Indonesia, Turning Potential into Reality

Opportunity and challenge are like two sides of a coin, they always come in tandem. Those statements depict Indonesia perfectly. From investor's perspective, Indonesia has so much potential to offer, but doing business in Indonesia is not easy. Luckily, the newly elected government is strongly committed to improve the situation.

Forty is a magic number for Indonesia. This large country represents 40 per cent of South East Asia, in terms of population, in terms of land area and in terms of GDP. With a population of 250 million and a GDP of close to one trillion US Dollar, Indonesia is the major economic player in the region. In addition, the relatively young population ensures economic vibrancy in the future. It has a huge potential both as market as well as production hub. World Bank figures show that nowadays the country is the 10th largest economy in the world, in terms of purchasing power parity.

According to a study by McKinsey, Indonesia will be the 7th largest economy by 2030 and will have 135 million consumers who will purchase globally produced goods and services. Other studies, including those by PricewaterhouseCoopers and Standard Chartered, confirm this forecast. Many investors are aware of the outlined situation and try to take advantage of it; particularly investors from Japan and South Korea stand in the forefront. For instance, Japanese car manufacturers have invested and will continue to invest a lot in Indonesia, not only to tap the huge domestic market but also to export the products to countries and regions like the Philippines, India, Pakistan, the Middle East and Africa.

This year Toyota alone will export 156,000 cars from its manufacturing facilities in Indonesia. Interestingly, the majority of the cars are already developed and designed in Indonesia by mostly Indonesian engineers. Toyota expects to further increase this high share by 30 per cent per annum over the next few years. Indonesia is also an attractive FDI destination, especially after the global economic crisis in 2008. The global crisis is a blessing in disguise for Indonesia. The economic resilience to the crisis, due to its large domestic market, has made the country more attractive.

FDI flows to Indonesia have increased consistently and reached 23 billion US Dollar in 2013 from 7 billion US Dollar in 2007. What does 23 billion US Dollar explain?
It means more than twice the size of FDI inflows to Malaysia, three times and six times the size of inward FDI to Thailand and to the Philippines respectively. The amount of FDI is expected to grow further in the near future. Our recent research, entitled “Partner in Pros - perity: The US FDI in Indonesia” which involves the 34 largest US corporations in Indonesia, shows that there is a potential for FDI of 65 billion US Dollar in the next five years from US companies alone. Certainly US investors are not alone. However, there is a precondition to materialise such potential: a friendlier and more certain investment climate.

Challenging Environment

Opportunity and challenge are like two sides of a coin. They always come together. Despite all of the above potential, doing business in Indonesia is not easy, especial-
ly for foreign companies. The recent ease of doing business index shows that Indonesia ranks 120th globally, much worse than its neighboring countries like Singapore, Malaysia and Thailand that rank 1st, 6th and 18th respectively. Our study shows that regulatory uncertainty is the largest handicap followed by a lack of infrastructure and high caliber human capital.

Indonesia is a large and diverse country with 34 provinces and 550 districts. Those sub-national governments have the autonomy to create policies, including those related to investment. The lack of centralized authority to facilitate foreign investment requires investors to deal with various sub-national governments that have diverse standards and policies. It is not only complicated, but also time-consuming. In addition to that, the government often changes policies without proper process. Involving the business community in the policy design process is rare in Indonesia.

Consequently, some regulations lack applicability and have the potential to create more uncertainty. The recent mining law that forbids mining companies to export raw mineral and requires them to build smelters in Indonesia is a clear example. If there is no adjustment, the policy could push many mining companies out of business. This law has a serious impact on the investor's confidence, especially in the mining sector. Despite the above situation, a recent survey by JBIC, a Japan-based think tank, puts Indonesia as the most attractive FDI destination for Japanese companies.

Most of the Japanese companies who participated in the survey are in the manufacturing business. In short, despite the decrease on investor's confidence in several sectors, such as oil, gas and extractive industry, Indonesia is still very attractive for investors active in the sectors of manufacturing, consumer goods and financial ser-
vices. JBIC’s findings also explain that Japan’s long history of investment and its understanding of Indonesian business culture have helped to navigate through the business climate in Indonesia.

Our study concerning policy handicaps across sectors in Indonesia also shows similar patterns. In areas of investment, in which the government has the authority to pick the winner or which feature less market competition, such as oil, gas and extractive industry, investors face more policy uncertainty; Investors in other sectors, such as consumer goods, manufacturing, technology and financial services, have very different experiences.

Promising Future

What about the bright sides? Over the last couple of years, we noticed that the government’s attitude toward FDI has shifted gradually toward the right direction. FDI was considered as a supplement in the past: it was good to have it but it was also fine not to have. Nowadays, in part due to its growing size, FDI is a game changer. It is a key determinant of GDP growth and job creation. It also plays a strategic role in enabling Indonesia to climb up the global value chain. In the past, the government tended to install second class personal to lead investment-related institutions; nowadays, they appoint the best people available.

In July 2014, Indonesia held presidential elections. It was peaceful despite the tough competition between the two candidates. More than 130 million Indonesians cast-
ed their ballots in more than 380,000 venues spread across 2,000 islands across the country. This development reflects Indonesia’s maturing democracy. In the past, political stability was one of investors’ major concerns. Nowadays they may take it out from their list of concerns. Since the political reform in 1998 the country has con-
ducted four presidential and legislative elections as well as more than one thousand sub-national elections; all of them were done peacefully.

Under the newly elected President Joko Widodo and Vice President Jusuf Kalla (Jokowi-JK), I believe, the government will be more accommodative toward FDI investors, especially to those who generate value added, encourage transfer of technology, create high quality employment and promote human capital development. I expect that investment in areas such as automotive, telecommunication, electronics, chemical, pharmaceutical, infrastructure and engineering will be on top of the priority list. Certainly, there are sectors in which German companies and investors have strength, expertise and probably interest.

I am very lucky to know Jokowi-JK in person. In my view, they are men of action; a type of leader Indonesia needs. Both are former entrepreneurs who understand how business works and have experience in dealing with the international business community. They have a clean history that will make it much easier for them to introduce policy reforms, including investment-related policies. I believe that the next five years will be an exciting time for Indonesians. We will see that under the leadership of Jokowi-JK Indonesia will be able to improve its investment climate.

Indonesia will be ready to welcome more investment turning its great potential into wonderful reality.

Wijayanto Samirin

Wijayanto Samirin is the Vice Rector of Paramadina University and is the Co-Founder & Managing Director of Paramadina Public Policy Institute.

wijayanto@paramadina.ac.id