Indonesia's new law removes redtapes for foreign investors

Yusin Hu, DIGITIMES, Taipei 0

With abundant natural resources and young labor, Indonesia attracts - and needs - more foreign investment. The three largest foreign investors in Indonesia are Singapore, China (including Hong Kong), and Japan.

Data provided by Indonesia's Ministry of Investment (BKPM) showed that in the first three quarters of 2021, Singapore accounted for 32% of the total foreign investment, Hong Kong 13.8%, China 10%, and Japan 7.7%.

According to PwC's 25th Annual Global CEO Survey on Asia Pacific, corporate executives see Indonesia as one of the crucial industrial hubs in the region. With its stable political scene, international manufacturers favor Indonesia as they expand to multiple countries to diversify geopolitical risks.

Around the end of 2020, Indonesia's president Joko Widodo officially enacted the Omnibus Law designed to create more job opportunities by opening up to foreign investors.

PwC Taiwan Southeast Asia and India Service Partner Tsai Yi-tai told DIGITIMES that the law reduces a lot of bureaucratic barriers formerly set for foreign investors. Under the Omnibus Law, the procedures to get licensing and to start a business are much more simplified and accelerated. Before 2016, about 350 business sectors were greatly limited by the old laws to obtain foreign ownership, but by 2021 the number has decreased to 46. Moreover, for low-risk businesses, in particular, the BKPM has adopted an online submission system to expedite the process of licensing.

Since Widodo took office in 2014, Indonesia has gradually opened up to encourage foreign investment, particularly in the low-risk industries. According to the BKPM, low-risks industries are defined by the level of risks involving the business activity, including labor-intensive, large manufacturing such as textile, shoe-making, and tire-manufacturing. Yet high-risk industries including high-risk drugs, casino, liquor business, and national defense still strictly prohibits foreign investment or requires careful review by the BKPM.

The law was seen as a gesture of welcome to foreign investors, but protestors feared that it would give employers a free pass in treating workers unfairly. The backlash from domestic workers mainly results from changes in temporary employment and severance pay. After the workers took the case to the supreme court last year, the parliament was ordered to make amendments within two years.

Pioneer industries targeted by foreign investors

The Omnibus Law significantly reduces investment barriers for foreign investors in particular sectors known as the pioneer industries. The pioneer industries include automobile, electric vehicle (EV) batteries, mineral processing, infrastructures, and others, according to the Indonesian Economic and Trade Office (IETO) in Taipei.

In recent years, nickel supply has been shifting from the stainless steel sector to the auto sector due to the rise of EV and the growing demand for lithium-ion battery packs. Indonesia's metal reserves have made it a vital supplier in the EV supply chain, following an export ban in 2014 on exporting unprocessed ores in attempt to promote domestic mineral processing.

Both South Korea-based Li-battery supplier LGES and Taiwan-based Foxconn, a veteran supplier in the IT sector, have announced their collaborations to start production of batteries and EVs in Indonesia. German-based Volkswagen has also disclosed it is setting up two joint ventures in Indonesia to supply EV battery materials, according to Reuters.

Foreign investors also play an important role in constructing infrastructures in Indonesia, including highways, railways, airports, some industrial facilities, and the subway system in Jakarta. Indonesia is currently building a new capital city in East Kalimantan (also known as Borneo Island). Construction of the planned new capital Nusantara heavily relies on foreign investment from the Middle East and China.

Although foreign businesses are not entitled to ownership of land and are required to renew land licenses, they have the rights of the buildings. Tsai noted that the procedures are simplified and straightforward to perform.