Indonesia’s Investment and Labor Environment

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Table of Contents

Indonesia Investment Policy
Labor Cost
Indonesia Labor Market
Challenges in Labor Market
Labor Management in Indonesia
Labor Policies
Works Cited

The general climate of investment in Indonesia is attractive for both international and local investment. Fiscal incentives have contributed to increased number of foreign investors. The country has simplified the process of approving those who want to invest in the country and there are no limitations to the investment value. Investors can wholly own their investment in Indonesia and this is among the advantages that they enjoy as they invest in this country.

Indonesia is also a member of ASEAN since it is strategically located between Australia and Asia where most foreign investors like investing in. Indonesia has its natural appeal to foreign and domestic investment because of increasing middle class, and natural resources that act as attractions to investors. However, investment was negatively affected between 1997 and 1998 by the Asian crises, which arose during this. However, the country has managed to overcome that challenge (Delfeld 67).

Indonesia Investment Policy

Just like other developing countries in Asia, its early investment and industrial policies meant to develop import substitutes. It caused liberalization and inefficient based on export policies. Crises, which occurred in Asia affected the economy of this country and led to fall in the real GDP by 13% and slowed the recovery process.

The country had to assess its existing policies because of the crises and democratic move. The government’s commitment to reforms also geared toward the creation of a good environment for both local and international investors. Policy changes have triggered flow of foreign direct investment. This was after the perception of accountability of the country that was tarnished by the crises (Dhanani, Islam and Chowdhury 136).

According to Dhanani, Islam and Chowdhury (136), reforms of investment policies resulted in political and macroeconomic stability restored investors’ confidence and increased the inflow. Since 2005, inflow of investors increased and raised FDI to eight billion dollars. The global financial crises did not spare the country as this reduced the GDP and the level of investment (Jones 318).

Labor Cost

Labor cost in Indonesia varies according to regions. Highest rates of labor costs are in Nanggroe, Aceh Darusalam and Papua. In the first two places, minimum wage is IDR 1.3 million that is $ 144 and IDR 1.1 million or 121million dollars. This shows that the minimum rate of payment in Indonesia is lower than in other members of ASEAN.

The minimum age of a person to be an employee in Indonesia is only 15 years and this presents an opportunity for investors because they can easily access affordable labor for their businesses. Additionally, the minimum working hours for a person in a week are 40 hours. Laksmana (160) argues that this will ensure that employees have time to work maximally and contribute to the business growth.

However, the government has an investment body called government investment unit that enables investors to gain confidence as they invest in the country and it advices them to look on the upcoming sectors of development. The investment unit and World Bank supports the investors, protects them from unpredictable changes in policies, and land acquisition problems. By assisting the investors, the government makes the investing climate more attractive for local and international investors.

Indonesia Labor Market

Growth in economy and social transformation has affected labor force structure and labor demand in the country. Indonesian economy has been growing faster than those of other members of ASEAN and around Asia are. This growth and transformation has delivered the country from low-income country to middle-income country. Economic growth of a country is an attraction for investors. Economic growth also comes along with creation of employment for those people who are unemployed.

Despite the growth in the economy of the country, employment opportunities in formal sectors are always not enough for rising unemployment rates. Labor supply in Indonesia exceeds the demand therefore leaving a big number of people unemployed. Those who do not get a chance in formal sector find employment in the informal sectors. The investors can access ready labor for their businesses or other sectors where they invest in (McDougall 340).

Challenges in Labor Market

Regardless of whether investors are local or international, they must face some challenges in their investments. The critical challenge is choosing the right partner to do their investment with. Even though there are no restrictions to working with an Indonesian partner, investors find it hard to choose the right partner to invest with. Despite the opportunities Indonesia provides for investors, there are still more challenges for investors to solve.

These challenges include bureaucracy, which is not efficient and undeveloped infrastructure in the region. Cooney (28) notes that the government has been changing investment policies frequently without informing the investors. This problem has affected investors’ trust in the support of the government. Restrictive labor laws have also led to investors moving from Indonesia to other countries.

Labor Management in Indonesia

Employees law Number 13 of 2003 controls the management power of employees and specified the minimum conditions for those employees. Rules for compensation are also specified on that section of law.

Employees have the right to strike if their needs are not meet according to the agreement they signed with their employers. However, the striking employees must have legal documents allowing them to hold their strikes. The law specifies requirements for labor management to notify the employers and investors what is required for the rights of employees (Jones 318).

