The Investment Coordinating Board (BKPM) is responsible for promoting foreign and domestic investment and approving most project proposals in Indonesia.
There are various ways for an investor to set up a presence in Indonesia, depending on the investor’s type of business. Types of legal presence for foreign direct investment in Indonesia are:
- Limited Liability Company (PT. PMA)
- Representative Office:
- General Representative Office (KPPA)
- Foreign Trade Representative Office (KP3A)
- Joint Venture
- Local partner
Based on Ministry of Trade Regulation No.10/2006, the company cannot engage directly in sales and is rather for marketing, buying and distribution purposes. Representative office set up is through application to BKPM for companies wishing to engage in areas of business under BKPM’s jurisdiction and regional representative offices. Otherwise it is through authorisation from the relevant ministry:
- The Ministry of Industry & Trade for those engaged in bilateral trade
- The Ministry of Public Works for construction companies and contractor services. Foreign Construction Representative Offices are valid for 3 years and have the same status as a National Construction Service Company.
- The Ministry of Energy and Mineral Resources for mining and energy companies.
- The Ministry of Finance for banking and finance companies. Licenses are issued for up to 2 years and then subject to renewal.
It is important for foreign companies to know that various sectors in Indonesia are closed, or partially closed, to foreign investment. To find out which sectors are open to foreign investment you need to access the Negative Investment List (Daftar Negatif Investasi), a list compiled – and regularly revised by the Government from year to year. The latest version of it was signed on Mid May 2016 and is available publicly in Presidential Regulation No. 44 year 2016. This issuance of updated Negative Investment List is expected to show positive impact towards the nation’s FDI performance.
Setting up a joint venture together with local company is another option for foreign individuals or companies to set up a business in Indonesia. This type of cooperation allow the partners to combine their respective expertise to be successful in the market; provided that the partnership arrangements have been thoroughly negotiated and agreed upon. Having trusted local companies as a partner, a foreign firm could gain the opportunity to access into their partner’s national network and local market knowledge.
In some cases when foreign companies do not have a choice to pursue specific business in Indonesia because of the sector is included in a Negative Investment List, then, joint venture is the suitable option to solve it.
And lastly, foreign companies may want to consider whether using a local partner (which could be an Indonesian companies or foreign subsidiaries with local establishment) would be more effective choice in penetrating the new market. In general, this option can be applied in most business sector. Any business or trading activities that will require direct interaction and support from channel distribution will benefit most from this type of cooperation.
Both joint venture and using local partner set ups made foreign companies success rate heavily determined by its local partner. Choosing the right partner and building up the trust between the foreign companies and local companies are not an immediate process especially in Southeast Asian countries.