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Early Impacts of Indonesia’s Investment Reforms : A Preliminary Analysis

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  • Montfaucon,Angella Faith Lapukeni
  • Senelwa,Victor Kidake
  • Doarest,Aufa

Abstract

The Indonesian government implemented comprehensive investment reforms in 2021 to encourageinvestment inflows and related positive impacts. Compared to the previous investment regulation in 2016, the new decreeremoved foreign direct investment restrictions in over 500 business activities. By estimating the difference indifference in difference event study model, this paper empirically assesses the response in (realized and planned)foreign direct investment and realized domestic direct investment to the reforms. The paper also assesses whetherthere was growth in investments in fully liberalized sectors linked to Sustainable Development Goals as a proxy for thequality of investment. The results suggest that the investment reforms were associated with increases inrealized foreign direct investment, realized direct domestic investment, and planned foreign direct investment,especially in fully liberalized sectors, while there was a decline in all three types of investments in thenon-liberalized sectors. The results for planned foreign direct investment suggest that the increase in fullyliberalized sectors is likely to continue. The results on direct domestic investment suggest a possible crowding-ineffect. Among the fully liberalized sectors, the base metal industry was a key driver of growth, and sectors linked toSustainable Development Goals sectors had mixed results. The findings provide suggestive evidence of the complementaryeffect of trade reforms, although the analysis does not specify which of the several reforms may have led to theincrease. These results are robust when the possible effects of Covid-19 recovery and other macroeconomic factors arecontrolled for. These results are also robust to alternative event study models. Further analysis would be needed toobserve the trajectory in both the quality and quantity of investment going forward, the distributional effects and theneeded complementary reforms to ensure sustainable gains beyond the short run.

Suggested Citation

  • Montfaucon,Angella Faith Lapukeni & Senelwa,Victor Kidake & Doarest,Aufa, 2023. "Early Impacts of Indonesia’s Investment Reforms : A Preliminary Analysis," Policy Research Working Paper Series 10478, The World Bank.
    • Handle: RePEc:wbk:wbrwps:10478
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