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REV: NOVEMBER 19, 2008
MICHAEL E. PORTER
CHRISTIAN KETELS
Indonesia: Attracting Foreign Investment
“I have realized that nothing will happen in trade unless investment flows into the country. Investment is
the key element in driving trade,”1 Dr. Mari E Pangestu, Indonesian Minister of Trade, 2005.
After years of political turmoil and disappointing economic growth, the Indonesian government
under President Dr. Susilo Bambang Yudhoyono was determined to make 2006 the beginning of a
new chapter in the country’s economic development. In the three decades prior to 1996, Indonesia
had achieved an average 7% annual GDP growth rate, while the population was growing at an
average of close to 3% per year. Since the Asian financial crisis in 1997–1998, Indonesian growth rates
had been significantly lower and it was not until 2005 that prosperity regained pre-crisis levels.
Indonesia’s leaders recognized that foreign direct investment was vital to restoring growth. While
there had been waves of foreign investment in the past, Indonesia’s stock and flow of foreign direct
investment (FDI) was low compared to its peers, especially other Asian countries. The net flow of
foreign investment had been negative since the mid-1990s. The President had declared that Indonesia
was open for business but winning back foreign investors was proving to be a challenge.
Country Background
With a population of 235 million on 13,000 islands (about 6,000 of which were inhabited) spread
over an area of 3,000 x 1,250 miles, the Republic of Indonesia was the world’s fourth most populous
nation and its largest archipelago. Located north and south of the equator, the country was bounded
by the Indian Ocean to the south and west, the Pacific Ocean to the east, and the South China Sea to
the north (Exhibit 1). Indonesia’s closest neighbors were Malaysia, Singapore, Thailand, Papua New
Guinea, the Philippines, and Australia. The five principal islands of the Indonesian archipelago were
Sumatra; Java; Kalimantan (72% of which was part of Indonesia and known as Borneo); Sulawesi,
formerly called Celebes; and Irian Jaya (West Irian) in the western portion of New Guinea.
Indonesia's capital city, Jakarta, was located on the island of Java.2 About 40% of the population lived
in urban areas, a number that had increased significantly over the last two decades. Levels of
prosperity and population density were highly uneven across the different parts of Indonesia, with
the three islands of Java, Bali, and Madura accounting for 61% of the population on 7% of the
country’s surface area.
________________________________________________________________________________________________________________
Professor Michael E. Porter and Principal Associate Christian Ketels prepared this case with the assistance of David Lane, Senior Researcher in
the HBS Global Research Group. This case was developed from published sources. HBS cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
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Indonesia’s population consisted of around 300 distinct native ethnicities speaking close to 750
different languages and dialects. Some, like the people of the Aceh province on the northern tip of
Sumatra, had a strong regional identity. In 1999, 45% of the population was Javanese, 14%
Sundanese, 7.5% Madurese, 7.5% coastal Malays, and 26% other.3 Another important group was the
ethnic-Chinese, descendents of immigrants from China and other parts of South East Asia. Indonesia
was predominantly Muslim (86%) and the country was by far the most populous Muslim country in
the world. Christians (11%) were the second largest group based on religion.
Indonesia was rich in natural resources and had a climate conducive to many forms of agriculture.
The country’s large forests had been used for logging, and there were numerous mining activities to
exploit deposits of coal, tin, bauxite, copper, nickel, and other minerals. Indonesia also had a
significant oil and gas sector, and was one of the leading suppliers of natural rubber.
Indonesia’s constitution, originally drawn up in 1945 but amended since 1999, provided for a
presidential republic in which the president was the head of state, commander-in-chief of the armed
forces, and leader of the executive branch of government. The president and the vice-president were
directly elected for five years with a limit of two consecutive terms. The president selected a council
of ministers to head the different government agencies. Three coordinating ministers for economics,
social issues, and security each oversaw the work of several individual ministries.
The People's Consultative Assembly (MPR) was the main legislative body. The MPR contained
two lower houses: the People's Representative Council (DPR) with 550 members, and the Regional
Representatives Council (DPD) with 168 members. The DPR, with members elected for five-year
terms on a proportional representation basis from party lists, was the main legislative chamber. The
DPD had representatives from the country’s thirty-three provinces and its role was restricted to
legislation on regional issues.
Indonesia was divided into 33 provinces and a special capital region. Each province had its own
elected parliament and a governor selected by the central government based on parliamentary
recommendation. Below the provinces, government functions were organized in sub-regions and
villages. Most civil disputes appeared first before a State Court, from which appeals could be heard
before the High Court. The Supreme Court heard final appeals or conducted a case review if there
was new evidence. Indonesia also had special judicial branches such as a Commercial Court, a State
Administrative Court, a Constitutional Court, and a Religious Court.
Indonesia was an active member in Association of Southeast Asian Nations (ASEAN), the
organization of South East Asian countries, and belonged to Asia Pacific Economic Cooperation
(APEC), which covered the entire Pacific area. Relations with Australia, the other large nation in the
wider region, had sometimes been tense but were improving.4
Indonesia's Economic History
Present-day Indonesia was a collection of regions with long histories as highly developed Hindu
and Buddhist civilizations. Around 1350, the Hindu leader Gajah Mada was the first to rule over
large parts of modern day Indonesia in a period that was referred to as a "Golden Age." From the late
twelfth century, Arab traders started to establish settlements, first in Aceh and then along the main
trade routes through the archipelago. Over time, Islam became the dominant faith in the country.
European traders started to appear in the early sixteenth century, attracted by island spices like
cloves and nutmeg. Dutch traders gained a dominant position, creating the Dutch East India
Company in 1602. In 1798, the Dutch East Indies became an official Dutch colony and companies
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developed dominant positions in Indonesia, especially in the export of natural resources and the
import of manufactured goods from industrialized countries. Sugar, coffee, and spices were the main
export goods.5 In the early twentieth century, petroleum, rubber, copra, palm oil, and fibers joined
the list of leading exports. The experience during the Dutch colonial period had left a legacy of
distrust toward private businesses and foreign capital.6
During World War II, colonial rule came to an end as Japanese troops overran the Dutch East
Indies in 1942. During the war, Sukarno, the popular leader of the Indonesian Nationalist Party,
cooperated with the occupying Japanese with the intention of strengthening the independence
movement. Two days after the Japanese surrender to Allied forces in 1945, Sukarno unilaterally
declared independence and became the country’s first president. Over the next four years, a bitter
armed conflict was fought as the Netherlands tried to win back its colony. In the face of international
pressure, the Netherlands finally recognized Indonesian independence in 1949.
The early years of independence: 1949 to 1965
The provisional constitution of August 17, 1950, provided for a unitary republic.7 Sukarno was
elected president by parliament, but no term of office was stipulated by the constitution. In practice,
President Sukarno played a dominant role with few checks and balances. His popularity led to
powers beyond those prescribed by the constitution.
Sukarno aimed to reduce the dominance of Dutch companies that controlled up to 25% of
Indonesian GDP, and, to a lesser extent, the companies owned by ethnic Chinese. The FinancialEconomic Agreement (Finec) between Indonesia and the Netherlands provided guarantees for the
ownership rights of the Dutch companies, but allowed nationalization under specific conditions. In
1951, the Indonesian government invoked these rules and took ownership of Java Bank, which
became the Central Bank of Indonesia. Subsequently, other companies, including utilities and
railways, were nationalized. The Indonesian government nationalized all remaining Dutch
enterprises in early 1959.
The government pursued policies to support indigenous businesses. In April 1950, the Benteng
(Fortress) regulation gave indigenous businesses priority for import licenses. Success was limited, as
the program mainly created a class of Indonesians that collected profits while the actual businesses
were run by ethnic Chinese. The government then attempted to reduce the number of so-called Ali
(Indonesian)-baba (Chinese) companies through more stringent controls. In the late 1950s, the
government decreed that ownership of rice mills and rural trading businesses had to be transferred to
indigenous Indonesians. These efforts did not succeed because of insufficient numbers of indigenous
entrepreneurs.
In 1955, Sukarno won Indonesia’s first general elections, although there was a surprisingly strong
showing by the Indonesian Communist Party (PKI), which gained 16% of the vote. In 1957, Sukarno
adopted a more authoritarian policy of "Guided Democracy." Sukarno suspended parliament in 1960
and began to rule by decree. He constituted a Provisional People's Congress which was to meet at
least once every five years to oversee policy and elect the president. In 1963, the Congress elected
Sukarno president for life.
During this period, Sukarno introduced ‘Indonesian-style socialism’ in a “Guided Economy.”
State-owned companies and trading houses were created which received preferential financing and
monopoly rights for the import of essential commodities.8 Private companies, especially those owned
by ethnic Chinese, were excluded from the most lucrative businesses. State-owned industries were
set up in fertilizers, cement, paper, chemicals, spinning, and shipbuilding, using foreign loans. The
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law governing foreign investment was repealed in 1958, leading to deteriorating conditions for
foreign investors. Sukarno’s policies let to massive budget deficits and soaring inflation, which
exceeded 600% annually. The economy stagnated and was close to collapse by the mid-1960s amid
social disorder.
In 1960, Indonesia was among the poorest countries in the world.9 Most of the population lived in
rural regions and agriculture accounted for more than 50% of GDP (Exhibit 2). The country had
become, in the words of one observer, a basket case.10
The Suharto regime: 1965 to 1997
As public support for the government eroded, the military under General Suharto took power,
claiming the need to avert a leftist take-over as the Cold War spread to Asia. About 750,000 alleged
members of the PKI were killed as the army consolidated its power.
In February 1968, Suharto replaced 123 members of the People's Consultative Assembly (Majelis
Permusyawaratan Rakyat or MPR). Following his appointment for a five-year term as president in
June, Suharto formed a new cabinet with himself as prime minister and defense minister.
