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Foreign Direct Investment (FDI) in Indonesia and Australia: Laws, Policies and Regulations

Foreign Direct Investment (FDI) in Indonesia and Australia: Laws, Policies and Regulations

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This article will examine Australia and Indonesia’s laws, policies and regulations surrounding foreign direct investment (FDI) and whether each country is directing its focus towards protectionism or the liberalization of free trade and the opening up of borders. A discussion will be made concerning the positives and negatives of adopting protectionist policies and policies that embrace FDI.

Australia sources approximately 20% of its capital flow from overseas 1 . This is significant, and I believe that if the Australian economy is to grow in an increasingly globalized world, Australia needs to loosen its laws and regulations surrounding FDI. Australia wants to strengthen its economic relations with Indonesia, however, Australia is still cautious about opening up its borders to foreign investment 2. Laws and regulations surrounding foreign investment may be too conservative, meaning that Australia is missing out on important opportunities to create valuable relationships and grow its economy. 3

Indonesia is one of the world’s ‘fastest growing consumer markets’. 4 GDP reached US 1 trillion in 2017 and is ‘growing steadily at around five percent annually’. 5 Private consumption ‘makes up 57 percent of GDP.’6 This is fueled by a ‘rapidly expanding middle class.’7 With half of Indonesia’s population of 262 million younger than 30, there is ‘growing demand for consumer goods, targeted education and training, and innovative knowledge-based services and technology.’ 8 The growth of internet access and uptake in smartphone ownership is ‘enabling government, business and consumers to take advantage of new digital services.’9

In spite of Indonesia’s growth, Indonesian economic policy priorities are mixed.10 Indonesian trade policy is ‘characterized by strong self-sufficiency imperatives, and investment policy combines a desire for greater foreign investment to fuel infrastructure and employment.’11 However, there is also a growing focus on resource nationalism.’12 With such a fast growing economy with a great ability to expand, it is believed that Indonesia should embrace laws that promote FDI.

Australia believes that FDI brings many benefits.13 It supports ‘existing jobs and creates new jobs, encourages innovation and the induction of new technologies and skills, provides access to markets, and promotes competition amongst our industries.’14 Australia’s foreign investment review framework is set by the legislative framework and is supported by Australia’s Foreign Investment Policy. The legislative framework includes the Foreign Acquisitions and Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Fee Impositions Act 2015. The acts ‘allow the Treasurer to review foreign investment proposals that meet certain criteria. The Treasurer has the power to block foreign investment proposals or apply conditions to the way proposals are implemented’ 15 to ensure they are not ‘contrary to national interest.’ 16 This means potentially beneficial proposals may be blocked just because the Treasurer does not agree with it.

The Australian government may be too conservative in its approach to FDI with Indonesia, and as a result, FDI is slowing. Jarryd de Haan in his article ‘Indonesian Perspectives: Economic and Security Relations with Australia’ 16 states that ‘Australia’s economic relationship with Indonesia has begun to falter.’17 Looking at 2017 trade figures from Bank Indonesia, Australia makes up 5.1% of Indonesia’s goods market. 18 In comparison, Indonesia’s largest trading partners in 2016 included China (which imported 13% of Indonesia’s exported goods, Japan (13%) and Singapore (11%). 19 While Australia’s ‘position in the Indonesian market is sizeable, increasing deficits have marred trade relations from Indonesia’s perspective. Indonesian exports to Australia have fallen in value, resulting in a trade deficit for Indonesia of $2.6 billion in 2016, ‘the largest shortfall in the trading relationship to date.’ 20 Laws allowing the Treasurer to block foreign investment proposals must have something to do with this.

