This chapter reviews the evolution and salient characteristics of direct foreign investment (DFI) in Indonesia in the three decades of the New Order government of President Suharto (1967–1998). In terms of evolution, DFI policy exhibited an early liberalization period till about 1970, followed by a sometimes ambivalent but mostly restrictive period till about 1985, and culminating in a significantly more open and receptive period after 1985. The focus of this chapter is on the last-mentioned period that featured some dramatic changes in policy and witnessed an equally dramatic surge in foreign investment and exports.
At the outset, a clear definition and understanding of DFI is desirable. Such investment is distinguished from portfolio investment in that it involves an equity stake which allows for influence over management. 1 DFI differs from other forms of foreign capital inflows in that it not only brings capital, but also technology, access to international markets, and management and marketing capabilities. It is sometimes accompanied by foreign borrowing (offshore financing) but domestic borrowing is also common. 2 The discussion below focuses on DFI in the manufacturing and services sectors that are approved through the Board of Investment. DFI in the oil and gas and financial services sectors is not included since these sectors are covered by different regulations and approval processes.Deregulation and Development in Indonesia