Foreign direct investment in Indonesia is governed primarily by the Foreign
Investment Law of January 1967, as amended in August 1970, while domestic investment
is regulated by Act No. 6 of 1968, as amended by Act No. 12 of 1970.
The Foreign Investment Law stipulates that foreign companies can invest and
operate in Indonesia either independently or in joint venture with Indonesian partners and
with the approval of the Government for a maximum period of 30 years. However, since
January 1974 all foreign investment, other than investments in some specific areas totally
for export, have been undertaken through joint ventures with Indonesian partners.
THE INVESTMENT COORDINATION BOARD
The Investment Coordinating Board (BKPM) is an agency that administer the
Foreign and Domestic Acts. It is also the central point of investment authority, and has,
since the end of 1977 been a truly one-step investment agency. For all of the approvals,
licenses and permits required to establish and expand production facilities in the country
and receive fiscal facilities, grants and other incentives, the investors deal solely with
BKPM (except for forestry and mining projects). In addition, it undertakes completely
the processing of application as well.
The Board also oversees investment in oil-related industry, mining and forestry,
although it does this for these sectors only after an initial working contract of forestry
agreement has been issued by the appropriate ministers.
Besides, its main offices in Jakarta, BKPM has regional offices, each under the
direction of the provincial Governor, to coordinate local investment in their respective
area. It has also investment offices in Paris, Frankfurt, and New York.
MOTIVES AND INVESTMENT POLICIES
The main motive to invite foreign capital to Indonesia is the intention to tap the
potential of natural and human resources of the country so as to strengthen the national
economy. Through foreign investments, economic growth is closely connected with the
process of industrialization for the purposes of promoting the export of manufacture
commodities, besides fulfilling domestic market demand (import substitution). The
process of industrialization is expected to develop with the process of transfer of
technology, transfer of ownership, expansion of employment opportunities, accompanied
by the enhancement of expertise and skills.
Meanwhile policies on investment are founded on the idea that investment should
contribute to strengthening and improving the country’s industrial structure. Thus first
priority has been given to industries that produce capital goods, intermediate products
and raw materials needed to build a strong foundation for the acceleration of industrial
growth. Priority is also placed to investments based on natural as well as human
resources making those industries strong-rooted and capable of competing because of
their inherent comparative advantage. Investments in manufacturers producing goods for
export are particularly being encouraged. Additional facilities are provided to export-
oriented manufacturers, including concessionaire export credit, bonded areas, and the
development of export precession zones.
Investment affecting the regions outside Java, especially the eastern part of the
country, which may provide new centres for economic growth, and possess potentially
available natural resources related to transmigration schemes given special priority.
Investments should also contribute to the enhancement of the quality of life and
protecting of environment.
To encourage the foreign investors’ operation in the country and at the same time
to create a more favorable climate for investment, the following policies and measures
have been pursued by the Indonesian government : the “ 25 October 1986” package by
which foreign investments scheme companies on a condition that they should increase
the export of their products; the “24 December 1987” Package that enhanced foreign and
domestic investments; the “21 November 1988” Package that smoothen among other
things the way for foreign investments in joint-venture companies in the sea
transportation business; the issuance of the 1989 Investment Negative List (DNI) that
replaced the former Investment Priority List (DSP). In addition, the Government on May
28, 1990 adopted new economic reforms to improve the access of foreign investors in the
manufacturing, health and agricultural sectors, by which tariffs and non-tariff barriers
were reduced and eliminated. Further, the Indonesian Government introduced the July 6
package that among other things reduced the number of sub-sectors closed to investors to
51 from previous 60 and prevented investment in 23 fields unless businessmen fulfill
certain regulations. Later on the investment reform package called Government
Regulation No. 20/1994 - was issued by which foreign investors can now invest in nine of
the country’s strategic industries which were beforehand off-limits to them, namely
seaport; the generation, transmission and distribution of electricity for public use;
telecommunications and shipping; civil aviation; drinking water supply; railways; atomic
energy generation; and mass media. The regulation also reduces the minimum equity
holding for Indonesian partners in join-ventures from 20% to 5% and removes the
compulsory investment requirement previously imposed on foreign partner.