Suharto relied on the military to maintain security and political stability.11 There was strong
central control, with a weak judiciary and a legislature with little power. The civil service dominated
by technocrats vigorously pursued economic modernization. Power effectively rested with the civil
service association Golkar, a group that included all civil servants and served as Suharto’s base of
power. In July 1971, the first general elections since 1955 were held for portions of two reconstituted
national bodies, a 460-seat house of representatives (Dewan Perwakilan Rakyat or DPR), and a 920seat MPR. In March 1973, the MPR elected President Suharto to a second five-year term; he was
reelected to a third term in 1978, a fourth in 1983, a fifth in 1988, a sixth in 1993, and a seventh in 1998.
Inheriting a bankrupt economy, Suharto’s top priority was a quick recovery. He moved to regain
macroeconomic stability and managed to control inflation. Conditions imposed by the International
Monetary Fund (IMF) and the World Bank played a role in setting macroeconomic policies. An
influential group of economic advisors from the University of Indonesia, called the Berkeley Mafia,12
all recent graduates from Berkeley, also exercised an influential voice in favor of stable
macroeconomic policies.13
The Foreign Investment Law of 1967 and the Domestic Investment Law of 1968 reopened the door
to investment, making it easier to secure government approvals. The Inter-Governmental Group on
Indonesia (IGGI), an international group of countries and international financial institutions lending
to Indonesia, was established in 1967 by the Netherlands to coordinate multilateral aid to the country.
The government also started to rehabilitate the dilapidated physical infrastructure and began
investing in rural development. Initially, the Suharto government removed many of the barriers that
had inhibited private enterprise, curtailing the activities of the state-owned companies and limiting
preferential credits and import concessions.
However, the oil booms of the 1970s led to a gradual reorientation of economic policy14 towards
an ambitious state-led industrialization program of establishing large-scale, capital-intensive
industries. These efforts gained a ‘high-tech’ bent when Dr. B.J. Habibie, a German-trained engineer
that had been technical director at a major German aerospace company, was appointed Minister of
State for Research and Technology. He initiated ventures in aircraft assembly, ship building, and
eight other industries which he considered of ‘strategic importance’ and which were nurtured behind
significant trade barriers.15 A group of large domestic business groups emerged under the patronage
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of senior government and military officials that operated in sectors such as textiles, electronics,
transport equipment, and pharmaceuticals.
The government used some of its oil revenues to invest in health, education, infrastructure, and
rural development. In the two decades after 1975, infant mortality fell by half and universal primary
education was achieved. Problems remained, however, in access to basic health, sanitation, and
education facilities, especially for women.
In 1973, the government launched a small enterprises development program (KIK/KMKP) to
provide subsidized loans to small and micro enterprises.16 The program’s default rate rose
throughout the 1980s, driven by corruption, poor training and operational practices, and inadequate
default penalties. In 1990, the program was terminated and a new program (KUK) was launched that
required all banks to allocate at least 20% of their loan portfolio to small enterprises. Banks, especially
the private ones, were reluctant and found ways around the regulation. Programs like the Small
Industries Development Program (BIPIK), launched in 1980, provided technical assistance to small
companies, but were rated poorly in terms of results.
After riots erupted in 1974 protesting an ‘over-presence’ of foreign investment, especially
Japanese companies that had increased their presence in areas such as electronics assembly, the
government required foreign investors to take minority stakes in joint ventures with Indonesian
partners. State banks were limited to lending to domestic companies. As in the 1950s, the main effect
of these regulations was to create a class of indigenous (pribumi) Indonesians that fulfilled the
domesticity requirement while operational control remained with foreign companies or ethnic
Chinese.
The second oil shock in 1978 with its rising oil prices further accelerated the introduction of local
preference regulations. Restrictions on foreign investors were expanded and affirmative action for
pribumis was increased, with specific industries and government procurement contracts under a
certain threshold reserved for indigenously-owned companies. By 1980, some 70% of total capital
investment was made by state-owned enterprises and the public sector. A devaluation of the rupiah
that year was intended to make it easier for Indonesian companies to export.
As the oil price tumbled in 1982, the government was forced to abandon its aggressive
industrialization strategy. It acted quickly to reestablish macroeconomic stability, curtail spending
and adopt market-based policy measures to restructure the economy. Deregulation of the banking
sector in 1983 and 1988 increased competition and improved access to capital. In 1985, the operations
of the hitherto corrupt and inefficient customs service were contracted out to a Swiss company.17
Economic growth was restored and the share of oil and gas exports to total exports declined from
over 70% in 1983 to 40% in 1988. Imports grew strongly, however, and external debt rose to $57
billion; the debt service ratio (debt repayments relative to export revenues) reached 40% by 1989.
The focus of economic policy shifted from import-substitution to export-promotion. In 1986, the
government introduced different programs, including a ‘duty exemption and drawback scheme’, a
bonded factory program, and export processing zones, that enabled exporting companies to import
supplies at market prices without tariffs.18 Exports were dominated by foreign-owned companies,
while the large Indonesian business groups remained largely domestic. Korean and Taiwanese
companies became significant investors in Indonesia during this period, concentrated in laborintensive industries.
There were successive rounds of trade reform in the late 1980s, and restrictions for both foreign
and domestic investment were gradually relaxed between 1986 and 1994, especially for export-
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oriented investments19 In 1989, the Singaporean Deputy Prime Minister, Goh Chok Tong, launched
the idea of a growth triangle between Singapore and neighboring regions of Malaysia and Indonesia.
The Indonesian island of Batam, located 21 kilometers south of Singapore, started attracting laborintensive activities from Singapore.
In the early 1990s, the government pressured large business groups to assist small companies with
management, technology, and access to finance. State-owned enterprises were required to set aside
5% of their profits to help small companies upgrade. Follow-up studies on these policies found little
sustained benefits for the companies involved.
Throughout the first half of the 1990s, Indonesian growth was strong.20 Agriculture dropped from
51% of GDP in the 1960s to 17% in 1997 while the share of industry rose from 28% to 42%.21 Indonesia
made it into the World Bank’s list of ‘high-performing Asian economies,’ alongside Japan, Malaysia,
Thailand, Singapore, Taiwan, and South Korea. Exports contributed to growth, although several
observers noted that exports were concentrated in a few industries in which Indonesia competed
mainly on low wage costs.
Indonesia’s foreign policy became more assertive. When the Dutch head of the IGGI, the group of
sovereign lenders to Indonesia, criticized the killing of demonstrators in East Timor by the
Indonesian military, Indonesia stopped cooperation with this group and terminated all Dutch
government and NGO aid projects in the country. The IGGI was soon after revived without Dutch
participation. The incidence was widely seen by the World Bank and others as a sign that openly
criticizing Indonesian’s internal policies was problematic.22
Poverty rates continued to fall, from 40% of the population in the mid-1970s to 11% by 1996.23
Despite this progress, a large proportion of the population continued to live on incomes just above
the poverty line, and inequalities between regions and ethnic groups persisted. The proportion of the
population living on less than $1 a day ranged from 3.4% in Jakarta to 41.8% in Papua (Irian Jaya).24
In 1995, Indonesia became a member of the World Trade Organization (WTO) and made a
commitment to reduce all tariffs to 40% or less within the next decade. The commitment would not
apply to industries on an exclusion list, which included portions of the automotive and steel industry.
It also had limited effect on import licenses that often were much more restrictive and marred by
corruption. In 1992, Indonesia had initiated with its ASEAN members the ASEAN Free Trade Area, a
program for phased regional tariff reductions through the year 2008, later moved forward to 2003.25
Countries kept higher tariffs for some sensitive industries, but in most industries, tariff rates came
down significantly over the next several years. A number of trade reforms were also implemented
during the mid-1990s.
While there was a general trend towards liberalization, some economists complained that
progress was slow and not comprehensive enough. There was also concern about exemptions that
created advantageous market positions for companies related to Suharto’s family and his associates.
Suharto’s second son, for example, was awarded the sole right to purchase the products of citrus
farmers in West Kalimantan. Cars produced in a national car project under the leadership of
Suharto’s youngest son were exempted from the 35% luxury tax. State banks accounted for 40% of all
assets in 1997 and had a high share of problem loans. Private banks were under the control of a small
number of family-owned conglomerates and aggressively extended loans to related companies, many
of which did not meet prudent lending standards.
Indonesia registered the highest concentration of corporate ownership in the region in the 1990s,
with 10 families controlling more than half of the corporate sector. The Suharto family alone
accounted for 17% of market capitalization, owning 417 companies.26 The military also controlled a
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significant group of companies, especially in more rural regions, which were an important source of
financing for military units and senior officers.
During the Suharto era, the World Bank’s total lending to Indonesia had been $25 billion and
World Bank staff viewed the country’s progress from 50% to 300% of India’s GDP per capita over the
last three decades as a success story. The World Bank had avoided criticizing the corruption around
Suharto too openly, but James Wolfensohn, president of the World Bank, visited Indonesia in 1996
and made a point of visiting with non-governmental organizations (NGOs) that were corruption
critics.27 Yet the World Bank approved loans that same year that stabilized the state-owned banking
system weakened by loans given to politically well-connected but financially questionable projects.
The Asian Crisis: 1997-98
In July 1997, the Asian Financial Crisis began in Thailand, as the Central Bank of Thailand was
forced by market pressures to float the Thai currency. Many countries in the region had experienced
rapid growth and huge inflows of foreign capital in recent years, but by 1997, investors had become
concerned about the ability of Asian countries and companies to service their foreign debt. Currency
traders started to bet on devaluation.
The Indonesian rupiah had been trading under a managed float, but the trading band was
widened from 8% to 12% and the rupiah came under severe speculative attack. On August 14 , 1997,
a free-floating exchange rate regime was adopted. The rupiah and Jakarta Stock Exchange touched
historic lows in September. Moody's downgraded Indonesia's long-term debt to junk bond status.
Real GDP contracted by more than 13%, more than in any other Asian country.
As inflation reached 70%,28 steep hikes in food prices led to riots throughout the country and more
than 500 people died in Jakarta alone. By January 1998, the Rupiah was in free fall, reaching rupiah
17,700 per $1, a devaluation of 700% in just six months.
