The Ministry of Investment/BKPM and the Bank of Indonesia are the two main sources of FDI data for Indonesia. BKPM records FDI figures based on issued business licences, while Bank of Indonesia records international capital flows as part of balance of payments statistics. FDI statistics from these two sources, however, differ significantly. Several reasons explain such discrepancy:
- Definition of FDI: BKPM classifies all investment realisations made into a PMA company (foreign capital investment company) as FDI, including those below 10% and joint venture with a local partner. Consequently, BKPM’s FDI figures may include some equity contributions from domestic partners and investments financed from domestic sources. This practice tends to inflate BKPM’s FDI figures. Bank of Indonesia’s FDI instead follows the standard FDI categorisation of equity investment, retained earnings and other capital flows.
- Sectoral coverage: BKPM records FDI projects based on issued business licenses. Since licences for companies in oil and gas and financial services are issued by other government bodies, these sectors are not fully covered by BPKM statistics, as well as the share of FDI in the primary and services sectors. Conversely, FDI data from Bank of Indonesia cover all sectors of the economy, although they are less granular.
- Divestment of foreign equity: Modifications of foreign share ownership of a PMA company are not recorded by BKPM’s FDI statistics.
FDI played a major role in raising employment and productivity and in generating exports in Indonesia. In addition to domestic investment, FDI could make an important contribution to a sustainable and inclusive recovery of Indonesia in the aftermath of the COVID-19 pandemic and resulting social and economic crisis. Besides providing a source for financing, FDI may bring significant advantages to the host country. It can raise productivity; support global value chain (GVC) integration; create more decent jobs; contribute to the development of human capital and the diffusion of cleaner technologies; and bring more gender-inclusive work practices. The largest share of FDI during 2010-2019 went to manufacturing, although the share is declining as services have received increasing flows. Among other constraints, foreign manufacturing firms report difficulties in finding workers with the required skills. Enhancing the attractiveness of Indonesia as a manufacturing location for foreign investors requires actions in multiple areas, including addressing inefficiencies and rigidities in the labour market, improving the quality of the education system, and liberalising services FDI. The primary sector also attracts a large share of FDI due to Indonesia’s rich endowment of natural resources. Greenfield FDI projects are prevalent in manufacturing, while M&A deals are mainly concluded in the primary and services sectors.
According to the Indonesian Investment Authority BKPM, Indonesia has attracted USD31.1 billion in foreign investment (FDI) in 2021, an increase of USD2.4 billion compared to the previous year and the highest value since the record year 2017 (USD 32.1 billion). The development is surprising as in 2021 there were severe restrictions on public life and entry of foreign business people without a temporary or permanent residence permit. The figure jumped 39.7 percent year-on-year to a fresh record high of IDR 163.2 trillion (USD 10.89 billion) in the second quarter of 2022 (excluding investment in banking and the oil and gas sectors), recording the biggest rise in the past decade, accelerating from a 31.8 percent growth in the previous period, amid efforts by the government to ease business and licensing rules as COVID-19 situations improved further, and base metals; mining, and housing, and transportation, warehouse and telecommunication were among the sectors taking beneficiaries. FDI is highly concentrated in terms of origin: the bulk of FDI in Indonesia originates in Asia, of which more than two-third comes from Singapore, China and Japan. There is evidence that some multinationals invest in Indonesia through their operations in Singapore.
Several studies suggest that Indonesia could leverage FDI to address crucial labour market challenges. The establishment of a foreign investment or the takeover of a domestic firm by a foreign investor causes changes in the local demand for labour, thereby affecting domestic employment, wages and the labour force composition (e.g the gender balance or skill intensity). Foreign firms may affect labour market outcomes directly, for instance by paying salaries to local employees, or indirectly through spillovers on domestic firms.