When Foreign Investment Law first came into force, foreign investors were only
interested in the sector of natural resources like fishery, forestry and mining. In 1967 only
two Japanese companies were licensed to operate in fishery. And in the three year period,
only 13 companies were engaged in the manufacturing industry.
Up to fiscal year 1993/94 the cumulative total of foreigh investments (new and
expansion projects) approved by the Government reached 2,864 at the value of about
US$67.8 billion. While during the period of Repelita V there were 1,522 new foreign
investment projects approved worth about US$22.5 billion, and 700 expanded foreign
investments projects with investments commitments amounting to about US$54.3
In fiscal year 1993/94 the number of new foreign investment projects approved
was 254 with investment commitments amounting to about US$5,254.6 million.
Compared to that of fiscal year 1992/93 the number of new foreign investment projects
noted an increase of 49.4%, while that of investments showed a decrease of 17.7%.
Accounting for the greater part of the total foreign investment commitments were metal
goods manufacturing industries with 64 projects worth US$966.4 million, followed by
hotel/real estate with 22 projects valued US$423.2 million and trade (excluding retailing)
with 25 projects worth US$664.7 million.
At the same fiscal year, there were 176 expanded foreign investment projects with
investment commitments amounting to US$2,780.2 million or an increase of 45.5% in
terms of project and 23.5% in terms of investment value compared to those of fiscal year
1992/3. The bigger part of the total expanded foreign investment commitments went to
paper manufacturing industry amounting to US$1,198.7 million with 7 projects, followed
by chemical manufacturing industry with 25 projects.
In the meantime, by location the Special Territory of Jakarta accounted for 37,6%
of the total new foreign investments commitments with 111 projects worth US$1,587.1
million. Trailing behind was the Province of Riau with 36 projects worth US$502.4
million or 30.3%. But in terms of expansion the Province of West Java accounted for
81.9% with 93 projects worth US$2,277.9 million, the Special Territory of Jakarta 9,1%
with 31 projects worth US$253.9 million.
By country of origin, Singapore occupied the first place in both the total projects
and the value of investment with 64 projects worth US$1,536,3 million (29.3%). England
came the second with 10 projects at a value of US$466.9 million (13.5%). In terms of
expanded foreign investment, Taiwan came first with investment commitment amounting
to US$1,186.2 million with 22 projects (42.& %), followed by Japan with investment
amounting to US$755.5 million for 53 projects (27,2%) and South Korea with US$173.1
million for 26 projects (6.2%).
The number of new domestic investments projects approved by the Government
during the period of Repelita V was 3,970 with the investment commitment amounting
to Rp 147,86 trillion.
During the 1993/94 fiscal year, the number of new domestic investments projects
was 654 with total investments commitment amounting to Rp 38,147,924 million.
Compared to that of the 1992/93 the number of investment projects and the amount of
investment commitments showed an encouraging increase of 61.1% and 128.9%
Of the total new domestic investment commitment in fiscal year 1993/94
chemical industries absorbed Rp 6,499.5 billion (17.0%) with 90 projects, and non-metal
mineral industries Rp 5,750.8 (15%) with 30 projects. In the meantime, the number of
expanded domestic investment projects approved reached 89 with investment
commitments amounting to Rp 12,338.6 billion, or an increase of 43.1 % and 51.7%
respectively compared to the previous fiscal year’s figure. The greater portions of
expanded domestic investments went to chemical industries with 43 projects at the value
of Rp 2,452.0 billion, textile industries with 63 projects at the value of Rp 2,381.1 billion
and paper industries with 14 projects at the value of Rp 2,292.4 billion. By percentage
they accounted for 19.3 %, 19.3%, and 18.6% respectively of the total investment of the
same fiscal year.
By location, Jakarta accounted for 25.5% of the total investment with 159
projects at the value of Rp 9,723.9 billion, West Java 22.6% with 196 projects worth Rp
8,629.1 billion and East Java 87 projects at the value of Rp 3,495.4 billion or 9.2%.
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