On November 5, 1997, the IMF approved a $10 billion Stand-By-Arrangement, but the crisis
intensified when companies became technically insolvent as the value of their $-dominated
obligations exceeded their assets. The Jakarta Initiative Task Force (JITF) was established to mediate
between Indonesian companies and foreign creditors, but progress was slow. With a large number of
nonperforming loans, the Indonesia Bank Restructuring Agency (IBRA) was created to take over
failing banks. Their rescue proved to be the most costly consequence of the crisis for the government.
Capital flight worsened when investors feared that Indonesia would curtail capital mobility, a step
taken by neighboring Malaysia. The failure of the government to close down some insolvent banks
close to Suharto, a key condition of the IMF, further eroded the market confidence.
1998 – 2004: ‘Reformasi’
In May 1998, Suharto was forced to step down as the inability of his government to deal with the
crisis had severally eroded his support among Indonesians. Golkar, the organization of civil servants
that had been the pillar of Suharto’s regime, remained an important political force and there was only
limited prosecution of those connected to the former regime. The period after Suharto’s fall became
known as ‘Reformasi,’ the Indonesian word for reformation
Suharto was succeeded by his vice-president, B. J. Habibie.29 Habibie sought to reduce the role of
the military in Indonesian politics and promised major political and economic reforms. He
introduced legislation to hold Indonesia’s first democratic elections in 34 years, which took place on
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June 7, 1999. The secular-nationalist Indonesian Democratic Party-Struggle (PDI-P) led by Megawati
Soekarnoputri, Sukarno’s daughter, gained the highest number of votes but no overall majority.
The IMF approved substantial credit in exchange for strong commitments by the Indonesian
government for structural reforms.30 With its long history of close collaboration with the Suharto
regime, the World Bank “was seen by many as part of the problem rather than the solution”31 and
trust in the Bank was low. Grass-roots World Bank programs that by-passed central government, like
the community-driven Kecamatan Development Program, were given priority. These programs gave
local communities a choice in setting their own infrastructure spending priorities and imposed new
standards of openness and governance.32
By mid-1999, macroeconomic stability improved, with the rupiah appreciating to 7,000 per US-$
from its low of 12,000 in mid-1998. Inflation dropped into single digits and interest rates fell. Large
Indonesian business groups worked to reduce heavy debt burdens, and restructured through
divestments and increasing focus.33 Traditionally well-connected with the Suharto regime, the
business groups were also seeking to build contacts with the new government.
Among the first economic policies introduced by the Habibie government was a new Competition
Law in 1999. A commercial court and a bankruptcy court were created to strengthen the position of
creditors. The government announced a privatization program, but there were no sales of stateowned enterprises in 1999 and 2000 and a minority stake in PT Telecom was sold in 2001.
In 1999, the government amended the corruption law to stiffen penalties and establish an
independent Anti-Corruption Commission (ACC).34 Pending the enabling legislation, a decree
established an ad hoc task force within the attorney general’s office. The task force experienced
serious difficulties in becoming operational and was declared unconstitutional after losing a case
against three Supreme Court justices. By late 2002, the Anti-Corruption Commission legislation was
finally approved and the first commissioner was appointed in December 2003. A special anticorruption court was established in 2004.
Habibie identified the decentralization of public decision making as a key priority.35 Law 22 on
Regional Autonomy, and Law 25 on Fiscal Balance between the Center and the Regions (districts and
municipalities), were passed in 1999. Eleven policy areas (health, education and culture, agriculture,
communications, industry and trade, capital investment, environment, land cooperatives, manpower
affairs, management of natural resources, and urban development) were designated for
decentralization to the regional and local levels beginning on January 1, 2001. One-third of all
government spending was decentralized.36 The central government was given 30 days to review
whether regional regulations were in conflict with national ones; after this period, they became law.
In October 2004, the parliament clarified the responsibilities of the different levels of government and
limited the scope for additional taxes to be imposed at the local level.
The stabilization of the economy came too late to save Habibie, who had run into increasing
political difficulties.37 He was forced to resign in October 1999 by the People's Consultative Assembly
(MPR). Abdurrahman Wahid, a well-respected Muslim cleric, was chosen as president. Megawati
Soekarnoputri became his vice-president. The Wahid administration proved no more effective in
implementing economic and political reforms against powerful interest groups. While unions had
held little, if any, independent power during the Suharto regime, they became significantly more
influential. In 2000, the parliament approved the Trade Union Act, later followed in 2003 by the Basic
Manpower Act, which gave unions a significantly stronger position in labor relations.38 Concerns
about the slow pace of reforms once again undermined macroeconomic stability. The rupiah
devalued, and inflation picked up. Bank Indonesia was slow to respond, and pressure rose to rewrite
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the central bank law and remove top management. Wahid was eventually removed from office by
parliament in July 2001.
Megawati Soekarnoputri became the third president in three years of post-Suharto Indonesia,
promising to address widespread problems of corruption and poor governance. In 2001, a
constitutional amendment was passed to form an independent judicial commission, charged with
nominating justices for the Supreme Court and overseeing improvements in the judicial system. By
2003, the Supreme Court had drafted blueprints for personnel management, financial management,
and the education of judges.
In 2001, a new oil and gas law created a new regulatory agency for oil, an agency for gas, and
removed these regulatory functions from the state-owned petroleum company (Pertamina) which
became a limited liability company (LLC). Implementation of reforms, however, was slow.
Production sharing agreements with foreign investors became more attractive and offered
comparable terms to other countries in the region by 2006. The telecommunication sector was
liberalized in 2002. New entrants no longer needed to partner with one of the two incumbents,
though foreign ownership in the sector remained capped at 49%.39 A law to liberalize the electricity
sector was passed in 2002 as well.
Indonesia in Transition
The People's Consultative Assembly approved constitutional amendments in 2002 that would
take effect for the presidential elections in 2004. Seats in parliament would no longer be reserved for
the armed forces, and the assembly rejected the imposition of Shari'ah, the Islamic law for Muslims.
After 2004, a second standing body would be created as a senate—the Regional Representative
Council. Parliament would no longer elect the president who would be directly elected by the public.
President Megawati initially opposed direct elections, but later accepted them.40
In October 2002, a terrorist bomb on the island of Bali killed more than 200 people. Another attack
in August 2003 killed twelve people in the Marriott hotel in central Jakarta. In both instances, a
militant Islamic group was suspected for the attacks. Indonesia became seen as an unsafe place for
business or tourism.
In 2003, President Megawati announced in her budget speech that Indonesia was able to graduate
from IMF support. Indonesia was the last of the Asian countries to graduate, with a slower recovery
process than its neighbors. A white paper, “Economic Policy Package Pre and Post IMF,” in
September 2003 outlined over 100 specific commitments by government to maintain macroeconomic
stability, restructure the financial sector, and increase investment, exports, and employment. The plan
announced the creation of an investment and trade team to coordinate efforts on investment climate
and the Anti-Corruption Commission.
President Megawati declared 2003 to be the year of investment. A year later, however, domestic
and foreign investment rates were still low and there was little sign of improvement.41 By 2003, 83%
of investment was in construction and real estate development. The Megawati administration
implemented the tariff reductions that had been agreed to under the ASEAN Free Trade Agreement
in 1992, but repeatedly expressed concerns about the fast pace of liberalization and used emergency
exit clauses to retain protection for some sectors. A new labor law significantly raised hiring costs and
set severance pay higher than elsewhere in the region. Individual provinces set their own minimum
wage levels.42
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GDP growth increased from 0.3% in 1999 to 5% in 2004, prosperity growth turned positive
reaching 3%, unemployment fell and the poverty rate dropped from 19.1% in 2000 to 16.6% in 2004.
External public debt declined from about 103% of GDP in 1999 to 59.8% in 2004. The rupiah
recovered to about 8,500 per dollar and inflation fell, but stagnant tax collection remained a challenge
for government finances.43 By the end of 2004, there was full utilization of production capacity for the
first time since the 1997–1998 crisis.
In April 2004, the parliamentary elections resulted in Golkar becoming the largest party with 23%
of the vote. President Megawati’s PDI-P saw a drop in support and ended up as the second-largest
party.
The First Elected President
Dr. Susilo Bambang Yudhoyono, from the small secular-nationalist Democratic Party (PD), won a
61% victory over President Megawati in the final round of voting in September 2004 and became
Indonesia’s first directly-elected president.44 He announced a “100-Day Plan” of economic reforms,
including more active engagement in ASEAN and with the WTO. The plan included measures to
improve the business environment, improve labor laws, liberalize trade, tackle corruption, lower
taxation, utilize public-private partnerships for infrastructure investment, and address poverty.
In December 2004, an earthquake and tsunami struck the Indian Ocean region, leaving over
150,000 dead in Indonesia alone. The government provided emergency aid in Sumatra and the Aceh
peninsula. In March 2005, an earthquake in Sumatra led to additional devastation. While the effect of
overall GDP was limited, the Asian Development Bank expected an increase of one million people in
the number of Indonesians in poverty.45 Later in 2005, two bombs exploded in Bali, killing more than
20 people, another blow to confidence.
In May 2005, Coordinating Minister for the Economy, Aburizal Bakrie, announced legislation to
improve aspects of the business environment. Policy packages on infrastructure, the investment
climate, and the financial sector were at different stages of implementation in 2006. Progress had been
the greatest in the financial sector. Revisions to the labor law proposed in April 2006 were on hold
after strong resistance from the labor unions. Business-friendly tax measures were held up in
parliament and not expected to take effect before 2008. The investment law was soon to be passed by
parliament, but decrees specifying implementation were still being negotiated.46 Numerous
provincial laws deemed to be obstructing trade and investment were under review by the central
government.
Regional governments had been unable to implement needed infrastructure investments given
limited capacity, which had left government budgets with significant surpluses. Public private
partnerships were to be used for infrastructure upgrading, but interested foreign companies were
being deterred by unclear rules on the government’s role and concerns about projected rates of
return.
