foreign direct investment is a form of effort to acquire or establish new foreign business venture with the aim to generate revenue, provide employment, and improve global economic development.
Foreign direct investment or FDI in Indonesia is too great opportunity for other countries to miss. Breaking down the terms, foreign investment usually takes place when a firm or individual invest their capital to establish a business or acquire the assets of foreign business interest; that includes building a new ownership system or taking control of the business’ interest.
The most common form of foreign investment in Indonesia is acquisition that is considered as the most efficient method, although there are some other key features that define effective control of the business. The methods include:
- Establishing an associate company
- Opening a subsidiary company
- Acquisition of controlling interest of the business
- Conduct a joint venture or merger
In order to make a foreign direct investment in Indonesia, a foreign company must at least possess 10% of ownership stake to be able to take control of the interest and take part of the decision-making of the business.
Advantages of Foreign Direct Investment
Since the government of Indonesia took a revolutionized action in easing the regulation, foreign direct investment in Indonesia has increased to 8.5% in 2017 compared to an increase of 8.4% during 2016. The number even rises to 12.1% in the first quarter of 2018, which also means an increase to the country’s income.
The most important thing about allowing foreign company to invest in the developed countries is to bring global economic development. Despite its major benefits to bring a significant amount of income to the developed country, there are other advantages of foreign direct investment in Indonesia that also impact the investor and the recipient country.
Stimulate Economic Growth of the Recipient Country
A new business sector opened in the country can stimulate economic development by creating more opportunities. Foreign direct investment leaves more permanent effect towards the economic development of the country and creates a more conducive business environment.
Profit Motive for Investors
Everyone knows that the huge amount of money goes for the best-run business with low risk. Investors will conduct a market research prior to putting their fund on a certain business sector. Thus, allowing a good business growth with a good prospect that delivers services to the market in the most efficient way.
Improved Standard of Living
With the number of investment, recipient country can improve their standard of living due to the benefits drawn from the FDI. The easiest example would be the FDI to pay higher taxes that will contribute to the recipient country’s income. Investment also opens new employment and creates new jobs for people to work in, leading the increased power of the people to engage in more economic activities.
Reduce International Trade Barrier
One commonest and biggest barrier to creating globally international trade is the imported fee. Some business sectors are required to be “exist” in the international market in order to conduct the trade with the specific country. Foreign direct investment eliminates that barrier and makes trading easier.
Best Practice Management for the Recipient Country
In order to run their business smoothly, the investor needs to apply best management practice that is automatically followed by the recipient country. Foreign direct investment indirectly stirs the recipient country to incorporate in the latest technology, financing tools, and engage in operational practices to improve their management ability as well as set of skills.
The Development of Human Capital
In addition to the best management practice, the advantage of foreign direct investment also influences the human capital resources. The FDI needs the human capital as the workforce to perform labor, also known to gaining its attributes through training, course, and shared experience. This shows that the investment can benefit the human resource of the recipient country a great deal of ways.
Among the advantage of foreign direct investment is to reduce the difference between production cost and profit. The business venture held in the designated country through FDI can help remove the number of disparity, while improving the productivity at the same time, and for the goods or services to be sold easily.
Besides the 7 advantages of foreign direct investment stated above, this practice can highly benefit individual investors as they can generate more revenue with lowered risk.
Openness to and restriction on Foreign Direct Investment in Indonesia
With such a huge potential, Indonesia is the perfect county for investors to place their fund and run a business. The country also aims for an increased rate of FDI to create more job opportunities and national economic growth in general. To ensure foreign investment in Indonesia, the government set up a focused agency to provide all investors with information regarding the investment.
The Indonesia Investment Coordination Board (BKPM) eases the regulation for foreign companies who want to invest in Indonesia; such policy is also strengthened by developing infrastructure and manufacture. Among the effort of BKPM to create a friendly investment climate is determining the business sectors that are opened and closed to investment. All foreign investors must reflect to the list before deciding to trust their fund in the business venture.
The openness to and restriction on foreign direct investment in Indonesia is set to give priority on the country’s development as well as served as limitation to certain business sectors available for foreign investors to conduct.
Business sectors that are opened with conditions require foreign investors to have a partnership with local business ventures. They are also reserved for small and medium enterprises, and the type of business that requires specific licensing, location, and capital ownership.
