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The economic impact of foreign investment in Indonesia

The economic impact of foreign investment in Indonesia

Foreign investment in Indonesia contributes to shaping a competitive global economic landscape. It involves substantial investments by companies or individuals in businesses operating within the country, known as foreign direct investment (FDI).

Unlike portfolio investments, where you buy stocks or bonds, FDI involves acquiring a controlling interest or significant influence in a foreign company. This can include setting up new operations, expanding existing facilities, or buying a controlling stake in a local company.

Why is foreign investment important for Indonesia?

In 2023, Indonesia received IDR 1,418 trillion in combined domestic and foreign investments, of which 52.4% (approximately Rp 744 trillion) originated from foreign direct investment (FDI).

Taking note of this achievement, the investment target for 2024 in Indonesia has been increased to Rp 1,650 trillion. The government aims to obtain over half of this amount from foreign investors.

Investment Minister Bahlil Lahadalia asserted that foreign investors remain keen on investing in Indonesia. Following the 2024 election, many companies are moving forward with their investment plans, with some even planning groundbreaking ceremonies.

Read more: Exploring investment potential in Indonesia

How does foreign direct investment work?

If you’re considering investing in a foreign country, it’s important to understand the steps involved in the foreign investment process. The process generally includes a series of steps you’ll need to follow to invest in a foreign market successfully.

Steps Description
Investment decision The foreign investor identifies a business opportunity in Indonesia and conducts market research.
Approval process The investor seeks approval from the Indonesian Investment Coordinating Board (BKPM) for their investment plans.
Setting up operations The investor forms a business entity in Indonesia, choosing from options like a wholly-owned subsidiary, a joint venture with a local partner, or acquiring an existing entity.
Investment The investor injects capital into the Indonesian business.
Management Depending on the type and size of the investment, the investor may participate in managing the business.

Types of foreign investment in Indonesia

Here are some helpful suggestions on how foreign investors can actively participate in the Indonesian market:

  • Wholly-owned subsidiaries: Foreign companies can establish their independent businesses in Indonesia.
  • Joint ventures: Partnering with a local Indonesian company allows foreign investors to benefit from local knowledge and navigate regulations.
  • Mergers and acquisitions (M&A): Foreign companies can acquire existing Indonesian businesses to gain immediate market access and a local presence.
  • Greenfield investments: This involves setting up a new business venture from scratch in Indonesia.

Benefits of foreign investment in Indonesia

The importance of foreign investment in Indonesia

Deciding to invest in Indonesia won’t make you regret it. There are several reasons why Indonesia is a good destination for your investment.

1. Robust economy

Consistent GDP growth exceeding 5% provides a stable environment for investment, fuelled by a growing middle class and increased consumer spending.

2. Business-friendly environment

Indonesia’s policies facilitate investment, with ongoing reforms to streamline bureaucracy and offer incentives like tax breaks and protection against expropriation.

3. Diverse opportunities

Indonesia offers a broad spectrum of investment prospects, from manufacturing to technology and renewable energy, catering to various sectors and interests.

4. Infrastructure development

Heavy government investment in infrastructure projects enhances connectivity and reduces logistics costs, benefiting businesses and driving overall economic growth.

5. Rich in natural resources

Rich in resources like coal, palm oil, and minerals, Indonesia presents lucrative opportunities for mining, agriculture, and energy industries.

6. Youthful workforce

With a median age of 30, Indonesia’s dynamic workforce offers ample skilled labor for businesses, backed by improving education levels.

7. Strategic location

As a member of ASEAN and situated close to major markets like China and India, Indonesia enjoys a strategic location for trade and investment.

8. Government support

The Indonesian government encourages investment through initiatives like “Making Indonesia 4.0” and offers incentives such as tax holidays and exemptions on imported machinery.

9. Cultural diversity

Embracing Indonesia’s cultural richness can benefit businesses focusing on cultural products such as handicrafts, traditional clothing, and cuisine.

10. Tourism potential

Indonesia’s tourism sector offers attractive investment prospects in hotels, resorts, and adventure tourism.

