INVESTMENT

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.

FOREIGN INVESTMENT

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 billion.

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%).

DOMESTIC INVESTMENT

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% respectively.

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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