Investing

Indonesia: Investing

FDI in Figures

Global foreign direct investment (FDI) flows in 2021 were USD 1.58 trillion, up 64 per cent from the exceptionally low level in 2020. The recovery showed significant rebound momentum, with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages. However, the global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world. Investor uncertainty could put significant downward pressure on global FDI in 2022. The 2021 growth momentum is unlikely to be sustained. Indeed, world flows in the second quarter of 2022, the latest data available, were down 31% from the first quarter and 7% less than the quarterly average of 2021 (UNCTAD Global Investment Trends Monitor, October 2022). The negative trend reflects a shift in investor sentiment due to the food, fuel and finance crises around the world, the Ukraine war, rising inflation and interest rates, and fears of a coming recession. Expectations for the full year are for a marked slowdown. In developing Asia, despite successive waves of COVID-19, FDI rose to an all-time high for the third consecutive year, reaching $619 billion. Asia is the largest recipient region, accounting for 40 per cent of global FDI. However, inflows remain highly concentrated; six economies account for more than 80 per cent of FDI to the region (UNCTAD, October 2022).

According to UNCTAD's World Investment Report 2022, FDI investment in Indonesia declined by 22% between 2019 and 2029, recording USD 18.59 billion, because of a 58% drop in investment in the manufacturing industry as a result of the economic crisis triggered by the Covid-19 pandemic. Moreover, two key sources of FDI fell: inward investment from Japan dropped by 75% to USD 2.1 billion and investment from Singapore by almost 30% to USD 4.6 billion. It reached USD 20.08 billion in 2021. The FDI stock reached USD 240.56 billion in 2020 and 259.26 billion in 2021. Prior to the outbreak of the Covid-19 pandemic, FDI flows to Indonesia had grown and their base had expanded due to resilient economic growth, low public debt and prudent fiscal management. FDI growth was attributed to a series of economic policy packages that had been implemented by the Indonesian government over the last years, mainly focusing on deregulation, law enforcement and business certainty, interest rate tax cuts for exporters, energy tariffs cuts for labour-intensive industries, tax incentives for investment in special economic zones and lowered tax rates on property acquired by local real estate investment trusts. Moreover, Indonesia lowered the minimum equity requirement for foreign investors and abolished the approval requirement for several business transactions involving foreign investors. The policy of liberalisation has enabled Indonesia to rank 17th among the top 20 host economies. Japan remained the largest source of investment, followed by Singapore, the UK, Thailand and the USA. The stock of FDI is concentrated in the manufacturing, financial intermediation, trade and mining sectors.

Indonesia has been a big-ticket recipient of Chinese investment for some time. As a trillion-dollar economy in its own right, the country offers opportunities in various sectors and not just infrastructure builds. These include the digital economy, healthcare, and finance, among others.

The Indonesian government has managed to improve the overall economic climate by consolidating political and economic stability and through structural reforms that have removed some investment risks. However, several obstacles remain, such as the rising cost of credit, excessive and unpredictable regulation, the poor quality of infrastructure, the terrorism risk and a high level of corruption. A recent Constitutional Court decision granting more regulatory authority to regional governments could pose a challenge to ongoing investment climate improvements. In the long term, however, Indonesia's current economic situation may may provide the right time to invest in the country, especially in its financial instruments.

The latest United NationAsia-Pacific Trade and Investment Trends Report provides additional information on FDI in Indonesia and Asia-Pacific in 2022 and 2023.

Foreign Direct Investment	2019	2020	2021
FDI Inward Flow (million USD)	23,883	18,591	20,081
FDI Stock (million USD)	235,348	240,564	259,268
Number of Greenfield Investments*	119	63	73
Value of Greenfield Investments (million USD)	533	103	8,217

Source: UNCTAD, Latest available data.

