- Indonesia Loosens Foreign Investment Limits, but Some Industries Remain Protected
- July 12, 2016 | Authors: Elizabeth Cole; Sushma Jobanputra; Paul C. Kuo
- Law Firms: Jones Day - Singapore Office ; Jones Day - Shanghai Office ; Jones Day - Singapore Office
On May 18, 2016, the Indonesian government revised its Negative Investment List (Daftar Negatif Investasi or DNI) through Presidential Regulation No. 44 of 2016. The revised Negative Investment List, which was part of a recent series of economic stimulus packages, creates opportunities for foreign investors in a range of areas including retail, tourism, entertainment, and distribution, although other previously open areas have now been restricted to protect local industry.
100 Percent Foreign Ownership Permitted in a Broad Range of New Industries
Various industries that were previously completely or partially closed to foreign investment are no longer included in the Negative Investment List and therefore should be open to 100 percent foreign investment. These industries include certain large-scale e-commerce activities involving investments in excess of IDR 100 billion (approximately USD 7.5 million), telecommunications equipment testing, health care support services, manufacturing of raw pharmaceutical materials, toll road management, nonhazardous waste management, film production/distribution, cinemas, restaurants/bars, cold storage, and distribution affiliated with production.
Relaxation of Foreign Ownership Limits
Foreign investment restrictions are also relaxed for a number of industries. For example, foreign ownership of distribution companies (not affiliated with production) and warehousing companies, which has long been a major issue for foreign companies operating in Indonesia, has been increased to 67 percent compared to the previous cap of 33 percent, effectively allowing foreign investors to go from being minority shareholder. Other industries in which foreign investment caps have been increased to 67 percent (and in some cases, 70 percent for ASEAN investors) include catering services, meetings, incentives, conferences and exhibitions services, professional training, golf courses, air transport support services, telecommunication services, health care services, consulting and construction services (where the contract value exceeds IDR 50 billion (approximately USD 3.7 million), and department stores with retail space of between 400m2 and 2,000m2.
Some industries that were completely closed to foreign investment, such as passenger land transportation and high-voltage electrical installation testing, have also been opened up to foreign investment of up to 49 percent.
Protectionist Policies May Discourage Investment
Along with the relaxation of foreign investment limitations that has occurred in many areas, the revised Negative Investment List has increased the number of industries reserved solely for Indonesian Micro Small or Medium Enterprises ("MSMEs") or that require foreign investors to establish a local partnership arrangement (through a subcontract, agency, franchise, or other partnership arrangement) with a local MSME or cooperative before being able to operate in certain industries. For example, construction and construction consultation services (involving low to medium technology or risk, or with a contract value of up to IDR 50 billion (approximately USD 3.6 million) for construction services or below IDR 10 billion (approximately USD 750,000) for construction consultation services), are reserved solely for MSMEs. Retail trading via mail order or the internet requires a local partnership.
These changes reflect policies intended to encourage the development of local businesses in these areas; however, they may discourage foreign investors who are unwilling to relinquish control or invest significant sums in Indonesia at this time.
The transitional provisions to the Negative Investment List provide that the changes to the Negative Investment List do not apply to foreign-owned companies (Penanaman Modal Asing) that are already licensed with the Indonesian Investment Coordination Board and operating in industries that have become either completely or partially closed to foreign investment as a result of these policies.
The revised Negative Investment List, partnered with Indonesia's potential accession to the Trans-Pacific Partnership Agreement, signals the Indonesian government's acknowledgment of the significant role foreign direct investment plays in boosting the Indonesian economy. While the Negative Investment List does not go as far as was hoped by many in expanding foreign investment, it does offer opportunities in key areas previously closed for investment. In addition, the raising of foreign investment caps in key areas such as distribution with production may enable foreign investors to take a controlling interest in an existing investment.