Investment in Indonesia: Unlocking opportunities

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Japan and Indonesia have maintained a longstanding economic relationship. In 2023 alone, Japanese investment in Indonesia totalled USD4.63 billion, making Japan the fourth-largest foreign investor. In the past decade, Japanese investors have been particularly interested in the vehicle and transportation sector, as well as utilities (electricity, water and gas) and the real estate market.

Indonesia is an attractive destination for Japanese investors wanting to expand their business. With a large population and ever-expanding economy, its consumer market offers significant growth potential for various industries.

An abundance of natural resources including minerals, coal and natural gas offers investors a stable supply chain. Indonesia’s geographically strategic location and relative proximity to Japan also make it ideal for Japanese investors intending to expand their market reach in Southeast Asia and globally.

Policy initiatives

In recent years, the Indonesian government has significantly emphasised facilitating the entry of foreign investment through various policy initiatives and regulatory reforms.

Current investment policies are largely aimed at strengthening the development of an innovative and technology-based economy, in particular a sustainable green economy and blue economy. Potential investment sectors to promote the green economy include infrastructure, the electric battery-based automotive industry, and the new and renewable energy sectors. The blue economy is promoted through potential investments in fisheries, marine and coastal resources, as well as coral reef conservation projects.

In addition to promoting a sustainable economy, the government is focusing on transforming its economic structure from primary sector-based to added value-based (downstream). This is being accomplished through the prioritisation of certain investment sectors including export-oriented and labour-intensive industries, renewable energy, infrastructure, the digital economy, and added value activities in the mining industry.

To facilitate the above-mentioned policy initiatives and ease the entry of foreign investment, the government has issued Law No. 11 of 2020 regarding Job Creation, which was revoked and replaced by Government Regulation in Lieu of Law No. 2 of 2022 regarding Job Creation, as stipulated by Law No. 6 of 2023 regarding the Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 regarding Job Creation as Law (Job Creation Law).

The Job Creation Law aims to enhance national competitiveness and attractiveness for investment through economic transformation, as well as to accelerate the national development process, primarily by improving the ease of doing business. Generally, the law reforms investment regulations by streamlining investment-related regulations and simplifying business licensing procedures.

Regulatory reform is supported by digitalisation of the business licensing system, which has significantly improved efficiency. Implementation of the Online Single Submission (OSS) system has simplified administrative procedures in relation to business licensing, greatly benefiting investors and business actors.

Government efforts to enhance the ease of foreign investment also include the provision of various incentives for foreign investors. These include tax holidays and tax allowances, as well as import duty exemption facilities for certain sectors.

Mitigating risk

Despite the attractiveness of Indonesia as an investment destination, a thorough understanding of its legal and regulatory frameworks is required for Japanese investors to be able to mitigate potential risks when entering the market.

The key legal considerations include procedures for establishing a presence in Indonesia, the minimum capitalisation requirement, foreign investment limitations, and required business licensing. Foreign investors, including Japanese investors, typically establish a presence in Indonesia by incorporating a foreign capital investment limited liability company (Perseroan Terbatas Penanaman Modal Asing, or PT PMA), which will be the entity conducting business operations in Indonesia.

Business activities in Indonesia are classified into a series of five-digit numbers from a catalogue known as the Indonesian Standard Business Classification (Klasifikasi Baku Lapangan Usaha Indonesia, or KBLI), which was last issued in 2020.

Before establishing a PT PMA, it is important to first examine the applicable KBLI for the PT PMA’s intended business activities. Determining the appropriate KBLI for contemplated business activities is crucial because any applicable foreign investment limitations, minimum capitalisation, and business licensing requirements are stipulated by reference to the KBLI classification.

Foreign investment limitations, including applicable foreign shareholding limits, applicable to a PT PMA are set out under Presidential Regulation No. 10 of 2021 regarding Investment Business Fields, as amended by Presidential Regulation No. 49 of 2021 (Positive List).

The Positive List provides a list of business activities that are both open to and restricted for foreign investment. Such limitations include a complete prohibition for foreign individuals and entities to invest in the relevant business activity, maximum shareholding percentage, or the requirement to co-operate with local co-operatives (koperasi) or micro, small and medium enterprises.

In addition to foreign ownership limitations, establishing the KBLI number of a PT PMA is also crucial to determine the required and proper capitalisation of the PT PMA.

As a general rule, with exceptions in certain sectors, the minimum investment value of a PT PMA is IDR10 billion (USD640,000) per KBLI number, excluding land and buildings. In practice, this minimum investment value is reflected and commonly regarded as the equivalent of the authorised capital of a company, which is not the capital injected into the company in actuality, but rather the ceiling value of the issued and paid-up capital (capital actually injected). Notwithstanding the above-mentioned, a PT PMA is also required to have minimum initial issued and paid-up capital of IDR10 billion.

After the PT PMA is incorporated, it must obtain the necessary licences to be able to conduct business activities in Indonesia. All licensing is carried out using a risk-based approach, where each business activity is classified based on the risk scale of that activity.

Low-risk business activities only require obtaining a Business Identification Number (Nomor Induk Berusaha, or NIB). Business activities with higher risk require additional business licences and/or certifications aside from the NIB, depending on the type of business activity and associated risk.

In addition to the above-mentioned general requirements and restrictions, some business sectors have sector-specific requirements and restrictions that must be considered by investors.

For instance, Indonesia enforces a divestment obligation for mineral and coal mining companies with shares held by foreign shareholders, obliging the foreign investors to gradually divest their shares to domestic shareholders over a certain period of time.

Another example is requirements imposed on shareholders of construction services companies; they must be construction services business entities in their country of origin (for foreign shareholders) or a national construction mining services company (for domestic shareholders). When investing in Indonesia, Japanese investors may face various risks in navigating the legal landscape, requiring mitigation strategies. A significant risk is regulatory change that may affect investments and business operations.

Such changes may be unforeseeable, even more so when combined with other factors such as political and geopolitical instability. Regulatory changes may disrupt the business plans of investors, and the process of complying with new regulations can sometimes be time-consuming and costly.

Unwritten rules

Another risk that may arise is legal uncertainty caused by unwritten policies that are often enforced in practice by Indonesian authorities. Sometimes laws are not clear and need to be further interpreted by the issuance of implementing regulations.

However, when the implementing regulations have yet to be issued, the interpretation of laws is by way of unwritten policies of the relevant authorities. Unwritten policies may also lead to different interpretations of existing laws and regulations, resulting in inconsistent application across different regions and sectors.

There are also situations where the implementation of stipulated laws and regulations in practice may differ from the written provisions of such laws and regulations, often caused by a lack of proper socialisation when stipulating a new law or regulation.

All of this can lead to confusion and uncertainty for investors intending to conduct business in Indonesia. A lack of transparent and standardised procedures for the implementation of laws and regulations may also hinder foreign investment, as potential investors are unable to accurately assess the future risks they may encounter.

Key takeaway

To counter possible future risks that can cause avoidable losses, Japanese investors are advised to conduct thorough due diligence and comprehensive risk assessments. This can be done by seeking legal advice from local legal counsel to guide investors through the investment process, ensure compliance with evolving regulatory requirements, and anticipate potential regulatory changes.

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