Sustainable Development Impacts of Investment Incentives

This case study examines the impact of investment incentives on the chemical and pharmaceutical industry in Indonesia, specifically focusing on the Banten province. It analyzes the evolution of Indonesian investment laws, the effectiveness of these incentives in attracting foreign direct investment (FDI), and the resulting socio-economic and environmental consequences.

• The primary driver for foreign chemical companies deciding to invest in Indonesia is the size of the domestic market, rather than investment incentives. While incentives are viewed as a beneficial element that can reduce tax and import costs, they are not the main determinant for the initial decision to locate in the country.
• Regression analysis indicates that the real foreign (world) interest rate is the most significant variable influencing FDI in the Indonesian chemical industry. In the long term, Gross Domestic Product (GDP) is also a significant determinant, whereas investment incentives do not show a significant impact.
• Among the various incentives offered, those reducing or exempting tariffs on capital goods and intermediate products are the most attractive to investors. This is because the Indonesian chemical industry relies heavily on imported machinery and intermediate goods for production.
• FDI in the chemical and pharmaceutical industry grew rapidly from 2002 to 2007, with the value increasing from $530.9 million in 2002 to $1,563.7 million by September 30, 2007. Major contributing countries include Singapore, the United Kingdom, Japan, and South Korea.
• Employment generation in the chemical industry from FDI fluctuated between 2002 and 2007, peaking in 2005 at 11% of the total FDI labour force before declining to 7% (3,082 people) in 2007. This trend suggests a shift toward more capital-intensive operations or a reduction in capacity.
• The chemical industry has provided positive socio-economic benefits to local communities in Banten, including higher wages than regional minimums and the creation of indirect economic opportunities such as rental housing and eateries. However, local employment is often limited to unskilled or non-managerial roles due to a lack of education among the indigenous population.
• Foreign-invested chemical companies generally demonstrate better environmental compliance than domestic companies. In 2007, five FDI companies in Cilegon, Banten, achieved a 'Green' ranking (exceeding legal standards), while no domestic companies reached this level.
• Despite corporate compliance, local communities report significant negative environmental impacts, particularly air pollution. Smoke, fumes, and odours from factory chimneys cause irritation and headaches, and 97.62% of community respondents perceived a negative impact on air quality.
• Indonesia's chemical industry remains heavily dependent on imports, failing to generate a positive balance of trade for organic chemicals between 2003 and 2007. For example, in 2007, imports of organic chemical products were valued at $3,734.8 million, while exports were $2,701.7 million.
• The Indonesian government has expanded its network of Bilateral Investment Treaties (BITs), increasing the number of signed agreements from 33 in 1996 to 63 by 2007, including treaties with Japan and Russia.

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} }