Kenneth Yeung gets a whiff of Indonesia’s souring investment climate.
It has long been fashionable to declare that doing business in Indonesia is a minefield of bureaucratic, regulatory, and even cultural hurdles. Despite decades of reforms and initiatives, naysayers argue that it’s a case of “one step forward, two steps back” and “things are getting worse.”
For much of the past 25 years, the reality was more positive than the picture painted by critics. This doesn’t mean Indonesia was ever a model of investment certainty, though. In sectors such as oil and gas, unfriendly policies prompted multinationals to avoid major commitments. However, overall investment levels grew as Indonesia improved its business climate with reforms such as a streamlined online licensing system.
But over the past two years, many of the old criticisms have become louder and harder to dismiss. Regulatory volatility, uncertainty over policy direction, and poor fiscal management are causing many foreign investors to have second thoughts about Indonesia’s attractiveness.
Such concerns are reflected in this year’s Indonesia coverage by The Economist magazine, including headlines such as “Indonesia is on a risky path” and “Indonesia’s president is jeopardising the economy and democracy.”
President Prabowo Subianto responded directly to The Economist in June, defending his decisions as making “tangible improvements in people’s lives.” But the negative headlines kept coming: “Indonesia’s erratic president grabs the country’s commodity exports” and, more recently, “A gold-bar scandal pits Indonesia’s army against its police.”
The government is hoping to counter negative sentiment with its proposed Indonesia International Financial Centre in Bali, which would offer a 0% corporate tax rate for up to 50 years to lure foreign investors and financial institutions. However, investors tend to value legal certainty over tax incentives, and analysts warn the scheme could increase the risk of money laundering without delivering major economic benefits.
Uneasy Business
For nearly two decades, pundits could cite the World Bank’s Ease of Doing Business Index to prove that Indonesia was generally progressing, regressing, or stagnating in terms of attractiveness to foreign investors. That index was dumped in 2020 due to concerns that countries were manipulating data to game the rankings.
As a replacement, the World Bank launched the Business Ready (B-READY) project to measure countries’ business and investment climates. Indonesia achieved an overall business readiness score of 63.72 in 2024—and the next scores are not expected until late 2026.
With the new global benchmark still in its early stages and lacking years of comparative data, the experiences of investors and business advisers operating in Indonesia provide a useful measure of the reality on the ground.
A foreign lawyer who has spent more than 30 years helping international companies operate in Indonesia says the investment climate is undoubtedly worsening, despite the government’s claim that its Online Single Submission (OSS) system has simplified business licensing.
He says constant regulatory changes are making it difficult for the OSS system to accommodate them and function effectively. He observes that foreign capital is staying away, private equity has largely stepped back from Indonesia, and even Indonesian businesses are looking abroad for opportunities, particularly in mining. He adds that ongoing pressure on the rupiah, with investors exiting the currency, and the central bank governor’s recent resignation have added to the gloomy outlook.
An Indonesian consultant to foreign investors is equally pessimistic, noting that extortion, regulatory instability, and the weakening rupiah are all increasing the cost of doing business. He further comments that corruption within big-budget government programmes is a major deterrent.
Offering a slightly more upbeat outlook is a British entrepreneur with over 20 years of experience in recruitment and building businesses in Indonesia. He says that while the regulatory environment remains cloudy, successful companies ultimately depend on how well they understand and operate within the system—and whether they can compete with efficient competitors, especially from China.
“The online system makes things a little easier when it works,” he says. “It’s the same old problem, though—too much remains in the grey. You just need to get on with things. I don’t think foreign companies can build their success or failure on how easy it is to set up and run a company. You show me a successful foreign company, and I will show you a good leader at the top. That is always the difference.”
Gary Dean, the founder and executive chairman of Okusi Associates, who has been assisting foreign companies in Indonesia for almost 30 years, concurs that the bigger challenge to doing business is not the bureaucracy.
“Is it getting harder? At the approvals level, no—company establishment is more straightforward today than at any time in the past three decades,” he says. “But running a real business anywhere is never easy. If it were easy, everyone would already be doing it. And if everyone is already doing it, you probably don’t have a business. About half of all new businesses are gone within five years, and the principal cause is not bureaucracy—it is failing to precisely identify your target market before committing capital. Indonesia is not exempt from that rule.”
In many respects, the environment for foreign investors in Indonesia has become more challenging. But that doesn’t mean Indonesia is a basket case. Businesses that understand the market and manage risk will likely reap rewards. The difference now is that Indonesia’s ongoing policy uncertainty and greater government intervention are undermining the advantages that previously attracted foreign capital.