The U.S. Department of State’s Investment Climate Statements provide information on the business climates of more than 170 economies and are prepared by economic officers stationed in embassies and posts around the world. They analyze a variety of economies that are or could be markets for U.S. businesses.
Topics include Openness to Investment, Legal and Regulatory systems, Dispute Resolution, Intellectual Property Rights, Transparency, Performance Requirements, State-Owned Enterprises, Responsible Business Conduct, and Corruption.
These statements highlight persistent barriers to further U.S. investment. Addressing these barriers would expand high-quality, private sector-led investment in infrastructure, further women’s economic empowerment, and facilitate a healthy business environment for the digital economy.
Executive Summary
Indonesia’s 276 million population, USD 1 trillion economy, growing middle class, abundant natural resources, and stable economy are attractive features to U.S. investors; however, investing in Indonesia remains challenging according to business contacts. President Joko (or “President Jokowi”) Widodo, now in his second five-year term, has prioritized pandemic recovery, infrastructure investment, and human capital development. The government’s marquee reform effort — the 2020 Omnibus Law on Job Creation (Omnibus Law) — was ratified in March 2023. When fully implemented, the Omnibus Law is touted to improve competitiveness by lowering corporate taxes, reforming labor laws, and reducing bureaucratic and regulatory barriers. The United States does not have a bilateral investment treaty (BIT) with Indonesia.
In February 2021, Indonesia replaced its 2016 Negative Investment List, liberalizing nearly all sectors to foreign investment, except for seven “strategic” sectors reserved for central government oversight. In 2021, the government established the Risk-Based Online Single Submission System (OSS), to streamline the business license and import permit process. Indonesia established a sovereign wealth fund (Indonesian Investment Authority, i.e., INA) in 2021 that has a goal of attracting foreign investment for government infrastructure projects in sectors such as transportation, oil and gas, health, tourism, and digital technologies, with a large nexus to the Ministry of State-Owned Enterprises (BUMN).
Foreign investors find that restrictive regulations, legal and regulatory uncertainty, economic nationalism, trade protectionism, and vested interests complicate the investment climate. Foreign businesses may be expected to partner with Indonesian companies and to manufacture or purchase goods and services locally. Labor unions have protested new labor policies under the Omnibus Law that they note have weakened labor rights. Labor unions report that restrictions imposed on the authority of the Indonesian Corruption Eradication Commission (KPK) led to a significant decline in investigations and prosecutions in lieu of education and prevention. Investors cite corruption as an obstacle to pursuing opportunities in Indonesia.
Some U.S. investors describe the investment climate as much improved over the past decade, but point out that, other barriers remain, including bureaucratic inefficiency, delays in land acquisition and the tendering process for infrastructure projects, weak enforcement of contracts, and delays in receiving refunds for advance corporate tax overpayments. Investors worry that new regulations are sometimes imprecise and lack stakeholder consultation. Companies report that the energy and mining sectors still face investment barriers, and all sectors lack adequate IP protection and enforcement, and restrictions on cross border data flows remain.
Nonetheless, Indonesia continues to attract significant foreign investment and foreign business chambers report an optimistic view of expanding economic. Singapore, the United States, Japan, the Netherlands, and China (PRC, HK) were among the top foreign investment sources in 2022. Private consumption drives the Indonesian economy that is the largest in ASEAN, making it a promising destination for a wide range of companies, from consumer products and financial services to digital start-ups and e-commerce. Indonesia has ambitious plans to expand access to renewable energy, build mining and mineral downstream industries (focused on electric vehicles and related components), improve agriculture production, and enhance infrastructure, including building roads, ports, railways, and airports, as well as telecommunications and broadband networks. Indonesia continues to attract American digital technology companies, financial technology start-ups, franchises, health services producers and consumer product manufacturers.
The Indonesian Government implemented new taxes and pricing regulations over the past few years to curb carbon emissions and manage emissions from the forest and land use sector. In 2022, the Indonesian Just Energy Transition Partnership (JETP) pledged to support an ambitious and just power sector transition in Indonesia, consistent with international global warming targets.
Russia’s invasion of Ukraine has caused supply disruptions, including increases in global energy and food prices. Indonesia is affected through an increase in prices of traded goods. The government of Indonesia increased the price of subsidized fuel in September 2022, which caused increases in transportation and food prices and triggered a surge in the inflation rate to 5.95 percent in September. In response, Bank Indonesia (BI) increased their policy rate to 5.75 percent to contain inflation expectations. BI believes that the 5.75 percent rate is adequate to ensure core inflation remains within the range of 2-4 percent in the first half of 2023, and that consumer price index (CPI) inflation returns to the target corridor of 2-4 percent in the second half of 2023.
To access the ICS on Indonesia, please visit the link to the U.S. Department of State’s Investment Climate Statement website.