In 2005, the government had taken the final step to remove fuel subsidies, historically a hugely
expensive part of Indonesia’s social transfer system. The subsidies had provided large benefits, which
went disproportionately to higher-income households. Market fuel prices went up by about 150%
throughout 2005, and triggered widespread public protests. The government had launched a
compensation program for the poor during the first round of price increases (29%), but their design
and implementation had been poor. A national energy policy would outline a broader plan to align
the country’s energy prices across all sectors to market levels by 2010.47
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Indonesia’s economy in 2006
The Indonesian economy had registered an average annual GDP growth rate of about 5% since
2000. GDP per capita was at about $3,500 per capita (PPP adjusted), roughly on par with India but
behind the Philippines, China, Thailand, and Malaysia. GDP per capita had grown at 3% over the
same period. Poverty rates had fallen recently after the worsening in the aftermath of the 1997 crisis,
but rising prices for rice, a staple food still protected by trade barriers, had affected low-income
groups.48 Close to half of the Indonesian population had income at or near the poverty level,
measured by a PPP-adjusted income of $2 or less per day (Exhibit 3). Poverty was especially high in
some of the more rural regions. Unemployment, at 10% had been rising over the last few years as 2–
2.5 million Indonesians were entering the labor market every year, significantly above the number of
new job openings.
Productivity in Indonesia was about 60% of the Thai level and 33% of the Malaysian level. India,
whose productivity levels had been far below Indonesia’s, had caught up. Studies by the World Bank
and others suggested that Indonesian productivity in textiles, electronics, and automotive was lower
than in peer countries in the region. Domestic investment rates remained low (Exhibit 4), and there
had been a net outflow of foreign capital since 1997 (Exhibits 5 and 6a, 6b). Indonesia’s overall
market share in global exports had been roughly stable since 1997 (Exhibit 7).49 Natural-resource
intensive industries continued to account for a significant share of exports and Indonesia had gained
position in some labor-intensive industries that were, however, falling in absolute size.50
Indonesian macroeconomic conditions were stable or improving. The government budget was
balanced and public debt had fallen steadily from about 90% in 2000 to about 50% of GDP,
comparable to other countries in the region.51 About half of debt was denominated in foreign
currencies and debt service accounted for about 53% of non-oil government revenues. Lending by
international donors like the World Bank, the Japan Bank for International Development, and the
Asian Development Bank had significantly decreased. Monetary policy was viewed as relatively
effective and government was expected to raise interest rates to push inflation below 10% by the end
of 2006. The country had registered a significant current account surplus, benefiting from strong oil
export revenues, falling interest payments on foreign debt, and moderate growth in domestic
demand. The real exchange rate had appreciated over time, reaching about 80% of the pre-Asian
crisis level, similar to other Asian countries.
Indonesia suffered from high levels of corruption52 and ranked low on most indicators of
governance, including government effectiveness.53 There were increasingly complex and diverging
rules and regulations at the provincial and municipal levels.
Business environment
Indonesia‘s business environment was seen as gradually improving in the post-Suharto period;
with the exception of 2005.54 In 2006, Indonesia ranked below Malaysia but slightly ahead of Thailand
in the Business Competitiveness Index of the Global Competitiveness Report (Exhibit 8). The
narrower World Bank “Doing Business” analysis ranked Indonesia below all other ASEAN countries,
China, and the Asian tigers in important aspects of business regulation (Exhibit 9).55 Many aspects of
the business environment, especially physical infrastructure and regulations affecting business,
varied substantially across Indonesian regions.56
In education, Indonesia lagged behind other Asian countries. Spending on education accounted
for 9.8% of total government expenditure in 2002, compared to 28% in Thailand, 20% in Malaysia,
14% in the Philippines, and 13% in Korea. The gap was biggest in secondary and tertiary education,
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with the primary education system in Indonesia about on par with regional peers. Fees for secondary
schools created a barrier for children of low-income families.57
Indonesia’s infrastructure had suffered from low investment after the Asian crisis, and many
small companies in rural regions reported difficulties in getting their goods to market.58 In telecom,
Telekomunikasi Indonesia, 65% government-owned, was the largest provider, competing with
Indosat, 42% owned by a Singaporean company and 16% government-owned. The electricity sector
suffered from insufficient capacity and low investment. The Constitutional Court had annulled a 2002
law to open the industry to private competitors, and PLN, the state-owned utility, remained the
dominant supplier. PLN was required to charge equal electricity rates across provinces despite
significant differences in costs, with government subsidies covering its losses.59
In 2005, the President had instructed the bureaucracy to reduce the number of days required to
obtain an investment license from 151 days to a month. Parliament approved amendments to the
bankruptcy law in 2004 to avoid arbitrary use of the law to threaten foreign firms with a bankruptcy
declaration if they failed to make payments demanded by a local business.
Research and development (R&D) spending was 0.05% of GDP in 2001, the most recent year for
which comparable data was available, versus 0.69% in Malaysia, 1% in China, and 2.9% in Korea. The
Department of Industry had introduced tax incentives for company R&D, but they were seen as
largely ineffective. The bulk of R&D financing came from the government (69% in 2001), and most
went to the large universities or government laboratories, like the Indonesian Institute of Science
(LIPI) and the Agency for the Assessment and Application of Technology (BPPT).
Indonesia’s financial sector was limited for the size of the country.60 Overall, bank credits to the
private sector were about 20% of GDP, versus 80% to 120% in the other countries in the region. As of
2003, there were 138 banks, with the top 10 banks accounting for 70% of banking assets. State-owned
banks held 44% of all assets, above pre-crisis level. State-owned provincial development banks were
growing quickly. The financial sector suffered from the corruption and inefficiency in the judicial
system and from incomplete property rights. In rural regions, less than 25% of land had an official
title. Bank lending was low due to conservatism from the Asian crisis and fears of corruption
accusations if loans went sour.
Indonesian tax rates were roughly in line with other countries in the region.61 Following the new
decentralization law which allowed regions to impose new taxes unless the federal government
objected, however, total taxes were increasing as more provincial and local taxes were introduced. A
new national law had been passed to define the maximum level of taxation for the different levels of
government.
There were laws to protect intellectual property (IP), and a U.S. software company had won a
landmark case against five Indonesian retailers in 2001 that were selling computers with pirated
software. However, the effectiveness of intellectual property protection in Indonesia remained
problematic. In 2004, the U.S. government had again put Indonesia on the watch list of countries with
weak intellectual property rights standards. Foreign companies also complained about the lack of
timely decisions by the Indonesian judicial system, a general problem that affected IP cases as well.
In the labor market, conditions had worsened in the years after the Asian crisis, making Indonesia
one of the most inflexible labor markets in Asia. Minimum wages had increased much faster than
productivity and were much higher relative to average wages than before the 1997 crisis. The
devolution of minimum wage setting to the regions in 2001 had added another level of complexity. A
new labor law was under discussion.62 The World Bank reported that termination costs were
significantly higher than in other countries in the region.
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Indonesia: Attracting Foreign Investment
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Indonesia was among the most open countries in Asia in terms of formal trade rules, with tariff
rates averaging around 7% in 2006, which was less than half the level of before the Asian crisis.
However, some sectors, like automobiles, remained under higher protection.63 Indonesia had
significantly reduced non-tariff barriers since the crisis but was not a party to the WTO Government
Procurement Agreement.
Competition laws were introduced beginning in 1999 but enforcement was spotty. The
Commission for Supervisory of Business Competition (KPPU)64 lacked clear authority and
procedural regulations, which resulted in many of its decisions being overruled by the courts.
Government was working on a revision of the law in 2006 that it hoped to submit to parliament in
2007.
A presidential decree in 2000 had created more transparency in procurement. Government had
conducted a number of audits at large state-owned enterprises. Despite clear evidence of
irregularities, however, no remedial action had been taken.
Indonesian Clusters
Indonesian exports were dominated by oil and gas, mining, and other natural-resource and
agricultural goods. Electronics, automotive parts, textiles, footwear, and other labor-intensive
activities were also significant (Exhibits 7 and 10). Service exports were limited, restricted largely to
tourism.
The oil and gas sector accounted for 10% of GDP and 25% of export revenues as of 2005.65
Indonesian production had been in decline for many years due to low investment rates, similar to
other parts of the economy. Indonesia’s production was about 20% below its Organization of the
Petroleum Exporting Countries (OPEC) quota, and proven reserves had fallen by half since 1983.
Environmental concerns were also rising. Drilling for gas, an Indonesian company had triggered a
mudflow in east Java in May 2006 that displaced 25,000 people and disrupted the local economy.66
The mining sector included a variety of minerals and metals. Indonesia had particularly strong
positions in tin, copper, and nickel, and had also benefited from the increasing demand in Asia for
coal. Mining accounted directly for 2% of Indonesian GDP and 35,000 employees, with a significantly
greater role in particular regions.67 Exploration activity was limited and global mining companies
rated investment conditions in Indonesia as poor relative to other locations. One concern was the
conflict between mining contracts and subsequent environmental regulations for the protection of
forests that declared much mining activity illegal. For example, the government had recently
announced that it would revoke export licenses for tin mines that did not meet stringent
environmental regulations at a standard that would put most operators out of business.68
Tourism accounted for a significant share of employment and was especially important in some
regions like Bali.69 The number of foreign visitors to Bali had grown most dramatically since the early
1990s, reaching more than one million per year by 2006. Demand from tourists also benefited related
clusters, such as the textiles and apparel cluster. Bali alone accounted for about 25% of all tourism to
Indonesia. The terrorist attacks on the island in 2002 and 2005 had been a significant disruption and
low occupancy rates remained a problem.
Forest products remained an important cluster.70 Since the 1990s, the focus had shifted to pulp
and paper products, the third transformation of the cluster from timber (1970s) and then plywood
(1980s). A doubling of the export tax for timber to 20% in 1978, followed by an outright ban on such
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Indonesia: Attracting Foreign Investment
exports in 1985, had pushed companies into downstream activities. Illegal logging, however,
remained a problem.