Australia plays a major role in Indonesia’s tourism industry. In the long-term however, Australia does not appear to be the ‘primary market for Indonesian plans to expand its tourism industry.’ 21 Indonesia is expected to focus on increasing the inflow of Chinese and Muslim tourists. 22 With Australia’s relatively small population of 24 million, Indonesia is ‘potentially better off seeking to expand trade in other, larger markets.’ 23 The growing economies of the Philippines and Vietnam are markets for Indonesian exports. 24

However, the Australian Department of Foreign Affairs is hopeful about a strong trading relationship between Australia and Indonesia. The ‘IA-CEPA aims to address impediments to bilateral trade, including both tariff and non-tariff barriers, to improve access to each other’s services markets and to cut the red tape preventing Australian investment in Indonesia.’ 26 In December 2015, a foreign investment framework was introduced by way of amendment to the Foreign Acquisitions and Takeovers Act 1975 (Cth), and the introduction of the Foreign Acquisitions Takeovers Regulations 2015 (Cth).27 This new regime was promoted as ‘reducing red tape, simplifying the foreign investment process and providing greater certainty. However, it also saw the ‘introduction of application fees for foreign investment for the first time and new offences and civil penalty provisions.’28 Changes were made to Australia’s foreign investment regime during 2016. Following the ‘acquisition of the Port of Darwin by a Chinese owned company, the Foreign Investment Review Board is now required to assess the sale of critical state-owned infrastructure assets to private foreign investors.’29 Previously, such an assessment was ‘only required when the sale was to foreign state-owned enterprises.’30 A foreign investment proposal led by Chinese owned Dakang Australia Holdings Ltd was rejected in April 2016. 31 In August 2016, the proposed acquisition for the lease of 50.4% in Ausgrid (New South Wales owned electricity network provider) by China’s State Grid and Hong Kong-owned Cheung Kong Infastructure Holdings was rejected by the Treasurer on the basis that the ‘transaction would be contrary to national interest.’ 32

A major part of the work that I do at my internship at Schinder Law Firm has been researching FDI in Australia and in Indonesia and looking at the possibility for increasing the trading relationship between the two countries. It is clear that Indonesian business people are generally keen to forge a stronger trading and economic relationship with Australia. Therefore I believe that whether Australia or Indonesia is supportive of free trade and FDI or not depends on the industry that is being considered. If it is clear that a domestic industry would be wiped out by a more competitive foreign company, the government will likely adopt protectionist policies with concern for this industry.

The Foreign Acquisitions and Takeovers Act 1975 provides the legislative framework for the foreign investment screening regime. 33 Separate legislation also imposes other requirements and restrictions on foreign investment in areas such as the banking sector (Banking Act 1959) and the shipping industry (Shipping Registration Act 1981).34

This legislation helps preserve jobs in sectors that are negatively affected by industrial development and globalization. 35 Protectionism can also help build up new industries. In sectors with ‘high start-up costs, new firms might find it difficult to compete’ 36 if there is no government support in the form of tariffs or subsidies. Once these businesses become competitive, these barriers can be lowered. 37

Indonesia’s attitude to trade and investment in recent years has been characterized as sitting on the fence. On the one hand, ‘the country is an active member of the G20, APEC, and ASEAN.’ 38 In the past, participation has ‘encouraged domestic policy reforms that ensured Indonesia benefitted from greater economic integration with other countries.’ 39 On the other hand, there is a growing trend of protectionism. Most policies reflective of this trend are ‘non-tariff related, as tariffs are already very low.’ 40 The introduction of a ‘more restrictive cap on certain sectors, the ban on raw mineral export, and the provision of greater authority for ministers to issue intervention and monitoring policies are just a few examples.’ 41 According to the Global Trade Alert (GTA) database, ‘since 2009 Indonesia has implemented 25 non-tariff measures, compared with 12 by India and 1 by Thailand.’ 42 Compared with China, Malaysia, India, and Thailand, Indonesia also ‘issued more export taxes and restrictions.’ 43

A number of factors have played a role in the re-emergence of protectionism in Indonesia. One of these has been ‘exchange rate movements.’ 44 When the ‘real exchange rate appreciates, exporting becomes more expensive.’ 45 To compensate for reduced demand, the sectors that produce traded goods often ‘ask government for protection in the form of tariff or non-tariff measures.’ 46 In part this seems to explain the rise in protection of the rice industry.

