Indonesia's Tech Investment Dilemma: Protectionism May Backfire

Indonesia, the world's fourth most populous country and the largest economy in Southeast Asia, is eager to attract tech investments. However, its protectionist policies, such as local content requirements, may be counterproductive, according to economists. These policies aim to foster local industries and create value-added supply chains, but they could ultimately deter foreign investment and hinder the country's tech sector growth.

Indonesia's local content requirements (TKDN) mandate a certain percentage of local production for tech companies operating in the country. For instance, smartphone and tablet manufacturers must produce 40% of their products locally. While these policies may seem beneficial for the domestic tech industry, they come with significant drawbacks.

Firstly, these policies increase costs for foreign tech companies. They must invest in local production, which may not be as efficient or cost-effective as their existing global supply chains. This leads to higher production costs, reduced competitiveness, and potentially lower profit margins. According to Yessi Vadila from the Economic Research Institute for ASEAN and East Asia, these policies have historically led to increased costs, decreased export competitiveness, and productivity losses.

Secondly, protectionist policies create regulatory uncertainty, which can deter foreign investment. Tech companies may opt to invest in countries with a more stable and predictable investment climate, such as Vietnam. Bhima Yudhistira Adhinegara from the Center of Economic and Law Studies warns that these policies may backfire, creating uncertainty and potentially driving away investments. For example, Foxconn and Tesla withdrew their plans to invest in Indonesia due to regulatory challenges.

Indonesia's local content requirements may also impact the competitiveness of its tech industry in the global market. While these policies aim to protect local industries, they ignore deeper reasons for Indonesia's failure to attract tech supply chains. For instance, Apple has been unable to sell its latest iPhone model in Indonesia until it invests or sources more components locally. The government's plans to increase local content requirements may deter, rather than attract, foreign investment.

In the long term, Indonesia's protectionist policies may have adverse effects on foreign direct investment (FDI) in its tech sector. While these policies might initially draw investment, they could ultimately hinder Indonesia's tech sector growth and FDI. A 2022 McKinsey report suggests that Indonesia's tech sector could gain $2.8 trillion by 2040 through technology adoption, but protectionist policies may hinder this potential.

Indonesia's tech investment dilemma highlights the importance of creating a stable and predictable investment climate. While protectionist policies may seem appealing in the short term, they can have long-term negative consequences. To attract tech investments, Indonesia should focus on improving its business environment, reducing regulatory uncertainty, and fostering innovation through supportive policies.

In conclusion, Indonesia's protectionist policies aimed at attracting tech investment may backfire, as they increase costs, create regulatory uncertainty, and deter foreign investment. To foster tech sector growth and attract FDI, Indonesia should focus on creating a stable and predictable investment climate, reducing regulatory challenges, and promoting innovation. By doing so, Indonesia can unlock the full potential of its tech industry and reap the benefits of a thriving tech ecosystem.