Capital city Jakarta is increasingly becoming a key FDI hub in South-east Asia. (Photo by Adek Berry/AFP via Getty Images)

Inbound foreign direct investment (FDI) to Indonesia has grown strongly since 2004, hitting an all-time high of $23bn in 2019, according to the UN Conference on Trade and Development’s (UNCTAD’s) 2020 World Investment Report.

That figure, representing year-on-year growth of 14%, means Indonesia was the 17th most attractive destination globally for FDI in 2019 (in terms of capital expenditure), ranking just ahead of Sweden and just behind Cyprus.

A leading Asian light

Indonesia, therefore, was one of developing Asia’s top targets for FDI, after China, Hong Kong, Singapore and India – in that order – according to UNCTAD. The country, alongside Singapore and Vietnam, helped South East Asia realise record high regional FDI inflows in 2019.

In terms of sectors, Indonesian manufacturing, financial services and mining accounted for about 65% of FDI to the country last year, while companies from Japan and the Association of South East Asian Nations were the largest investors. South Korea also made some big moves in the country, with Lotte Chemical building a $4.3bn petrochemical complex and Hyundai a $1.5bn vehicle plant.

In financial activities, multinational enterprises (MNEs) from Japan and South Korea were prominent investors. Meanwhile, investment in Indonesia’s digital economy remained dynamic, highlighting the rising attractiveness of the country for e-commerce and other digital operations, according to the UNCTAD report.

In addition, many foreign MNEs participated in the country’s infrastructure and development of special economic zones through non-equity means, including as engineering, procurement and construction contractors.

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FDI into Indonesia has grown notably over the past decade. Indeed, FDI stock more than doubled between 2009 and 2019, according to UNCTAD.

Reform-led growth

This growth can largely be attributed to government reforms in terms of deregulation, law enforcement, interest rate tax cuts for exporters, energy tariff cuts for labour-intensive industries, and tax incentives for investment in special economic zones, according to Santander Trade, a leading provider of international market information.

Moreover, the country lowered the minimum equity requirement for foreign investors and removed cumbersome approval mechanisms for several business transactions involving foreign investors.

As with all parts of the world, however, Indonesia has been hit hard by Covid-19. South East Asia is experiencing a significant economic slowdown due, in large part, to major disruption of production and supply chains in many sectors.

For example, major automotive manufacturers such as Toyota temporarily suspended production in Indonesia, while Nissan shut down one of its plants in the country. Generally, factories in Indonesia, Thailand and Vietnam source between 40% and 60% of electronics parts and components from China, whose supply chains were hugely disrupted by the lockdown.

On the plus side, Indonesia’s low labour cost advantages mean foreign investment puts the country in a good position to rebound more quickly than others, as MNEs pick up operations, according to the UNCTAD report. Like Vietnam, Indonesia could also benefit from ongoing MNE decisions to diversify geographical risks and build more resilient supply chains, in light of the US-China trade war and the pandemic.