Potential and Opportunity for Foreign Direct Investment in Indonesia

This report assesses the potential and opportunity for foreign direct investment in Indonesia based on various factors including existing levels of FDI, natural resource competitive advantage, trade policies, barriers, and incentives. It highlights the importance of FDI in Indonesia's economic growth and the government's efforts to attract and maintain foreign investors.

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA i
POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA
Student Name
Institutional Affiliation
Facilitator
Course
Date

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA ii
EXECUTIVE SUMMARY
Today’s business era has become more globalized. Many nations are aware of the benefits
associated with international trade (Giddens 2018, p.19). As a result many nations have tried
their best to improve their economic performance by supporting their national businesses to enter
international trade. Nations have also created conducive business environment to attract and
maintain foreign direct investments. Indonesia is among the richest nations in the Asia-Pacific
region and is among the nations with the largest economies in the world. Its economic
performance has been great for the past 10 years averaging 5.28 percent of economic growth
which is measured by the annual percentage growth of the gross domestic product. Foreign direct
investment has been contributing much towards fostering the Indonesian economic growth.
Currently it contributes more than 20 percent of the total gross domestic product of Indonesia. In
this report, the Indonesian potential and opportunity for foreign direct investment has been
assessed. The assessment has been based on various factors which include some of which
include the Indonesian existing levels of foreign direct investments and foreign currency and
exchange influences among others.

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA iii
Table of Contents
EXECUTIVE SUMMARY.........................................................................................................................ii
INTRODUCTION.......................................................................................................................................1
Political, Economic, Socio-cultural and Technological Influences..............................................................2
Indonesia natural resource competitive advantage.......................................................................................4
Foreign currency and exchange influences..................................................................................................5
Indonesian trade policies, barriers and incentives........................................................................................6
Existing levels of foreign direct investment in Indonesia............................................................................7
Summary and recommendations..................................................................................................................8
References...................................................................................................................................................9

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 1
INTRODUCTION
Indonesia is among the best performing richest nations in the Asia-Pacific region. It is also
among the nations with the highest population in the world with a population of 258.7 million. It
embraces free economy where some of its industries are open to foreign competition but still
some industries are protected by the nation’s regulatory policies. According to the 2018 index,
Indonesia is ranked position 69 in terms of economic freedom having a score of 64.2. This is an
increase of 2.3 points due to improvements in the judicial effectiveness, monetary and business
freedom. Indonesia has been improving in terms of economic performance currently having a
growth rate of 5.17 percent which is measured by the gross domestic product growth rate. It has
been ranked position 45 out of the 43 nations in the region of Asia-Pacific. Its economic
performance score is above the expected averages at regional and world levels at large (Booth
2014, p.287).
Currently the world of business has become more globalized. Many nations are aware of the
benefits of international trade. As a result, nations have encouraged and highly supported their
national businesses to venture into international trade. Nations as well have tried their best to
attract and maintain foreign direct investors into their economies in order to foster their
economic growth and easily access commodities which they lack comparative advantage in their
production (Levitt 2014, p.249). Nations have reformed their ineffective economic policies
which hinder foreign investment in their economies. They have also come up with various
incentives in various sectors of their economies which serious require improvement from foreign
investors. Some of these sectors include the technological sectors for the developing nations.
Generally, foreign direct investment occurs when businesses or rather firms from different

