Strategies on improving Indonesia’s foreign relations.

Foreign Direct Investment (FDI) flows into Indonesia have grown and their base has been expanding because of resilient economic growth, low government debt, and prudent fiscal management. FDI growth is mainly focusing on deregulation, law enforcement, and business certainty implemented by the Indonesian government over the last years. Moreover, Indonesia lowered the minimum equity requirement for foreign investors and abolished the approval requirement for several business transactions involving foreign investors. How does Indonesia set strategies on improving foreign relations through foreign investment?

Foreign Investment through Foreign Relations 

Indonesia is ranked 17th among the top 20 host economies due to the enabling policy of liberalization. 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. Jakarta is among the top 5 cities for investment in Indonesia with transportation, warehousing, telecommunication as the most popular sectors for investment.

According to United Nations Conference on Trade and Development (UNCTAD) latest Global Investment Trends Monitor released on 24 Janvier 2021, Global foreign direct investment (FDI) flows fell 42% worldwide and 31% in South-East Asia in 2020 compared to 2019. In this global context, Indonesia’s FDI fell 24% during the same period, remaining the second-largest recipient in the region. Almost 70% of Indonesia’s economic growth is from consumption and 30% from investment, thus foreign investment is crucial for economic recovery (Santander, 2021).

The Indonesian government was able to improve the overall atmosphere of the market in 2019 by consolidating political and economic stability and through structural reforms that have removed some investment risk. 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. Indonesian government’s current priority sectors in foreign investments are pharmacy, medicine, and medical equipment, nickel, battery vehicle, and renewable energy.

COVID-19 Impacts on Foreign Investment 

According to the Investment Coordinating Board (BKPM), the investment realization value can be measured after the release of 2020’s first-quarter investment realization value, in April. According to the Institute for Economics and Finance (INDEF), the COVID-19 impacts for investment in Indonesia will lead to a loss of up to IDR 127 trillion. The fantastic amount appears due to the primary factor in investment prospects and growth are continuously down.

The most affected industry is the tourism sector which is in the lowest condition since Indonesia and other countries began to restrict their borders from foreigners by closing international airports. This affects the declining number of tourists visiting several objects in the country. Indonesia’s Central Bureau of Statistics stated that there is a 7.62% decline in foreign tourists during January of 2020 when the COVID-19 outbreak started threatening several countries. As a result, according to Indonesia’s Minister of Labour, many hotel owners in Bali and Batam were forced to do massive layoffs.

Moreover, the International Labour Organization (ILO) predicts more than 20 million people will lose their job due to the Coronavirus outbreak. These situations bring us back to the global economic crisis in 2008-2009, in which the number of unemployed reached 22 million people.

Indonesia’s Strategy in Increasing Foreign Investment

Bahlil Lahadalia, the Head of the Indonesia Investment Coordinating Board (BKPM), stated that in reducing FDI, Indonesia only at 10% (Singapore, People’s Republic of China, Netherland). In the last 5 years, Jakarta’s FDI reached its highest in 2019. Because of the reduction of FDI, the government already prepared some plans to increase foreign relations through Indonesian investment.

Riding the Omnibus

According to Indonesian President Joko Widodo, the solution is to streamline the Indonesian investment procedures and change it to be hiring rules – while also improving fiscal incentives and restructuring Indonesia’s economic system. Also, the proposed vehicle for these changes is omnibus laws will streamline the legal structure complex for the governing economic activity. Quite 100 bills will be revised, updating the system to fulfill the wants of Indonesia’s increasingly vibrant and modern economy (Oxford Business Group, 2020).

Tax

One area that will be covered by the omnibus laws is tax reform, with corporate tax reduced from 25% to 2023. The reform agenda also includes removing a tax on dividends provided they’re reinvested in-country and a 10th value-added tax (VAT) on digital products sold by non-resident internet companies beginning from July 2020. Digital transactions were previously exempt from the VAT, which will be disadvantaged by the competitors.

