Foreign Direct Investment (FDI) is an investment made by a foreign investor in the business of a citizen of another country. FDI is a long-term investment that is relatively stable. Not only does it help increase the country’s income, but FDI positively impacts the economy, such as expanding employment, increasing productivity, and reducing import dependency.
In this article, we will discuss the determinants of FDI in Indonesia, which includes the definition of FDI and how it differs from Foreign Investment, how FDI works in Indonesia, and some factors that influence FDI. We can provide insights that support the Indonesian government’s policy-making to increase FDI in the country by understanding the determinants of FDI and the steps. Check it out!
What is Foreign Direct Investment?
FDI is a legal entity that foreign companies and individuals can use to conduct business or invest in Indonesia for profit. The establishment of FDI in Indonesia on UU No.40/2007 on Limited Liability Companies (UUPT). In this case, the foreign company must obtain a license from the Investment Coordinating Board (BKPM), which deals with foreign finance. These are some of the prerequisites:
- Deed of establishment and approval to establish a Limited Liability Company (PT) from the Minister of Law and Human Rights of Indonesia
- Taxpayer Identification Number (NPWP)
- Certificate of Domicile
- Company Registration Certificate (TDP)
- Permanent Business License
- Temporary 1-year Business License (optional)
- Minimum Investment Amount Data
Foreign-Direct Investment in Indonesia
FDI in Indonesia is an investment made by companies or individuals based on business interests in Indonesia. In countries with open economies, FDI is usually as opposed to a restrictive economy, which provides skilled workers and above-average growth opportunities for investors. FDI is often more than just an equity investment.
In 2022, Indonesia achieved the 2nd most significant foreign investment in Southeast Asia, with the value of FDI reaching US$21.96 billion. In the third quarter of 2023, FDI into Indonesia, which excludes investments in the banking and oil and gas sectors, increased 16.2% year-on-year to a record high of 196.2 trillion IDR (12.38 billion USD). Then, for the latest results ahead of the general election in February 2024, FDI in Indonesia grew by 14.2% in Q2.
Most of the FDI results came from several countries invested in Indonesia, such as China, Singapore, and Hong Kong. Then what sectors do these countries choose? Some industries that experienced an increase include vital industries rapidly growing in Indonesia, such as the primary metal industry, pharmaceuticals and chemicals, and mining. In addition, this year, Jakarta has also targeted to attract foreign and domestic investment of Rp1,400 trillion.
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The Factors that Influence FDI
FDI is a crucial economic growth and development driver in many countries, including Indonesia. Various factors influence the flow of FDI, and understanding these factors is essential for policymakers and potential investors. Here are some of the factors that influence foreign investment:
High Wage Rate
The higher the minimum wage level in a country, the less likely investors are willing to invest their capital or funds in outsourced labor-intensive production activities or vice versa.
Low Human Resource Level
Although a country has a low minimum wage level, human resource skills can also be a factor investors consider. It is because common human resources discourage investors from investing due to the lack of guarantee that the products produced will be of high quality.
High Tax Rates
Countries with tax rates that are too high also tend to make investors think again about investing. It is because they feel that they are less able to maximize profitability and profits due to the tax rates paid that are too high.
Poor Transportation and Infrastructure
Transportation and infrastructure are two of the vital assets of a country. These foreign investors will prefer countries with good transport and infrastructure to ensure a smooth shipping process abroad and within the country.
Poor Economic Growth
Countries with poor economic growth rates are certainly less attractive to investors. Conversely, countries with positive economic prospects can attract investors to invest because of their excellent growth potential and profitability.
Unstable Political Climate
An unstable political climate will impact the uncertainty of business growth, making investors less confident and interested in investing. These investors will take a “wait and see” approach, resulting in a slow process of implementing investment plans.
Lack of Vital Commodities
Vital commodities a country owns are essential for investors to invest their capital. The need for vital commodities tends to make the country less visible to investors.
Volatile Volatility
Volatile volatility causes investors to be less interested in investing because it has the potential to reduce the costs that a multinational company has in acquiring assets.
Lack of Track Record in Certain Sectors
Foreign companies often choose sectors that are certain and have a reasonable growth rate. For specific industries that need a track record, it will usually reduce the interest of investors when investing in that field.
Limited Access to Free Trade Area
Limited access to free trade areas will certainly make investors think repeatedly about investing in certain countries.
Accelerating economic growth through Foreign Direct Investment (FDI) in Indonesia considers many crucial factors affecting foreign investment flows. From wage levels to political stability, each aspect determines investment attractiveness. With the proper strategic measures and policies, Indonesia can improve its competitiveness, attract more FDI, and open up opportunities for a more resilient economy.
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