Sustainable Development Impacts of Investment Incentives

The report finds that while Indonesia offers various investment incentives, such as tax facilities and import duty exemptions, these are not the primary drivers for FDI in the chemical sector; instead, the large domestic market and international interest rates are more significant. While FDI has fostered economic growth and provided employment in Banten province, the industry remains heavily dependent on imported inputs and has caused significant air pollution, although foreign-invested firms generally show higher environmental compliance than domestic ones.

• The primary driver for foreign chemical companies deciding to invest in Indonesia is the size of the domestic market, rather than investment incentives.
• Regression analysis indicates that the real foreign (world) interest rate is the most significant variable influencing FDI in the Indonesian chemical industry, while investment incentives do not have a significant impact in the long term.
• Among the available incentives, those reducing or exempting tariffs on capital goods are the most attractive to investors because the industry relies heavily on imported machinery and intermediate goods.
• Employment in the chemical industry from FDI fluctuated between 2002 and 2007, with a decline in 2007 to 3,082 people, suggesting a shift toward more capital-intensive operations or reduced capacity.
• FDI in the chemical sector has not created a positive trade balance for Indonesia, as imports of organic chemicals consistently exceeded exports from 2003 to 2007.
• The establishment of chemical factories in Banten province has improved local socio-economic conditions by providing employment and stimulating secondary businesses like rental housing and eateries.
• Foreign-invested chemical companies generally demonstrate better environmental compliance than domestic companies, often applying stricter standards from their global holding companies.
• Despite corporate compliance, local communities report significant air pollution, including smoke and pungent odors that cause irritation and headaches, though many perceive these as within tolerable limits.

APA

Lestari, S. A. M., Rahutami, A. I., & Wijaya, A. S. (2009). Sustainable Development Impacts of Investment Incentives. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/sd_investment_impacts_indonesia.pdf

Chicago

Lestari, Sri Adiningsih Murti, A. Ika Rahutami, and Awang Susatya Wijaya. Sustainable Development Impacts of Investment Incentives. International Institute for Sustainable Development, 2009. https://www.iisd.org/system/files/publications/sd_investment_impacts_indonesia.pdf.

Wikipedia

{{cite report |last1=Lestari |first1=Sri Adiningsih Murti |last2=Rahutami |first2=A. Ika |last3=Wijaya |first3=Awang Susatya |title=Sustainable Development Impacts of Investment Incentives |publisher=International Institute for Sustainable Development |date=2009 |url=https://www.iisd.org/system/files/publications/sd_investment_impacts_indonesia.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{lestari2009sustainable, author = {Lestari, Sri Adiningsih Murti and Rahutami, A. Ika and Wijaya, Awang Susatya}, title = {{Sustainable Development Impacts of Investment Incentives}}, institution = {International Institute for Sustainable Development}, year = {2009}, url = {https://www.iisd.org/system/files/publications/sd_investment_impacts_indonesia.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }