JAKARTA - Indonesia has become an increasingly important investment hub for foreign companies, especially from Japan, although various issues in the fields of bureaucracy, legal uncertainty and corruption remain a major concern, an international investment consultancy has said.
Kroll, the global leader in risk mitigation and response, said Japanese foreign direct investment (FDI), which accounted for 16.4 per cent of market share in early 2014, had continued to grow from year to year.
In 2013, Indonesia overtook Thailand to become the second-highest recipient of Japanese FDI in ASEAN, Kroll said in a report on the potential and challenges in Indonesia on FDI and mergers and acquisitions (M&A) markets, released on Tuesday.
"In terms of M&A, Indonesia remains favourable in Southeast Asia," the report noted, adding that last year, Indonesia had achieved a new record for deal value, reaching a high of just over US$2 billion (S$2.54 billion).
Despite growing opportunities, Kroll highlights several issues such as legislative changes, the Trade Law, the negative investment list, the central government having additional powers over strategic industries and corruption as concerns.
Recently, Mitsubishi Motors, a subsidiary of Japanese trading giant Mitsubishi Corp., said it would invest US$600 million in building a multipurpose vehicle (MPV) factory in Bekasi, West Java, due to strong automotive demand in the country.
Indonesia has also attracted major investors from elsewhere.
Taiwan's Foxconn Technology Group, the world's biggest electronic components maker, said it may invest US$1 billion in Indonesia. Meanwhile, visiting Russian Industry and Trade Minister Denis Manturov said in Jakarta Tuesday that Russia's investment and industrial group, Vi Holding, plans to invest up to US$1.5 billion to build alumina and ferronickel smelting facilities in Indonesia.
Growing interest from foreign companies indicates Indonesia remains one of the world's major investment destinations. Analysts hope the new government will use the momentum to further attract foreign investors to help spur the country's economic growth amid the decline in the global economy.
Agustinus Prasetyantoko, chief economist of state-run Bank Tabungan Negara (BTN), told The Jakarta Post that FDI would help Indonesia fix the deficit in its trade balance due to the country's dependency on the import of raw materials.
"We need to push FDI for upstream industries as well as manufacturers that are able to create products with added value, instead of just exporting raw materials," he said.
The Investment Coordinating Board (BKPM) reported total FDI realisation in the third quarter grew 16.9 per cent year-on-year to reach Rp 78.3 trillion (S$8.3 billion). Total realised investments are expected to reach Rp 456 trillion this year, a 15 per cent increase on last year. As of September, the country had realised Rp 342 trillion of investments.
FDI is regarded as a key feature of economic growth in the country, where investments account for 30 per cent of gross domestic product (GDP) - the second-largest growth driver after consumer spending - as well as to support the balance of payments, which is under pressure from the current-account deficit.
Raden Pardede, an economist and deputy chairman of the National Economic Committee (KEN), a think-tank under former president Susilo Bambang Yudhoyono, said the new government should attract FDI to productive sectors, including export-oriented manufacturing, to reduce the current account deficit.
A fuel subsidy cut and state budget efficiency to attract positive sentiment, as well as bureaucracy reform in order to accelerate business license issuance, should also be listed as the new administration's main priorities, Raden said.