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 2
nations invests in other nations across their national boundaries. The investors must own more
than 10 percent of the foreign investments made in order to control them (Lizondo 2015, p.85).
Firms which take part in foreign investments are termed as multinational enterprises (MNEs).
Foreign direct investment in Indonesia is of great importance as it significantly contributes
towards improving its economic performance. It accounts for more than 20 percent of the total
gross domestic product of Indonesia. According to the United Nations Conference on Trade and
Development (UNCTAD) World Investment Report 2018, foreign direct investment in Indonesia
improved from $3.92 billion to $23 billion from the year 2016 to 2017 respectively. This was as
a result of implementation of the government proposed reforms which were aimed at improving
foreign direct investment in the nation by attracting and maintaining more foreign investors.
With more government reforms being implemented to attract and maintain more foreign
investors, Indonesia has a big potential and opportunity for foreign direct investments.
Political, Economic, Socio-cultural and Technological Influences
Since the year 1998, after a 30 year authoritarian ruling of General Suharto, Indonesia citizens
have been enjoying a democratic ruling. Despite Indonesia being a democratic nation, there are
barriers to trade and foreign direct investment arising from political influence. The protection of
property rights has been inefficient and corruption cases have emerged due to difficulties
involved in the registration of foreign property. The Indonesian judiciary is said to be
independent but it has been vulnerable to influence from some corrupt businesses and politicians
who focus on achieving their own selfish gains (Bresnan 2015, p.189). Corruption in the
government of Indonesia has reduced government integrity to 42.8, judicial effectiveness to 45.2
and property rights to 49.3 according to the 2018 index. To attract and maintain foreign direct

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 3
investments, the government of Indonesia under the leadership of Joko Widodo, has put forward
strong economic reform policies to remove barriers to trade and has also highly prosecuted
corrupt cases. With the current pace of implementation of Indonesian government economic
reforms, foreign direct investments are anticipated to increase. Political stability has been highly
maintained even as the nation of Indonesia waits its democratic elections come next year.
Indonesia has been doing great in terms economic performance since the year 2000. Its economic
performance which is measured in terms of growth rate of the annual gross domestic product has
been averaging 5.28 percent since the year 2000 with the growth rate being highest during the
year 2004 at 7.16 percent and being lowest during the year 2001 at 1.56 percent. Currently the
economic growth rate stands at 5.17 percent which is higher than that of various nations in the
Asian-Pacific region such as Thailand. Strong policies governing the Indonesian macro-economy
have led to its economic prosperity. The Indonesian inflation rates have been high averaging 3.0
percent and above for the last 8 years. This is a relatively high rate of inflation but it is still
within the set target of 3.5 percent by the Bank Indonesia (Aghevli and Khan 2017, p.390). The
good thing with the Indonesian inflation rates is that they are kept relatively stable enabling
investors to predict the future price of goods and services with great certainty. Interest rates of
Indonesia have been kept high at an average of 7.0 percent for the last 10 years. Currently
interest rates stand at 6.0 percent as the Bank Indonesia is trying to adjust the current account
deficit of the nation to around 2.5 percent of the gross domestic product after which it will reduce
the interest rates. The higher interest rates mean that investors have to acquire capital
expensively but the government of Indonesia has introduced incentives of offering soft loans to
small and medium enterprises (SMEs). The unemployment rate of Indonesia currently stands at

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 4
5.6 percent which is relatively huge compared to other ASEAN nations. This is due to its poor
education system which the government has invested much in to improve it.
The social-cultural practices of Indonesia involve much of the Muslim activities as the nation is
composed of mainly the Muslims. Their activities do not hinder foreign investment in any way.
Telecommunication especially infrastructure and mobile has been poor in Indonesia. The
government has set a huge expenditure to improve its infrastructure to attract and maintain more
foreign investors. There is still room for investment in the infrastructure sector especially the
information and communication technology in Indonesia.
To sum up, the political system of Indonesia has been stable and its economy is growing
generally. This shows that Indonesia has the potential and opportunity to attract and maintain
more foreign direct investments.
Indonesia natural resource competitive advantage
Indonesia has competitive advantage in various sectors. The major competitive sectors include
Mining, Agricultural especially rubber and wood, Automotives, Tourism and Electronic
components such as computers. The various natural resources produced by Indonesia include
timber, petroleum, coal, copper, gold, tin, natural gas, bauxite, silver, nickel and fertile soils.
Globally Indonesia leads in the production nickel, gold, liquefied natural gas (LNG) and nickel
(Gonzales 2013, p.93). It is ranked position in the world in terms of tin production. These major
sectors have contributed much towards improving the Indonesian economic performance. They
have contributed much towards increasing the Indonesian exports which has improved over the
past years and currently stands at more than $170 billion. The main goods exported by Indonesia
include plywood, rubber, food, textiles, oil and gas and electrical appliances. The contribution of

