2011 Reports

Inward FDI in Indonesia and its policy context

Tambunan, Tulus T. H.

Inward foreign direct investment (IFDI) in Indonesia has been an important element of the country's economic development process. Following the introduction of the first foreign direct investment (FDI) law early in the 'New Order' era (1966-1998), IFDI flows to Indonesia were relatively large. Indonesia was hit hard during the Asian financial crisis in 1997-1998, when net IFDI inflows fell sharply. In the first half of 2004, IFDI started to grow again. Indonesia still faces some uncertainties relating to the implementation of regional autonomy and to the high costs of running businesses caused by inadequate infrastructure, restrictive labor regulations and corruption. Nevertheless, the availability of vast reserves of highly diversified natural resources, a huge domestic market potential, a cheap labor force, and continued reforms in the direction of a market-based economy, including privatizations and open access to almost all sectors, are likely to boost IFDI.