Indonesia had traditional networks of small companies at the village level.71 Most of these focused
on rudimentary production activities tied to natural resources and agriculture, with many of the
characteristics of an informal economy. While there had been some success stories, such as the roof
tile cluster in Karanggeneng (Java) and the wooden furniture cluster in Jepara (Java), most small
company networks had not managed to improve their sophistication and size. Policies for small- and
medium-sized enterprises (SMEs) benefited these companies, but fell far short of a broader cluster
development agenda.
Indonesian Companies
In 2005, about 50% of the top 100 Indonesian companies were owned by a dominant single
shareholder or group. State-owned enterprises (SOEs) were estimated to account for up to 40% of
GDP and had continued to have strong presence in sectors like financial services, electricity, oil and
gas, telecommunications, cement, fertilizer, steel, mining, agriculture, and transport.72 Privatization
had been slow. The 2003 SOE law set rules for managerial independence from the government,
although the public service obligations of some SOEs blurred the lines of independence. Pertamina,
the oil and gas company, received significant subsidies to compensate for the artificially low prices it
charged in the residential market and to some other SOEs.
The Indonesian private sector was characterized by a few large conglomerates and a huge number
of small and micro enterprises. In the large conglomerates, governance was limited though
improving. Ownership concentration had fallen, financial reporting had become more transparent,
and the Code of Good Corporate Governance introduced in 2001 had set clearer standards for
behavior. In a 2004 report, the World Bank pressed for further improvements in the disclosure of
cross-ownership and related-party transactions.
Small and micro enterprises, many of which were active in rural agriculture, had traditionally
been seen as needing protection from competition. Article 50 of the Indonesian Competition Law
exempted small scale-enterprises from legislation against anti-competitive behavior. Indonesia also
had, like India, created a scheme that reserved specific sectors or sub-sectors for small and micro
enterprises or joint ventures involving such enterprises. These regulations were not believed to be
very effective.
Attracting Foreign Investment
Indonesia had a long history of foreign direct investment, with Dutch companies having been
dominant in most parts of the Indonesian economy until the early decades of the twentieth century,
especially the extraction of natural resources, utilities, and trade. Many Dutch companies had been
awarded dominant market positions by the Dutch government, and were perceived as instruments of
colonial suppression and extortion. In the decades up to World War II, companies from other
Western nations, especially the United Kingdom and the United States, invested in Indonesia. Most
of these companies were active in oil and other natural-resource based industries.
After independence, the Indonesian government nationalized many foreign companies, especially
those from the Netherlands. However, some large U.S. and U.K. companies remained active in the
country. In the 1950s, Indonesia was among the top three Asian locations for U.S. investors, along
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Indonesia: Attracting Foreign Investment
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with India and the Philippines.73 In the 1970s and 1980s, Japanese, Singaporean, and Taiwanese
companies became leading investors in Indonesia, especially in manufacturing.
In the late 1980s and early 1990s, Indonesia experienced an investment boom. Successive reforms
in the 1980s had made the country more attractive to investors, and Korean and Taiwanese
companies began relocating their labor intensive operations to Indonesia (as well as other southeast
Asian countries) around 1990. Indonesian textile exports doubled from 1989 to 1993, and became
Indonesia’s largest non-oil export. As global FDI flows increased in the early and mid-1990s, more
foreign investors entered the country.
Between 1995 and 2005, however, China rose to become by far the largest destination for FDI in
Asia, alarming many observers in the ASEAN region.74 The ASEAN Investment Area (AIA)
agreement, signed in October 1998, was intended to improve the attractiveness of ASEAN countries
compared to China through more transparent investment rules. It was initially focused on
manufacturing but was to be extended to services over time. Many foreign companies looked for a
second production base in Asia—the so-called ‘China + 1 strategy’—to manage country risk and
rising costs in China.75
Much of the FDI flowing into China went into export-oriented businesses that assembled products
from imported materials and parts. According to a study by the Japanese Foreign Trade Agency
(JETRO), products assembled from foreign inputs accounted for more than 70% of Chinese exports.76
In Malaysia, the Philippines, and Thailand, this ratio had dropped to up to 50%, signaling higher
value-added activities in these countries. Indonesia, however, was much closer to the Chinese levels.
During the Asian Crisis, FDI inflows into Indonesia collapsed and net inflows were negative for
most years until 2003. A number of Korean and Japanese companies operating in Indonesia relocated
to other countries in the region, including Vietnam, citing Indonesia’s negative investment climate.77
While there was improvement in 2004 and 2005, Indonesia continued to lag far behind most of its
neighbors in attracting investment. The experience of the shoe industry was typical. When the
European Union imposed quotas on shoe imports from Vietnam and China in 2006, Indonesia was a
natural alternative. Adidas, the German sportswear company, already sourced about 23% of its
global shoe orders from factories in Indonesia. Yet two of these factories, owned by South Korean
companies, were closed as stringent labor laws were introduced.78
As of 2006, Japanese companies remained the largest group of foreign investors in Indonesia,
followed by companies from Korea and Taiwan. Asian investors led by Singapore and China had
been the leading investors after the Asian crisis, while companies from Europe and North America
had lagged.79 The stock of foreign investment continued to be concentrated in natural-resource based
industries, with a third or less in manufacturing. Close to 60% of FDI inflows after the crisis had gone
into manufacturing, metal mining and chemicals in particular. Since 2004, services had gained in
importance.
Foreign Investment Rules and Regulations
Indonesia had a history of fluctuating incentives for foreign investors. The 1967 law for foreign
investment granted investors up to five years tax holiday from corporate tax and withholding tax on
dividends.80 Three years of tax holidays would be given if the investment reached more than $2.5
million in the first two years and earned/saved foreign exchange. Additional years of tax holidays
could be awarded if the investment in infrastructure was above $15 million, was made outside of
Java, or was one of the first to companies to enter an industry. The incentives were extended to
domestic investors in 1968.
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Indonesia: Attracting Foreign Investment
The Technical Team for Foreign Investment was established in 1967 to handle incoming
applications (it became the Capital Investment Coordination Agency (BKPM) in 1973). In 1970, the
investment law was amended, giving preference to specific priority sectors. Incentives were granted
by the Ministry of Finance through its representatives in BKPM. In 1977, BKPM further specified lists
of industries that were closed, open for FDI but with no tax incentives, and open for FDI and
qualified for tax incentives. In 1984, all tax incentives were eliminated based on advice from the
Harvard Institute for International Development. This move was criticized by BKPM officials and
some foreign investors, especially the Japanese. However, more foreign investors preferred general
lowering of taxes to special investment incentives.
In 1994, tax incentives started to come back when the government awarded ExxonMobil an
attractive division of revenues from a natural gas field in the Natuna Sea. Two years later, investment
incentives were reintroduced more generally. Under the new scheme, an interministerial team had
discretion for case-by-case decisions. In practice, President Suharto made the decision which often
benefited companies related to his family or associates.81 In 1998, the tax incentives were again
eliminated under pressure from the IMF. An amendment to the tax law in 2000, however, offered
new incentives in the form of investment allowances, accelerated depreciation, and longer loss carry
forwards on investments.
As of 2006, Indonesia provided tax concessions in the form of temporarily reduced tax rates but
no tax holidays (i.e., zero tax rates) as was customary in other countries82 (Exhibit 11). Indonesia did
not grant up front cash payments to investors to cover training or site investments. “Our competitors,
like Chennai, Bangkok, and Hanoi, are offering more attractive incentives,” complained Ismeth
Abdullah, governor of the Riau Islands province close to Singapore in a 2005 interview.83
The foreign investment law dating back to 1967 remained the legal basis for foreign investment,
permitting investments except for a “Negative List.”84 The Negative List closed some sectors
completely (for example), while requiring joint ventures with Indonesian partners in others such as
electricity production. The law stipulated a 30-year limit for land titles to real estate. While no
investor had been affected, the existence of the rule created uncertainty.
The BKPM was the main administrative body dealing with inward foreign investment,
responsible for approving investments in all areas except oil and gas and some areas of financial
services where special regulatory agencies existed. While the formal Negative List was seen as no
more restrictive than in peer countries, BKPM had exerted pressure for the inclusion of Indonesian
partners even in open industries. Apart from its regulatory role, BKPM had more recently also been
tasked with attracting foreign investors to Indonesia, and with facilitating investors’ administrative
contacts with other parts of government.85 Regional BKPM offices could give permission for smaller
investments while the head office in Jakarta handled larger projects. Many provinces and subregional governments in Indonesia had their own foreign investment offices as well.
A 2003 white paper committed the government to introducing a new investment law that would
establish BKPM as a one-stop-shop for investors.86 The government announced in 2004 that the role
of BKPM was to change from investment approval to investment attraction.
Foreign investors had encountered diverging experiences in Indonesia. Studies by the World Bank
identified policy uncertainty, corruption, and lack of confidence in the court system as key worries.
2006 data indicated that infrastructure bottlenecks were an increasing concern for investors,
especially for export oriented companies in areas like electronics.87 Japanese investors ranked the
country behind China, India, Vietnam, and Thailand but ahead of Malaysia and the Philippines in
terms of medium-term potential as an investment location.88 According to one Western executive,
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Indonesia: Attracting Foreign Investment
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“In Suharto’s day, everybody knew the rules about payoffs and kickbacks. [The current situation]
makes for uncertainty, and businesses don’t like uncertainty.”89
Investors such as Exxon Mobil and Philip Morris, which had made a record $5 billion acquisition
in 2005, reported good experiences with Indonesian government agencies. However, companies such
as Manulife, a Canadian insurance company, and PT Prudential Life Assurance had been declared
bankrupt by Jakarta courts over business disputes. After pressure from the international business
community, the government had overturned the decisions and the judges were put under
investigation. Other foreign companies had been dismayed with such judgments as well as provincial
meddling. Provincial objections to increasing its stake in Semen Gresik, Indonesia’s state-owned
cement company, had led Mexican company CEMEX to sell its shares and leave Indonesia in 2006.90
Batam
Batam had been more successful in attracting foreign investment than other parts of the country.
