The new administration must reach out and actively welcome foreign investors.

With the Joko '€œJokowi'€ Widodo administration preparing to take office in October, investors have high hopes that Indonesia'€™s uncertain attitude to foreign investment over the past few years will change for the better.

There is much to be excited about. The recent legislative and presidential elections confirmed to the world that Indonesia'€™s political system is solid and stable.

Much of the credit for that must go to the outgoing administration of President Susilo Bambang Yudhoyono, which has consistently reaffirmed through its actions over the past decade its respect and commitment to the political process, enshrined in Indonesia'€™s Constitution.

It is easy to take a country'€™s political stability for granted, but investors do not. All investors, from every country, see political stability as one of the most important predicates for future investment. The experience through this recent election means that Indonesia will continue with high marks on the investor scorecard in that area.

Foreign investors in Indonesia did not vote at the ballot box but they did vote in the markets. And they voted positively. The stock market hit record highs immediately following the election, which was a vote of confidence both for the political process and the winning ticket.  

But the market has stalled and begun to slip, and the rupiah has weakened since the election, as investors look ahead to the challenges the new administration will face, including a massive fuel subsidy, which at the current level, will gobble up nearly 20 percent of the 2015 budget, and the ballooning current-account deficit, which stood at 4.27 percent at the end of the second quarter.

With the Jokowi election already factored into the market'€™s calculus, the investment community will now be looking forward to the actions taken (or not taken) by the new administration as it steps into office in October.

What are investors looking for and what are the critical factors that will determine future investment inflows to Indonesia?

To answer this, it'€™s important to first examine the role that foreign direct investment (FDI) plays in growing Indonesia'€™s economy. Some critics question the value of FDI. They claim that FDI is not a meaningful contributor to Indonesia'€™s prosperity and that Indonesia should close its doors to foreign investment, particularly in certain sectors, to protect and grow the economy from within.

If it is the case that FDI has no net positive impact on Indonesia'€™s economy, certainly the new administration should not waste time looking for ways to attract it.

However, if FDI does have a positive impact on the economy, the new administration must reach out and actively welcome foreign investors, many of whom have felt somewhat unwelcome over the past few years.

The American Chamber of Commerce (AmCham) examined the impact of foreign investment in a study (Partners in Prosperity: US Investment in Indonesia), which we commissioned along with the US Chamber of Commerce and USAID, late last year.

Gadjah Mada University (UGM) conducted much of the economic research for the study and its research clearly showed the significant positive impact that FDI had on gross domestic product (GDP).

In the study, UGM researchers calculated that in a nine-year period (2004-2012), US firms had invested US$65 billion in Indonesia.

According to their analysis, that investment translated into an increase in national production output of $179.0 billion or about 1.8 percent of national production during the investment period, an increase of $94.1 billion in national GDP or about 2 percent of GDP over the period of investment, and 1.74 million jobs each year or about 1.7 percent of total employment.

UGM'€™s analysis was limited to US investment and only 65 companies. Had it factored in investment from other countries and more companies, the impact would have been substantially greater.   

To state it simply, foreign investment is an important contributor to Indonesia'€™s prosperity. If Indonesia'€™s GDP is to continue to grow, it must continue to attract foreign investment. FDI and GDP growth go hand-in-hand.

Looked at from the other angle, Indonesia'€™s GDP growth over the past several years has also been a significant magnet for increased foreign investment. According to UGM'€™s analysis, every year that Indonesia grows its GDP by 1 percent, future foreign investment increases by 4.7 percent, with a lag time of three years.

The analysis points out that '€œforeign investors who are about to invest in Indonesia are prudent investors who are less reactive, but more anticipative and cautious, toward the Indonesian business and investment climate. Once they see that the climate is conducive, they will start injecting their capital into the country'€.

In other words, success breeds success.  When Indonesia'€™s GDP grows, more foreign investment is attracted to Indonesia. But the reverse is also true. If Indonesia'€™s GDP declines, foreign investment is also likely to decline, which then leads to a further decline in GDP in a downward spiral.

To some extent, that spiral has already begun, if only slightly.  According to the latest World Bank estimates, Indonesia'€™s GDP will fall by a percentage point to 5.2 percent in 2014 from 6.2 percent in 2012.  

One of the biggest challenges facing the new administration is to stop this GDP decline and get it back on track quickly before a downward spiral really has a chance to take hold.

In our study, the Paramadina Public Policy Institute interviewed 65 of the world'€™s largest American multinationals investing in Indonesia, asking whether they were prepared to continue investing in Indonesia and, if so, what from their perspective were the largest stumbling blocks that could hinder their future investment.  

US companies in the survey reported they were prepared to make additional investments of  $60 billion in the next three to five years, but this investment was contingent upon an improved regulatory environment, better infrastructure (including roads, ports, airports and electricity) and a greater availability of skilled labor.  

As pointed out by the Paramadina Public Policy Institute in our report, Indonesia'€™s current regulatory environment inadvertently creates significant barriers to investment. These barriers restrict not only foreign investment but to an even greater degree, affect Indonesian businesses, particularly small and medium enterprises (SMEs).