There are also plans to supply legal support for an existing presidential instruction that tasks BKPM with sole responsibility for handling the Indonesia investment process while also granting the body the facility to review policies deemed unfavorable to investors. The move aims to enhance Indonesia’s position on the World Bank’s and change it from rank 73rd in 2020 to between 50th and 40th by 2021 (Oxford Business Group, 2020).

Shift to Digital

Work to synchronize reforms has already begun by conducting the investment approvals process via the single web submission (OSS) platform. Consistent with BKPM, within the 18 months to December 2019, the system had issued quite the business licenses. The OSS system allows companies to obtain a business license and operational/ commercial license and fulfill the wants later. OSS integration with other ministries’ licensing systems will help businesses identify which additional permits are required. Companies have also been relieved of obligations to narrowly define their scope of business and the Indonesia investment timelines, leaving them more flexible to adapt as they grow (Oxford Business Group, 2020).

Labour Reform

The area that is targeted for reform that has garnered the main opposition from vested interests is labor law. Regulations mandate relatively high minimum wages – which in January 2020 were increased by 8.5% – and make it change to be prohibitively expensive to terminate employment, in some cases requiring up to 32 months of backpay. These regulations are blamed for the stagnating of the Indonesian market and deterring foreign investment. However, the skills gaps are arguably and will be pressing more the issue facing Indonesia’s investment environment. But currently, the regulations prohibit or limit this gap from being addressed by other talents from overseas. 

Meanwhile, several recent reforms have opened the door to foreign universities establishing campuses in Indonesia, with Australia’s Monash University becoming the primary pledge to try to do so. As of February 2020, the university planned to open its campus by the top of the year, but it remains to be seen if this timeline will be pushed back due to the Covid-19 pandemic. When the university opens, it is expected to steer the way for more international tertiary institutions to enter the market, expanding choice and raising educational standards. Furthermore, omnibus reforms may clarify any lingering ambiguities for foreign universities, seeing opportunities in Indonesia, particularly concerning bringing in skilled faculty members from abroad (Oxford Business Group, 2020).

Indonesia Opportunities Sector 

Investing in Indonesia has many opportunities and potential. To attract an investor to invest in Indonesia, the government has to prepare some strategies. Indonesia’s government already has priority sectors for the FDI strategy to promote more. The Indonesian government’s current priority sectors in foreign investments are pharmacy, medicine, medical equipment, and mining sectors like nickel, battery vehicles, and renewable energy.

Healthcare and pharmaceuticals

Given its large market size, Indonesia’s healthcare sector is auspicious and presents a lucrative and massive opportunity for foreign investors. Also, the government’s annual spending on healthcare has skyrocketed high since implementing the universal healthcare program (BPJS) in 2014, which has grown to be the world’s largest and also covering some 200 million people. Every citizen and every expatriate are mandated to join, and corporations must register their employees to the program and also pay a percentage of the premiums.

However, the industry is very enthusiastic about importing raw materials, which prompted the government to enact reforms and permit foreign investors 100% ownership of factories that produce these essential raw materials. Additionally, there’s a replacement demand for more niche products outside of generics, especially people who treat lifestyle and chronic related diseases. As a part of the ongoing reforms within the industry, foreign investors can now have up to 67% ownership of private hospitals, which will increase to 70% if the investor is from an ASEAN country. This is often also the case for clinics, although foreign investors are limited to owning specialized clinics and not people who provide essential medical services (Asean Briefing, 2021).

Medical sector

Indonesia seeks to continuously keep on improving health sector development by improving the infrastructure’s standard so that the healthcare industry will still grow, especially with foreign Investment. Indonesia has 222 manufacturers of medical equipment, and 90% are SMEs, consistent with the Joint Health Tools and Laboratory Indonesia. To harness the Indonesian health industry’s potential, cooperation must be enhanced at the extent of state to the government to business. The Ministry of Health also invites foreign investors to enter the health sector to support the health sector’s event, especially medical equipment products (Cek Indo, 2020).

