This first Investment Policy Review of Indonesia assesses the development of Indonesia’s investment environment on the basis of the Policy Framework for Investment. It testifies to the growing ties between the OECD and Indonesia, both through the Enhanced Engagement process with key emerging economies and as part of the strategic partnership between Southeast Asia and the OECD.

Indonesia has achieved impressive success in overcoming immense political and economic obstacles since the late 1990s. New economic laws and policies, based on an increasingly transparent and accountable political system, are bearing fruit in the form of stable growth and a renewed rise in inflows of foreign direct investment (FDI). At the same time, fixed investment, both domestic and foreign, remains inadequate to meet the country’s requirements for basic infrastructure and higher productivity.

Indonesia has successfully overcome immense political and economic obstacles since the late 1990s. New economic laws and policies, based on an increasingly transparent and accountable political system, are bearing fruit in the form of stable growth and a renewed rise in inflows of foreign direct investment. Both domestic and foreign investment are nevertheless still inadequate to meet the country’s requirements for basic infrastructure and higher productivity. This overview describes the tremendous political and institutional changes since the Asian financial crisis and suggests ways in which Indonesia’s investment performance could be improved through further reforms.

This chapter charts how much progress Indonesia has made in reforming its investment climate, encompassing the post-independence era, the New Order regime and the Reformasi period. The Asian economic crisis of 1997/98 damaged the country’s economic and political stability, causing many foreign investors to withdraw their capital, and new foreign investment was slow to come back to the country. The chapter describes the government’s policies to improve its investment climate, including the enactment of the new Investment Law of 2007, while transforming the country into a democratic and decentralised state with a more transparent governance structure. It also demonstrates how FDI flows have responded to policy changes over time and highlights contributions of foreign investment to Indonesia’s economy.

The investment climate was one of the worst casualties of the 1997-98 financial crisis. Over the past decade, the government has made considerable progress in creating a policy environment conducive to both domestic and foreign investment. This chapter describes efforts to reduce red tape, create a complete registry of land ownership, strengthen protection of intellectual property rights and improve systems to enforce contracts and settle disputes. A new Investment Law was enacted in 2007 which offers both national treatment for foreign investors and compensation based on market values in the event of expropriation. This chapter discusses the new Investment Law, as well as remaining restrictions on foreign investment contained in the Negative Investment List. The chapter is structured around the questions set out in the Policy Framework for Investment (PFI). Each section is preceded by the relevant PFI questions, which serves as general context for consideration of the main policy areas.

Indonesia has been active in promoting and facilitating investment as part of overall investment climate reforms. This chapter examines various measures adopted by the government to reduce administrative burdens on investors such as one-stop integrated services at both central and local levels. The role of an national investment promotion and administration agency, the Indonesia Investment Co-ordinating Board (BKPM), is reviewed in the context of streamlining administration in a decentralised system. Investment incentives provided by the government are also explained, including a recently approved special economic zone scheme. The chapter is structured around the questions set out in the Policy Framework for Investment (PFI). Each section is preceded by the relevant PFI questions, which serves as general context for consideration of the main policy areas.

Indonesia’s regulatory framework for competition has strengthened since the enactment of the first Competition Law of 1999 and the establishment of the Commission for the Supervision of Business Competition (KPPU) in 2000. The government has also implemented sectoral reforms to promote competition and productivity growth in sectors dominated by state-owned enterprises. This chapter examines the performance of KPPU in implementing the Competition Law over a decade and points out remaining challenges. The chapter is structured around the questions set out in the Policy Framework for Investment (PFI). Each section is preceded by the relevant PFI questions, which serves as general context for consideration of the main policy areas.

Indonesia once outperformed many of its peers in infrastructure provision but, since the 1997-98 crisis, has lagged behind much of the region in terms of both public and private investment in infrastructure. The government has been forthright in acknowledging weaknesses in infrastructure and has taken major steps to increase funding, improve regulatory quality and allow for greater private participation. It has set a target for universal access in the power sector by 2020 and has imposed universal service obligations in other sectors, notably telecommunications. State monopolies have been eliminated in telecommunications over the past decade and currently also in the operations of major ports. Increased private participation is possible in toll roads, railroads and power generation. Where SOEs still operate, efforts are under way to ensure that they operate on commercial principles, under an independent regulatory authority. This chapter reviews these efforts to create an institutional environment suitable for private participation in infrastructure. The chapter is structured around the questions set out in the Policy Framework for Investment (PFI). Each section is preceded by the relevant PFI questions, which serves as general context for consideration of the main policy areas.

Weakness of the financial sector was one of the principal causes of the depth and duration of the crisis in Indonesia in the late 1990s. The chapter describes measures taken by the government to strengthen the banking sector and develop the domestic capital and bond markets. FDI policies in the financial sector are also reviewed. Through restructuring and regulatory improvements, the banking system has improved its health and performance, as evidenced by its ability to withstand the recent global financial crisis. The chapter is structured around the questions set out in the Policy Framework for Investment (PFI). Each section is preceded by the relevant PFI questions, which serves as general context for consideration of the main policy areas.

The fall of the Suharto regime has generally improved conditions affecting the quality of governance in the country, promoting freedom of media and civil society activities. At the same time, a democratic and decentralised system might have caused corruption to spread into lower government levels and political parties. This chapter describes the measures taken by the government since anti-corruption was made a top priority by President Yudhoyono. The chapter also provides an overview of Indonesia’s regulatory reform framework. The chapter is structured around the questions set out in the Policy Framework for Investment (PFI). Each section is preceded by the relevant PFI questions, which serves as general context for consideration of the main policy areas.

This chapter examines other policy areas shaping Indonesia’s investment climate, including trade and tax policies, corporate governance, and policies for promoting responsible business conduct. The chapter is structured around the questions set out in the Policy Framework for Investment (PFI). Each section is preceded by the relevant PFI questions, which serves as general context for consideration of the main policy areas.