T

he Indonesian government decided last week to open up more local industries to foreign investment and permit foreign investors to accrue majority or full ownership of local businesses in a bid to attract more investment and sharpen up domestic companies with the predicted influx of competition.

These more liberal economic measures, part of the economic reform packages delivered periodically over the past six months, straddle a policy tightrope of trying to balance the interests of foreign investors and the interests of nationalistic business groups averse to the notion of foreigners taking a controlling stake in strategic industries.

This policy package will correct the negative perception that Indonesia is a protectionist nation often suffocated by excessive economic nationalist sentiment.

In a bold move, the government will allow the effective ownership of businesses by foreigners in the cold storage and rubber processing industries, in restaurants, toll road development, plantations and pharmaceuticals. Majority control by foreign investors is also permitted in film distribution networks, warehousing, construction consulting and support services for air transportation.

Judging from the sectors opened up to foreign investors, we can see several objectives of the latest reform package. One of them is to generate more jobs and inject more competition into particular industries where national companies have tended to enjoy an oligopoly, such as the film distribution industry.

Another objective is to improve the efficiency of logistics systems. This can be seen in the opening up of cold storage, warehousing and supporting services for air transportation.

Substandard logistics capabilities make Indonesia a less attractive place to do business because most investors now demand efficient supply-chain management to enable them to tap into local comparative advantages and economies of scale. The modern production system requires efficient supply-chain management to allow for lower warehousing costs, lean manufacturing and on-time delivery.

But again, a good, strong investment policy is only one of the prerequisites needed to woo investment. Investors will not change their negative sentiments toward Indonesia solely on the back of the new reform packages, as they will still make judgments about how the reforms are implemented. It is the interaction between policy and governance that investors assess before making the decision to put their capital in the country.

Put another way, foreign investors are willing to stake their capital only when the general business climate meets a minimum degree of physical, legal and institutional infrastructure that allows for a reasonable risk calculation.

Hence, the hardest part of the challenge to woo investment remains the same, namely, strengthening law enforcement to minimize government policy-related costs and risks in taxation, customs, labor, local autonomy and basic infrastructure.

In fact, the bad regulatory environment is one of the main barriers to new investment in Indonesia and is one of the main reasons why the costs of starting up a business in the country are among the highest in Asia.