Policies Towards Foreign Direct Investment
Indonesia is an attractive destination for foreign direct investment (FDI) due to its relatively young demographics, strong domestic demand, stable political situation, abundant natural resources, and well-regarded macroeconomic policy. Indonesian government officials often state that they welcome increased FDI, aiming to create jobs, spur economic growth, and court foreign investors, notably focusing on infrastructure development, export-oriented manufacturing, mining refinery industries, and green investment. The Indonesian House of Representatives ratified the Omnibus Law on Job Creation (Law No. 6/2023) in March 2023 to improve the investment climate by amending prevailing laws deemed to hamper investment. Foreign investors praised the law for streamlining business rules, but labor and environmental groups criticized it for eroding worker protections and benefits such as cuts to severance, new reduced minimum wage limits, removing mandatory paid leave benefits, and permitting increased outsourcing of workers. Business contacts have since been somewhat less enthusiastic in their praise, noting that GOI policies creating a challenging business environment include local content requirements, mandatory partnerships, technology transfer, and non-transparent decision making.
The Ministry of Investment/Investment Coordinating Board (BKPM) serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia. As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors. To conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights. Once incorporated, a PMA must fulfill business licensing requirements through the Risk-Based Online Single Submission (OSS) system. Under the OSS, businesses deemed “lower risk” face fewer administrative requirements to obtain permits and licenses.
Limits on Foreign Control and Right to Private Ownership and Establishment
As part of the implementation of the Omnibus Law on Job Creation, the Indonesian government significantly liberalized foreign investment in Indonesia, repealing the 2016 Negative List of Investment (DNI). In contrast to the previous regulation, the new investment list sets a default principle that all business sectors are open for investment unless otherwise stipulated. It details seven sectors that are closed to foreign investment, explains that public services and defense are reserved for the central government, and outlines four categories of sectors open to investment:
- Priority investment sectors qualifying for special incentives
- Sectors reserved for MSMEs and cooperatives, accessible to cooperating foreign investors
- Sectors open with conditions (e.g., foreign ownership limits and special permits)
- Sectors fully open to foreign investment
Although hundreds of sectors that were previously closed or subject to foreign ownership caps are now, in theory, 100 percent open to foreign investment, in practice, technical and sectoral regulations may stipulate different or conflicting requirements that still need to be resolved.
In total, 245 business fields listed in the new Investment Priorities List, or DPI, are eligible for fiscal and non-fiscal incentives, notably pioneer industries, export-oriented manufacturing, capital intensive industries, national infrastructure projects, digital economy, labor-intensive industries, and research and development activities. Restrictions on foreign ownership were removed in the following sectors: telecommunications and information technology (e.g., internet providers, fixed telecommunication providers, mobile network providers), construction services, oil and gas support services, electricity, distribution, plantations, and transportation. Healthcare services, including hospitals/clinics, wholesale pharmaceutical raw materials, and finished drug manufacturing are fully open for foreign investment, which was previously capped in certain percentages with complex restrictions. The regulation also reduced the number of business fields that are subject to specific requirements to only 46 sectors. Domestic sea transportation and postal services are allowed up to 49 percent of foreign ownership, while press, including magazines and newspapers, and broadcasting sectors are allowed up to 49 percent and 20 percent, respectively, but only for business expansion or capital increases. Small plantations, sectors related to cultural heritage, and low technology industries or industries with capital less than IDR10 billion (USD 700,000) are reserved for MSMEs and cooperatives. Foreign investors in partnership with MSMEs and cooperatives can invest in certain designated areas. The new investment list shortened the number of restricted sectors from 20 to 7, namely, cannabis, gambling, fishing endangered species, coral extraction, alcohol, industries using ozone-depleting materials, and chemical weapons. In addition, while education investment is still subject to the Education Law, Government Regulation No. 40/2021 permits education and health investment as business activities in special economic zones.
