Foreign direct investment (FDI) in Indonesia

FDI in Figures

Global foreign direct investment (FDI) flows in the first half of 2021 reached an estimated USD 852 billion, showing stronger than expected rebound momentum, with an increase of 78% of the partial-year growth rate on the previous year according to UNCTAD’s Investment Trends Monitor released on October 2021. The global FDI outlook for the full year 2021 has also improved from earlier projections. The current momentum and the growth of international project finance are likely to bring FDI flows back beyond pre-pandemic levels. Nevertheless, the duration of the health crisis and the pace of vaccinations, especially in developing countries, as well as the speed of implementation of infrastructure investment stimulus, remain important factors of uncertainty. Other important risk factors, including labour and supply chain bottlenecks, energy prices and inflationary pressures, will also affect final year results. (UNCTAD, October 2021). Covid’s impact on developing markets and shifting investment from China are major trends that will impact foreign investment in 2022.

According to UNCTAD's World Investment Report 2021, FDI investment in Indonesia declined by 22% between 2019 and 2029, recording USD 19 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. In 2020, the FDI stock reached USD 240 billion. 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.

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. In the long term, however, Indonesia's current economic situation may well be the right time to invest in the country, especially in its financial instruments. President Widodo has announced plans to improve the country's position in the Doing Business report published by the World Bank with the goal of reaching 40th position globally. Following a bold reform programme aimed at liberalising the economy and reducing investment barriers, Indonesia fell one spot to 73rd out of 190 in the last Doing Business 2020 survey. At the same time, however, a recent Constitutional Court decision granting more regulatory authority to regional governments could pose a challenge to ongoing investment climate improvements.

The latest United Nation Asia-Pacific Trade and Investment Trends Report provides additional information on FDI in Indonesia and Asia-Pacific in 2021 and 2022.

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.

Bilateral investment conventions signed by Indonesia

Indonesia has signed bilateral agreements for the protection of investments with 72 countries, listed here.