Successfully investing in Indonesia

published on May 16, 2018

 

How do you assess the current economic situation in Indonesia?

The Indonesian economy has developed dynamically in the last 10 years, achieving growth rates of approx. 6 per cent. Nevertheless, the country is still struggling with some problems, especially cumbersome and non-transparent bureaucracy, underdeveloped infrastructure in large parts of the country and a serious shortage of a skilled workforce in some sectors of industry.

 

How would you describe the investment climate in Indonesia? Which sectors offer the largest potential?

In light of this positive economic development, Indonesia is increasingly becoming a focus of attention for foreign investors. The country rich in natural resources has a large domestic market and growing technological needs. Major target sectors for medium-sized foreign direct investments in Indonesia include – in addition to infrastructure – especially mechanical engineering, metal and electrical industries.

 

What challenges do German companies face during their business ventures into Indonesia?

Indonesia faces massive deficits in the area of infrastructure, especially in electricity generation and transport (roads, railways, seaports and airports). Depending on the specific location, this can pose challenges especially to production facilities. In addition, the Indonesian legal system often appears non-transparent and somewhat obscure to German entrepreneurs since it is influenced by various legislations. Restrictions on foreign investment in some sectors of industry were imposed by the so-called “negative list”, which limits foreign investment in certain business sectors in order to protect the national interest and the domestic economy.

 

Despite the trend encouraging more equal treatment of foreign and domestic investment, there are still restrictions on foreign investment in some sectors of the economy, which are stipulated in the negative list – enacted at irregular intervals – in a Presidential Decree whose most recent version entered into force on 18 May 2016. The new Negative List has facilitated market access in further business sectors and in some cases – like in a number of production sectors or industry-related services – foreigners may now hold up to 100 per cent of shares. However, many projects still require establishing joint ventures with the participation of an Indonesian entity.

 

Furthermore, business sectors not mentioned in the Negative List may be restricted by way of special acts or regulations. Many foreign investors also complain about lengthy administrative procedures for obtaining licences required for a newly founded company to start operations. 

 

In recent years, Indonesia has extended the scope of its import barriers and non-tariff barriers to trade in some areas. The opening of negotiations over a Free Trade Agreement between the EU and Indonesia, which, among others, aims to reduce trade barriers, was announced on 18 July 2016. The fourth round of negotiations as part of the “Comprehensive Economic Partnership Agreement” (CEPA) was held in Surakarta (Central Java) in February 2018.

 

“One vision, one identity”: To what extent have the requirements of the ASEAN Economic Community (AEC) been implemented in Indonesia?

Indonesia continues to work towards opening its market to an increasing number of business sectors to approach the objectives of the “Asean Economic Community” (AEC) Blueprint 2025. It should be noted that – despite the planned development of the AEC into a single market – Indonesia protects various business sectors from foreign competition. This has an impact on numerous aspects of trade in goods and services as well as on the movement of capital and persons with other ASEAN countries. In this respect, it remains to be seen to what extent the government will follow the adopted path towards liberalisation or will be influenced by protectionist views; Indonesia's 2019 presidential election is likely to affect this development.

 

In your opinion, how will Indonesia develop?

During the first presidential term of the President Joko Widodo, who was elected in 2014, Indonesia appeared to be relatively stable, both in democratic and economic terms, and developed into an attractive investment location. There are indications that this stability will be maintained and the economic framework conditions will be liberalised in the medium term. Nevertheless, also protectionist aspects are discernible in the President's policy due to the pressure within the party: For example, the local production of industrial products should be boosted, which is coupled with import and distribution restrictions being still in place. In this regard, the new Negative List has only partially facilitated foreign investment. It is also likely that the 2019 election campaign will be accompanied by similar nationalist and protectionist corollaries as in 2014, which could impede investment in the short term at the least. This development should be carefully considered when planning the possible market entry.

 Contact

Tomy Harsono

Partner

+62 21 5056 0405
+62 21 5056 0412

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Markus Schlüter

Associate Partner

+49 221 9499 093 42
+49 221 9499 099 00

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