Indonesia: Investing in Indonesia
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.
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.
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.
Advantages for FDI in Indonesia:
Disadvantages for FDI in Indonesia:
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Latest Update: January 2023