When looking at investment opportunities in Asia, Indonesia doesn’t seem like an obvious choice. Natural disasters, religious intolerance and terrorist attacks might put a less experienced investor off. However, Indonesia’s economy has shown the most stable growth of any economy globally since World War II. This, alongside its young workforce, growing middle class, large population and abundance of natural resources, makes the country an attractive destination for foreign investors.

The Rewards

In recent years, Indonesian President Jokowi Widodo has passed reforms to make it easier to invest in the country. These include the government’s marquee reform effort—the 2020 Omnibus Law on Job Creation (Omnibus Law)—which was temporarily suspended in 2021 by a constitutional court ruling. However, if fully implemented, it is touted to improve competitiveness by lowering corporate taxes, reforming labor laws, and reducing bureaucratic and regulatory barriers like the replacement of its 2016 Negative Investment List in February 2021, liberalizing nearly all sectors to foreign investment, except for seven “strategic” sectors reserved for central government oversight and the establishment of the Risk-Based Online Single Submission System (OSS), to streamline the business license and import permit process in 2021.

In Asia, investment activity in green energy and related heavy industries has accelerated, doubling over the last decade, with particular growth in the last year. With the increasing need to move away from carbon heavy technologies, particularly more so with the current energy crisis, green businesses are becoming an important focus. Asia is predicted to see up to a ten-fold increase in startup activity over the next three to four years, with much of this momentum concentrated in the energy sector.

One sector that has played a particularly significant part in this is electric vehicles. Whilst China has overwhelmingly dominated this industry, Indonesia’s government has been pushing for the development of the domestic battery industry, as well as local electric vehicle manufacturing with a goal to have 2 million electric cars and 13 million electric motorbikes on the road by 2030. Indonesia, as the world’s largest producer of nickel, an essential component in electric vehicle batteries, is keen to tap its resources to become a key player in the global electric vehicle supply chain. The country has signed a $9.8 billion electric vehicle battery deal with South Korea’s LG Energy Solution and has also been wooing Tesla. Despite obstacles, it is also expecting investment in nickel processing to double from 2020 to $35 billion by 2033, led by Chinese stainless steel producers and battery makers.

The Risks

Investors, particularly those in the energy sector, should be aware that Indonesia has a checkered environmental track record in mining. Electric vehicle companies should be cautious about directly investing given environmentally-conscious consumers. Even though there is potential, investors should ensure companies have strong policies in place. Further, despite the central government reforms, the legal and regulatory uncertainty, restrictive regulations, economic nationalism, trade protectionism and vested interests continue to complicate the investment climate. Foreign investors may be expected to partner with Indonesian companies and to manufacture or purchase goods and services locally. Restrictions imposed on the authority of the Indonesian Corruption Eradication Commission (KPK) have led to a significant decline in investigations and prosecutions and investors have cited corruption as an obstacle to pursuing opportunities in Indonesia. Companies report that all sectors have a lack of adequate and effective IP protection and enforcement, and the energy and mining sectors still face significant foreign investment barriers.

Managing Risks

One of the best ways to manage the risks associated with investing in Indonesia is to ensure that proper due diligence and investigation is undertaken on the market and subjects with a view to identify any of the following compliance/reputational risks for potential investors:

• Market entry research
• Beneficial ownership
• Source of wealth
• Political exposure
• Sanctions exposure
• Litigation or regulatory infractions

Nonetheless, Indonesia continues to attract significant foreign investment and is a promising destination for a wide range of companies, ranging from consumer products and financial services to digital start-ups and e-commerce.