According to the World Bank '€œEase of Doing Business Index'€, it take 10 times longer to establish a business in Indonesia than it does in Malaysia and Singapore, with roughly twice as many procedures.

As the index makes clear, Indonesia must simplify its permitting, registration and licensing procedures if it is to compete successfully for investment.

A related stumbling block to investment is the unpredictability of business regulations and bureaucratic inflexibility, which hinder the ability of companies to manage projects and enterprises effectively.

This includes not only the ability to invest, but also the ability to protect that investment through clear rules and regulations and the related rule of law in respecting contracts in any disputes that may arise.

It also extends to business decisions relating to a company'€™s ability to bring in qualified personnel to manage their projects and train local staff.

Investors clearly acknowledge the benefits of hiring local talent, given the high costs of expatriate labor, and this is evidenced by the fact that since 2007 US companies have reduced the number of expatriates employed by 75 percent.

But, at the same time, investors need to know that, if needed, they will be able to get the necessary permits to bring qualified expatriate employees to work here and train local staff.

The wholesale denial of expatriates in certain positions and in certain industries will not achieve the government'€™s goal of developing local talent to the level needed to make Indonesia more competitive in the global marketplace, and this reality is only amplified by the free movement of labor provision embodied in the ASEAN Economic Community (AEC) agreement, which will begin to take effect later in 2015.

The extractive sector has in recent years been especially hard-hit by regulatory uncertainty to the detriment of the development of the energy sector and Indonesia'€™s current and future ability to satisfy its energy needs.

Indonesia'€™s energy resources are quite literally the fuel that will drive its future economic growth, but new exploration and development projects in oil and gas have virtually come to a standstill.

This does not need to be the case. American oil and gas companies, alone, stand ready to invest tens of billions of dollars and work with Indonesian companies to bring on-stream Indonesia'€™s tremendous supply of deep water, natural gas and geothermal resources.

But the existing Oil and Gas Law undercuts investor certainty.  Add to that constantly changing regulations and related indecision, and the result is that billions of dollars of investment projects are stalled. As a result, Indonesia is now importing nearly half of its energy supply and that figure could reach 90 percent by 2030 if investments in exploration and drilling do not pick up at a rapid pace.

We note and support the goals articulated by president-elect Jokowi that envisage Indonesia developing a regulatory and fiscal system that encourages increased oil and gas production and seeks to recognize the risks in exploration activities.

A lack of solid infrastructure is another impediment to encouraging foreign investment and developing the economy. This is another area where clear and consistent laws and regulations, transparency in the bidding process to combat perceived corruption, and an expectation of a sound '€œrule of law'€ must factor in and play a critical role in developing infrastructure.

The recent changes to the negative investment list (DNI) that allowed international investors to take a larger role in infrastructure projects are a good step.

But to successfully achieve the public-private partnership goal, particularly with foreign institutional investors, there needs to be sound economic rationale and government protections available for specific projects '€” in other words projects need to be '€œbankable'€ so that investors in infrastructure can line up necessary project financing to generate a reasonable return on their investment.

The president-elect clearly recognizes the urgent need for quickly developing additional infrastructure and that is refreshing.

Improved infrastructure will also be one of the criteria that help attract more companies to move manufacturing facilities to the country. But further improving the investment regulatory and tax climate toward foreign investment in this area will also serve to make Indonesia more competitive in attracting large-scale investments in manufacturing.  

Expanding the manufacturing base in Indonesia presents great opportunities both for multi-national corporations (MNCs) as well as for Indonesia and locally owned businesses.  

For MNCs, it allows closer access to reach a substantially large market '€“ thus reducing the time and cost of product to market.

For Indonesia, it creates jobs, while also allowing the transfer of know-how to the local workforce and economy, not to mention increased tax revenues from an expanded production base.

In addition, the export of locally produced products to other markets will not only support the balance of trade, but will also see greater global recognition of  '€œMade in Indonesia'€.  

Finally, having MNC'€™s bring new (or relocated) production facilities to Indonesia also creates avenues for more Indonesian SMEs to enter the regional and global supply chain.

We recognize that the government is uniquely suited to promoting the rule of law, providing a clear regulatory pathway, developing a fiscal regime consistent with the technical and financial risks, and holding companies accountable. In addition, the government is also critical to establishing the level playing field that enables companies to compete to the benefit of consumers.

In short, government leaders are responsible for putting in place the sound and stable regulatory and tax policies that enable investment, cooperation and risk management to flourish. And only that foundation can ensure there is a sound basis for any industry to invest in the research, development and deployment of evolutionary and revolutionary technologies.

For its part, AmCham and its member companies will strive with the new administration to be an effective partner to encourage investment in Indonesia, maintain our positive role in public dialogue and remain open to freely consult with policymakers so they understand the scope and scale of the particular industry sectors we represent and the specific challenges they face.

We hope the new government will remain open to listening to AmCham, our member companies and their technical experts about how to address some of these challenges.  

As a committed stakeholder in Indonesia'€™s continued prosperity, we at AmCham pledge to continue to communicate with the public and policymakers about how we can achieve our shared aspirations.