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Indonesia eyes foreign investment in start-ups
Investment may be below Rp 10 billion for tech start-ups in economic zones
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he government has unveiled a draft presidential regulation, derived from the recently passed Job Creation Law, that offers leeway for foreign investment in tech-based start-ups in special economic zones (SEZs).
The draft, which is available on the official website of the jobs law, stipulates that foreign investment in start-ups located in an SEZ will be exempted from the minimum requirement of more than Rp 10 billion (US$710,111) applied to other types of foreign investment. This is expected to strengthen the tech start-up ecosystem, the article reads.
The regulation will further ease the process for start-ups to hire foreign workers without being required to have a government-approved plan to use foreign employees, which is included in an article of the jobs law.
In doing so, the government seeks to promote investment in education, financial technology (fintech), software development, research and innovation start-ups, according to Yuliot, the deputy for investment climate development at the Investment Coordinating Board (BKPM).
“This will affect investors’ appetite and thus give a boost to SEZs,” Yuliot told The Jakarta Post in a phone interview on Thursday, adding that foreign start-ups thus could also invest in Indonesia.
“In many countries, they offer something special in such zones. This is what we want to apply to our SEZs.”
President Joko "Jokowi" Widodo has made repeated comments that he wants technology to play a central role in his government.
Through the jobs law his administration is seeking to attract more investment by overhauling more than 79 prevailing laws to improve Indonesia's ease of doing business rating.
In the January–September, 2020, period, the foreign direct investment (FDI) realization was down by 5.1 percent year-on-year (yoy) to Rp 301.7 trillion. The realization accounted for 86.7 percent of last year’s target.
Fifty-two start-ups raised $1.9 billion as of September 2020, according to data from the Indonesian Venture Capital and Start-up Association (Amvesindo). The association estimates the figure reached $2.5 billion by the end of 2020, lower by around 13.7 percent than the capital raised by 113 start-ups in 2019 at a total of $2.9 billion.
Aside from relaxing the investment requirements, the jobs law offers an exemption from value-added tax and luxury goods tax for goods coming to an SEZ from a customs area, free trade zone or bonded zone, as well as for intangible goods and services.
“If we do not offer incentives in an SEZ for activities that can add value to the economy, it will end up relatively empty, with no significant activities coming in,” said Yuliot.
Earlier in January, East Java Governor Khofifah Indar Parawansa also stated that she envisioned the Singhasari SEZ in Malang, East Java, which is currently being built by the private sector, to become like Silicon Valley, in the United States, in the future.
The coronavirus outbreak has also helped many homegrown start-ups as customers turn to digital services to meet their daily needs amid movement restrictions implemented by the government.
Consequently, Indonesia’s gross merchandise value (GMV) from the digital economy is projected to grow by 11 percent yoy this year to $44 billion, according to the e-Conomy SEA 2020 report by Google, Singapore state investor Temasek Holdings and Bain & Co.
Amvesindo welcomed the draft government regulation, saying it could help develop a special zone where start-ups, venture capital companies and the government gather, said Jefri Sirait, the chairman.
The regulation is expected to benefit start-ups in their early stages, since it is aimed at investments of less than Rp 10 billion, said Jefri. Most Indonesian start-ups had deals in this stage for the past five years.
“But this is a draft,” Jefri told the Post in a phone interview. “We are also inviting dialogue. In this context, we hope the favorable conditions that we build for the Indonesian start-up ecosystem can help economic recovery through technological innovation.”
Indonesia’s economy is still reeling from the pandemic-induced downturn, which led the country to enter its first recession in two decades last year as gross domestic product (GDP) shrank by 3.49 percent yoy in the third quarter in 2020.
With the growth of start-ups during the pandemic, Jefri is expecting to see further growth in health technology, education technology, fintech, transportation and software development start-ups.
“So, with Indonesian start-ups still having a lot of room for improvement, I hope they can scale up,” said Jefri.
However, the relaxation of investment requirements for start-ups in SEZs was not the right fit to help boost the start-up ecosystem because it was different from the manufacturing sector, said Bhima Yudhistira, an economist at the Institute for Development of Economics and Finance (Indef).
"It does not need to be one zone, except for start-ups producing goods," Bhima told the Post in a phone interview on Tuesday. As most start-ups offer services, the draft regulation is less effective in promoting investment in start-ups, he added.
Bhima also said the plan to relax the use of foreign workers was also misplaced because most start-ups already employed workers from abroad remotely. Moreover, the relaxation might lead to foreign workers getting jobs at the expense of local digital talent.
