Investment Opportunities in Indonesia: The Challenges

Potential and Risks of Investing in Indonesia

  • InCorp Editorial Team
  • 4 September 2024
  • 10 reading time

Indonesia is an attractive business destination due to its large market, stable environment, low labor costs, and abundant raw materials. However, starting an investment in Indonesia involves risks such as political unrest, bureaucracy, infrastructure challenges, and natural disasters. Explore further to understand the investment opportunities in Indonesia and the associated risks.

Is Indonesia A Good Place to Invest?

Many investors have invested in Indonesia based on its low labor cost and availability of raw materials. They make Indonesia a location for intensive activity by using local distributors and partners while making strategic decisions in other countries like Mexico and China.

Indonesia is considered “Asia’s next big opportunity” because of its fast-growing economy (up 5.8% in 2022) and favorable demographics. Over 60 percent of the population is between 20 and 65, which gives the country a large bank of earners and not too many older people for workers to support.

Recently, a growing business model in Indonesia has expanded beyond contracts or consignment manufacturing plans.

Instead, development has been focused on a capital-intensive business model that does not rely solely on Indonesian labor in some industries, such as consumer goods, cosmetics, automotive, and components. Many plans involve joint ventures with local representation in Indonesia.

Why Should You Invest in Indonesia

Indonesia’s business environment offers unique advantages, making it an appealing choice for investors seeking short-term gains and long-term success.

A favorable investment climate facilitates doing business in Indonesia, whether you’re looking to enter a thriving market or explore new growth opportunities.

Advantages Description
Strategic Location Indonesia is a critical gateway to ASEAN and Asia markets and is an attractive China +1 destination along significant shipping and transport routes.
Growing Economy The country’s GDP has grown above 5%, with domestic consumption representing about 60%.
Government Reforms The Indonesian government is committed to promoting foreign investment with a clear economic vision and vital incentive programs.
Ease of Doing Business Indonesia offers fair and improving conditions for foreign investors, and its ease of doing business ranking is growing. This positive trend reflects the country’s commitment to creating a more attractive and accessible investment environment, as evidenced by improving Indonesia’s investment ranking.
Large and Young Labor Force Indonesia has a dynamic and youthful workforce with a labor force of nearly 137 million and a median age below 30.
Special Economic Zones Developing Special Economic Zones provides various incentives to attract investors.
Expanding Indonesia Investment List The Positive Investment List includes over 200 business sectors open to foreign investment, such as transportation, energy, and telecommunications.
Rising Consumer Spending Consumer spending is rising, with a population of over 237 million, a growing middle class, and a services sector exceeding 40% of GDP.
Extensive FTA Network Indonesia has signed more than 14 Free Trade Agreements, offering trade benefits to Asian countries, ASEAN, Europe, and the world.
Rich Natural Resources Indonesia is rich in natural resources, including coal, silver, gold, nickel, copper, bauxite, thermal coal, tin, petroleum, and natural gas.

What are the Best Investment Opportunities in Indonesia?Investment Opportunities in Indonesia: The Challenges

Here are the best investment opportunities in Indonesia, highlighting sectors poised for growth and providing insights into how you can capitalize on the country’s evolving economic landscape.

Oil and Gas Sector

Indonesia has an estimated 87.22 billion barrels of oil and 594.43 trillion cubic feet (TSCF) of gas, making it an attractive investment destination in the oil and gas sector. The country still holds great potential for hydrocarbon resources.

The government’s plan to maintain oil production at 1 million barrels per day opens up significant investment opportunities in Indonesia’s upstream sector.

Exploration activities have a success rate of 38%, with well drilling (wildcat wells) averaging over 10% success. Key exploration areas include Sulawesi Offshore, Nusa Tenggara Offshore, Halmahera, Maluku, and Papua Offshore.

Non-oil and Gas Sectors

The manufacturing sector is expected to continue leading national investment growth in the non-oil sector, outperforming plantations, mining, and services.

This will drive more Indonesian suppliers to support manufacturing. The sector’s investment value is projected at IDR 225 trillion, making up 50% of the estimated total investment of IDR 450 trillion.

