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Indonesia, a diverse archipelago with over 300 distinct ethnic groups, has experienced significant economic resurgence since recovering from the Asian financial crisis in the late 1990s. As of today, it stands as the world’s fourth-largest country by population and ranks tenth in terms of purchasing power parity.
Additionally, its membership in the G-20 underscores its global economic significance. Impressively, Indonesia has halved its poverty rate since 1999, bringing it down to just under 10% in 2020. This article delves into the factors and strategies propelling Indonesia’s commendable economic ascent.
Key Takeaways
- GDP Overview: The industry sector is the largest contributor to Indonesia’s GDP at 46.5%, with manufacturing being the primary growth engine. The services sector contributes 38% to the GDP, and the agriculture sector accounts for the remaining 15%.
- Omnibus Law: Introduced as Law No. 11 of 2020 on Job Creation, the Omnibus Law aims to provide corporate tax incentives, restructure labor laws, and simplify the business licensing system. A notable feature is the Risk-Based Approach Business Licensing Scheme.
- Risk-Based Approach: Economic and business activities are categorized into four risk levels: low, medium-low, medium-high, and high. Depending on the risk, businesses have different licensing requirements.
- Business Sector List: The article provides a comprehensive list of business sectors and their categorization based on the risk-based licensing scheme. The “Grandfather Clause” ensures that businesses with active licenses before the introduction of the new system can continue operating irrespective of their current risk level.
- Positive Investment List: Replacing the previous “Negative Investment List”, the Positive Investment List opens up many business sectors that were previously closed or restricted for foreign investment. The list categorizes business activities into groups such as those closed for all private businesses, investment priority sectors, businesses reserved for Cooperatives and MSMEs, and businesses conditionally open to investment.
Overview of Gross Domestic Product (GDP)
| Sector/Subsector | Percentage of GDP |
|---|---|
| Industrial Sector (Total) | 46.5% |
| – Manufacturing | 24% |
| – Mining and Quarrying | 13% |
| – Construction | 10% |
| – Electricity, Gas, and Water Supply | 0.5% |
| Services Sector (Total) | 38% |
| – Trade, Hotels, and Restaurants | 14% |
| – Transportation and Communication | 7% |
| – Finance, Real Estate, and Business Services | 7% |
| – Government Services | 6% |
| Agricultural Sector | 15% |
Indonesia’s GDP Annual Growth Rate averaged 4.85% from 2000 to 2021, with a high of 7.16% in the fourth quarter of 2004 and a low of -5.32% in the second quarter of 2020. This pressured the Indonesian government to take progressive measures and implement major economic reforms by enacting Law No. 11 of 2020 on Job Creation (Omnibus Law).
The Purpose of Omnibus Law
The Omnibus Law introduced transformative changes to the business licensing landscape by incorporating new regulations and revising around eighty existing statutes. Its primary objectives include:
- Offering corporate tax incentives to stimulate business growth.
- Modernizing and streamlining labor laws to foster a more flexible work environment.
- Simplifying the business licensing process, thereby reducing bureaucratic hurdles and regulatory impediments to investment.
A standout feature of these changes is the Risk-Based Approach Business Licensing Scheme, introduced through the newly established OSS-RBA system. This approach aims to categorize and manage businesses based on their associated risks, ensuring a more efficient and effective regulatory process.
Risk-Based Approach: Implementation
The BPS classifies Indonesian economic and business endeavours using the Indonesia Standard Industrial Classification, known locally as “Klasifikasi Baku Lapangan Usaha Indonesia” or KBLI. The revamped RBA system segments these classifications into four distinct risk tiers:
- Low Risk: Only a NIB (Nomor Induk Berusaha) is required.
- Medium-Low Risk: Both a NIB and a Standard certificate are necessary.
- Medium-High Risk: A NIB along with a Processed standard certificate is mandated.
- High Risk: A NIB, Processed standard certificate, and a business license are all essential.
This stratification is grounded in the Government Regulation No. 5 of 2021 on Investment Business Fields (GR 5/2021). Furthermore, businesses that meet certain criteria can avail themselves of various incentives through the OSS system, including tax holidays, tax allowances, and exemptions from import duties.