Note: * Greenfield Investments are a form of Foreign Direct Investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

FDI FLOWS BY COUNTRY AND INDUSTRY

Main Investing Countries	2020, in %
Singapore	23.2
Thailand	17.7
Hong Kong	14.5
Japan	11.5
South Korea	8.5
China	4.8
Taiwan	3.8
USA	3.4

Main Invested Sectors	2020, in %
Financial intermediation	24.5
Manufacturing	22.1
Transportation, Storage, and Communication	12.1
Wholesale and retail trade	11.5
Mining and quarrying	10.2
Electricity, gas and water supply	8.2
Construction	5.4

Source: Bank Indonesia - Latest available data.

Form of Company Preferred By Foreign Investors: As a general rule, foreigners can only invest through setting up a limited liability company (Perseroan Terbatas or PT). A PT can be a joint venture set up by a foreign investor and an Indonesian partner, or a company whose ownership is exclusively foreign and in which foreign holdings can reach 100%.
Form of Establishment Preferred By Foreign Investors: A company is the favored form of setting up business.
Main Foreign Companies: Total, Shell, British petroleum, Credit Lyonnais, ING Bank, ABN Amro Bank, Nike, Reebok, Adidas, Carrefour, Danone, Accor...
Sources of Statistics: Bureau for the coordination of investments (BKPM)
Institute of statistics (BPS)

What to consider if you invest in Indonesia

Strong Points

Advantages for FDI in Indonesia:

Large population of over 277 million inhabitants, which is a huge internal market for any company wishing to do business there
Abundant natural resources (timber, fishery resources, oil, natural gas, metals)
High biodiversity
Domestic demand is growing, thanks to the development of the middle class.
The soundness of the banking and financial sectors creates an economic environment favourable to sustainable growth.

Weak Points

Disadvantages for FDI in Indonesia:

High cost of illegal removals, which can rise to as high as 60%
World Bank studies show that the legal and economic framework is less effective in Indonesia than in other Asian countries
Justice and tax and customs administrations are still perceived by the business community as generally corrupt and arbitrary.
Limited infrastructure; access to the different islands of the archipelago is generally complicated, which increases economic inequalities.
The great diversity of the population, a high level of unemployment and extreme poverty in some regions exacerbate inter-ethnic tensions and thus weaken the stability of the country.
The country is spread out on over 6000 inhabited islands, making transport and business management difficult if a company wants to expand beyond the largest island of Java, Sumatra and Borneo.
China's high dependence on commodity exports increases the risk of the country's economic slowdown.

Government Measures to Motivate or Restrict FDI

Incentives for investment are accessible to all investors, national and foreign. More specifically, these are reductions of duties on imports and equipment goods and additional incentives for export investors and investments made in certain regions. A reduction in corporate income tax in the form of a tax holiday is available to pioneer industries with a capital investment plan of more than IDR100 billion. Companies that are not entitled to tax holiday may claim a tax allowance, in order to obtain a tax reduction.

Indonesia restricts foreign investment in some sectors through a Negative Investment List. The 2016 Negative Investment List allows greater foreign investments in some sectors, including e-commerce, film, tourism, and logistics. In health care, the 2016 list loosens restrictions on foreign investment in categories such as hospital management services and manufacturing of raw materials for medicines.

In June 2019, the Indonesian government issued GR 45/2019, which sets out a series of tax incentives for businesses that invest in labor intensive industries, training programs, as well as research and development (R&D). Taxpayers investing or expanding in labour-intensive or pioneer industries can benefit from a reduction in net income of 60% of their total investment in the form of tangible assets, comprising any land used for major commercial activities over a certain period. Investors wishing to start apprenticeship programmes or training activities to develop workers on the basis of "certain skills" may obtain a reduction in gross income of up to 200% of the total costs incurred. Taxpayers who engage in R&D initiatives are eligible for a 300 per cent tax reduction in gross income of the total costs incurred.