Investment opportunities in Indonesia shift from labor-intensive to capital-intensive industries, with significant funds flowing into the automotive, steel, and chemical sectors.

Investment in labor-intensive industries like textiles and footwear is expected to lag. The ban on raw mineral exports will also boost manufacturing investment.

Property

As the world’s fourth-most populous country, Indonesia needs rapid development to meet housing, workplaces, and entertainment demand.

This has led to a boom in property development, making it one of the most promising investment opportunities in Indonesia. The residential property price index in 14 major cities rose 7.88% in the year leading up to Q2 2014.

While foreign property ownership is not allowed in Indonesia, foreigners have options, such as purchasing through a PMA, Local PT, or buying shelf companies in Indonesia.

Transportation

The transportation sector is a promising investment opportunity in Indonesia for foreigners. With high demand for better transportation options, there is room for growth in various modes, from land transportation to railways, buses, and MRT systems.

The airline industry is desirable, as Indonesia is the fastest-growing airline market but still has limited competition. As a vast archipelago, Indonesia offers many places to explore, further boosting the demand for air travel.

Internet and Telecommunications

With the rapid growth of telecommunications and Internet technology, Indonesia has become one of the most connected societies in the world.

Over the last decade, IT, Telco, and Internet technologies, especially from the US and China, have rapidly developed in Indonesia.

However, the country must catch up with neighbors like Singapore and Malaysia regarding Internet speeds and Telco infrastructure, creating significant investment opportunities.

While Indonesia previously lacked significant internet companies, this is changing. For example, Japan’s SoftBank and India’s Sequoia Capital invested $100 million in the online marketplace Tokopedia.

Renewable Energy Sector

Indonesia, one of the world’s largest energy consumers, has become Asia’s biggest emitter of greenhouse gases. Despite its large population and vast area, the country still faces an energy crisis, especially in remote regions outside Java.

This is partly due to its reliance on conventional coal, diesel, and steam power plants. While some water plants are in use, they must be fully optimized.

Given its tropical climate and long coastlines, Indonesia has great potential for renewable energy sources like solar panels and windmills. There is only one solar and windmill plant in the country, creating significant investment opportunities to expand this technology and help solve Indonesia’s energy crisis.

Medical Sector

Indonesia aims to enhance its health sector by improving infrastructure and attracting foreign investment.

With over 222 medical equipment manufacturers in the country, 90% of which are small and medium-sized enterprises (SMEs), there is significant potential for growth.

Stronger collaboration between the government and businesses is needed to realize this potential fully. The Ministry of Health is encouraging foreign investors to support the development of the healthcare industry, particularly in medical equipment.

Pharmacy Industry

The Indonesian pharmaceutical market is growing faster than in other ASEAN countries. The increasing elderly population and the Social Security System drive this growth. Currently, there are about 208 pharmaceutical companies in Indonesia.

Investment in the sector is expected to reach around IDR 300 trillion this year, with promising opportunities ahead. The national pharmaceutical industry sales could hit about $4.9 billion, with multinational companies contributing 23-24%. Indonesia’s pharmaceutical market holds about 0.4-0.5% of the global market share, valued at $800 billion.

With a population of 243.7 million and annual health spending per person at $108 (2014 figure), Indonesia imports $748 million in medical equipment annually and has the potential to import $1.7 billion.

Food Industry

The food and beverage industry, along with retail trade, faces challenges due to changing lifestyles, a growing middle class, and rising average incomes.

Given these factors, investors should be cautious when navigating the stock market. It’s important to focus on long-term investments in promising industries and not be distracted by short-term fluctuations.

Investment Risks in Indonesia

In addition to holding huge investment potential, Indonesia also has investment risks that need to be calculated for potential investors, including:

Demonstration

Demonstrations, which are a hallmark of a democratic society, take place every day in Indonesia, although they are usually on a small scale. Protests focus on a range of political, economic issues, and social issues.

Corruption

Corruption in Indonesia has yet to improve impressively on the annual Corruption Perception Index, which shows the level of corruption worldwide. Indonesia is ranked 118 out of 176 countries; however, its performance has steadily increased since the beginning of 2004.

