Foreign investment regulation in Indonesia: making a case for reform in regulating foreign investment in public companies

Foreign investment is crucial for countries in the present era of globalisation. But foreign investment may not always work to a host country’s benefit. While there is a considerable amount of literature discussing the interaction between globalisation and foreign investment policy, there is limited analysis of the intersection between capital market governance and foreign investment restrictions. This thesis aims to fill the gap and provide policy insights about problems caused by legal uncertainty in the Indonesian foreign investment restriction law with respect to public companies. It will also attempt to articulate lessons that may be applicable to other countries hosting foreign investment and seeking to appropriately regulate it. The foreign investment regime in Indonesia seeks to restrict foreign investment in certain sectors, through a regulation that prescribes a “negative investment list”. This list classifies industry sectors as either open, open with specified foreign ownership threshold or closed to foreign investors. This thesis examines whether the negative list is effective in regulating inward foreign investment, in light of regulatory best practice and the public interest of developing the Indonesian economy. It combines theory, historical and regulatory analysis, case studies, and a comparative method to examine the adequacy of the regulation. The thesis uncovers a loophole in the Indonesian foreign investment regulatory regime, which some practitioners have been aware of, but many academics and economic observers have failed to notice. The loophole appears because the regulation excluded public companies from its purview without providing guidance as to how to implement the exclusion, allowing foreign investment to occur in public companies where the regulation should have prevented or limited it. To understand the motive behind this move, the thesis examines the evolving law around the negative investment list of investment and its implementation – using a case study of the debt-to-equity IPO arrangement of PT Graha Layar Prima Tbk., and supported by the historical evidence of middle path approach, political patronage and regulatory capture in Indonesia’s foreign investment policy development. This thesis goes on to discuss practical solutions available to close the loophole, such as using and strengthening existing regulatory requirements and terms such as ‘disclosure requirements’, ‘control’ and ‘piercing the corporate veil’. It finds that these available remedies have not been used; instead, the Widodo government (being focused on increasing foreign investment at all costs) has provided even more ways for companies to circumvent the intent of the regulation. This thesis suggests that the path chosen by the government was the result of regulatory capture and the political dynamics surrounding the Indonesian foreign investment regulatory and enforcement framework. Of particular importance is the problem of regulatory uncertainty and corruption, which dates back to the inception of the post-colonial, independent Indonesia.