List of business sector that are opened with conditions (reserved for small and medium enterprises):
|Business Sector||Business Field|
|Agriculture||Staple food crops planted in an area of more than 25 Ha:
Rice, corn, soy, peanut, green bean, other food crops
|Agriculture||Plantation seeding in an area of more and less than 25 Ha:
Tobacco, coconut, sugar cane, oil palm, cloves, spices crops, etc.
|Agriculture||Venture with specific capacities:
Animal oil, dried clove buds, copra, coconut oil, palm oil, dried tobacco leaves, cotton seeds, and fiber, etc.
|Industry||Fish preservation, tempe, and tofu industry, red sugar, fabric printing, embroidery, hand-drawn batik, industry of food from soybean and legumes, etc.|
|Public work||Construction service with work value of up to IDR 50,000,000,000
Business service with work value of up to IDR 10,000,000,000
|Trade||Retail sale order|
|Tourism and creative economy||Travel agent, homestay, tour guides, community broadcasting agency, internet café.|
List of business sectors that are opened with partnership conditions:
|Business Sector||Business Field|
|Forestry||Forest business in rattan, bamboo, oleo pine resin, honeybee business, alternative food crops, etc.|
|Marine Affairs and Fisheries||Hatchery and rearing of marine fish, brackish water fish, freshwater fish, fishery product processing, marketing, distribution, export of fish products, etc.|
|Industry||Copra industry, processed rattan industry, dried tobacco industry, lime industry, precious stone industry, handicraft industry, etc.|
Negative Investment List of Foreign Direct Investment
|Business Sector||Business Field|
|Forestry||Catching endangered and protected fish as listed in the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES)|
|Marine affairs and fisheries||Taking valuable remains from shipwreck, endangering coral lives|
|Industry||Going through mercury process to make chloral alkali, industrial chemical industry, wine industry, malt beverages industry, etc.|
|Transportation||Organization and operation of terminal passenger, weigh station, air navigation service, etc.|
|Education and culture||Museums, historical remains|
|Tourism and creative economy||Gambling facility|
The business sectors listed in the Indonesia negative investment list are prohibited to be conducted by foreign investors due to the hazardous nature or a threat to the national security and heritage. For more detailed information on the openness to and restriction on foreign direct investment in Indonesia, you may refer to the Presidential Regulation of The Republic of Indonesia Number 44 Year 2016.
Indonesia FDI by Sector
Based on the division, Indonesia FDI by sector is divided into three major sectors, namely the primary, secondary, and tertiary sector. Through the investment, Indonesia has generated more than US $32.24 billion in 2017. The number is excluded from revenue generated by FDI in banking, and oil and gas sector.
For investors who are planning to trust their capital, below is the list of Indonesia FDI by sector and the total project of the second quarter of 2017.
|Business Sector||Investment Value|
|Food crops and plantation||US $401.9 million|
|Livestock||US $68.4 million|
|Forestry||US $22.1 million|
|Fishery||US $3.6 million|
|Mining||US $1.06 billion|
|Business Sector||Investment Value|
|Food||US $705.3 million|
|Textile||US $76.1 million|
|Leather goods and footwear||US $40.5 million|
|Wood||US $100.6 million|
|Paper and printing||US $283.9 million|
|Chemical and pharmaceutical||US $798.9 million|
|Rubber and plastic||US $137.3 million|
|Non-metallic mineral||US $62.7 million|
|Metal, machinery, and electronic||US $1.13 billion|
|Medical and optical instrument, watches and clock||US $1.7 million|
|Motor vehicle and other transportation equipment||US $483.0 million|
|Other||US $54.4 million|
|Business Sector||Investment Value|
|Electricity, gas, and water supply||US $989.6 million|
|Construction||US $74.9 million|
|Trade and repair||US $437.1 million|
|Hotel and restaurant||US $301.5 million|
|Transportation, storage, and communication||US $236.4 million|
|Real estate, industrial estate, and business activities||US $393.7 million|
|Other||US $493.7 million|
For the first quarter of 2018, foreign direct investment in Indonesia remains strong and shows significant improvement. The percentage of investment realization rises up to 12.4% or equal to IDR 108.9 trillion; the number is excluding the investment in banking, as well as oil and gas sectors.
From the number of foreign direct investment, the biggest investment is coming from Singapore, which projects in Indonesia are amounted to US $2.6 billion. The number is counted from the first quarter of 2018.
The country that placed second in the amount of foreign direct investment in Indonesia is Japan, with a total investment of US $1.4 billion. The list of biggest investors in Indonesia continued by South Korea with an investment value of US $900 million, China with a total investment value of US $700 million, and Hong Kong with the total investment value of Us $500.
Among those numbers, the most favored business sector chosen by the investors is the industrial estate, real estate, and office building, amounted to US $1.88 billion worth. The FDI in Indonesia also shows a significant amount in construction, agriculture, and transportation sectors.