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 5
the main export goods is estimated as follows: mineral fuels especially oil and gas account for
21.8 percent of the total exports, electrical machinery 5 percent, wood 2.4 percent, rubber 4.6
percent and electronic components majority of which are computers 3.5 percent. The government
of Indonesia is doing its best to improve these key sectors by allocating much of its expenditure
towards improving infrastructure such as roads and the ICT sectors. There are various
opportunities for foreign investors to venture in which include the energy sectors especially
electricity, oil and gas, telecommunications and the transport sectors (Warr 2012, p.41).
Foreign currency and exchange influences
Indonesian currency (Rupiah) has a relatively low value among the developed nations. Despite
its low value, the Bank Indonesia has been maintaining the Rupiah exchange rates relatively
stable (Callis 2016, p.30). The most common currencies involved in Indonesian economy include
the Euro, American Dollar, Chinese Yuan Renminbi and Japanese Yen. There exchange rates are
as shown below:
Currency Comparison Amount In Rupiahs
Euro 0.0001 16559
American Dollar 0.0001 14573
Chinese Yuan Renminbi 0.0005 2115
Japanese Yen 0.0077 129.2
Though the value of the Indonesian Rupiah is lower, it is relatively stable. The Indonesian
government through the Bank Indonesia has currently increased its interest rates to 6.0 percent to
maintain the value of its currency and maintain the existing currency exchange rates by avoiding

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 6
its devaluation. This has attracted many foreign investors to invest in the economy as they can
plan their future operations with great certainty.
Indonesian trade policies, barriers and incentives
The government of Indonesia has trading policies which govern trading activities in the country.
Some of these policies discourage foreign direct investment. The government of Indonesia under
the leadership of Joko Widodo has come up with policies aimed at reforming foreign direct
investment in the nation as discussed (Boeke 2015, p.90). The government has reduced the time
involved in setting up new businesses in the country to about less than 10 depending on the
businesses urgency. This has highly attracted foreign direct investment as before new businesses
were required to be set up for more than 20 days. The government has formulated policies aimed
at increasing its expenditure on improving the nation’s infrastructure especially the information
communication and technology. The government trading policies also requires foreign investors
to make a minimum investment of 10 billion Rupiah in order to be granted permanent business
trading license. The government also does not allow foreign investors to own land and property.
The premises of doing a business must be leased. This is not a good move and it should be
rectified in order to attract more foreign direct investments.
Although the government is doing its best to attract and maintain foreign direct investments,
there are various trade barriers which hinder or rather discourage foreign direct investment in
Indonesia (Caballero, Farhi and Gourinchas 2018, p.358). The government sets a requirement of
10 billion Rupiah for a foreign business to be granted a permanent license. This is too much as
some of foreign investments may be small and may not afford such huge amounts of capital. The
government sets standards for foreign products which must be met for them to be allowed into

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 7
the market. Most of times, corruption is involved in checking these standards and this even made
the United states to raise concern towards the transparency of the process in investigating their
product’s standards. Import licenses are required for the entry of foreign products into Indonesia.
These licenses are sometimes denied unfairly if the government wishes to limit the level of
imports from certain nations.
The government of Indonesia has come up with various incentives to encourage foreign
investment in the country. The government has reduced duties levied on imported goods and
services as well as the capital equipments. Incentives are also offered to national and foreign
businesses which venture in the export industry. The government has set incentives for
investments in the targeted seven customs of Indonesia commonly referred to as the “islands of
excellence”. This has been done with an aim of fostering development in these remote areas. The
government has also introduced an incentive of lending soft loans to small and medium
enterprises for their expansion. The introduction of the various government incentives has highly
attracted foreign direct investment in the sectors with the incentives such as the ICT sector and
better results are anticipated in future.
Existing levels of foreign direct investment in Indonesia
Foreign direct investment in Indonesia has been increasing over the past years especially from
the year 2014 after Joko Widodo took over the leadership of the nation. This is due to various
policies and incentives introduced by the government of Indonesia under the leadership of Joko
Widodo who was formerly a businessman and a governor of Jakarta. The introduction of the
government policies and incentives led to increase in foreign direct investments from $3.92
billion to $23 billion from the year 2016 to 2017 respectively according to the UNCTAD World

