Sustainable Development Impacts of Investment Incentives: A Case ...

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1 Introduction
Foreign direct investment inflow has assumed great importance for the Indonesian economy, especially
after the 1997 economic crisis. High unemployment, poverty and low economic growth over the past
decade, call for substantial investment inflow to propel the economy out of the doldrums. However,
investment in the economy continues to show sluggish performance. For instance investment over the
last six years grew by about 7.2 per cent. Meanwhile, investment expenditure to GDP in Indonesia is
around 20 per cent. In contrast, in other Asian countries such as South Korea investment expenditure
contributes 29 per cent to GDP, and China was 44.9 per cent in 2006. Thus, the Indonesian economy
requires injection of foreign investment in general and FDI in particular.
In order to attract the needed foreign investment into the country, Indonesia is not only involved in
forming cooperation agreements with other countries, but also offers various investment incentives to
potential investors. The incentives take several forms, which include:
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Import duty exemptions: exemptions from import duties for foreign and domestic investors for
imports of machinery and equipment, raw materials and supporting materials.
Tax facilities: an investment tax allowance in the form of taxable income reduction as much as
30 per cent of the realized investment spread over six years; accelerated depreciation and
amortization; a loss carried forward facility for a period of no more than ten years; a ten per cent
income tax on dividends, and possibly lower if stipulated in the provisions of an existing
particular tax treaty.
Export manufacturing: restitution (drawback) of import duties and import charges on
imported goods and materials needed to manufacture exported finished products; exemption
from Value Added Tax and Sales Tax on Luxury Goods and Materials Purchased Domestically,
to be used in the manufacturing of the exported products; the ability to import raw materials
required regardless of the availability of comparable domestic products.
Bonded zones: industrial companies located in the bonded areas receive many incentives.
FDI in the chemical and pharmaceutical industry is the second largest after transportation services industry,
warehousing and telecommunications (see Table 4 for a description of the chemical and pharmaceutical
industry). In 2007, 16 per cent of total FDI in Indonesia was in the chemical and pharmaceutical industry,
which, in comparison with the manufacturing industry, constituted more than 35 per cent of total FDI. The
high percentage of FDI in the chemical and pharmaceutical industry has remained unchanged over several
years, an indication that Indonesia is an attractive destination for FDI in the global chemical industry.
1.1 Scope and methodology
This country study assesses the extent and impacts of investment incentives on the chemicals sector in
Indonesia. In particular, the study aims to:
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Analyze developments in the incentives that Indonesia offers to foreign investors;
Examine the impact of FDI incentives on the decision to locate FDI in Indonesia, especially in
chemical companies; and
Analyze the impact of FDI on the environmental and socio-economic development in
Indonesia’s chemical industry.
Sustainable Development Impacts of Investment Incentives: A Case Study of the Chemical Industry in Indonesia
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