Originally a support base for the Indonesian state oil company, the island had been designated a free
trade zone in 1974 under the Batam Island Development Authority (BIDA).91 BIDA was headed by
B.J. Habibie, minister for science since 1978 until he became the first president in 1998. Foreign
investors were exempt from the need to have a local partner if they produced for export markets. In
1978, Batam became a ‘bonded zone,’ where imports of goods and services used for export products
were exempted from import duties and no sales tax was collected. In 1989, Batam’s status was
confirmed by a national law. The 1990 Growth Triangle agreement with Singapore marked the
beginning of a decade of strong growth for Batam.
Politicians in Jakarta had started to debate whether the exemption of domestic transactions in
Batam from sales taxes was really justified. While Batam had been successful in investment, some
analysts criticized that the limited linkages with the local economy and the fact that wage levels for
Batam employees were only marginally higher than the Indonesian average.92 In the early 2000s,
foreign investors became reluctant to invest when the legal status of Batam was put into question.
Batam’s share of Indonesian non-oil and gas exports dropped from 14% in 2001 to 8% by 2005.93
However, Batam received a boost in 2003 when it was included in the area covered by the U.S.Singapore Free Trade Agreement.94
In 2006, President Yudhoyono and Singaporean Prime Minister Lee Hsien Loong signed a new
framework agreement for cooperation in the Batam region. Singapore would provide its know-how
in order to attract more foreign investment to the area.95 Batam’s new ‘Integrated Investment Services
Center’ (IISC) had become a one-stop agency for investment approvals and, according to BKPM, had
reduced approval times by a third.96 Limits on the level of foreign ownership had been removed and
other government permits, for example work permits for foreign employees, were easy to obtain.
Foreign investors could choose among a number of industrial parks offering modern real estate,
housing, and physical infrastructure. Foreign developers from Singapore, Taiwan, and the
Netherlands, were among the industrial park owners.
New Legislation
In late 2006, the government prepared a new program for special economic zones. Initially, each of
the large Indonesian islands was to get one or two zones, but the program evolved towards
establishing zones in regions with sufficient infrastructure and an established presence of investors
that could achieve faster results. The intention was to provide investors with streamlined investment
procedures through dedicated one-stop agencies rather than financial incentives. Zones would only
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Indonesia: Attracting Foreign Investment
be created where local governments backed them and were willing to delegate decision rights to the
new agencies. After the draft law on economic zones had been stuck in the parliament for some time,
the government was considering whether to launch the program as a presidential decree.
A new investment law was approved in March 2007.97 It had been under discussion for more than
three years. The new law gave policy makers the discretion to offer further financial incentives to
foreign investors on a case-by-case basis: higher rates of depreciation, carry forward of losses, and
lower income tax rates on dividends paid to foreigners.98 There were ongoing discussions about
whether to focus these incentives on specific industries. Trade Minister Mari Pangestu announced
that the law would reduce the time to establish a new business to 30 days, in line with neighbors in
the region and significantly below the 155 required in 2006.99 This would raise Indonesia to rank 120
in the World Bank’s Doing Business assessment, up from its current 136.100 BKPM would focus on
investment attraction and providing services, while the regional governments and one-stop agencies
would be responsible for investment approvals. The law would also simplify temporary residence
permits for foreign investors and extend the length of usage rights under land titles. It would also
open the way for a simplification of the Negative List.
18
Indonesia: Attracting Foreign Investment
Exhibit 1
708-420
Indonesia and its Neighborhood
Source: Courtesy of the University of Texas Libraries, The University of Texas at Austin, Perry-Castenada Library Map
Collection, http://www.lib.utexas.edu/maps/cia06/ indonesia_sm_2006.gif, accessed December 1, 2006.
Exhibit 2
Long-term trends in prosperity growth, selected Asian countries
GDP per capita (PPP)
growth, CAGR
1950–1965
1965–1980
1980–1990
1990–1997
1997–1999
1999–2004
1950–2004
GDP per capita, US-$,
(PPP), 2004
Indonesia
1.1%
4.3%
3.0%
5.8%
-7.8%
3.0%
3.4%
3,684
China
3.2%
2.8%
5.7%
7.0%
2.0%
9.0%
5.6%
4,785
Thailand
3.2%
4.6%
6.1%
5.4%
-4.3%
4.2%
5.2%
7,549
Malaysia
1.0%
4.8%
3.4%
6.8%
-2.9%
3.1%
4.0%
8,937
India
1.5%
1.3%
3.4%
3.6%
4.5%
4.2%
3.0%
2,257
Source: Compiled from Groningen Development and Growth Center, The Conference Board (2006).
19
708-420
Exhibit 3
Indonesia: Attracting Foreign Investment
Basic economic indicators, selected Asian countries, 2004
Indonesia
Malaysia
Philippines
Thailand
China
India
Vietnam
Population
Population (in millions)
218
25
82
64
1,300
1,100
82
1.3%
1.9%
1.8%
0.9%
0.6%
1.4%
1.0%
102
16.5
50.5
20.4
512
308
21.3
254,298
118,318
90,100
161,688
1,931,714
694,703
45,210
GNI per capita, PPP (current U.S. $)
3,480
9,720
4,990
7,930
5,890
3,150
2,730
Agriculture, value added (in % of GDP)
15.6%
9.5%
15.2%
10.1%
13.1%
19.6%
21.8%
Industry, value added (in % of GDP)
44.3%
50.4%
31.9%
43.5%
46.2%
27.3%
40.1%
Services, value added (in % of GDP)
41.2%
40.1%
52.9%
46.4%
40.7%
53.2%
38.2%
Gross capital formation (% of GDP)
23.1%
22.6%
17.1%
27.1%
38.7%
30.1%
35.6%
Goods exports (BoP, current U.S.$ in
millions)**
72,167
126,642
38,728
94,979
593,393
59,388
26,503
Goods imports (BoP, current U.S.$ in
millions)**
50,615
99,149
45,109
84,193
534,410
60,208
28,759
Population growth (annual 2003–2004)
Urban population (in millions)
Economy
GDP at market prices (current U.S.$ in
millions)
Health and Education
Life expectancy at birth (years)
67
73
71
71
71
63
70
Infant mortality rate (per 1,000 live births)
29.6
10.2
26.0
18.2
26.0
61.6
17.4
Health expenditure, public (% of GDP)*
1.1%
2.2%
1.4%
2.0%
2.2%
1.2%
1.5%
Public education spending (2003, % of
GDP)
0.9%
8.0%
3.2%
4.2%
--
3.3%
--
Personal computers (per 1,000 people)
13.9
196.8
45.1
58.3
40.9
12.1
12.7
Cell phone subscribers ( per 1,000 people)
137.9
587
403.5
429.9
258.3
43.8
60.4
Telephone mainlines (1997, per 1,000
people)
45.9
178.6
42.1
106.7
241.1
40.7
70.3
Inflation (GDP deflator annual %)
6.2%
6.2%
6.0%
3.1%
69.1%
4.2%
7.9%
Tax revenues (% of GDP)
12.5%
NA
12.4%
15.9%
NA
10.2%
NA
Present value of debt (% of GNI)
60.9%
52.7%
73.1%
35.2%
14.50%
18.4%
39.1%
Information Technology
Finance
External debt (current U.S.$ in millions)
140,649
52,145
60,550
51,307
248,934
122,723
17,825
Stock market capitalization (% of GDP)
28.8%
160.6%
32.1%
71.4%
33.1%
55.8%
--
Source: Compiled from World Development Indicators, 2006.
20
Indonesia: Attracting Foreign Investment
Exhibit 4
708-420
Investment as Percentage of GDP from 1995 to 2005, Selected Asian countries
80%
70%
60%
Malaysia
Vietnam
50%
Thailand
40%
China
Philippines
30%
India
Indonesia
20%
10%
0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Compiled from Economist Intelligence Unit, 2006.
Exhibit 5
FDI Position in 2005, selected Asian countries
Source: Compiled from World Investment Report, 2006.
21
708-420
Indonesia: Attracting Foreign Investment
Exhibit 6a
Foreign Direct Investment Inflows as % of Fixed Capital Formation over Time, selected
Asian countries
50%
40%
30%
Malaysia
Vietnam
China
India
Philippines
Thailand
Indonesia
20%
10%
0%
-10%
-20%
1970
1975
1980
1985
CAON Indonesia 11-28-06 CK.ppt
1990
20
1995
2000
2005
Copyright © 2006 Professor Michael E. Porter
Source: Compiled from World Investment Report, 2006.
Note: The 2005 data for Indonesia is affected by one major transaction that accounted for 90% of inflows that year.
22
Indonesia: Attracting Foreign Investment
Exhibit 6b
708-420
Foreign Direct Investment Inflows in Millions US-Dollars, selected Asian countries
Source: Compiled from World Investment Report, 2006.
Note: The 2005 data for Indonesia is affected by one major transaction that accounted for 90% of inflows that year.
23
708-420
Exhibit 7
Indonesia: Attracting Foreign Investment
Indonesian exports by cluster, 2005
Coal and Briquettes
(9.5%, +2.4%)
3.00%
Change In Indonesia’s Overall
World Export Share: -0.01%
Indonesia’s world export market share, 2005
Footwear
2.50%
Fishing and
Fishing Products
Furniture
Building Fixtures
and Equipment
Forest Products
(1.9%, -3.3%)
2.00%
Apparel
Oil and Gas Products
Textiles
Agricultural Products
1.50%
Plastics
Tobacco
Communications
Services
Entertainment and Reproduction Equipment
Metal Mining and
Manufacturing
1.00%
Indonesia’s Average World
Export Share: 0.88%
0.50%
Construction
Services
Business
Services
Hospitality and Tourism
Prefabricated Enclosures and Structures
Jewelry, Precious Metals and Collectibles
0.00%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
Change in Indonesia’s world export market share, 1997 – 2005
Exports of $5 billion =
CAON Indonesia 11-28-06 CK.ppt
7
Copyright © 2006 Professor Michael E. Porter
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness,
Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade
Statistics Database and the IMF BOP statistics.
