Supply Chains: Indonesia

Investment Climate

Indonesia has undergone rapid political and economic changes following the Asian financial crisis and has grown into the largest economy in Southeast Asia. The Indonesian economy is heavily reliant on commodities but has made gains in establishing domestic manufacturing centers. To further this transition, Indonesia continues to reform its inbound investment policies to make it a more attractive destination for investors. In 2021, it received US$20 billion of inbound foreign direct investment (FDI) versus US$3.9 billion five years earlier, an increase of 412 percent, and real GDP grew by 3.6 percent.

Indonesia’s growing economy and middle class have attracted foreign investment, while its relatively lower levels of human capital development as compared with other countries in Asia and comparatively high regulatory burdens on foreign firms have lessened its attractiveness for foreign investors. As Indonesia has grown wealthier, it has also increased the complexity of its trading sectors by welcoming foreign investment, upskilling its labor force, and simplifying its bureaucracy. Currently, Indonesia ranks 68 out of 146 countries in economic complexity.

Diversifying its economy beyond commodities is one reason Indonesia has prioritized attracting further foreign investment. In November 2020, President Joko Widodo officially enacted the Omnibus Law on Job Creation, which aims to boost economic competitiveness by reducing regulatory and bureaucratic barriers for investment, strengthening labor laws and lowering corporate taxes. This law seeks to make it easier to conduct business in Indonesia and provides more incentives through free-trade zones. In recent years, Indonesia’s top three foreign sources of investment have been Singapore, the Netherlands, the United States, Malaysia, and Japan.

Key Data Points

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Recent Investment/Supply Chain Policies

National

Subnational

Economy-Wide Policies

TAX INCENTIVES

National

On February 2, 2021, President Joko Widodo signed Presidential Regulation No. 10 of 2021 on Investment Business Lines (PR 10/2021), which came into effect on March 4, 2021. The regulation designates 245 industries as "priorities" and will offer incentives to foreign investors who invest more than 10 billion rupiah (US$710,000) in these industries, including tax breaks, streamlined licensing, guaranteed access to energy/materials, and others.
On February 2, 2021, President Joko Widodo issued Government Regulation 9 of 2021 (GR 9/2021) under the Omnibus Bill. According to ASEAN Briefing, to “increase investments in Indonesia’s financial markets and the real sector,” the regulation will (1) provide income tax exceptions of foreign dividends received by domestic taxpayers and (2) reduce the withholding tax (WHT) rate for bond interest paid to nonresidents from 20 percent to 10 percent.
On November 2, 2020, President Joko Widodo signed and enacted the Law of the Republic of Indonesia No. 11 of 2020 on Job Creation, also known as the Omnibus Bill, which was passed by the Indonesian House of Representatives on October 5, 2020. The law revises more than 75 current laws and requires the national government to issue 30 more regulations, including those related to tax incentives.
On November 13, 2019, the government issued Government Regulation Number 78 of 2019, which lists tax incentives available to businesses investing in certain industries, such as pharmaceutical, energy, and information technology. Incentives include tax deductions, accelerated depreciation of fixed tangible assets, and fiscal loss compensation.
On June 25, 2019, the government issued Government Regulation Number 45 of 2019, which expands the pool of taxpayers who may receive tax benefits, and loosens the criteria for receiving these benefits. For instance, corporations investing in "labor-intensive" industries and research and development can now receive significant tax breaks under GR 45/2019.

SUBSIDIES

Subnational

On August 2, 2021, Bantul Regent Abdul Halim Muslih of the Bantul Regency in the Yogyakarta Special Region, signed a Resolution on the Provision of Incentives and Easy Investment (Regional Regulation No.1, LD 2021/No.1) for immediate implementation. The resolution seeks to increase subsidies for industrial businesses and lower loan interest rates in Bantul to spur growth in its manufacturing sector and attract domestic and foreign investors to the region.

LAND REFORM

National

On November 2, 2020, President Joko Widodo signed and enacted the Omnibus Bill, which revises current laws, including those to do with land acquisition processes.

LABOR REFORM

National

On November 2, 2020, President Joko Widodo signed and enacted the Omnibus Bill, which revises current laws, including those regarding labor and immigration. More specifically, changes were made to laws related to "definite period employment, outsourcing, overtime, minimum wage, termination of employment and manpower social security."

