Wed, 13 Jan 2016
Indonesia—Faced with sluggish economic growth, Indonesia is working on a major revamp of foreign-investment rules that could open the door for overseas companies to take bigger stakes in domestic firms and gain a foothold in new industries.

Government officials aim to finish discussions on a first round of investment easing by the end of the month. Talks are focused on a list of sectors, including e-commerce and pharmaceuticals, in which the government limits or prevents foreign investment.

“To me, the [list] is like a list of added imports. If we prohibit foreigners, it means they’re forced to build their factories outside” the country,” said Trade Minister Tom Lembong. Allowing more investment would amount to a “fundamental paradigm shift,” he added.

Foreign businesses, which pour billions of dollars into Southeast Asia’s largest economy each year, making up for local capital shortfalls, have long pushed for changes to a list they say has grown more restrictive over the years.

President Joko Widodo has promised to ease investment restrictions for foreigners and locals alike in an effort to bolster the beleaguered economy. But industry observers say the latest efforts will likely face strong opposition from some lawmakers and officials, and could ultimately fall far short of hopes.

“If they don’t make sweeping changes to the [list], it will undermine the president’s message,” said Lin Neumann, managing director of the American Chamber of Commerce in Indonesia. “The trend has been to restrict investment. For the first time in 10 years, you have a president saying the opposite.”

The country’s investment agency said it is pushing to allow 100% foreign ownership of pharmaceutical ventures, from 85% currently.

“Currently the obstacle for us to invest here is finding local partners that we don’t really need. We have to form a JV, and [the ownership cap] complicates equity capital injections, said Parulian Simanjuntak, executive director of the International Pharmaceutical Manufacturers Group, an association of foreign pharmaceutical companies in Indonesia. Intellectual property rights are another concern, he added, because local partners have access to drug formulas.

The investment agency also said it is seeking to allow foreigners to own 80% to 100% of cinemas, which are currently off limits to foreign entry. Another proposal would open up all hotels to full foreign ownership. Currently only 5-star hotels are eligible, with all others at a 51% foreign ownership cap.

Just before Mr. Widodo came to power in 2014, Indonesia closed retail trade to foreign investment and further restricted investment in telecommunications, agriculture, oil, gas, electricity and power. Foreign shares in some oil and gas services were reduced to 0% from 95%.

Since taking office, Mr. Widodo has pushed to relax some restrictions and draw new investment to the country and last year unveiled a series of minor deregulation moves, speeding up permit processing and lowering gas and electricity prices for businesses.

Indonesia has attracted record amounts of foreign investment in recent years, much of it in the resources industry, including in petroleum and copper mining, and to sectors such as automotive manufacturing that tap into the rising consumption power of the world’s fourth most populous nation.

Major U.S. companies with a presence in Indonesia include Exxon Mobil, which has a partnership with state-run oil company Pertamina in one of the country’s major oil blocks, and General Electric Co. , which runs a turbine-service facility with state-owned companies PT Dirgantara Indonesia and PAL Indonesia.

Recently, however, the economy has hit the skids. Growth in foreign investment has fallen and the country has lost out to a more competitive Vietnam on major tech investments by the likes of Samsung Electronics Co.

John Riady, a director of Lippo Group, an Indonesian conglomerate with interests in property, shopping malls, e-commerce and hospitals, said a less restrictive investment environment would help attract much-needed foreign capital.

“The industries that have grown the most in Indonesia are those that have opened up to foreign investment,” he said, pointing to banking and telecommunications.

Last October, Lippo Group unveiled a $100 million joint venture with Japan’s Mitsubishi Corp. to build apartments on the outskirts of Jakarta.

Mr. Riady said he wasn’t concerned about the competition, nor about how large a stake foreign investors could hold in a certain industry as long as it ushered in training and knowledge sharing. “It’s important that foreign investors are encouraged to partner,” he said.

—Sara Schonhardt contributed to this article.



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