Foreign direct investment in Indonesia in the established frame is named an organization of outside nation which is doing physical venture to construct a production line or branch in Indonesia. All the more particularly, foreign direct investment is a cross-fringe corporate administration component in which firms get gainful resources in different nations, or can be extended to incorporate ventures made to acquire enduring enthusiasm for firms working outside of the speculator’s economy. The FDI relationship comprises of outside holding organizations and members that together frame a global business or multinational corporations (MNC).
Indonesia has become a very attractive market for foreign investors since the independence period. A number of foreign companies, mostly large multinational companies, have invested in the Indonesian market in certain areas. These companies have contributed a lot in the development of state resources, building infrastructure, establishing manufacturing facilities for export and/or providing products and services for the domestic market. The Indonesian market is a very hot perspective for investment and there are many opportunities available to set up a company
The Indonesian government itself is interested in inviting new foreign companies and attracting more investment in the country. This policy has been adopted by the Indonesian government from the beginning and therefore has taken several steps in this regard. To encourage foreign direct investment in Indonesia, the Indonesian government introduced the Foreign Investment Act No. 1 of 1967 in 1967.
However, this law excluded oil and gas, banking, insurance and sector leasing. This law provides a number of incentives to investors such as tax exemptions and some collateral. Initially the Indonesian government adopted an open door policy but in subsequent years they have changed their strategy.
In 1970, some sectors were closed for foreign direct investment. In the coming years this policy is made tighter because of protests from the public above the presence of Japanese investors. After this restriction foreign investors are required by law to invest their capital with local partners in the form of joint ventures.
The regulations also have a purpose to speed up the process of transferring shares to Indonesian investors’ partners. However, in the final years of the oil boom and other crises forced the Indonesian government to deregulate the economy and adopt a more liberal policy to attract foreign investment in the country.
Recently, the Indonesian Investment Coordinating Board has proposed to the government to take more effective measures to encourage foreign investment in the country. Their proposal includes advice to open all sectors of business to foreign investors, except for some who are considered sensitive to state security.
The proposed bill will bring a more liberalized stance in the policies of the Indonesian government. Indonesia prohibits foreign investment in print, television and radio sector. However, foreign investors are also provided with more opportunities in the telecommunications sector, air transportation and port management, power generation, transmission and distribution, shipping, drinking water, and atomic power generation.
However, even in this sector foreign companies or investors are required to enter in cooperation with local partners. The argument provided by the government in support of this policy is that investment liberalization aimed at by the future law is intended to strengthen the competition in this country and improve the efficiency of the industrial sector of the country. This should benefit the general public in general as increased competition in this “open” sector will force the company to operate efficiently and cut prices to win market share
Types of Foreign Direct Investors in Indonesia
Foreign Direct Investment in Indonesia may be classified in any sector of the economy and may be one of the following:
- A group of related individuals;
- Combined (group) or entity;
- Public company or private company;
- Group of related companies;
- Government agencies;
- Estate (law), trust or other civic organization; or
- The combination of the types above.
Foreign Direct Investment Methods
Foreign direct investors may acquire 10% or more of the voting rights of an enterprise in an economy through any of the following methods:
- By entering a subsidiary or company
- By acquiring shares in related companies
- Through mergers or acquisitions from unrelated companies
- Participate in equity joint venture with investors or other companies
Foreign direct investment incentives can take the following forms:
- Corporate tax rate and low income tax
- Other types of tax concessions
- Tariff preferences
- Special economic zone
- Financial investment subsidy
- Soft loans or loan guarantees
- Free land or subsidized land
- Relocation of subsidies
- Job training & subsidy work
- Subsidy infrastructure
- Research & Development support
- Reductions from regulations (usually for large projects)
The most significant impacts have been found in creating nations, where yearly outside direct speculation streams have expanded from a normal of not exactly $ 10 billion in the 1970s with a yearly normal of not exactly $ 20 billion in the 1980s, detonated in the 1990s from $ 26.7 billion out of 1990 to $ 179 billion out of 1998 and $ 208 billion of every 1999 and now includes the majority of the worldwide FDI.
Driven by mergers and acquisitions and internationalization of generation in a wide range industry, FDI to created nations a year ago rose to $ 636 billion, from $ 481 billion out of 1998 (Source: UNCTAD). Supporters of foreign investment indicate that exchange of investment flows benefits both countries of origin (the country from which the investment comes from) and the host country (investment destination).
New market access is also another major reason for investing overseas. At some stage, the export of products or services reaches a critical mass of quantities and costs of production or where foreign locations begin to become more cost-effective. Every decision on investment is thus a combination of a number of key factors including: resource assessment, internal, and competition.
Foreign direct investment in Indonesia allows the company to complete several tasks, among others; avoiding foreign government pressure for local production, avoiding trade barriers, hidden and otherwise, making moves from domestic export sales locally based to national sales offices, ability to increase total production capacity and opportunities for co-production, joint ventures with local partners, joint marketing settings, permissions, etc.