ADMINISTRATIVE BARRIERS

National

On March 17, 2022, Deputy Minister for Investment Planning Nurul Ichwan announced a new Sustainable Investment Projects program, which includes 47 projects across Indonesia as a part of the country’s G20 presidency. The investment projects support the Sustainable Development Goals (SDGs) and aim to attract foreign investment. The projects all have preexisting feasibility studies, which reduce the time required for investors to begin developing the projects. The program covers the tourism, manufacturing, and infrastructure sectors, as well as special economic zone sectors.
On April 28, 2021, President Joko Widodo signed Presidential Regulation Number 31 of 2021 (PR 31/2021). The regulation upgrades the status of Badan Koordinasi Penanaman Modal (BKPM), the government agency in charge of implementing foreign direct investment (FDI) policies, into a full-fledged government ministry.
On April 28, 2021, the Indonesian government upgraded the bureaucratic status of the Investment Coordinating Board by incorporating it into the new Ministry of Investment/Investment Coordinating Board (BKPM). The aim is to create a government body that focuses on “enhancing the ease of doing business in the country.”
On February 15, 2021, the PT Bank Negara Indonesia (Persero) Tbk (BNI) and the Investment Coordinating Board (BKPM) signed a memorandum of understanding (MOU) on Investment Facilitation and Banking Services for Investors to more efficiently provide information, banking transactions, and services to investors. According to BKPM Chairman Bahlil Lahadalia, the office “remains committed to facilitating all businessmen, foreign or domestic, to operate businesses” in Indonesia.
On February 10, 2021, the Entrepreneurs Association (HIMPI) and the Investment Coordinating Board (BKPM) announced a partnership through a memorandum of understanding (MOU) to “improve the country’s investment climate.” The two offices will work together to facilitate “partnerships between foreign investors and small and medium-sized enterprises.”
On February 2, 2021, President Joko Widodo issued Government Regulation 29 of 2021 (GR 29/2021) under the Omnibus Bill, which eliminates the previous 67 percent cap of foreign ownership of department stores and self-service stores that are at least 400 square meters.
On February 2, 2021, President Joko Widodo issued Government Regulation 10 of 2021 (GR 10/2021) under the Omnibus Bill to replace the Presidential Decree No. 10/2010, which opens up 254 business sectors to 100 percent foreign investment, with 209 others subject to certain limitations based on the government’s positive investment list. Previous foreign ownership restrictions on sectors including transportation, energy, distribution, and construction services have also been eliminated.
On November 2, 2020, President Joko Widodo signed and enacted the Omnibus Bill, which revises current laws that allow for the simplification of licensing, environmental assessment, and Micro, Small, and Medium Enterprise (MSME) registration processes.

SPECIAL ECONOMIC ZONES

National

On February 2, 2021, President Joko Widodo issued Government Regulation 40 of 2021 (GR 40/2021), which provides tax incentives for foreign investors operating in Special Economic Zones, including the reduction of corporate income tax by 30 percent for certain business entities.
On November 2, 2020, President Joko Widodo signed and enacted the Omnibus Bill, which amends previous provisions on Special Economic Zones (SEZs) –– including Law No. 39 of 2009 on Special Economic Zones (KEK Law), Law No. 36 of 2000 on Free Trade and Port Zones, and Law No. 37 of 2000 on Sabang Free Trade and Port Zone –– to provide more legal certainty for investors, more government support to SEZs, and enhanced cooperation across different sectors and government agencies.

Information and Communication Technology

ADMINISTRATIVE BARRIERS

National

In November 2019, the Indonesian government issued Government Regulation Number 80 (GR 80/2019), which provides and clarifies legal guidelines around Indonesia's e-commerce industry.

Agriculture

ADMINISTRATIVE BARRIERS

National

On May 24, 2019, the Ministry of Agriculture issued Government Regulation Number 40 (GR 40/2019), which simplifies procedures for acquiring agricultural business licenses.

Transportation

ADMINISTRATIVE BARRIERS

National

On February 2021, the Indonesian government created Government Regulation 32/2021, an implementing regulation under the Omnibus Bill, which raises the foreign ownership maximums for the Indonesian aviation industry. Under this regulation, domestic air transport is now open to 49 percent foreign ownership, while airports and airport support services are open to 100 percent.

Medical

TAX INCENTIVES

National

On June 26, 2020, Taxation Regulation Director II Yunirwansyah announced that the Indonesian government issued Government Regulation Number 29 of 2020 on Income Tax Facilities to Address Corona Virus Disease (COVID-19) (GR-29/2020). According to the Indonesian Cabinet Secretariat, the regulation provides income tax cuts to taxpayers who produce, handle, and donate medical supplies, including surgical masks and respirators, medical disposable ventilators, and diagnostic test reagents for COVID-19.

ADMINISTRATIVE BARRIERS

National

On February 2, 2021, Indonesia’s government promulgated Government Regulation 47/2021, liberalizing foreign investor access to Indonesia’s hospital system. The regulation reduces the required number of beds privately owned foreign specialist hospitals must provide, which can be burdensome for foreign investors.

Financial Services

ADMINISTRATIVE BARRIERS

National

On January 20, 2020, the government issued Government Regulation Number 3 of 2020, which permits foreign investors to own more than 80 percent of shares in locally-listed insurance companies without a “local partner.”