Risk-Based Approach: Business Sector List
The following are the business sectors that are categorized in risk-based business licensing schemes:
| Business Sectors | Closed to private business | Closed to PMA |
| Maritime affairs and fisheries | Fishing of endangered species Coral extraction business | Fish preservation manufacturing |
| Agriculture | Cultivation of weeds | Geographically protected coffee manufacturing Batik manufacturing (printed, written or both) Wooden construction material Manufacturing of traditional medicine Ingredients for Human Consumption Traditional medicine Traditional medicine for human consumption Ship manufacturing (Pinisi, Cadik or Wooden design) Soy manufacturing Geographically protected salt manufacturing Krupuk manufacturing Weaving manufacturing Woven & embroidery fabric manufacturing Traditional clothing manufacturing Wickerwork manufacturing Wooden-carved craft manufacturing Goods made of wood, rattan, cork manufacturing Rubber preservation manufacturing Household equipment made of clay/ceramic Cutting tools & hand tools for farming General tools manufacturing Traditional music instruments manufacturing Motorcycle repair and maintenance Household tools reparation Household and private goods reparation manufacturing |
| Environment and Forestry | Harvesting of forestry resources | |
| Energy and mineral resources | Electricity provision for power generation below 1 MW Electricity installation Inspection of technical installation services | |
| Nuclear power | Closed for all business | Closed for all business |
| Industry | Industry of Ozone-depleting substances Chemical weapon manufacturing Alcoholic drink production | Building construction with basic or average technology Road civil building construction Construction of irrigation and drainage networks Civil building construction of clean water processing Civil building construction of waste treatment Transport construction of telecommunication civil building Central construction of telecommunication Creation of underground well Electrical civil building construction Network construction of irrigation, communication Site construction with basic or average technology Construction of other civil building Demolition Land conditioning Public installation Work using simple and average technology Decoration using simple and average technology Installation of construction using basic technology Other specific construction Transportation consultant Architecture activity Engineering and technical consultation activity Laboratory testing services |
| Trade | Retail trade Post and online retail Service activity | |
| Public works and housing | Building construction with basic o average technology Road civil building construction Construction of irrigation and drainage networks Civil building construction of clean water processing Civil building construction of waste treatment Transport construction of telecommunication civil building Central construction of telecommunication Creation of underground well Electrical civil building construction Network construction of irrigation, communication Site construction with basic or average technology Construction of other civil building Demolition Land conditioning Public installation Work using simple and average technology Decoration using simple and average technology Installation of construction using basic technology Other specific construction Transportation consultant Architecture activity Engineering and technical consultation activity Laboratory testing services | |
| Transportation | ||
| Health, Drugs and Food | Traditional medicine business Private hospital | |
| Education and Culture | Art studio | |
| Tourism | All forms of gambling and casino business | Hostelry service Travel & tour agency Tour guide service |
| Religious affairs business | Travel agency Hajj & Umrah | |
| Post and telecommunication | ||
| Defence and security | Closed for all business | Closed for all business |
| Manpower |
Grandfather Clause applies to all businesses whose licenses were active, prior to the introduction of the OSS-RBA system, irrespective of the current risk level. If the business licence remains “inactive”, those businesses are obliged to re-process their business licenses under the new scheme.
Positive Investment List
In February 2021, the Indonesian government unveiled Presidential Regulation No. 10/2021, which underwent modifications by May of the same year with the introduction of No. 49 of 2021. This regulation was pivotal in reshaping investment guidelines in the business sectors, as outlined in Table 2.
Notably, PR 10/2021 superseded PR No. 44 of 2016, previously known as the “Negative Investment List” (DNI). Under the DNI, certain KBLIs were either limited or entirely prohibited for foreign investments.
The introduction of the new regulations marked a progressive shift. It not only expanded access to several business sectors previously off-limits or limited to foreign investments but also introduced the “Positive Investment List”.
Under the Positive Investment List, the investment landscape is broadly open, barring sectors that remain exclusively closed or those earmarked solely for the central government without provisions for third-party collaborations. The PR 10/2021 organizes business activities into distinct categories:
- Exclusively Closed Sectors: Refer to Table 2 for specifics.
- Priority Investment Sectors (Appendix I of PR 10/2021): This category encompasses 246 business activities, all of which are open to 100% foreign direct investment.
- Sectors Reserved for Cooperatives and MSMEs: Appendix II of PR 10/2021 lists 106 business activities under this category. These sectors are off-limits for foreign ownership. However, PMA Companies have the latitude to partner with CMSMEs in select businesses, aligning with the government’s vision to integrate them into the global value chain.
- Conditionally Open Sectors: These are sectors reserved exclusively for domestic investors. For a detailed list, refer to Table 2. Some businesses in this category may necessitate special licenses and are subject to rigorous monitoring and regulations.
This revamped approach underscores Indonesia’s commitment to fostering a conducive investment environment while ensuring strategic sectors remain under national purview.
Conclusion: Indonesia’s Forward-Thinking Investment Landscape
Indonesia’s commitment to bolstering its economic trajectory is evident in its progressive legislative reforms. Initiatives like the Omnibus Law, the introduction of the Risk-Based Approach, and the unveiling of the Positive Investment List collectively underscore the nation’s drive to create a more investor-friendly environment, particularly for foreign stakeholders.
For those considering investment opportunities in Indonesia, it’s imperative to navigate this evolving landscape with informed guidance. Our team is poised to offer expert advice and assist you at every juncture of your investment journey.
Should you have queries or require insights on company registration in Indonesia, don’t hesitate to reach out. You can fill out the form below or directly email us at contact@permitindo.com. Your successful investment in Indonesia begins here.