, local hires who understood cultural nuances, and visible investments in projects that mattered to people’s daily lives,” said Dr Röell, who explained that, over time, these efforts created goodwill that reduced conflict and gave firms the social licence to operate in difficult environments.

Key takeaways for multinationals navigating political corruption

This research reveals several crucial insights for multinational companies operating in politically unstable environments. Corruption patterns change predictably during regime transitions, typically shifting from centralised to decentralised networks. Companies that successfully navigate these changes focus on building sustainable relationships rather than simply managing transactions.

The most effective long-term strategy involves embedding operations within local communities through genuine partnership rather than extractive relationships. This approach requires patience and substantial upfront investment but ultimately reduces both corruption pressures and operational risks.

Perhaps most importantly, the study demonstrates that ethical alternatives to corruption are not only possible but often more effective than traditional approaches. Companies that invested in community development, environmental partnerships, and skills training found that these strategies provided better access to government officials and more sustainable competitive advantages than traditional rent-seeking behaviours.

“Our key advice to multinationals is to think beyond short-term fixes,” said Dr Röell. “Investing early in government partnerships, community projects, and local talent may seem costly upfront, but it builds resilience when political systems shift. Those companies that treated embedding as a strategy, not an afterthought, were the ones that managed to thrive without compromising their integrity.”

For multinational executives facing similar transitions in other emerging markets, the Indonesian experience offers a roadmap for maintaining operations while building ethical foundations for long-term success.