Protection of Foreign Investment

Bilateral Investment Conventions Signed By Indonesia: Indonesia has signed bilateral agreements for the protection of investments with 72 countries, listed here.
International Controversies Registered By UNCTAD: The ISDS Navigator contains information about known international arbitration cases initiated by investors against States pursuant to international investment agreements. Indonesia is involved in 7 cases as Respondent State.
Organizations Offering Their Assistance in Case of Disagreement: ICCWBO , International court of arbitration, International chamber of commerce
ICSID , International Center for settlement of Investment Disputes
Member of the Multilateral Investment Guarantee Agency: Indonesia is a member of MIGA convention.

Country Comparison For the Protection of Investors	Indonesia	East Asia & Pacific	United States	Germany
Index of Transaction Transparency*	10.0	5.9	7.0	5.0
Index of Manager’s Responsibility**	5.0	5.2	9.0	5.0
Index of Shareholders’ Power***	2.0	6.7	9.0	5.0

Source: Doing Business - Latest available data.

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action.

Procedures Relative to Foreign Investment

Freedom of Establishment

Not guaranteed in all sectors. Indonesia restricts foreign investment in some sectors through a Negative Investment List.

Acquisition of Holdings

A majority holding interest in the capital of an Indonesian company is legal, except in certain sectors of activity.

Obligation to Declare

The Investment Coordination Board, or BKPM, acts as an investment promotion agency, regulatory body and agency responsible for approving planned investments in Indonesia. Consequently, it is the first point of contact for foreign investors, particularly in the manufacturing, industrial and non-financial services sectors.

Competent Organisation For the Declaration

Agency for the control of food and drugs (BPOM)
Bureau for the coordination of investments (BKPM)

Requests For Specific Authorisations

Restrictions on FDI are outlined in Presidential Decree No.44/2016. The Negative Investment List aims to consolidate the restrictions on FDI resulting from numerous decrees and regulations, in order to create more certainty for foreign and domestic investors. The 2016 revision of the list has relaxed restrictions in a number of previously closed or limited fields.
Among the partially open sectors for foreign investment, there are:

A construction services business is open for up to 67% foreign investment (70% if the foreign investor is from an ASEAN nation).
A distribution business that is not affiliated with a manufacturing business is open for up to 67% foreign investment; however, the distribution business becomes open to 100% foreign investment if it is affiliated with the manufacturer.
An insurance business is open for up to 80% foreign investment.

Before conducting business in the abovementioned sectors , approval must be obtained from the competent organization BKPM.

Office Real Estate and Land Ownership

Possible Temporary Solutions: Temporary office solutions: Regus, Jakarta Virtual Office
The Possibility of Buying Land and Industrial and Commercial Buildings: The Government has recently approved a regulation enabling foreign individuals to purchase property of a certain value locally. For example, foreign individuals can buy a house with a minimum value of IDR 10 billion in DKI Jakarta. In addition to the value of the property, the foreigner must meet the requirements of the Ministry of Agriculture regulations.
For investment purposes, foreign investors must set up a Foreign Investment Company (PMA Company) according to BKPM rules. Therefore, the PMA Company will hold the property title instead of the foreign investor (right to build and right to use the land).
Risk of Expropriation: Article 21 of the Law of 1967 on foreign investments stipulates that the government must not nationalize foreign investments except if a Law is passed, or if national interests are at stake. According to the BKPM, the right of a company to receive compensation is respected in the case of expropriation. Since the Law of 1967 on foreign investments was passed, no expropriation has been carried out.

