Author: Sulistiyo Aridyono, ANU
Indonesian export and foreign direct investment (FDI) inflows have slowed over the last two decades despite the robust performance of neighbouring Southeast Asian countries. To attract FDI and streamline its regulatory environment, Indonesia enacted the Omnibus Law in November 2020.
To revive domestic competitiveness and create more jobs, the Omnibus Law reformed Indonesia’s labour-related regulations. But while the relaxation of labour laws can induce higher private investment, it can also harm workers.
The competition between countries to attract FDI is influenced by the locational preferences of multinational firms. In Southeast Asia, Vietnam is a success story. Its long-term economic reforms have attracted significant FDI inflows, especially after the country’s WTO accession in 2007. From 2005–2021, Vietnam’s FDI per capita increased seven times from approximately US$270 to US$2000.
Vietnam’s rise as an FDI destination has had a negative spillover effect on Indonesia. From 2010–2015, firms in labour-intensive industries, such as apparel, footwear and furniture, relocated from Indonesia to Vietnam to benefit from the more competitive wages and flexible labour regulations.
Before the Omnibus Law, the Indonesian government tried to calibrate an optimal minimum wage, but their policy changes were not in favour of business. Surveys conducted by the Japanese External Trade Organization reveal that the primary concern of Japanese-affiliated...
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