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Regulatory framework for FDI: Financial Services Authority (OJK) chairman Wimboh Santoso (center) speaks at the first Next Indonesian Unicorn (NextICorn) Summit in Nusa Dua, Bali, accompanied on stage by Investment Coordinating Board (BPKM) chairman Thomas Lembong (left) and Bank Indonesia’s head of Payment Systems Policy Onny Widanarko. Wimboh spoke on the regulatory framework for foreign direct investment (FDI) in the digital economy. (JP/Zul Trio Anggono)
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ndonesia’s gross domestic product (GDP) growth has averaged 5 percent in the last few years, lower than the government target. Meanwhile, the manufacturing sector has continued to decline and our current account deficit has widened. Is there a magic bullet that can solve all three?
The drop in manufacturing growth and commodity prices resulted in slower growth. Also, foreign direct investment (FDI) declined 9 percent in 2018. Although FDI fell 19 percent globally, emerging Asian countries actually saw a rise of 5 percent, with Vietnam a clear winner.
It is useful to first take a look at how FDI can help domestic investments. We must understand that production in any country is today part of a global supply chain and we also need to recognize that now is time for Indonesia open up to gain FDI.
FDI complements domestic investments through the production chain. Foreign firms operating here need domestic suppliers, and in certain cases, they also need agents to market their products. This is on top of the demand for construction to build their factories. And of course, there is job creation.
In terms of timing, as the Chinese economy slows down, its players are seeking other countries to invest in. Foreign investors are also looking for locations outside China to open shop. This is now being pushed forward amid China’s trade war with the United States. Southeast Asia is ripe for industry relocation, both in terms of its proximity to China and its large consumer base. Indonesia could be a target destination, but only if the conditions are right.
Infrastructure is one factor. Next is making the right connection with producers in the global supply chain. But most important is a proper regulatory environment — which is exactly what Vietnam created.
Current restrictions on foreign investment in Indonesia appear in several forms. First is the negative list which forbids certain sectors for foreign investment. Second is limited foreign ownership. Third is the local inputs rule, which includes limits on foreign workers.