In the last few years the Indonesian government has increased protectionist policies in the form of ‘non-tariff barriers.’ 47 However, from the perspective of someone in support of FDI, these measures are likely to ‘drive up prices for Indonesian consumers at a time when their purchasing power is declining, and undermine the competitiveness and productivity of Indonesian firms.’ 48 Increased protectionism in Indonesia can be said to be partially caused by ‘a strong rupiah, anti-foreign sentiment and increased Chinese competition in the global supply chain.’ 49

It is clear that protectionism can be used to ‘safeguard ‘strategic’ industries such as energy, water, steel, armaments and food.’ 50 For example, ‘food security may be seen as important so that we can feed ourselves if something terrible happens to disrupt the system of world trade.’ 51 Finally, there might be pressure to reduce domestic standards for rights of workers or protection of the environment so that domestic corporations can compete with countries that have lower standards. 52

On the other hand, free trade increases the size of the economy as a whole as it ‘allows goods and services to be produced more efficiently.’ 53 This is because free trade encourages ‘goods and services to be produced where natural resources, infrastructure, or skills and expertise are best suited to them.’ 54 This increases productivity which may ‘lead to higher wages in the long term.’ 55 Increased global economic growth can partially be attributed to global trade and the lowering of tariffs and quotas, increasing competition. 56

Reducing non-tariff barriers can ‘remove red tape, thus reducing the cost of trading.’ 57 Cost of compliance would come down therefore making goods and services cheaper. In contrast, ‘protectionism can result in destructive trade wars that increase costs and uncertainty as each side attempts to protect its own economy.’ 58 Protectionist rules can tend to ‘favor big businesses and vested interests, as they have the resources to lobby most effectively.’ 59

It is clear when analyzing the trade and protectionist laws, policies and regulations of Australia and Indonesia is that both countries are embracing free trade and FDI with a degree of caution in order to safeguard domestic industries. From my experience at Schinder, and from research undertaken, I have come to the conclusion that globalization is inevitable, and domestic industries that are artificially being ‘propped up’ by governments cannot be sustainable in the long run. With the further opening up of borders, industries will learn to be more efficient and more competitive. It is my belief that Indonesia and Australia should focus more thoroughly on creating a strong trading relationship to ensure economic prosperity, while also strengthening diplomatic relations.

_________________________________________
1 Tim Robinson & Sean Langcake ‘Forecasting the Australian Economy with DSGE and BVAR Models’ (2018) 50, 3 Applied Economics 252
2Weihuan Zhou ‘Circumvention and Anti-Circumvention: Rising Protectionism in Australia’ (2016) 15, 3 World Trade Review 504
3 Tim Robinson & Sean Langcake ‘Forecasting the Australian Economy with DSGE and BVAR Models’ (2018) 50, 3 Applied Economics 252
4 Hal Hill ‘Asia’s Third Giant: A Survey of the Indonesian Economy’ (2018) 94, 307 Economic Record 472
5 Ibid.
6 Ibid.
7 Ibid.
8 Ibid.
9 Ibid.
10 Ruhul Suyanto, Harry Salim and Henry Bloch ‘Does Foreign Direct Investment Lead to Productivity Spillovers?’ Firm Level Evidence from Indonesia.’ (2009) 37, 12 World Development 1861.
11 Ibid.
12 Australian Government Department of Foreign Affairs and Trade Indonesian Market Insights (October 2018) Department of Foreign Affairs and Trade https://dfat.gov.au/geo/indonesia/pages/indonesia.aspx
13 Australian Government Department of Treasurer Australia’s Foreign Investment Policy (1st January 2019) Treasurer Space https://cdn.tspace.gov.au/uploads/sites/82/2018/12/1-January-2019-Policy_.pdf
14 Tim Robinson & Sean Langcake ‘Forecasting the Australian Economy with DSGE and BVAR Models’ (2018) 50, 3 Applied Economics 252
15 Ibid.
16 Ibid.
17 Jarryn de Haan Indonesian Perspectives: Economic and Security Relations with Australia (31st May 2018) Future Directions International http://www.futuredirections.org.au/publication/indonesian-perspectives-economic-security-relations-australia/ 18 Ibid.
19 Ibid.
20 Ibid.
21 Ibid.
22 Ibid.
23 Ibid.
24 Ibid.
25 Ibid.
26 Tim Robinson & Sean Langcake ‘Forecasting the Australian Economy with DSGE and BVAR Models’ (2018) 50, 3 Applied Economics 252
27 Clyde & Co Trends in Foreign Investment in Australia (22nd December 2016) Clyde & Co https://www.clydeco.com/insight/article/trends-in-foreign-investment-in-australia
28 Ibid.
29 Ibid.
30 Ibid.
31 Ibid.
32 Ibid.
33 Clyde & Co Trends in Foreign Investment in Australia (22nd December 2016) Clyde & Co https://www.clydeco.com/insight/article/trends-in-foreign-investment-in-australia
34 Kali Sanyal Australia’s Foreign Investment Policy (January 2013) Parliament of Australia https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/
BriefingBook44p/AustForeignInvest
35 Ibid.
36 Ibid.
37 Ibid.
38 Arianto Patunru and Sjamsu Rahardja Trade Protectionsim in Indonesia: Bad Times and Bad Policy (30th July 2015) Lowy Institute https://www.lowyinstitute.org/publications/trade-protectionism-indonesia-bad-times-and-bad-policy
39 Ibid.
40 Ibid.
41 Ibid.
42 Ibid.
43 Ibid.
44 Ibid.
45 Ibid.
46 Ibid.
47 Ibid.
48 Ibid.
49 Ibid.
50 Ibid.
51 Ibid.
52 Ibid.
53 Citizens Assembly Free Trade vs Protectionism (8th September 2017) Citizens Assembly https://citizensassembly.co.uk/trade-free-trade-v-protectionism/
54 Ibid.
55 Ibid.
56 Ibid.
57 Ibid.
58 Ibid.
59 Ibid.