Pharmacy industry

The Indonesian pharmaceutical market growth is above other ASEAN countries. Indonesia’s pharmaceutical industry market is driven by the growing population aged 65 years and older and Social Security (Social Security System). Currently, in Indonesia, there are approximately 208 pharmaceutical companies.

Investments this year are expected to succeed in around 300 trillion. Investment opportunities within the country are still very promising. Previous data from the Pharmaceutical Association stated that national pharmaceutical industry sales could reach about USD 4.9 billion. Supported contributions, multinational companies, are expected to make up about 23-24% of the USD 4.9 billion. The Indonesian pharmaceutical industry market share is estimated at or 0.4-0.5% of the world market share, which reached USD 800 billion.

Indonesia’s potential market is 243.7 million people with per capita expenditure on health amounting to USD 108 per annum (2014 figure). Meanwhile, Indonesia imports medical equipment amounting to USD 748 million annually and has the potential to import USD 1.7 billion (Cek Indo, 2020).

Indonesia Battery Vehicle

Indonesia’s plans for creating competition for the EV battery industry have also happened because of the prospect of investment by leading foreign companies, and it has led to a rally within the share prices of the country’s nickel producers in recent months.

The economic benefits of the battery industry are estimated to bring back the country may be essential to pushing for the project. The EV battery will project acceleration team estimates, and the industry will generate USD 26 billion in value in 2030, with 23,500 people being used within the industry.

Moreover, a domestic EV battery industry would leave increased exports of finished products and a discount in imports of intermediate products, allowing a USD 9 billion improvement within its trade balance (Nikkei Asia, 2020).

Nickel Sector

The demand for EV batteries also translates to high demand for nickel, which does not appear to be letting up soon. Consistent with Deloitte’s research, EV sales reached 2 million units globally in 2018 and will get around 4 million units in 2020, expanding to 21 million by 2030. EV battery packs’ value has been falling by 20% per annum at an equivalent time, making EV a cheaper option for consumers.

CRU Mobility and Energy Futures have predicted that the EV market will need 1.3 million plenty of nickel per annum by 2030, compared with 600,000 tons in 2018. This suggests that demand for Pacific Rim’s products could quite double within the next decade.

With Indonesia holding around 25% of the world’s nickel reserves, the country — and corporations operating inside the country — lies at the nexus of those developments. Spending on new nickel processing plants within the country is predicted to succeed in USD 20 billion by 2024 because of the government’s efforts to make a world-leading EV supply chain. With an early position within the country’s nickel market, companies like Pacific Rim look to be idealized to take advantage of this (Network News Wire, 2020).

Renewable Energy Sector

Indonesia is one of the large energy consumers within the world. Now has become Asia’s most significant emitter for greenhouse gasses, given its enormous populations and vast region. Indonesia is still facing an energy crisis, particularly in a remote area and out of doors Java. 

This may be because Indonesia still relied on conventional power stations like Coal, Diesel, and Steam. Some already use water plants also but still not maximized when there are many other environment-friendly and renewable options like solar array plants and windmills, which are highly suitable considering Indonesian geography as a Tropical country and have long coastlines. Currently, there is not a single solar and windmill plant in Indonesia. Hence There’s an enormous opportunity for Investment to bring this technology to be applied by Indonesia. which can solve the Indonesian energy crisis now and within the future (Cek Indo, 2020).

Indonesia Partnership Relations

Indonesia has several partnerships to support the strategy for increasing the FDI. Including the partnership with India, Seychelles, and Hong Kong.

Indonesia-India

Mr. V. Narratanan, Counselor, the Economic & Commercial for Embassy of India in Jakarta, has stated that India experienced -4% of GDP in 2020. But, despite that fact, India is an attractive investment destination. Also, for investment, India is the second-largest PPE manufacturer in the world. Indonesia and India have similar potential, including that both economies constitute USD 3.8 trillion, ample scope for scaling up two-way investments. Estimates an outward FDI of Indonesia and India and Webinar would help enable appreciation or potential for scaling up the investment. 

