Successfully investing in Indonesia

Over the past twenty years, the Indonesian economy has developed dynamically, with annual growth rates of around 5 percent. It is by far the largest economy in Southeast Asia, surpassing the combined economies of Vietnam, Malaysia, and Thailand. Indonesia currently ranks 16th among the world's economies.

In early 2021, the Indonesian government introduced numerous facilitations for (foreign) investors by enacting the so-called ”Omnibus Law,” which includes significant changes in investment, tax, and labor laws. This law aims to open more than 100 business sectors to foreign direct investment and simplify administrative (approval) procedures. While the administrative procedures related to the implementation of the “Omnibus Law” have been fundamentally implemented by the authorities in Indonesia, they still require constant updates. Therefore, specific business projects often still require (intensive) dialogue with the relevant Indonesian authorities.

The economy continues to face several challenges, particularly in the form of (still) cumbersome and non-transparent bureaucracy, underdeveloped infrastructure in large parts of the country, and a significant shortage of qualified labor (especially those with solid international experience and relevant language skills).

Despite all these challenges, Indonesia stands out with its vast domestic market (as the largest economy in Southeast Asia), its young and tech-savvy population (approximately 283 million in 2024), and its wealth of natural resources.

Given the positive economic development, vast domestic market, and previous growth forecasts, Indonesia is increasingly attracting the attention of foreign investors. However, the Indonesian government's hopes of benefiting from the trend of “decoupling” and “de-risking” from the Chinese market have not yet been realized. The tasks of better integrating into regional/global supply chains and addressing infrastructure inadequacies for sustainable growth (especially outside Jakarta) remain.

From a tax perspective, Indonesian investment promotion programs are comparable to those in other Southeast Asian countries. Indonesian tax law provides tax holidays for certain “pioneer industries.” Tax incentives are available for specific companies or investments in remote regions, including the possibility of extended loss carry forwards for up to ten years. The so-called “Investment Master List” facilitates duty-free importation of machinery and raw materials. The criteria for availing the aforementioned tax benefits and incentives are similar to those offered by other Southeast Asian countries. They target investment projects in remote regions with a high proportion of local labor, the provision of technology transfer, benefits to the Indonesian economy or society, and the strengthening of Indonesia's export orientation.

Investors are actively interested in the infrastructure sector, the energy sector (with a particular focus on renewable energy), the robust automotive sector (including electric vehicles and battery manufacturing), and the tourism and hospitality sector. Additionally, the health and pharmaceutical sector is attracting attention due to the growing demand from Indonesia's middle class. Finally, domestic processing of raw materials is one of the key projects of the Indonesian government.

Despite Indonesia's positive economic development, there are still significant infrastructure deficits, particularly in power generation and transportation (roads, railways, sea, and airports). Depending on the location, this can lead to challenges, especially for the supply of production facilities. Fundamentally, Indonesia is currently inadequately integrated into global/regional supply chains.

The Indonesian legal system often appears opaque and not very clear to German entrepreneurs. However, the mentioned “Omnibus Law” facilitates access to Indonesian authorities and streamlines the framework conditions for foreign direct investments, representing an improvement over previous investment laws and regulations. For example, the necessary registration and approval procedures can now be handled digitally via the OSS portal (Online Single Submission), significantly reducing processing times. Companies can now be established in certain cases in less than a month. Although this is only average in regional comparison, it represents a significant improvement.

Restrictions on foreign investments arise in some sectors due to regulations that limit certain business areas for foreigners to protect national interests and the domestic economy. Challenges for business practices also arise from the previously applicable restrictive labor laws. It remains to be seen how the amended regulations, particularly in investment law and their implementing provisions in connection with administrative procedures, will affect practice. However, some simplification is already noticeable.

Although there is a constant influx of university graduates into the Indonesian labor market every year, the talent pool relevant to foreign investors is limited. Most university graduates have not lived or studied abroad, meaning that the level of English proficiency and international experience within this group varies greatly. Foreign investors generally have to expect to invest significant resources and time in training and developing their respective workforce.

In recent years, Indonesia has expanded its import restrictions and non-tariff trade barriers in some areas. On July 18, 2016, the initiation of negotiations for a free trade agreement between the EU and Indonesia was announced, aiming, among other things, at reducing trade barriers. In September 2022, the European Commission and Indonesia agreed to accelerate negotiations on this free trade agreement and to conclude it by mid-2024. This timeline was not met; however, the European Chamber of Commerce on-site is confident that the free trade agreement will be concluded in 2025, as the current geopolitical situation has led to a rethinking in both the European Union and Indonesia regarding the necessity of a free trade agreement.

On February 14, 2024, the Indonesian people elected the country's future president. Prabowo Subianto achieved a solid majority of 58.6 percent of the votes and took office in October 2024. President Prabowo's mandate is considered robust due to the very large coalition majority in parliament and the (implicit) support of former President Joko Widodo.

International companies believe that the change in government will not significantly alter the general (legal) environment for foreign direct investments in Indonesia. Economic growth, a better social security system, and investments in the infrastructure sector are expected to remain priorities.

Additionally, the Prabowo administration is setting its own priorities: The defense sector is receiving more attention from the new government, partly because President Prabowo Subianto was the defense minister and has a long military career. Finally, the agricultural sector is benefiting from new government initiatives to strengthen Indonesia's food security.

In my view, Indonesia will continue to experience stable and sustainable growth. The policies pursued by former President Joko Widodo and his administration are unlikely to be significantly altered by the new government under President Prabowo Subianto. This means that Indonesia will continue to open its economy to foreign direct investments, albeit at its own pace and with certain protectionist elements. The current geopolitical climate is likely to support this.

However, I do not believe that the required investment volume/minimum capitalization of (at least) 10 billion IDR (approximately 580,000 euros) will be lowered in the foreseeable future. The Indonesian government currently shows no intention of allowing small businesses access to the Indonesian market. There may be movement in the areas of “local content” as well as imports and distribution.

It remains to be seen to what extent and at what pace the current government will address certain areas that are seen as obstacles to even greater growth potential. In my opinion, workforce training should be a priority to reduce the existing shortage of skilled labor. Additionally, the existing disparities between Jakarta (Java) and other regions in terms of infrastructure quality, income equality, and opportunities for the young population need to be adequately addressed.​