Investment procedures in Indonesia are regulated by a number of laws. The foreign direct investment law of 1967 provides a legal framework for foreign investments in the country. In the earlier development period, the priority for investment, including foreign investment, was in the import-substituting industries, in order to fulfil domestic market needs by concentrating on the provision of consumption goods. This is in line with the government's import-substitution policy. In later stages, there was a strong government commitment to reorient the industrialization strategy from import substitution to a more outward-oriented policy.
Much new investment is now in export-oriented manufacturing.
This change has, in turn, led Indonesia to increase its accessibility and interaction with the outside world and to be more aware of and rely on market signals for the country's production orientation. Table 11.1 shows the shift of investment priority from import substitution to export orientation for both foreign and domestic investment. Indonesia is one of the major recipients of Japanese investments in South-East Asia because of advantages offered such as inexpensive labour and abundant natural resources. Several reforms and incentives were introduced in Indonesia to attract more investment by the private sector, including foreign investment. Tax holidays granted by the government at the beginning strongly encouraged investment, but this was no longer effective in later years.