Challenges of foreign direct investment in Indonesia

The Indonesian Investment Coordinating Board (BKPM) has noted at least five challenges faced by investors in Indonesia, leading to a decline in foreign investment interest. These include:

  • Complex regulations
  • Difficulty in land acquisition
  • Uneven distribution of public infrastructure
  • Tax and other non-fiscal incentives that are not supportive
  • Insufficient skilled labor

Moreover, ongoing global challenges such as the Ukraine-Russia conflict and geopolitical tensions in the Middle East between Israel and Palestine are feared to worsen the economic conditions that have not fully recovered.

These conditions are believed to impact the flow of foreign direct investment, including to Indonesia.

The disadvantages of foreign direct investment in Indonesia

While beneficial, foreign investment in Indonesia also poses drawbacks. One key concern is the potential loss of control for the host country, allowing foreign companies significant influence over local businesses.

This may result in profit and resource transfer, weakening the host country’s economy and impeding independent decision-making.

Furthermore, FDI can foster reliance on foreign companies and technologies, hampering local industry growth and competitiveness.

This dependency may lead to foreign dominance in key sectors, diminishing the host country’s economic autonomy. Additionally, FDI could exacerbate income inequality, with benefits disproportionately favoring foreign investors over the local population.

Investment opportunities in Indonesia

The government has announced 14 new National Strategic Projects (PSNs) to be funded by private companies, with construction scheduled to commence in 2024. The PSN initiative prioritizes infrastructure, including toll roads, public transportation, energy, seaports, airports, and information technology.

Among the new strategic projects are the Pantai Indah Kapuk Tropical Concept property development in North Jakarta, the Wiraraja Industrial Area in Galang Island, Riau, the North Hub Development Project in offshore East Kalimantan, and the Neo Energy Parimo Industrial Estate in Parigi Moutong, Central Sulawesi.

How do you start investing in Indonesia?

There are several ways for foreigners to start a business in Indonesia. Apart from establishing PT PMA, the most commonly used legal entity by foreigners, Indonesia offers other easier ways, namely representative offices.

Below are various kinds of representative offices available in Indonesia:

Foreign Representative Office (KPPA)

KPPA is a general office used to enter the Vietnamese market. The parent company typically sets it up to manage operations.

Foreign Construction Representative Office (BUJKA)

BUJKA differs slightly from KPPA and KP3A and is established for organizations operating in the construction sector. The necessary license for BUJKA is SIUJK.

Foreign Trade Representative Office (KP3A)

A KP3A can engage in activities similar to KPPA and act as a buying and/or selling agent. However, it still needs to be authorized to make sales independently.

Guide to Doing Business in Jakarta

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InCorp Indonesia offers expertise in assisting foreign businesses with investing in Indonesia by providing company registration and investor KITAS services.

With years of experience in the market entry fields, InCorp Indonesia ensures compliance with Indonesian laws and regulations for thousands of overseas businesses. Our services can be tailored to meet your specific requirements.

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    Pandu Biasramadhan

    Senior Consulting Manager at InCorp Indonesia

    An expert for more than 10 years, Pandu Biasramadhan, has an extensive background in providing top-quality and comprehensive business solutions for enterprises in Indonesia and managing regional partnership channels across Southeast Asia.

Frequently Asked Questions

    For tax purposes in Indonesia, companies must maintain their books in Rupiah, using the Indonesian language, and store them within the country. Exceptions for using USD and English in bookkeeping require prior notification to the authorities and any use of languages other than Indonesian needs approval from the Ministry of Finance.

    Foreign investors need to have a minimum of IDR 10 billion in authorized capital, IDR 10 billion in paid-up capital, and IDR 1 billion in personal shares for applying for Investor KITAS/ITAS in Indonesia.

    To provide you with accurate pricing information for our visa and immigration consultation services, we consider the complexities of your inquiries and the dynamic nature of regulations in Indonesia. As a result, the pricing for the services may vary accordingly. For pricing details, please talk to our experts.

    In Indonesia, employment arrangements are categorized into temporary employment agreements (PKWT) and permanent employment agreements (PKWTT). Temporary contracts are for short-term, seasonal, or experimental work, while permanent contracts are for continuous employment.

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