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Kai Hauerstein (LL.M.)

🚀The International Business Environment

2y ago

Lawyer & Management Consultant with 20+ years in Development Cooperation. I write about Indonesia's Legal Business Environment to help professionals and businesses make informed decisions.

The Business Environment in Indonesia - Foreign Direct Investment: Prohibited and Restricted Investment Areas

As part of the reforms under the 2020 Law on Job Creation, on March 4, 2021, the Indonesian government enacted Presidential Regulation No. 10 of 2021 (amended by PR No. 49 of 2021), which revoked the 2016 Negative List and replaced it with a new Negative List (2021). The PR claims that the general principle under this list is that business activity is open to 100% foreign investment unless subject to specific limitations in the regulation. The question is whether the exception is still the rule.

Prohibited and restricted investment (negative list).

Restricted investments are grouped into the following sectors: prohibited sectors, restricted sectors, and reserved sectors and reserved sectors for MSMEs and cooperatives.

  • Prohibited Sectors: These are specifically reserved for the government, where no private investment, domestic or foreign, is permitted.

  • Restricted Sectors: These are subject to specific conditions, such as being reserved for domestic investors only, foreign equity caps, and businesses requiring special licenses.

  • Sectors Reserved for Cooperatives and MSMEs: These are either sectors closed to investors or open under strict conditions.

    • MSME sectors closed for Investors: These are business activities that do not use technology or simple technology, are labor-intensive, or are related to special cultural heritage, and the capital required for them does not exceed IDR 10 billion (excluding land and buildings).

    • Restricted MSME sectors: Activities that are open to foreign investment if the business is conducted based on a partnership with a cooperative or MSME (i.e., requiring compulsory partnership, which can be in the form of operational cooperation, franchise, distribution, joint ventures, profit sharing, outsourcing, etc.)/

Key Takeaway

Reforms have notably "liberalized" foreign investment, reducing prohibited and restricted business activities in specific sectors. However, the investment framework, including an extensive negative list, remains. The negative list includes prohibited business activities and restricted sectors still closed or limited to foreign investment. The claim that Indonesia is generally open for investment should be taken with a grain of salt.

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