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 8
Investment Report for 2018. The major sectors which recorded an increase in the foreign direct
investment include electronics and machinery, mining sector, electricity, chemical and
pharmaceutical industry and water and gas supply (Lane 2016, p.178). Largest foreign direct
investments came from Singapore, Japan and China. With the continued implementation of the
government foreign direct invest policies and incentives, foreign direct investment is anticipated
to improve in future.
Summary and recommendations
From the findings of the report, Indonesia has a great potential and opportunity for foreign direct
investments. Political stability in Indonesia has been maintained which has been offering a cool
climate for businesses to thrive in. the economic performance of Indonesia has been good for the
pas years with its growth rate high at an average of 5.28 percent. The macroeconomic factors
which include unemployment, inflation and interest rates are good for Indonesian economy.
Inflation and interest rates despite being high have been kept stable which enable investors to
predict the future outcomes with great certainty (Utami and Inanga 2017, p.151). The foreign
currency exchange rates are also high but relatively stable. Stability of foreign currency
exchange rates enables investors to undertake their operations without the fear of making losses
in future due to fluctuations in the currency exchange rates. Various policies and incentives
introduced by the government have attracted more foreign investors and the same trend is
anticipated in future. The Indonesian government should promote transparency in the process of
offering import licenses and investigation of product’s standards. The required capital for
acquiring permanent business licenses should be lowered for foreign investors. Foreign investors
should also be allowed to own property such as land in Indonesia provided they have acquired it
fairly.

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 9
References
Aghevli, B.B. and Khan, M.S., 2017. Inflationary finance and the dynamics of inflation:
Indonesia, 1951-72. The American Economic Review, 67(3), pp.390-403.
Boeke, J.H., 2015. Economics and economic policy of dual societies, as exemplified by
Indonesia. International Secretariat, Institute of Pacific Relations.
Booth, A., 2014. The state and the economy in Indonesia in the nineteenth and twentieth
centuries. In The new institutional economics and third world development (pp. 287-309).
Routledge.
Bresnan, J., 2015. Managing Indonesia: The modern political economy (p. 189). New York:
Columbia University Press.
Caballero, R.J., Farhi, E. and Gourinchas, P.O., 2018. An equilibrium model of" global
imbalances" and low interest rates. American economic review, 98(1), pp.358-93.
Callis, H.G., 2016. Foreign Capital in Southeast Asia. AMS Press, 60(2), pp.30-40.
Giddens, A., 2018. Globalization. In Sociology of Globalization(pp. 19-26). Routledge.
Gonzales, L.A., 2013. Economic incentives and comparative advantage in Indonesian food crop
production (Vol. 93). Intl Food Policy Res Inst.
Lane, M.T.D., Schulze-Gattas, M.M., Tsikata, M.T., Phillips, M.S., Ghosh, M.A.R. and Hamann,
M.A.J., 2016. IMF-supported programs in Indonesia, Korea and Thailand (No. 178).
International Monetary Fund.

POTENTIAL AND OPPORTUNITY FOR FOREIGN DIRECT INVESTMENT IN INDONESIA 10
Levitt, T., 2014. The globalization of markets. Readings in international business: a decision
approach, 249.
Lizondo, J.S., 2015. Foreign direct investment. Readings in International Business: A Decision
Approach, pp.85-114.
Utami, S.R. and Inanga, E.L., 2017. Exchange rates, interest rates, and inflation rates in
Indonesia: The International Fisher Effect Theory. International Research Journal of Finance
and Economics, 26, pp.151-169.
Warr, P.G., 2012. Comparative advantage and protection in Indonesia. Bulletin of Indonesian
Economic Studies, 28(3), pp.41-70.