The industrial sector is the sector that currently contributes most to Indonesia's annual GDP growth. The two most important sub-sectors of industry are mining and manufacturing, both being major pillars of the nation's economy since the 1970s, thus being engines of economic change and development during Suharto's New Order regime. Although the manufacturing sub-sector has lost its momentum after the Asian Crisis of the late 1990s, it still constitutes the most popular sub-sector of Indonesia in terms of foreign direct investment (FDI), followed by the mining sub-sector.
| Industrial growth
(annual percent change)
¹ indicates a forecast
Source: World Bank
Throughout the first decade after the Asian Crisis, the industry sector underwent a period of recession in which foreign investors lacked appetite to invest. After 2008, however, foreign companies and investors have regained confidence in this sector due to robust domestic demand brought on by a growing middle-class, low wages and the promising perspectives of the mining sub-sector (discussed in more detail below). One indicator that shows investors' appetite for Indonesia's industry sector is the significant rise in hectares of industrial land that was taken up in the Greater Jakarta area from 2010 onwards.
Indonesia's main mining and manufacturing products are:
|• Coal||• Footwear|
|• Oil||• Textile Products|
|• Gold||• Paper Products|
|• Automobiles||• Furniture|
However, there is plenty of room for improvement to make this industry sector more efficient and attractive. An important matter is the need for improvement in Indonesia's infrastructure to make industries more productive and cost-efficient. Moreover, complicated bureaucracy, corruption and legal uncertainty jeopardize investors' confidence in the Indonesian market.
Recent free trade agreements (such as the China ASEAN free trade agreement in 2010) are regarded by some economists as having a negative impact on Indonesia's industrial sector as Indonesian products are unable to compete with Chinese ones, resulting in a massive influx of cheaper Chinese products onto the Indonesian market and thus disrupting local Indonesian economies. It will be important for the Indonesian industry sector to become both more effective and efficient in the production process as well as logistics (which includes more investments in infrastructure as mentioned above).
For a detailed account on obstacles for economic development such as infrastructure and governance, please visit our Risks of Investing in Indonesia section.
Mining in Indonesia
Although mining has always been an important sub-sector of industry in Indonesia, it gained renewed attention - both nationally and internationally - in the mid- and late 2000s when commodity prices rose significantly and when the country had more-or-less recovered from the Asian Crisis. Indonesia is currently a major producer of coal, copper, gold, tin and nickel. The country remains the leading global exporter of thermal coal. But apart from coal mining, investments in the mining sector have been limited in recent years mainly due to regulatory uncertainty which hurts the investment climate. In January 2009 a new law "Mining Law No. 4 2009" came into force with the aim of providing a conducive mining investment climate which is more environmentally friendly, foresees a larger role for domestic stakeholders and aims for more value-added processing within the country. As it also led to an increase in exports of raw minerals the government is making legal incentives to stimulate value-added processing industries, including a possible ban on the export of raw minerals from 2014 onwards.
The mining industry provides substantial export earnings, employment opportunities and other economic activities. In 2011 the mining sector contributed around 12 percent to Indonesia's GDP.