FDI

Why Invest in Indonesia?

Trường Lăng

October 25, 2024

FDI

Why Invest in Indonesia?

Trường Lăng

October 25, 2024

investment-in-indonesia-3

Investment, in its very essence, is the strategic placement of resources, primarily financial capital, into businesses or assets with the expectation of generating returns in the future. In Indonesia, investment has grown into an important catalyst for economic development; it has driven everything from infrastructure to high technology. In the last two decades, the investment climate in the country has dramatically changed and commanded increased interest both nationally and globally.

Indonesia’s investment boom had been a result of considerable economic reforms since the Asian financial crisis in 1997. These reforms succeeded in bringing about an open, transparent, and investor-friendly atmosphere that was perceived to attract FDI, together with domestic capital, in key sectors. Favorable demographics with a population of over 270 million and a rising middle class further support the case for the country as a preferred investment destination.

Indonesia offers an even more large internal market, a strategic geographical location in Southeast Asia, and fast-growing sectors in consumer goods, real estate, and technology. Just like any other emerging market, the investor will face regulatory environments, political situations, and operational difficulties. Despite all these glitches, Indonesia is still considered as one of the most potential investment destinations in this region.

In the discussion that follows, we go through how Indonesia’s investment landscape has gradually taken shape, explore key sectors pushing forward growth, and give an insight into what businesses and investors can expect as they interact with this energy-filled market.

Key Takeaways:

  • In Indonesia, investment has grown into an important catalyst for economic development; it has driven everything from infrastructure to high technology. 
  • Indonesia’s investment boom had been a result of considerable economic reforms since the Asian financial crisis in 1997. These reforms succeeded in bringing about an open, transparent, and investor-friendly atmosphere that was perceived to attract FDI, together with domestic capital, in key sectors. 
  • Indonesia offers an even more large internal market, a strategic geographical location in Southeast Asia, and fast-growing sectors in consumer goods, real estate, and technology. 

You Might Also Like: Strategies for Indonesian Startups to Attract Investors

Indonesia’s Allure for Foreign Direct Investment

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According to the U.S. Department of State, Indonesia maintains a popular destination for FDI, having an attractive youthful population, strong domestic demand, political stability, rich natural resources, and stable macroeconomic policies. The government would have liked to attract FDI for job creation, accelerating economic growth, and attracting foreign investment in infrastructure, export-oriented manufacturing, mining refineries, and green investments.

Until today, a breakthrough policy has emerged with the passing of the Omnibus Law on Job Creation, Law No. 6/2023, this coming March 2023, to renew the investment climate by revising a number of regulations that have formed obstacles in the past. While the new law has rationalized business operations and gratified foreign investors, it also provoked demonstrations from labor and ecological groups for reducing labor protection, such as by reducing severance pay, minimum wage ceilings, and enhancing flexibility in outsourcing. Business participants have also complained about the imposition of local content requirements, obligatory partnership, technology transfer, and limited transparency regarding policy formulation  (U.S. Department of State, 2024). 

Investment and the Ministry: The Process of Foreign Ownership

The Investment Ministry, more popularly known as the Investment Coordinating Board or BKPM, has the main role of promoting and regulating investments, giving approval for foreign investments in manufacturing, industrial and non-financial service sectors.

Foreign investors will have to, as a way of operating in Indonesia, establish through the Ministry of Law and Human Rights, a foreign-owned limited liability company more popularly known as PMA. These incorporated companies would have to adhere to the business licensing through the OSS system, which administered less bureaucracy, especially for enterprises categorized as “lower risk.” 

Liberalization of Foreign Investment under the Omnibus Law

The Omnibus Law also liberalized Indonesia’s foreign investment regime by removing the 2016 Negative List of Investment (DNI).

The new regime opens up all sectors to foreign investment unless prohibited explicitly. The new policy categorizes industries into four lists: special incentive industries, sectors reserved for MSMEs, sectors that come under conditions on operations, including a ceiling on foreign investment, and the list of fully liberalized sectors open to foreign investment. The reform of investment policies has not removed some existing regulatory barriers in many industries due to conflicting technical regulations and sector-specific laws. 

Investment Incentives and Restricted Sectors

Of the 245 business fields eligible for incentives under the new Investment Priorities List, pioneering industries are capital-intensive projects, infrastructure, digital economy, and research and development.

There are still some prohibitions, particularly in the industries of domestic transport, broadcasting, and low-technology industries, that are reserved or exclusive for MSMEs and cooperatives. On the other hand, sectors such as healthcare, telecommunications, and oil and gas support services, which had been more closed, have been fully opened to foreign ownership, making investing in these sectors easier.

Also read:  Strategies for Startup in Indonesia to Attract Investors

Relaxed Foreign Ownership Limits in Financial Services 

Ownership restrictions in banking and financial services have, over time, become progressively more open.

This is reflected in the fact that the FSA permits foreign investors to own up to 99 percent in a commercial bank, provided that would not conflict with Indonesia’s economic development. Likewise, in the insurance business, there is an 80 percent limit on the ownership, except that there are savings for those companies whose ownership is above the ceiling under prior laws. Securites and reinsurance exhibit some easing of foreign ownership restrictions in other financial subsectors as well, even though there are certain domestic obligations in a few categories of risks. 

Shifting Policies in the Natural Resource Sector

The natural resources have sector increasingly implemented policies of increased local ownership in few subsectors like mining along with extended downstream processing requirements.

Indonesia’s export bans on raw minerals, such as nickel and bauxite, epitomize the government’s effort to encourage home smelting and value addition. Mining companies are now supposed to convert from contracts into business licenses, divest ample shares to local interests, and focus on domestic processing. This has led a number of foreign firms to reconsider their investment strategy regarding Indonesia. 

Balancing Foreign Investment with National Development Goals

These policies merely reflect the broader approach of Indonesia in its careful balancing act between gaining foreign investment and achieving national development objectives with resource sovereignty. As much as foreign investors enjoy many opportunities, particularly within newly liberalized sectors, Indonesia’s complex regulatory environment and adherence to tight local requirements are things to be reckoned with.

The investment climate prevailing in postwar Indonesia combines both challenges and opportunities. While uncertainty may still prevail, encouraging prospects are offered by the active participation of American oil companies, as well as other foreign firms, in giving impetus to industrial development. Again, several economic, political, and administrative factors operate as impediments to the free flow of foreign capital in this country.

Economic and Financial Constraints

Indonesia’s underdeveloped economic structure creates several obstacles for foreign investment. These barriers have included the following in the past:

  1. Economic Instability: Indonesia is still heavily dependent on the export of a few commodity products, such as rubber, petroleum, and tin, which are sensitive to any external market fluctuations.
  2. Lack of Domestic Savings/Capital Markets: Limited domestic savings and reduced development of capital markets hinder the internal capacity to generate funds for large-scale industrialization.
  3. Inadequate Infrastructure: The infrastructure for transport, communication, and energy is underdeveloped; thus, this sector hampers industrial development.
  4. Labor Issues: Indonesia has an inadequate supply of skilled labor. Labor productivity is low; therefore, it affects the efficiency in industries.
  5. Low Per Capita Income: Low per capita income implies a very limited domestic market; hence, it limits possibilities for internal consumption of industrial products.

With development, these obstacles should gradually decline over time, as in fact they have in the course of development in other nations. Recovery to prewar levels in certain sectors notwithstanding, the Indonesian government has initiated various programs to spur economic development. No development plan or programme as such, however, has yet been laid out or implemented.

Restrictions on Capital Repatriation

This has been a major disincentive for foreign investors: stringent regulations on the repatriation of profits and the transfer of capital.

In June 1955, new regulations placed even more severe restrictions on remitting profits for foreign firms. Foreign firms were compelled, for instance, to pay a surcharge of 6.5 percent on their profits in 1953 and to deposit 40 percent of net profit with the Bank of Indonesia. While these restrictions had relaxed slightly by 1955, a government ordinance still restricts the amount of dividends that can be transferred abroad. In addition to this, high corporate taxes for any corporation showing net profits of more than 2.5 million rupiah further discouraged foreign investment. The government policy statement issued in December 1955 contained hints that repatriation rules may be relaxed, thus suggesting that in the near future some easing of these restrictions could occur.

Labor and Political Conditions

Labor conditions have equally been unattractive to investors. While wages are generally low, strong labor unions with partial influences from communist ideologies have commanded conditions that limit productivity. This situation has been compounded by legal decisions which more often than not adjudicate in favor of employees rather than employers and especially foreign-owned companies, thus raising the bar on operational risks.

One of the main entry barriers for foreign investors has been political instability, whether internal or external. Indonesia’s political situation, characterized by internal unrest and unsettled issues with neighboring countries, has raised concerns for foreign investors. The disturbances perpetrated by extremist groups-thievery, arson, and property damage-specifically reached and affected foreign-owned businesses in particular. These have somewhat lessened over the years, but the impact of this disturbance still prevails in the investment climate.

There is also the doubtful state of Indonesia’s political development-with the first national election still not held by 1955, for example-to add to this uncertainty. Obviously, the successful installation of a stable and democratically elected government will be all-important for further economic progress and confidence by foreign investors.

Nationalization and Economic Policy

One key issue for the foreign investors has been that of the Indonesian government’s attitude regarding nationalization.

In fact, the government has increasingly moved to control in strategic industries, including rubber milling and cement plants, though these are planned for eventual sale to private enterprises. Many strategic sectors have also been fully nationalized, such as central banking and public utilities. The possibility of further nationalization worries a number of foreign investors, especially in transport and energy, though the government has said that nationalization would be carried out in an orderly and duly compensated manner. Indeed, this process of “Indonesianization”-placing Indonesian control over the vital activities of the economy-has made foreign investors apprehensive, especially with respect to those industries in which the participation of the government is becoming more pronounced.

Abundant Natural Resources and Future Potential

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In spite of the above, Indonesia has much to offer investors for the future, given the rich and largely unexploited natural resources. Mineral resources, forests, fisheries, and arable agriculture-all contribute to a wide variety of available products and export capacity, as seen in the book entitled, by Ada V. Espenshade, a government economist who worked for the U.S. Department of Commerce (Ada V.E., 1956).

With 82 million people, Indonesia’s labor force is a considerable asset, but the productivity level at present is low, mainly because of insufficient education and technical training. The efficiency of workers is further handicapped by ill health, malnutrition, and lack of exposure to modern methods of agriculture.

However, with the proper investments in education, infrastructure, and health, Indonesia’s future economic growth prospects are very good. As the people’s incomes grow, the per capita income of the country will go up, making more purchasing power available to the people to create a bigger domestic market for goods. What is needed is the government making continuous efforts to build a stronger financial, infrastructural, and administrative base-a prerequisite toward translating this potential into actual performance.

Conclusion

Therefore, vibrant Indonesia in investment perspective offers enormous opportunities for enterprises looking to expand business in Southeast Asia. The welcoming attitude of the government promotes foreign direct investment, while infrastructural development opens wide vistas in energy, technology, and manufacturing sectors. Advisory services at Viettonkin Consulting provide advice on how to navigate through these complexities to companies desirous of knowing more. 

Viettonkin can help businesses in making the appropriate decisions by providing market entry strategy consultancy, consultancy on compliance issues with the law, or seeking local partners in the place. Besides, let Viettonkin Consulting open more possibilities and guide the investment path for customers. Visit our website to know more of how we can help your business.

Also Read: PT PMA Indonesia: An Entry Point for International Investors

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