24
Indonesia: Attracting Foreign Investment
Exhibit 8
708-420
Quality of the national business environment, selected Asian countries, 2006
Indonesia
Malaysia
Philippines
Thailand
China
India
Vietnam
Factor (Input) Conditions
Railroad infrastructure development
22
17
79
24
31
38
58
Quality of math and science education
12
19
74
27
63
20
88
Quality of public schools
43
15
67
33
50
61
70
117
31
89
19
82
2
63
3
20
78
38
57
20
95
107
Quality of electricity supply
Port infrastructure quality
Overall infrastructure quality
19
58
63
23
67
3
Ease of access to loans
98
30
49
36
96
4
48
Financial market sophistication
73
41
82
40
90
94
49
Telephone/fax infrastructure quality
28
23
83
63
72
59
108
Air transport infrastructure quality
76
71
63
35
90
53
82
Efficiency of legal framework
36
19
43
44
70
91
108
Presence of demanding regulatory standards
70
10
49
61
78
107
57
Stringency of environmental regulations
97
31
85
38
95
27
97
Buyer sophistication
49
11
82
47
62
13
85
50
Demand Conditions
Context for Strategy and Rivalry
Intensity of local competition
29
9
84
36
36
26
Efficacy of corporate boards
98
32
66
82
117
10
61
Cooperation in labor-employer relations
83
16
99
35
99
2
99
Effectiveness of antitrust policy
42
18
56
30
67
31
88
Business costs of corruption
87
27
56
59
81
20
88
Intellectual property protection
75
12
40
38
75
4
87
81
13
87
36
69
22
74
4
14
79
46
45
28
81
Supporting and Related Industries
Local supplier quality
Local supplier quantity
Source: Compiled from Business Competitiveness Index data, in: Global Competitiveness Report 2006-07.
Exhibit 9
World Bank “Doing Business” rankings, 2006, Selected Asian countries
Indonesia
Malaysia
Philippines
Thailand
China
India
Vietnam
Overall rank
135
25
126
18
93
134
104
Starting a Business
161
71
108
28
128
88
97
Dealing with Licenses
131
137
113
3
153
155
25
Employing Workers
140
38
108
46
78
112
104
Registering Property
120
66
98
18
21
110
34
Getting Credit
83
3
101
33
101
65
83
Protecting Investors
60
4
151
33
83
33
170
Paying Taxes
133
49
106
57
168
158
120
Trading Across Borders
60
46
63
103
38
139
75
Enforcing Contracts
145
81
59
44
63
173
94
Closing a Business
136
51
147
38
75
133
116
Source: Compiled from World Bank Doing Business Report, 2006.
25
708-420
Indonesia: Attracting Foreign Investment
Top 25 Indonesian Goods Export Industries by Export Value, 2005
Exhibit 10
Industry
Cluster
Export
Value
(in $1,000)
World
Export
Share
Point Change
in Share
1997 - 2005
Natural gas
Oil and Gas Products
$8,603,835
7.58%
-2.18%
Crude petroleum oils
Oil and Gas Products
$8,145,844
1.43%
-1.60%
Fixed vegetable fats and oils,
other
Agricultural Products
$4,762,103
36.26%
11.06%
Coal, not agglomerated
Coal and Briquettes
$4,354,121
9.70%
2.31%
Copper ores and concentrates
Metal Mining and Manufacturing
$3,310,967
21.22%
-4.77%
Natural rubber, balata and similar
natural gums
Plastics
$2,583,963
28.11%
0.72%
Petroleum Oils
Oil and Gas Products
$1,903,797
0.59%
-0.68%
Video recording or reproducing
apparatus
Entertainment and Reproduction
Equipment
$1,251,637
3.11%
-2.61%
Plywood, solely of wood
Building Fixtures and Equipment
$1,193,503
15.11%
-26.98%
Input or output units
Information Technology
$1,161,549
1.75%
1.40%
Paper and paperboard, uncoated
Forest Products
$1,049,910
5.30%
3.36%
Crustaceans, mollusks, and
aquatic invertebrates
Fishing and Fishing Products
$983,520
5.37%
-1.52%
Nickel mattes, sinters and other
intermediate nickel products
Metal Mining and Manufacturing
$925,452
25.39%
9.88%
Tin
Metal Mining and Manufacturing
$918,686
30.46%
12.84%
Chemical wood pulp, soda,
bleached
Forest Products
$886,026
5.41%
1.46%
Fabrics of man-made fibers
Textiles
$831,999
3.04%
-0.07%
Other wooden furniture
Furniture
$804,027
4.71%
2.24%
Other sports shoes with leather
uppers
Footwear
$765,826
16.67%
-6.85%
Yarn of staple fibers, strip and
other synthetic textile materials
Textiles
$718,274
12.40%
6.13%
Builders’ joinery and carpentry of
wood
Furniture
$717,256
6.49%
-2.11%
Copper, copper anodes and
alloys
Metal Mining and Manufacturing
$676,312
2.47%
2.39%
Cocoa
Agricultural Products
$653,510
7.60%
-0.20%
Rubber tires, tubes
Motor Driven Products
$650,052
1.57%
0.61%
Parts for automatic data
processing machines
Information Technology
$641,605
0.45%
-0.26%
Printed circuits
Information Technology
$607,666
2.85%
2.79%
Source: Institute for Strategy and Competitiveness (2006).
26
Indonesia: Attracting Foreign Investment
Exhibit 11
Foreign Direct Investment incentives, 2006, selected Asian countries
Financial incentives
Indonesia
• Some sectors: 30% reduction in net income,
carry forward losses for 10 years, accelerated
depreciation
• Import duty exemptions of 100% for main
equipment and supplies, raw materials not
locally available (for up to 2 years)
Malaysia
708-420
• Incentives for export orientation, and valueadded, local participation, and skills transfer;
Carry forward losses indefinitely
Ownership restrictions
• 8 sectors closed to foreigners, including:
broadcast media, forestry, warehousing
wholesaling, market research, noxious
chemicals
• FDI in infrastructure requires 55%:45%
JVs with foreigners in the minority
• Maximum 30% foreign equity in banks,
telecom, law; additional limits in services
• Pioneer status limits tax rate to 10% for 5 years;
reinvestment allowances for 60% of capital
spending; accelerated capital allowances
• Pioneer status, special investment capital
allowances, concessional government loans
Thailand
• Carry forward losses for 5 years; other tax
benefits depend on investment location, nature
of activity (e.g. R&D), and degree of exports’
200 industries eligible for 8 years’ import and
other tax exemptions
• Tax incentives for regional headquarters
Philippines
• Income tax holidays, tax credits; exemptions
from local taxes; 6 year tax exemption for
pioneer status industries
• Tax credit on imported raw materials and
components used in exports; credits for duties
on raw materials
• Foreign ownership constrained in 32
areas in 3 categories, including cultural
and security sphere prohibitions,
industries in which foreigners can hold a
maximum 40% stake with govt approval;
businesses in which Thai companies
cannot compete with foreign firms.
• Foreign ownership barred in mass media,
retail trade, licensed professions, rice and
maize farming; Minority foreign interests
only allowed in advertising, public utilities,
land ownership, exploration and extraction
of natural resources, investment houses.
• Eleven priority investment areas with 6 year
income tax holidays.
China
• Preferential 15% tax rate for foreign investors in
state-approved zones, additional local benefits;
Exporters qualify for a 50% income tax cut
• Foreign ownership divided into prohibited,
restricted, allowed, and encouraged
categories.
• 2 year tax holiday for increased investment,
50% income tax reduction for 3 more years; 10
year tax reductions possible for foreign
investments in underdeveloped areas
• 100% foreign ownership allowed in most
industries; capped at 49% in basic
telecom, rail freight, publications, aviation
(though no single foreign entity can own
more than 25%); no 100% owned
employment agencies allowed.
• Bank of China offers fixed asset loans, working
capital loans, and accounts receivable financing.
India
• 10 year tax holiday for FDI in infrastructure,
scientific R&D firms, and a 5 year tax holiday for
cold chain operations, telecom and ISPs
• R&D is fully tax deductible; accelerated
depreciation available for energy-saving,
environment-protection, and pollution control.
• Permission required for investments in
aviation, courier services, defense, public
sector oil refining, tea, some telecom and
airports.
• Real estate, plantations, and retail trade
are all closed to foreign ownership.
Source: Based on Economist Intelligence Unit, CountryCommerce, various countries, 2006, available from www.eiu.com.
27
708-420
Indonesia: Attracting Foreign Investment
Endnotes
1
Interview with Minister Pangestu in FDI Magazine, 3 October 2005.
2 Thomson Gale data, available at www.nationsencyclopedia.com/Asia-and-Oceania/Indonesia-LOCATION
-SIZE-AND-EXTENT.html, accessed January 3, 2007.
3 Thomson Gale data, available from http://www.nationsencyclopedia.com/Asia-and-Oceania/IndonesiaETHNIC-GROUPS.html, accessed January 3, 2007.
4
Australia’s willingness to send peacekeepers to East Timor had particularly angered parts of the Indonesian
leadership
5
The Economic History of Indonesia, http://eh.net/encyclopedia/article/touwen.indonesia, accessed
March 12, 2007.
6 Thee Kian Wie, Policies for Private Sector Development in Indonesia, ADB Institute Discusssion Paper No. 46,
March 2006.
7 ‘Unitary’ relates to the country being a single entity, divided only for administrative purposes, not a
federation of regions with different identities.
8
Thee Kian Wie, ibid.
9 Jonathan Temple, Growing into Trouble, In: Dani Rodrik (ed.), In Search of Prosperity, Princeton University
Press, 2003.
10 Higgins quoted in Haryo Aswicahyono/Tubagus Feridhanusetyawan, The Evolution and Upgrading of
Indonesia’s Industry, CSIS Working Paper WPE 073, January 2004.
11
Asia Development Bank, Appendix 1: Country Context, p. 66.