In 2016, BI issued Regulation No. 18/2016 to implement transaction processing. The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and funds transfer operators. The BI Regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision. BI Regulation No. 19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions. Firms wishing to continue executing domestic debit transactions are obligated to sign partnership agreements with one of Indonesia’s four NPG switching companies. In December 2020, BI issued umbrella Regulation No. 22/23/2020 on the Payment System which introduces a risk-based categorization and licensing system and will implement BI’s 2025 Payment System Blueprint. The regulation entered into force on July 1, 2021. The umbrella regulation, along with BI Regulation No. 23/06/2021 on payment system providers, allows 85 percent foreign ownership of non-bank payment services providers, although at least 51 percent of shares with voting rights must be owned by Indonesians; foreign investors may hold 49 percent of voting shares. The 20 percent foreign equity cap remains in place for payment system infrastructure operators who handle clearing and settlement services, and a grandfathering provision remains in effect for existing licensed payment companies. U.S. payment systems companies have stated that the new regulations could further limit access to Indonesia’s financial services market. Prior regulations required authorization, clearing, and settlement to be processed onshore. The regulations add initiation of a payment as an onshore processing requirement. The regulations do not specify requirements by product. While the regulations provide for offshore processing if certain requirements are met, it is subject to BI approval. The Payment System Blueprint 2025 plan required NPG services to focus on developing card-based payment service standards in stages that would be mutually agreed upon with the industry. However, in May 2023 Bank Indonesia (BI) launched physical government credit cards using NPG services and preventing U.S. payment system companies from participating in government credit card payment systems.
Financial Services Authority (OJK) Regulation No. 12/POJK.03/2021, issued in August 2021, increased the foreign equity cap for commercial banks to 99 percent, subject to OJK evaluation and approval, and foreign entities should meet requirements as follows: commit to support the development of the Indonesian economy; obtain recommendations from the supervisory authority of the country of origin; and have a rating of at least 1 level above the lowest investment rating for bank financial institutions, 2 levels above the lowest investment rating for nonbank financial institutions, and 3 levels above the lowest investment rating for legal entities that are not financial institutions. The regulation did not repeal the regulations listed in OJK regulation No. 56/2016 article 2 and article 6 paragraph 1, stating that foreign entities may own shares of a bank representing more than 40 percent of the bank’s capital, subject to the approval of the OJK. Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market. Capital investments in publicly listed companies through the stock exchange are generally not subject to the limitation of foreign ownership as stipulated in Presidential Regulation No. 10/2021, which was amended by Presidential Regulation No. 49/2021.
Government Regulation 14/2018 (Regulation 14) on foreign ownership in insurance companies set the maximum threshold for foreign equity ownership of an Indonesian insurance company to 80 percent but exempted insurance companies with existing foreign ownership levels that exceed 80 percent. Subsequently, the government issued Government Regulation 3/2020 to strengthen the grandfathering provisions of Regulation 14 by allowing foreign investors to inject capital and maintain their existing capital share, repealing the obligation under Regulation 14 for a local shareholder to make a corresponding 20 percent capital injection in the event of a capital increase. In June 2020, OJK issued Regulation 39/2020, which provides for phased elimination of domestic cession requirements to purchase reinsurance from companies domiciled in a country with whom Indonesia has a bilateral agreement. The regulation also phased out the requirement for domestic reinsurance obligations for simple and non-simple risks in 2023.
Based on Government Regulation No. 31/2022 issued in September 2022, up to 85 percent of the shares of a joint venture securities company can be owned by a foreign legal entity engaged in finance other than securities. Up to 99 percent of the shares of a joint venture securities company can be owned by a foreign legal entity engaged in securities that has obtained a license or is under the supervision of the capital market regulator in the country of origin.
Indonesia’s natural resources have attracted foreign investment, primarily from the PRC. However, many foreign firms in sectors such as mining, oil, and gas left Indonesia between 2000 to 2015 due to government policies favoring national ownership and requiring local processing of natural resources. In 2014, Indonesia banned exports of many raw minerals, increased divestment requirements for foreign mining companies and required major mining companies to renegotiate their contracts of work with the government. Indonesia banned exports of raw nickel ore in 2020 and bauxite and copper exports in 2023. However, some copper miners were granted temporary exemptions to the ban until 2024 on the condition they develop smelter facilities for eventual in-country processing. Indonesia has indicated it may expand the ban to include additional minerals.
