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Indonesia: Attracting Foreign Investment - Coggle Diagram
Indonesia: Attracting Foreign Investment
Country background
Indonesia’s capital city
Jakarta
Population consisted of around 300 distinct native ethnicities
Speaking close to 750 different languages and dialects
The five principal islands of the Indonesian archipelago
Java
Kalimantan
Sumatra
Sulawesi
Irian Jaya
Indonesia was predominantly Muslim (86%)
Christians (11%) were the second
Closest neighbors
Malaysia
Singapore
Thailand
Papua New Guinea
the Philippines
Australia
.
Indonesia’s constitution provided for a presidential republic in which the president was the head of state
Population of 235 million on 13,000 islands
spread over an area of 3,000 x 1,250 miles
.
The People’s Consultative Assembly was the main legislative body
Contained two lower houses
The People's Representative Council
The Regional Representatives Council
.
Indonesia was divided into 33 provinces and a special capital region
Each province had its own elected parliament and a governor selected by the central government
Indonesia was an active member of
Association of Southeast Asian Nations
The organization of Southeast Asian countries
And belonged to Asia Pacific Economic Cooperation
Indonesia’s Economy in 2006
The Indonesian economy had registered an average annual GDP growth rate of about 5% since 2000. GDP per capita was at about $3,500 per capita
Indonesian Clusters
.
Tourism accounted for a significant share of employment and was especially important in some regions like Bali
Demand from tourists also benefited related clusters, such as the textiles and apparel cluster
Indonesia had traditional networks of small companies at the village level
Most of these focused on rudimentary production activities tied to natural resources and agriculture
Policies for small- and medium enterprises benefited these companies
.
The mining sector included a variety of minerals and metals
Indonesia had particularly strong positions in tin, copper, and nickel, and had also benefited from the increasing demand in Asia for coal
.
Forest products remained an important cluster
the focus had shifted to pulp and paper products
The oil and gas sector accounted for 10% of GDP and 25% of export revenues as of 2005
.
Indonesian exports were dominated by oil and gas, mining, and other natural resources
Electronics, automotive parts, textiles, footwear, and other labor were also significant
Indonesian Companies
The Indonesian private sector was characterized by a few large conglomerates and a huge number of small and micro enterprises
In the large conglomerates, governance was limited though improving
Privatization had been slow
Ownership concentration had fallen, financial reporting had become more transparent
In 2005, about 50% of the top 100 Indonesian companies were owned by a dominant single shareholder
Small and micro enterprises had traditionally been seen as needing protection from competition
Indonesia also had created a scheme that reserved specific sectors for small and micro enterprises or joint ventures involving such enterprises
Business Environment
Indonesia’s infrastructure had low investment after the Asian Financial Crisis
The electricity sector suffered from insufficient capacity and low investment
In education, Indonesia lagged behind other Asian countries
Research and development (R&D) spending was 0.05% of GDP in 2001
Indonesia’s business environment was gradually improving
Indonesia’s financial sector was limited for the size of the country
Bank credits to the private sector were about 20% of GDP, versus 80% to 120% in the other countries
Indonesian tax rates were roughly in line with other countries in the region
In the labor market, conditions had worsened in the years after the Asian Financial Crisis
Indonesia was among the most open countries in Asia in terms of formal trade rules
.
A presidential decree in 2000 had created more transparency in procurement
Despite clear evidence of irregularities, however, no remedial action had been taken.
Attracting Foreign Investment
In the 1950s, Indonesia was among the top three Asian locations for U.S. investors
After independence, the Indonesian government nationalized many foreign companies
.
In the late 1980s and early 1990s, Indonesia experienced an investment boom
Successive reforms in the 1980s had made the country more attractive to investors
During the Asian Financial Crisis, FDI inflows into Indonesia collapsed and net inflows were negative for most years until 2003
Many Dutch companies had been awarded dominant market positions by the Dutch government, and were perceived as instruments of colonial suppression and extortion
A number of Korean and Japanese companies operating in Indonesia relocated to other countries in the region
Indonesia had a history of foreign direct investment, with Dutch companies being dominant in the Indonesian economy
The experience of the shoe industry improved when the European Union imposed quotas on shoe imports from Vietnam and China, Indonesia was a natural alternative
While there was improvement in 2004 and 2005, Indonesia continued to lag behind most of its neighbors in attracting investment
The stock of foreign investment continued to be concentrated in natural- resource-based industries
Asian investors led by Singapore and China had been the leading investors after the Asian Financial Crisis
Foreign Investment Rules and Regulations
As of 2006, Indonesia provided tax concessions in the form of temporarily reduced tax rates but no tax holidays
The foreign investment law dating back to 1967 remained the legal basis for foreign investment, permitting investments except for a Negative List
Two years later, investment incentives were reintroduced more generally
BKPM was the administrative body dealing with inward foreign investment, responsible for approving investments except oil and gas
In 1994, tax incentives started to come back when the government awarded Exxon Mobil
The government announced in 2004 that the role of BKPM was to change from investment approval to investment attraction
In 1984, all tax incentives were eliminated based on advice from the Harvard Institute for International Development
Foreign investors had encountered diverging experiences in Indonesia identified as policy uncertainty, corruption, and lack of confidence in the court system as key worries
In 1970, the investment law was amended, giving preference to specific priority sectors
Investors which had made a record $5 billion acquisition in 2005, reported good experiences with Indonesian government agencies
The incentives were extended to domestic investors in 1968
law for foreign investment granted investors a tax holiday of up to five years from corporate tax and withholding tax on dividends
Other foreign companies had been dismayed by such judgments as well as provincial meddling
Indonesia had a history of fluctuating incentives for foreign investors
Batam
The 1990 Growth Triangle agreement with Singapore marked the beginning of a decade of strong growth for Batam
While Batam had been successful in investment, some analysts criticized that the limited linkages with the local economy
Batam became a bonded zone, where imports of goods and services used for export products were exempted from import duties and no sales tax was collected
In the early 2000s, foreign investors became reluctant to invest when the legal status of Batam was put into question
Foreign investors were exempt from the need to have a local partner if they produced for export markets
A new framework agreement for cooperation in the Batam region was signed
Batam had been more successful in attracting foreign investment than other parts of the country
Singapore would provide its know-how in order to attract more foreign investment to the area
Limits on the level of foreign ownership had been removed and other government permits were easy to obtain
Foreign investors could choose among a number of industrial parks offering modern real estate, housing, and physical infrastructure
New Legislation
The intention was to provide investors with streamlined investment procedures through dedicated one-stop agencies
Zones would only be created where local governments backed them and were willing to delegate decision rights to the new agencies
In late 2006, the government prepared a new program for special economic zones
A new investment law was approved in March 2007
The new law gave policy makers the discretion to offer further financial incentives to foreign investors
Trade Minister announced that the law would reduce the time to establish a new business to 30 days
The law would also simplify temporary residence permits for foreign investors and extend the length of usage rights under land titles