12
The term is somewhat misleading as most of the “Berkeley Mafia” weren’t graduates of Berkeley. The
name came largely from the fact that two leaders did go to Berkeley on scholarships financed by the Ford
Foundation.
13
J. Temple, ibid.
14 Haryo Aswicahyono/Tubagus Feridhanusetyawan, The Evolution and Upgrading of Indonesia’s Industry,
CSIS Working Paper WPE 073, January 2004., p. 12
15
Ibid., p.13.
16
Thee Kian Wie, Policies for Private Sector Development in Indonesia, ADB Institute Discusssion Paper No. 46,
March 2006.
17 Jonathan Temple, Growing into Trouble, In: Dani Rodrik (ed.), In Search of Prosperity, Princeton University
Press, 2003.
18
The government intentionally used three parallel programs to induce competition between them that
would limit corruption – companies could opt for the program with the least amount of hidden payments.
Interview with Louis Wells, former advisor to the Indonesian government.
19
Haryo Aswicahyono/Tubagus Feridhanusetyawan, The Evolution and Upgrading of Indonesia’s Industry,
CSIS Working Paper WPE 073, January 2004, p. 13.
20 Haryo Aswicahyono/Tubagus Feridhanusetyawan, The Evolution and Upgrading of Indonesia’s Industry,
CSIS Working Paper WPE 073, January 2004.
21
22
28
Asia Development Bank, BELOW?, Appendix 1: Country Context, p. 69.
Dewi Fortuna Anwar, Indonesia in ASEAN, Institute for South East Asian Studies, 1994, p. 316/317.
Indonesia: Attracting Foreign Investment
23
708-420
The World Bank, Making the New Indonesia Work for the Poor, Jakarta, 2006.
24 Asia Development Bank, Operations Evaluation Department, “Country Assistance Program Evaluation for
Indonesia,” CAP: INO 2005-16, December 2005, p.iv.
25
US-ASEAN Business Council, http://www.us-asean.org/afta.asp , accessed April 12, 2007.
26
IMF, Indonesia: Selected Issues, 2006.
27
Sebastian Mallaby, The World’s Banker, Penguin Books.
28
Asia Development Bank, Appendix 1: Country Context, p. 69.
29 For a description of the political developments in the first six year’s after the end of the Suharto regime see
J.F. Conceicao, Indonesia’s Six years of Living Dangerously, Horizon Books, Singapore: 2005.
30
IMF, Indonesia: Selected Issues, July 2004.
31
World Bank, Indonesia Country Assistance Strategy, 2006, p. 10.
32
Sebastian Mallaby, The World’s Banker, Penguin Books.
33
IMF, Indonesia: Selected Issues, 2006.
34
IMF, Indonesia: Selected Issues, July 2004.
35 R. Rohdewohld, A New Framework for Local Governance, GTZ Discussion Paper, 1999, available from
www.gtzsfdm.or.id, cited in Asian Development Bank, Appendix 1: Country Context, p. 67.
36
World Bank, Indonesia Public Expenditure Review 2007.
37
See J.F. Conceicao, 2006.
38
IMF, Indonesia: Selected Issues, November 2005.
39
EIU, Country Profile Indonesia, 2006.
40
Thomson Gale data, available from http://www.nationsencyclopedia.com/Asia-and-Oceania/IndonesiaGOVERNMENT.html, accessed January 3, 2007.
41
Suzanne Miller, “Indonesia Disappoints,” fDi Magazine, Financial Times Business, Ltd.,
www.fdimagazine.com/news/printpage/php/aid/421/Indonesia_disappoints.html, accessed December 22,
2006.
42
World Bank, Indonesia: Economic and Social Update, 2006.
43
Asian Development Bank, Appendix 1: Country Context, p. 68.
44
International Monetary Fund, Asia and Pacific Department, Indonesia: Report for the Post-Program
Monitoring Discussions, IMF Country Report 05/128, January 14, 2005, p. 3.
45
Asia Development Bank B, Initial Assessment of the Earthquake and the Tsunami in Southeast Asia,
Manila, 2005.
46
World Bank, Indonesia: Economic and Social Update, 2006.
47
Asian Development Bank, Appendix 1: Country Context, p. 70.
48
The World Bank, Making the New Indonesia Work for the Poor, Jakarta, 2006.
49
IMF, Indonesia: Selected Issues, November 2005.
50
IMF, Indonesia: Selected Issues, 2004.
29
708-420
Indonesia: Attracting Foreign Investment
51
IMF, Indonesia: Selected Issues, November 2005.
52
Transparency International, 2006 Corruptions Perceptions Index.
53
Kaufmann, Kraay, Mastruzzi, Worldwide Governance Indicators 1996-2005, World Bank .
54
Business Competitiveness Index, in: Global Competitiveness Report 2006.
55
World Bank, Doing Business data base www.doingbusiness.org, accessed February 14, 2007.
56
Asian Development Bank, Improving the Investment Climate in Indonesia, 2005.
57
The World Bank, Making the New Indonesia Work for the Poor, Jakarta, 2006.
58 World Bank, Revitalizing the Rural Economy: An assessment of the investment climate faced by non-farm
enterprises at the District level, July 2006.
59
Montty Girianna, A way forward for RI electricity industry, Jakarta Post, July 31, 2006.
60 IMF, Indonesia: Selected Issues, November 2005; World Bank, Unlocking Indonesia's Domestic Financial
Resources, 2006
61
IMF, Indonesia: Selected Issues, 2004.
62
Ibid.
63
Asian Development Bank, Asian Development Outlook 2006, p. 199.
64
Annual Report on Competition Policy Developments in Indonesia, OECD, 2005.
65
IMF, Indonesia: Selected Issues, November 2005.
66
See http://news.bbc.co.uk/2/hi/asia-pacific/4798501.stm and Jakarta Drifts, Newsweek, February 19, 2007.
67
PriceWaterhouseCoopers, mineIndonesia 2006, February 2007.
68
“Jakarta’s tough tin export regime begins,” Financial Times, February 24–25, 2007.
69 See Harvard student team analysis in 2002 by Ijeoma Akunyili, Bertha Angulo, Oupa Mokuena, and
Salvador Stadhagen.
70
Haryo Aswicahyono, Competitiveness and Efficiency of the Wood Products Industry in Indonesia, CSIS
Working Paper WPE 075, February 2004.
71
Martin Perry, Business Clusters in the South: A Critical Appraisal from Indonesian Evidence, Singapore
Journal of Tropical Geography, Vol. 26 (2), 2005, pp. 227-243.
72
IMF, Indonesia: Selected Issues, 2006, p. 32.
73
Stephen Royle, Industrialization in Indonesia: The Example of Batam Island, Singapore Journal of Tropical
Geography, Vol. 18 (1), 1997, pp. 89-98.
74
Stepen Thompson, Southeast Asia: The Role of FDI Policies in Development, OECD, 1999/I.
75 Osamu Watanabe, JETRO, Economic Integration in East Asia and Investment in Japan, May 27, 2005. See also
The problem with Made in China, China Supply Chain Council, January 15, 2007,
http://www.supplychain.cn/en/art/?1438, accessed March 23, 2007.
76 Quoted in Thee Kian Wie, Policies for Private Sector Development in Indonesia, ADB Institute Discusssion
Paper No. 46, March 2006.
77
2002.
30
FDI Magazine, Sony pulls out of Indonesia as a result of frustration with governance issues, December 2,
Indonesia: Attracting Foreign Investment
78
708-420
Tom Wright, Indonesian Labor Rules Take Toll on Investment, Wall Street Journal, December 6, 2006.
79 BKPM Indonesia Investment Coordinating Board), http://www.bkpm.go.id/bkpm/file_fact/Tabel-10.xls,
accessed March 20, 2007.
80 Louis T. Wells/Nancy J. Allen, Tax Holidays to Attract Foreign Direct Investment: Lessons from Two
Experiments, FIAS Occasional Papers 15, World Bank, 2001.
81
Ibid.
82
Stephen Thompson, Southeast Asia: The Role of FDI policies in Development, OECD, 1999, p. 22.
83
FDI Magazine, “Out of nowhere,” October 3, 2005.
84 Jannes Hutagalung, Indonesia’s Efforts to Enhance Transparency for Improving the Investment Climate, OECD
Global Forum on International Investment, Johannesburg: 2003.
85
Interview with Mr. Lufti, head of BKPM, in FDI Magazine, August 1, 2005.
86
CGI Brief: Beyond Macroeconomic Stability, Jakarta, December 2003.
87
Indonesia: Economic and Social Update, World Bank, April 2007.
88
Japanese Bank for International Cooperation, Survey Report on Overseas Business Operations by Japanese
Manufacturing Companies, 2006.
89
Quoted in Newsweek, February 19, 2007.
90
Cemex retreats from Indonesia with sale of stake, Financial Times, July 24, 2006.
91 Stephen Royle, Industrialization in Indonesia: The Example of Batam Island, Singapore Journal of Tropical
Geography, Vol. 18 (1), 1997, pp. 89-98.
92
Ibid., p. 96.
93
Embassy of the United States in Jakarta, Indonesia, Economic Reform Update January 2007, Batam Special
Economic Zone.
94
FDI Magazine, “Out of nowhere,” October 3, 2005.
95
The Coordinating Minister for Economic Affairs, Press Release: Indonesia and Singapore Signed
Framework Agreement on Economic Coordination in the Islands of Batam, Bintan, and Karimun, June 25, 2006.
96
Embassy of the United States in Jakarta, Indonesia, Economic Reform Update January 2007, Investment
Incentives and Streamlined Procedures.
97 Trade and Investment News, The Coordinating Ministry for Economic Affairs, Republic of Indonesia, Jakarta:
April 2, 2007.
98 Embassy of the United States in Jakarta, Indonesia, Economic Reform Update January 2007, Investment
Incentives and Streamlined Procedures.
99
100
A Red Carpet for Investors, Globe Asia, March 2007.
Indonesia: Investment Law Passed At Last, DBS Group Research, Singapore: March 30, 2007.
31