During the first quarter of 2018, Indonesia’s investment realization on housing, industrial estate, and office building sector is US $1.9 billion worth of investment. The number is followed by metal, machinery, and electronic industry (US $1.4 billion), electricity, gas, and water supply sector (US $900 million), mining sector (US $600 million), crops and plantation sector (US $600 million), and other industry (total investment of US $2.7 billion).
Considering the geography status, the spread of investment still shows a slight inequality. That is, Java Island receives more than IDR 111 trillion, while the other areas outside Java manage to welcome investment amounted to IDR 73.5 trillion.
Indonesia Foreign Investment Law
The government of Indonesia through BKPM has set of rules and regulations regarding the foreign direct investment. The good thing is, BKPM has taken policies to simplify the bureaucracy, allowing the investors to undergo simple application process through effective coordination between institutions. In order to set up a foreign direct investment and open a business in Indonesia, investors must refer to the negative investment list, as stated on the president regulation number 44 year 2016.
Besides the renowned regulation, Indonesia investment law also set control on right to private ownership and establishment in the country. For example, the foreign investors are allowed the equity in a state-owned enterprise by purchasing through initial public offerings. This is not considered as the negative investment list as the stock is listed publicly.
In addition, foreign investors are not eligible for land and property ownership in Indonesia. This policy is based on the Basic Agrarian Law No. 5 Yeat 1960. However, BKPM as the investment promotion agency allows one-stop shop center facility to ease the licensing and permitting process. A foreign direct investment that meets specific criteria (an investment worth of US $8 million or more) will receive special immediate licensing service. This rule also applies for a foreign company that will employ 1000 local workforce when establishing their business in Indonesia.
Another set of rule to be taken into consideration before putting your fund in the investment is that foreigners are not allowed to invest in MSMEs (micro, small, and medium enterprises). That is because the business sectors are designated to encourage and empower local people. This regulation is derived from the Indonesia Small and Medium Enterprises Law Number 20 Year 2008. Foreigners can also define the MSMEs as the business ventures with less than US $7 million of assets, or a business that employs less than 99 workers.
Indonesian Corporate Legal Services Firm for FDI
Among the most convenient methods prior to setting up a foreign direct investment in Indonesia is by consulting with the legal service firm. The firm will provide future investors with a legal guide to invest in Indonesia while ensuring a smooth process and giving advice both from business and legal perspectives.
Indonesian corporate legal service firm, as the SMART Consulting, is comprised of experienced individuals in providing foreign investors with beneficial information on every aspect of the investment. The investors will be assisted on how to establish a PMA and generate revenue based on the business sector chosen.
How can a corporate legal service firm help you?
At first, a consultation will be conducted on the initial process to get the idea of what type of business available on the list. That also includes which business that will provide the best possible revenue or what type of venture to jump in. In general, the firm will give you basic information on how to set up a PMA in Indonesia, including:
- Have minimum paid-up capital of IDR 2.5 billion
- Have minimum investment value of IDR 10 billion
- Have at least 2 shareholders
- You can decide whether the business will be fully-owned by foreigner or partially-owned
- Must obtain principle and business license
- Willing to hire employees, both foreigner and Indonesian.
Based on the requirements, foreign direct investment in Indonesia will be able to fully operate their business and generate revenue. In this sense, a corporate legal service firm can also help investors with the submission of licensing process. It can save investors both effort and time.
To help the investors, the following 7 tips for foreign investment in Indonesia will be most beneficial:
- Conduct a market research on the recipient country
- Decide the business sector that is most promising to invest
- Looking up for foreign direct investment requirements
- Set up a partnership with the local corporate legal firm
- Choose local business partnership (if necessary)
- Get all the requirements ready for submission
- Applying for a business license to BKPM
Foreign direct investment in Indonesia provides abundant opportunities both for the investors and the recipient country. By following the rules, regulation, as well as choosing the correct business sector, the investment will not only affects the foreign investor and recipient country but also improve global economic development in general.
HOW CAN SMART CONSULTING HELP YOU?
To ensure a smooth investment and business operation from the legal perspective, but also still focus on maintaining your business in Indonesia and reach your revenue target, it is advised for you to find capable and trusted lawyers or legal consultants for advice and assistance in ensuring your legal compliance with prevailing laws and regulations.
SMART Consulting is an Indonesian Corporate Legal Services firm. SMART has assisted Clients in dealing with matters related to Investment Law, such as assist Client to establish Foreign Direct Investment Company and Representative Office. We also assist Clients regarding the Compliance and Corporate Legal Services.
Contact Us Now to get your legal solution for your business goals, and still comply with the prevailing laws and regulations.