References

Arianto Patunru and Sjamsu Rahardja Trade Protectionsim in Indonesia: Bad Times and Bad Policy (30th July 2015) Lowy Institute
https://www.lowyinstitute.org/publications/trade-protectionism-indonesia-bad-times-and-bad-policy

Australian Government Department of Treasurer Australia’s Foreign Investment Policy (1st January 2019) Treasurer Space
https://cdn.tspace.gov.au/uploads/sites/82/2018/12/1-January-2019-Policy_.pdf

Citizens Assembly Free Trade vs Protectionism (8th September 2017) Citizens Assembly
https://citizensassembly.co.uk/trade-free-trade-v-protectionism/

Clyde & Co Trends in Foreign Investment in Australia (22nd December 2016) Clyde & Co
https://www.clydeco.com/insight/article/trends-in-foreign-investment-in-australia

Hal Hill ‘Asia’s Third Giant: A Survey of the Indonesian Economy’ (2018) 94, 307 Economic Record 472

Jarryn de Haan Indonesian Perspectives: Economic and Security Relations with Australia (31st May 2018) Future Directions International
http://www.futuredirections.org.au/publication/indonesian-perspectives-economic-security-relations-australia/

Kali Sanyal Australia’s Foreign Investment Policy (January 2013) Parliament of Australia
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/
pubs/BriefingBook44p/AustForeignInvest

Ruhul Suyanto, Harry Salim and Henry Bloch ‘Does Foreign Direct Investment Lead to Productivity Spillovers?’ Firm Level Evidence from Indonesia.’ (2009) 37, 12 World Development 1861.

Tim Robinson & Sean Langcake ‘Forecasting the Australian Economy with DSGE and BVAR Models’ (2018) 50, 3 Applied Economics 252

Weihuan Zhou ‘Circumvention and Anti-Circumvention: Rising Protectionism in Australia’ (2016) 15, 3 World Trade Review 504

About the author:

Julia BellJulia Bell

Julia Bell is a law student from Monash University. She was placed in our internship program from January 21st to February 15th 2019 as part of Australia Consortium for In-Country Indonesian Studies Legal Professional Practicum Program (ACICIS LPP).

During the internship, Julia assited our lawyers in various legal matters such as research on foreign direct investment, financial technology and international commercial arbitration. She had the opportunity to visit and meet the officials of the Indonesian Investment Coordinating Board (BKPM) as well as other agencies.

Julia was also involved in our firm’s bonding activities. We had a wonderful cross cultural experience hosting her. She commented: “Through my internship, I have learnt so much about the work you do at Schinder, but most of all I have loved getting to know all of the lawyers and learning about the country’s legal system.”

Schinder Law Firm as a partner organisation of ACICIS welcomes opportunities to host more Australian students in the future.




Foreign Direct Investment (FDI) in Indonesia and Australia: Laws, Policies and Regulations