Government and Bureaucracy

Indonesia’s government and bureaucratic systems are among the most complex globally, making it challenging for investors to do business. Critical processes like company registration and work permits are still tricky, and stricter new investment rules have yet to help.

However, the government is working on reforms through the Investment Coordinating Board to simplify bureaucracy and improve the investment process.

Infrastructure

Indonesia’s insufficient infrastructure quality and quantity could interfere with economic growth. While the government acknowledges the need for significant investments in roads, bridges, and ports, these projects have yet to be fully realized, diminishing the country’s investment appeal.

Natural Disasters

Natural disasters in Indonesia, such as earthquakes, tsunamis, volcanic eruptions, and floods, often made headlines in the Indonesian media and caused casualties and damage to infrastructure.

Indonesia’s location is in the Pacific Ring of Fire, and its geographic area consists mainly of seawater. Both these reasons make Indonesia prone to natural disasters.

Volatile Exchange Rate Leading to Inflation

In early 2014, inflation surged by 1.07% due to rising food prices and a weak exchange rate, which reached over 12,000 rupiah per US dollar. If the rupiah stabilizes, predicting production costs and setting competitive market prices will be easier.

A weakening dollar could lead to higher production costs and potential losses in the manufacturing sector. We advise foreign companies to partner with Indonesian distributors to navigate these challenges and establish business operations in Indonesia.

Changes in Global Liquidity

Indonesia faced high economic risks in 2014 that could slow growth. While economic indicators remain positive, global liquidity is changing due to the Federal Reserve’s plan to reduce its bond-buying stimulus.

The Fed’s decision to cut back on its $85 billion monthly bond purchases aims to decrease the money supply. This differs from past crises like those in 1997/1998 and 2008, as it’s not due to a financial collapse but rather an economic recovery.

Indonesia is prepared to handle these global liquidity changes, one of four major risk factors for 2014. The other three are global oil prices, food prices, and domestic politics.

What is the Economic Outlook for Indonesia in 2024?

In 2024, Indonesia will emerge as Asia’s key alternative investment destination, particularly for consumer-focused sectors like retail, healthcare, and financial services.

Recent global trade disruptions and rising labor costs have made Indonesia a viable option for a China+1 strategy, enhancing its appeal for foreign direct investment in Indonesia in 2024. The country offers a vast labor pool, a growing middle class, and abundant natural resources.

Standard Chartered Bank forecasts that Indonesia’s economy will expand significantly, growing from $4.2 trillion in 2020 to $10.1 trillion by 2030, positioning it as the world’s fourth-largest economy by purchasing power parity.

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Maximize Investment Opportunities in Indonesia with InCorp

Despite the risks and challenges, Indonesia presents many opportunities for businesses looking to expand.

InCorp can help you navigate the business landscape and identify investment opportunities in Indonesia. Our comprehensive services include:

  • Company Registration: Establish a legal entity that aligns with your business goals and complies with regulations.
  • Business License: Obtain the necessary permits and certifications to operate your business smoothly and legally.

Click the button below to take advantage of this investment opportunity in Indonesia.

Daris Salam

COO Indonesia at InCorp Indonesia

With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships.

Get in touch with us.

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Frequent Asked Questions

There are three things business owners need to consider before setting up a business in Indonesia: the type of business entity, capital requirements, and regulations.

Indonesian regulations separate local companies from foreign companies. Generally, foreign-owned companies (PT PMA) have more limitations than their local counterparts (Local PT). However, to pursue more foreign direct investment in the country, the government has taken several bold initiatives to increase the ease of doing business and provide numerous attractive incentives for foreign investors.

There are two main types, namely, primary business licenses and non-primary business licenses. The primary ones commonly apply to various industries, such as general and industrial business licenses. Additional non-primary ones are included, depending on the operations of your business. Examples of non-primary business licenses are operational and commercial licenses.

Yes, you must apply for it to be able to issue work permits for your foreign employees. This permanent business license is also a prerequisite for the applications for other business licenses and import licenses.