# **3. 3 FDI Flows into the Service Sector in Indonesia**

The relaxation of regulatory restrictions, together with an increasingly attractive domestic market and relatively lower labor costs have contributed to an increase in FDI flows. Having dipped in 2009 with the onset of the global financial crisis, FDI flows have since surged, reaching $18.9bn USD in 2011.FDI has been strong across all sectors, but particularly in the services sector, which accounted for 40.1% of all inward investment into Indonesia in 2011 (Figure 6).<sup>9</sup> To a large extent, this has been driven by FDI into the two service sub-sectors that were both the largest and the fastest growing in 2011: Transport & Communications and Trade, Hotel & Restaurant (of which the bulk is accounted for by Wholesale & Retail; Figure 7).

While FDI flows now broadly reflect the size of Indonesia’s economy, the country accounting for both 1.2% of world FDI flows and 1.2% of world GDP, it lags far behind regional peers. In 2011, the South East Asia region accounted for 3.1% of global GDP, but 5.3% of global stocks of FDI and 7.6% of global FDI flows.

Cross-country evidence suggests that the statutory restrictions measured in the OECD FDI regulatory restrictiveness index are negatively correlated with FDI stocks (Figure 8).

# **3. 4 Liberalization Path in the Indonesian Telecom Sector**

Between 1966 and 1998, Indonesia’s telecommunications sector was tightly controlled, and reform was incremental. From 1980 onwards, government acted as both regulator and monopoly operator. With investment capital in short supply, however, the government began to allow the incumbents to form strategic alliances with foreign firms as of 1989. Although a degree of competition emerged in the mobile phone sector after partial privatizations in 1995, government remained the dominant player until the East Asian crisis.

In 1998, given the commitments made with the IMF, and the pre-existing commitments arising from Indonesia’s joining of the WTO in 1995, avenues for reform opened up across the economy, including in telecommunications. This gave rise to the government’s 1999 Blueprint for Telecommunications, and the landmark Telecommunications Act that set out broad based reforms including increased regulatory transparency and an end to the government’s triple role as regulator, policymaker and provider.

These reforms were important, but incomplete as Indonesia continued to lag behind regional peers in term of telecom and internet penetration, even if the cellular sector grew substantially, and inadequate infrastructure remained a significant constraint.

With the introduction of the landmark Investment Law in 2007, the sector became significantly more restrictive as foreign equity limits were reduced while several sectors were included on the newly introduced Negative Investment List (NIL). With amendments to the NIL in 2010, restrictions on investment in internet service providers were tightened further with the introduction of a 49% foreign equity limit. Furthermore, in one of the most significant changes to the NIL at this time, foreign investment in cellular towers was completely prohibited.

> 9 Source: BKPM.

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