Jones (318) notes that the ministry of transmigration and manpower specifies minimum wages for provinces and councils within those provinces. This enables investors not to overpay the employees or partners they work with.

Employers cannot just terminate the employee’s contract without following the law and regulations. For the workers who have been employed for a period of three months, they must be compensated before they get discharged for good. The rule of employment termination of Indonesia changes with the period an employee has been employed (Juliawan 350).

Labor Policies

Poverty, unemployment, underemployment, and economic growth are challenges, which the government of Indonesia faces. Continued growth can assist the government to reduce the rate of unemployment and underemployment. Programs that government should implement are development and expansion of job creation activities and enhancing the quality and productivity of workers (Pambudi and Russell 230).

Pambudi and Russell (230) argue that foreign investors faces challenges particularly in labor, whereby they are not allowed to hire foreigners unless under special condition. An organization is allowed only to employ foreigners only in positions that cannot be filed by Indonesians. It is a challenge for investors who may wish to employ people who are technologically advanced and skilled that the employees in Indonesia.

They must seek approval from BKPM before they employ foreigners. A companies report must state all positions that organizations wish to fill with experts from outside the country for further scrutiny. Consultations must be done for approval of the experts or employee in a business sector. A person must have more than 50% approval of the workforce (Manning and Sumarto 8).

According to Chowdhury, Islam and Tadjoeddin (40), economic and social growth needs infrastructure development to encourage further investment. Private and public sectors are encouraged to invest in infrastructure sector to forester growth in the region. Modern technologies need to be applied in development of infrastructure in Indonesia.

It poses an opportunity for local and foreign investors to take part in investing in that sector. Investment climate for both local and international or foreign investors is enhanced. Investors bring along technology and management experience for the country and leads to economic growth and reduction of inflation.

When compared to other ASEAN countries, the FDI contribution to capital has been small in Indonesia. However, it has assisted the country in creation of jobs, advance access to global market and increased productivity growth of Indonesia.

Foreign direct investment in labor-intensive sectors has contributed to creation of jobs and increased exports of manufactured products. Indonesia investment challenge is to improve their policies to gain new foreign investment. This can create more jobs, improve competitiveness, and upgrade the export and industrial sector (Cooney 28).

Indonesia is among the most populated in the world. The country’s economy is the largest in southern Asia. Greate investors chooses the country because of its continuous economic growth and favorable demographic. Even through the world crises, the country was able to overcome the challenges that affected the whole world.

Indonesian economy had the real economic growth in 2008, which convince many investors that the country is save to invest in. investors have room to grow when the invest in Indonesia. The country is also strategically located and politically stable to make internal and external investors comfortable to invest there.

Indonesian financial environment is also attractive to foreign investment, and there is no limitation on value of investments an investor is supposed to make. Large population makes this country a better place for investment. Democracy and stable government assures the investors on safety and freedom when they in that country.

Works Cited

Chowdhury, Anis, Iyanatul Islam and Mohammad Tadjoeddin. “Indonesia’s employment challenges: Growth, structural change and labor market rigidity”. European Journal of East Asian Studies 8 (2009): 31-59. Print.

Cooney, Sean. Law and labor market regulation in East Asia. New York: Routledge, 2002. Print.

Delfeld, Carl. Etf investing around the world: A guide to building a global Etf portfolio. Lincoln: iUniverse, 2007. Print.

Dhanani, Shafiq, Iyanatul Islam and Anis Chowdhury. Indonesian labor market: New York: Routledge, 2009. Print.

Jones, Gavin. Indonesia assessment: Population and human resources. Canberra: Institute of Southeast Asian, 1997. Print.

Juliawan, Benny. “Street-level politics: Labor protests in post-authoritarian Indonesia”. Journal of Contemporary Asia 41 (2011): 349-370. Print.

Laksmana, Evan. “Indonesia’s rising regional and global profile: Does size really matter?” Contemporary Southeast Asia: A Journal of International & Strategic Affairs 33 (2011): 157-182.

Manning, Chris and Sudarno Sumarto. Employment, living standards and poverty in contemporary Indonesia. Canberra: Institute of Southeast Asian, 2011.Print.

McDougall, Derek. “Australia’s engagement with it’s ‘near abroad’: A change of direction under the labor government, 2007-10?” Commonwealth & Comparative Politics 49 (2011): 318-341. Print.

Pambudi, Djauhari and Smyth Russell. “Making Indonesia more attractive to foreign investors: a computable general equilibrium analysis of reducing the risk premium in central java”. Review Of Urban & Regional Development Studies 20 (2008): 226-240. Print.

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