Investment Aid

Forms of Aid: Among the measures supporting FDI are reductions of duty on imported inputs and capital equipment, additional incentives for investment in export or for investment in certain regions, a bill on taxation which generates a simplification of fiscal incentives, an adjustment of VAT, a tax holiday and a tax allowance.
Privileged Domains: Incentives are granted to pioneer industries that could provide additional value and high external output, introduce new technologies (for example, in relation to industries such as upstream metal, oil refinery, sea transportation, and/or processing), have strategic value for the national economy. To conclude, the incentives are designed to encourage more foreign direct investment that expand the skilled labor base, develop industry and R&D.
Privileged Geographical Zones: There are four type of Economic Zones: Industrial Parks, Special Economic Zones (SEZs) and Tourism Zones and Free Trade Zones. The Government of Indonesia encourages the development of Industrial Parks that aims to control the use of space, increase efforts of environmentally sound economic development, accelerate the growth and improve the competitiveness of investment, and provide certainty in the planning and construction of infrastructures in support of economic development and investment. The SEZs are designed to maximize industrial activities, export, import and other related activities which has high economic value. Furthermore, the areas are given certain facilities and incentives in order to increase the competitiveness among the countries nearby. Finally, the government has listed 10 priority tourism destinations for development.
Free-trade zones: The State gives incentives to foreign and national industrial companies which choose to set up business in one of the Free Trade Zones: Sabang, Bintan, Karimun and Batam.
Public aid and funding organisations: With decentralization, the local authorities are bidding higher and higher concerning incentives to investment.
Indonesia benefits from the assistance plan of the European Union and of USAID. For the USAID program, the national organization in charge of carrying it out is the Indonesian Plan of assistance to commerce (ITAP), whose task is to reinforce the capacities of public administrations in analysis, negotiation and setting up of bilateral and multilateral trade agreements. The ITAP works directly with the Ministry of Commerce to ensure training which will help Indonesian companies to find more openings on the international markets. The Program of support for commerce (TSP), which is in charge of carrying out the assistance program of the EU, devotes itself mainly to training and broadcasting information, as well as market research. The beneficiaries of this program are those who engage in international commercial activities in Indonesia, in particular exporting SMEs, who can thus increase trade with their counterparts in other countries and in the EU. European companies which buy in Indonesia will find more reliable products, more in conformity with European standards, while European companies which export to Indonesia, or which operate in the country, should also benefit from simplified import procedures.

Investment Opportunities

The Key Sectors of the National Economy: Energy (oil, gas, electricity), agriculture (coffee, palm oil, rubber), mining resources and forestry, the textile and paper industries
High Potential Sectors: Among the sectors with a strong potential for expansion are: telecommunications (especially mobile and infrastructure), transport, energy (oil, gas, electricity), water treatment and engineering, construction, security, the medical and pharmaceutical industries, aeronautics, IT, the chemical industry, retail trade, franchise services.
Privatization Programmes: The State is carrying out a privatisation program in the sectors of telecommunications, energy (gas), banks and transports. The central government of Indonesia has repeatedly announced its intention to universalise access to clean water. To achieve this goal, an estimated 27 million new connections are needed, with a significant investment gap of IPR 274.8 trillion ($20.8 billion). This is why a privatisation process has been underway since 2017.
Tenders, Projects and Public Procurement: Tenders Info, Tenders in Indonesia
Asian Development Bank, Procurement Plans in Asia

Sectors Where Investment Opportunities Are Fewer

Monopolistic Sectors: Arms manufacturing, alcoholic drinks, concessions for exploiting natural forests, woodcutting companies, growing genetic material, transport services by taxi/bus, small sailing companies, trade services and support services, except large scale retail sales, the wholesale trade, the provision of exhibition and congress services, the provision of certification services, quality, the provision of market research services, the provision of warehousing services outside sea ports and the provision of after-sales services, radio and television broadcasting, the provision of services, the provision of radio broadcasting services and closed circuit television broadcasting and the audiovisual and written press, and the production of cinema films.

Finding Assistance For Further Information

Investment Aid Agency: Agency of investments promotion
Other Useful Resources: Indonesian Chamber of Commerce and Industry
Doing Business Guides: Indonesia Commercial Guide (trade.gov)
Investment Climate in Indonesia - US Department of State
Indonesia Tax Guide, Deloitte
Doing Business in Indonesia 2022, Mazars

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