However, there are several tools for promoting investment with this partnership. Introducing both potential Indonesia India infrastructure in the India Indonesia CEOs forum will be one of the strategies. The Indonesia Omnibus Law and the CII Representative Office in Jakarta will also make the partnership stronger and work. The partnership of India in Indonesia is also including the Act East Policy. However, Indonesia is the second-largest trading partner of India in ASEAN with around US 20 billion in bilateral trade, and Trade and investment are vital components for both.

Indonesia-Hong Kong

Hong Kong Trade Development Council (HKTDC) introduced its T-Box Programme. There are 10 Hong Kong Small Medium Enterprises (SMEs) participants from various businesses, ranging from environmental protection and information technology to medical healthcare. The joint program with HKTDC is one of the strategies to perpetuate efforts in raising the interests of Hong Kong business communities to trade and invest in Indonesia during the COVID-19 pandemic. 

The transportation and infrastructure, Hong Kong is well connected to several investors, especially in China and Southeast Asia makes it easy to boost connectivity amid the nation’s infrastructure push in the maritime sector. The HKTDC Integrated marketing solution focuses on product magazines, mobile applications, online marketplace, trade affairs, and healthcare investment.

Indonesia-Seychelles

Mr. Niko Barito, Seychelles Envoy for ASEAN Countries, explained that there are high opportunities with Indonesia and Seychelles’ partnership. Seychelles is located in the Indian Ocean with good connectivity from Doha, Dubai, Nairobi, Turkey, Europe. Seychelles is a popular destination for ecotourism. Many islands in Indonesia are prospective to be a tourism destination, and with the partnership with both countries, Seychelles will help Indonesia develop its tourism. 

However, besides that Seycheless will also help Indonesia on terrorism as the hub of Africa. With Indonesia extraordinary in the marine and fishery sector, Tuna is a Seychelles important sector and seeks to become the tuna processing hub. Also, despite the COVID-19, Seychelles is already open again because 63.5% of Seychelles’ people are vaccinated.

BRIGHT Indonesia as a perfect local partner

Foreign direct investment Indonesia is an investment made by a company or an individual during a business interest-based in Indonesia. In open economies, it is usually wiped out, in contrast, to tightly manage economies that deliver qualified workers and over-average opportunities for growth for investors. Overall, many sectors of investment in Indonesia had so much potential. Those sectors are set to grow in future years and have many prospects since Indonesia started increasing . To support Indonesia’s efforts to improve foreign relations is through Indonesia’s Foreign Investment. 

Foreign direct investment is usually quite an equity investment. It should also contain leadership requirements and technology provisions. Indonesia, as the country of the world’s fourth most populous with a high Internet adoption rate and also a largely untapped digital market, everything is moving fast here. One thing to notice in entering Indonesia’s Investment is crucial to have the right local partner.

BRIGHT Indonesia is a perfect partner for your company. BRIGHT Indonesia will assist you on the ground, including virtual assistant during the mission, logistic arrangement, and communication of every detail. It can make your company focus on developing partnership cooperation without thinking further about the hassle during the business trip.

BRIGHT Indonesia provides several services such as Market Insight Research, Business Partnership Engagement, and Business Registration and Establishment, Foreign Direct Investment services that can help you in expanding and developing your business, register and establish your products and company, as well as obtain the work and stay permit in Indonesia ((expatriates utilization plan (RPTKA), expatriates utilization permit (IMTA), limited stay permit (KITAS)) easier. 

BRIGHT Indonesia always strives to give excellent services designed only to fulfill your company’s needs with experiences in assisting multiple global clients in entering Indonesia and Southeast Asia Market. Having successfully collaborated with several clients, BRIGHT Indonesia has extraordinary experience with global companies. These collaborations are proof of our unrivaled service. 

For more information, email info@brightindonesia.net.

*This article is co-written with Alifia Berizky