Business associations and experts have welcomed the government’s announcement on the relocation of foreign-owned production facilities to Indonesia, a positive sign for the slowing economy amid the pandemic. However, they also warned that regulatory reforms would be needed to improve the country’s ease of doing business.
President Joko “Jokowi” Widodo announced on Tuesday that seven foreign companies had confirmed plans to relocate production facilities to Indonesia, mostly from China. The move, which will include South Korean industrial conglomerate LG, is estimated to bring US$850 million to the country and potential employment for 30,000 workers, according to the Investment Coordinating Board (BKPM).
Responding to Jokowi’s announcement, Indonesian Chamber of Commerce and Industry (Kadin) deputy chairwoman Shinta Kamdani said the relocation provided hope for businesses, especially amid the COVID-19 pandemic.
“This is a great development for Indonesia as we’ve been waiting for foreign investment to arrive in our country. We have to realize these [investment] commitments,” Shinta told The Jakarta Post in a phone interview on Tuesday.
The novel coronavirus, which was first detected in China, has put a strain on Indonesia’s foreign direct investment, with projects being delayed as a result of social restrictions to contain the spread of the virus.
Indonesia has booked a 9.2 percent year-on-year (yoy) decline in foreign direct investment (FDI) to Rp 98 trillion ($6.8 billion) in the first quarter of 2020.
The Indonesian Employers Association (Apindo) also welcomed the President’s announcement but warned against government complacency on the ease of doing business for companies that had already established their manufacturing facilities in the country, said chairman Hariyadi Sukamdani.
“The government shouldn’t only cater to investors invited to the country but also maintain those who are already operating [here],” he said in a separate interview on Tuesday.
Red tape and unfavorable labor laws for businesses have weighed down Indonesia’s appeal to foreign investors. The country’s ranking in the World Bank’s ease of doing business index has stagnated at 73rd position out of 190 for the past two years.
American Chamber of Commerce (AmCham) Indonesia managing director Lin Neumann told the Post that the chamber welcomed the commitment made by Alpan, a United States maker of lighting products, to move its facility to Indonesia.
However, Neumann also echoed Hariyadi’s statement, saying that structural reform was needed to boost foreign investment in the country, including the negative investment list (DNI). Currently, the DNI regulates which business sectors are open, prohibited or open with certain conditions to foreign investment.
“We still have the need for significant structural reform of things like the negative investment list and local content laws if the push for more investment is going to be sustainable long term,” Neumann said on Tuesday.
Center for Indonesian Policy Studies (CIPS) researcher Andree Surianta agreed, adding that regulatory reform was needed to ensure sustainable foreign investment.
“We believe that the main reasons for the government’s current success in inviting investors are the right timing between its effort to reform business regulations and the worsening trade war between the US and China.”
He added that the government needed to simplify its regulations, including through the omnibus bill, which is being deliberated in the House of Representatives and intends to remove a number of regulations seen as hampering investment activities.
The government must also reconsider the local content regulation for the electronics industry, as it could dissuade electronicmakers from setting up their factories in Indonesia, he said.
Adding to Andree’s statement, Perbanas Institute economist Piter Abdullah said the technical difficulties for foreign investors, such as land acquisition, also needed to be addressed.
“We’ve seen cases in which investors who had already executed their initial investment canceling their relocation plans because of land acquisition and regulatory difficulties.”
During his speech, the President also highlighted the issue of land procurement and vowed to back investors until such problems were resolved. For investors who had not yet procured land for their facilities, he offered the newly established Batang Industrial Park as a location.
“We will provide around 4,000 hectares of land here; to start, there will be 450 ha,” he said.
He also ordered the BKPM to assist the companies with permits so they would feel catered to.