Indonesia is becoming one of preferred destinations in ASEAN for Japanese businesses to invest in. A report by Kroll, a New York-based consulting firm, noted that Japanese foreign direct investment (FDI) accounted for 16.4% of Indonesia’s total in the first half of 2014, and has been increasing steadily in the past few years.
According to Kroll, Indonesia replaced Thailand as the second largest recipient of Japanese FDI in 2013. The report studied the opportunities and challenges for mergers and acquisitions (M&A), and foreign direct investment in Indonesia.
“In terms of M&A, Indonesia remains favorable in Southeast Asia,” said the report. It showed that in 2013, the value of new M&A deals reached a new record of more than US$2 billion.
Mitsubishi Motors is one company that recently announced plans for a large investment in Indonesia. They will spend US$600 million on building a factory in Bekasi, West Java because of a strong domestic demand for motor vehicles.
Businesses in other countries besides Japan are also looking to invest in Indonesia. Foxconn Technology Group, the world’s largest producer of electronics parts, said it may invest up to US$1 billion in the country. Vi Holding, Russia’s state-owned industrial group, also plans to invest as much as US$1.5 billion to build smelting facilities in Indonesia.
Analysts consider FDI to be one of the most important factors that drives Indonesia’s economic growth. Investments make up around 30% of gross domestic product (GDP), and is the second largest contributor to the Indonesian economy after consumer spending. Foreign capital inflows also help support the country’s trade balance, which now suffers from a current account deficit.
Agustinus Prasetyantoko, chief economist of Bank Tabungan Negara (BTN), said in an interview that more FDI will help decrease Indonesia’s trade deficit. There is a dependency in the importation of raw materials, and Indonesia is one of the few countries in ASEAN that has a negative trade balance.
“We need to push FDI for upstream industries as well as manufacturers that are able to create products with added value, instead of just exporting raw materials”, said Prasetyantoko.
Raden Pardede, deputy chairman of the National Economic Committee (KEN), said that the new government should do more to encourage foreign companies to invest in export-focused manufacturing, which will help reduce the current account deficit. He also recommended a fuel subsidy cut and reforms aimed at cutting bureaucracy as solutions that the government should implement.