Of note for foreign investors, in order to export mineral ores, provisions of the regulations require companies with contracts of work to convert to mining business licenses, be subject to prevailing regulations, and commit to build smelters within the next five years. The regulation also requires foreign-owned mining companies to divest 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not consider existing reserves.
In January 2020, the government banned exports of nickel ore for all mining companies, foreign and domestic, to encourage construction of domestic nickel smelters and a downstreaming industry focused on nickel products, including electric vehicle batteries. In March 2021, the Ministry of Energy and Mineral Resources issued a Ministerial Decision to allow mining business license holders who have not reached smelter development targets to continue exporting raw mineral ores under certain conditions. The 2020 Mining Law returned the authority to issue mining licenses to the central government. Local governments only retain authority to issue small scale mining permits. Mining firms, both local and foreign, report difficulty and delays in receiving permits owing to the centralized approval process. Indonesia required mining companies to renegotiate their contracts of work to include higher royalties, increased divestment to local partners, more local content, and domestic processing of mineral ore.
In December 2020, the Ministry of Energy and Mineral Resources issued Ministerial Decision No. 255.K/30/MEM/2020 which mandates coal mining companies contribute 25 percent of their production for Domestic Market Obligation (DMO) (i.e. to the domestic market) and sets the maximum price of coal for domestic power generation at USD70/ton.
Business Facilitation
In February 2021, the Indonesian government issued Government Regulation No. 5/2021, introducing a risk-based approach and streamlined business licensing process for almost all sectors. The regulation classifies business activities into categories of low-, medium-, and high-risk, which will further determine business licensing requirements for each investment. Low-risk business activities only require a business identity number (NIB) to start commercial and production activities. An NIB also serves as the import identification number, customs access identifier, halal guarantee statement (for low-risk), and environmental management and monitoring capability statement letter (for low-risk). Medium-risk sectors must obtain an NIB and a standard certification. Under the regulation, a standard certificate for medium-low risk businesses is a self-declared statement that certain business standards were fulfilled, while a standard certificate for medium-high risk businesses must be verified by the relevant government agency. High-risk sector organizations must apply for full business licenses, including an environmental impact assessment (AMDAL). A business license remains valid while the business operates in compliance with Indonesian laws and regulations. A grandfather clause applies to existing businesses that have obtained business licenses.
Guidance on the business application process through the Risk-Based Online Single Submission (OSS) can be found at https://oss.go.id/panduan. The OSS system is an online portal which allows foreign investors to apply for and track the status of licenses and other services online. Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although Presidential Regulation No. 10/2021 opened some opportunities for partnerships in farming, two- and three-wheeled vehicles, automotive spare parts, medical devices, ship repair, health laboratories, and jewelry/precious metals.
According to Presidential Instruction 7/2019, the Ministry of Investment/BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and other business licenses) that have been delegated from all relevant ministries and government institutions to foreign entities through the OSS system. BKPM has also been tasked to review policies deemed unfavorable for investors. While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, and financial sectors still require licenses from related ministries and authorities. Certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies must often seek additional approvals to establish a business. Government Regulation No. 6/2021 requires local governments to integrate their business licenses system into the Risk-Based OSS system and standardize services through a service-level agreement between the central and local governments.
Outward Investment
Indonesia’s outward investment is limited, as domestic investors tend to focus on the large domestic market. BKPM is responsible for promoting and facilitating outward investment, to include providing information about investment opportunities in other countries. BKPM also uses its investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities. The government neither restricts nor provides incentives for outward private sector investment. The Ministry of State-Owned Enterprises (BUMN) encourages Indonesian SOEs through the SOE Go Global Program to increase their investment abroad, aiming to improve Indonesia’s supply chain and establish demand for Indonesian exports in strategic markets. According to the United Nation Conference on Trade and Development (UNCTAD), Indonesia recorded USD 6.8 billion outward direct investments in 2022, increasing 79 percent from USD 3.8 billion in 2021.
