In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 investment support agreement between the United States and Indonesia by adding OPIC products such as direct loans, coinsurance and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia. OPIC has been the key USG agency encouraging American private business investment in developing countries, newly emerging democracies, and fledgling free market economies. Over its 39-year history OPIC had committed more than $2.1 billion in financing and political risk insurance to 110 projects in Indonesia. Currently, OPIC is providing more than $94 million in support to six projects in Indonesia, in the energy, manufacturing and services sectors. Investors are urged to contact OPIC directly for up-to-date information concerning availability of OPIC services in Indonesia.
Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of World Bank Group, is an investment guarantee agency help investors and lenders deal with political risks that may accompany an investment in emerging markets, by insuring eligible projects against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract.
Indonesian labor is relatively cheap by world standards, but the country’s under-funded education system and overly rigid labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and rules on expatriate workers, as significant obstacles to new investment in Indonesia. Lack of education is especially problematic among unskilled and semi-skilled workers. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of a written agreement. Local courts are likely to ignore written contracts and side with locals in labor disputes. On the other hand, some socially responsible foreign investors view Indonesia’s labor regulatory framework and respect for freedom of association and the right unionize as an advantage to investing in the country. The GOI established in January 2006 a new Labor Court as part of a broader labor dispute resolution system. Expert local human resources advice is essential for American companies doing business in Indonesia, even those only opening representative offices.
Industrial relations at the factory level have improved in recent years and frequency of strikes declined. Following the October 2005 fuel price increases, unions demanded annual minimum wage increases (regional, district, or industrial sector) as high as 50 percent, but most settled for increases closer to ten percent. Although demonstrations surrounding these negotiations were vocal, they were not perceived as a significant threat to civil order. Draft revisions to the labor law — particularly reductions in severance payments and removal of restrictions on outsourcing and contract employment — led to labor protests in 2006 that prompted the GOI to suspend efforts to amend the law, and to instead formulate regulations aimed at changing severance pay to ease the burden on employers while providing cushion to those unemployed.
Foreign-Trade Zones/Free Ports
The GOI offers incentives to foreign and domestic industrial companies that locate in any of Indonesia’s seven designated bonded zones. The largest bonded zone is on the island of Batam, located just south of Singapore. Investors in bonded zones are not required to apply for additional implementation licenses (location, construction, nuisance act permits, and land titles), and foreign companies are allowed 100 percent ownership. These companies do not pay import duty, income tax, value-added tax (VAT), and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market is “exported” to Indonesia, in which case fees are owed only on that portion.
Companies operating in bonded zones may lend machinery and equipment to subcontractors located outside of the bonded zone for a maximum two-year period. The companies have also enjoyed exemption from VAT and sales tax on luxury goods on the delivery of products to subcontractors for further processing outside of bonded zones. The Free Trade Agreement between the United States and Singapore, signed on May 6, 2003, allows special tax treatment for certain Singaporean exports made with components sourced in Indonesia.
Foreign Direct Investment Statistics
Please note that BPKM data does not include investments in the following sectors: oil and gas, finance, banking, non-bank finance, insurance, and leasing. Also, BKPM ceased releasing investment data in 2008.
Economic Freedom Index: According to the Heritage Foundation’s Economic Freedom Index, Indonesia’s economic freedom score is 56, making its economy the 116th freest in the 2011 Index. Its score is 0.5 point better than last year and is improved in half of the measured economic freedoms. Indonesia is ranked 22nd out of 41 countries in the Asia–Pacific region, and its overall score is below the world average.
Transparency International: The 2010 Transparency International’s Corruption Perception Index (CPI) shows that nearly three quarters of the 178 countries in the index score below five, on a scale from 10 (very clean) to 0 (highly corrupt). These results indicate a serious corruption problem. The CPI ranks countries according to perception of corruption in the public sector. It is an aggregate indicator that combines different sources of information about corruption, making it possible it possible to compare countries. Indonesia’s score is 2.8 number 110 worldwide rank and number 20 for regional rank.
World Bank Doing Business: The 2011 World Bank Doing Business data indicates Indonesia’s overall “Ease of Doing Business” rank number 121 out of 183 economies, a six point shrink from rank 115 in 2010. The WB Doing Business records all procedures that are officially required for an entrepreneur to start up and formally operate and industrial or commercial business. These include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions for the company and employees with relevant authorities. The ranking on the ease of starting a business is the simple average of the percentile rankings on its component indicators.
The following are rankings by each topic and benchmark against regional and high-income economy (OECD) averages: