Ijmet 10 01_144

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International Journal of Mechanical Engineering and Technology (IJMET)
Volume 10, Issue 01, January 2019, pp. 1420-1426, Article ID: IJMET_10_01_144
Available online at http://www.iaeme.com/ijmet/issues.asp?JType=IJMET&VType=10&IType=01
ISSN Print: 0976-6340 and ISSN Online: 0976-6359
© IAEME Publication Scopus Indexed
FOREIGN DIRECT INVESTMENT POLICY AS
THE METHOD OF CONTROLLING FOREIGN
INVESTMENT ACTIVITIES
Ary Zulfikar
Doctoral Program of Law Science, Faculty of Law, Padjadjaran University, Bandung, Indonesia
ABSTRACT
Foreign Investment is an important activity in order to improve economic growth and
prosperity of society. It needs to be supported with legal instruments that can guarantee
and protect the investments. The formation of legal instruments is strongly affected by the
economic and political interests of the country, therefore sometimes it goes against the
principle of legal certainty. By using normative jurisdictional research methods in this
study, the Author will discuss about the principles and concepts used by the government
to establish a policy on foreign investment.
Keywords: Foreign Direct Investment, Foreign Investment, Negative List of Investment
Cite this Article: Ary Zulfikar, Foreign Direct Investment Policy as the Method of
Controlling Foreign Investment Activities, International Journal of Mechanical
Engineering and Technology, 10(01), 2019, pp.1420–1426
http://www.iaeme.com/IJMET/issues.asp?JType=IJMET&VType=10&Type=01
1. INTRODUCTION
The purpose of national development, as mandatory by the 1945 Indonesian Constitution is to
imply the public welfare, enhance and maintain the independency and fill it with equitable and
democratic development, implemented gradually and continuously. In order to maintain the
sustainability of development, the Government issued Law Number 25 of 2004 on National
Development Planning System (“Law No. 25/2004”), as a basis or legal foundation for the
government in national development.
The legal system in all countries whether implicitly or explicitly determines two basic issues
as to an international investment, as described below: [1]
a) All national legal systems implicitly or explicitly address two fundamental issues with
respect to international investment: (i) the extent to which foreign capital in its various
forms is permitted to enter and exit national territory, and (ii) the treatment to be given
to foreign capital once it enters national territory.
b) The content of national laws and regulations on these two issues is shaped by the
interests, attitude, and ideologies of countries’ governing authorities. At any particular
time, governmental positions on questions relating to the entry, exit and treatment of

Ary Zulfikar
international investment are in turn influenced by domestic interest groups, such as
labor unions and business association, as well as by external forces such as diplomatic
pressure from allies and from international institutions like the International Monetary
Fund and the World Bank.
There are some of concerns related to the foreign investment and the international law, as
quoted by Tullio Treves, as follows: “the basic concerns relevant in foreign direct investment are
those of the investor and of the state in which the investment is made (the host state). The host
state is concerned that the investor, because of the strength deriving from being the party that
brings in capital and know-how, imposes on it conditions that are economically unjust or that
might jeopardize its freedom to pursue its economic, financial, social or environmental policies.
The investor is concerned that the host state may take advantage of the strength of being the
sovereign in the territory in which the investment is made to expropriate the investor’s property
or limit the use of thereof, or to change the legal framework of the investment or the political and
economic climate in which the investment takes place. The concerns of the host state have to do
with its perception of being weaker party in determination of the conditions applicable to the
investment before the investment is decided, while the concerns of the investor have to do with its
perception of being the weaker party once the investment is in place.” [2]
In view of the aforesaid perspective, it would be important for the host party to determine the
investment conditions for the investor that suitable with the purpose of economy development of
host country in general and to increase the economic growth which would eventually give the
prosperity to the people of the host country where the investment made by the Investor. In the
perspective of the investor, they will also need a profit from their investment in the host country,
by expanding their business activities in other country. Jorge A Huerta stated that the domestic
laws on investment are unilateral acts by a State that provide benefits not only for investors, both
national and foreign, but also for other States [3]. As the sovereign country, the host country may
determine which investments are allowed for the foreign investor and which are not preferable
for the foreign investor. The authority of host country to determine embodied in the negative list
set out by the host country.
2. RESEARCH METHODOLOGY
According Soerjono Soekamto, legal research can be divided into two typologies: (i) Normative
legal research, which consists of: a. Research on legal principles; b. Research on legal
systematics; c. Research on the level of legal synchronization; d. The study of legal history; and
e. Comparative study of law. (ii) Sociological or empirical legal research, viz. Research on legal
identification and Research on the effectiveness of law [4].
Based on the problems and frameworks described in Introduction, subsequently the type of
legal research that will be used is normative jurisdictional method, which will be focused on
library data or secondary data through legal principles and comparative law. All bibliographic
data to be used were obtained from authorized institutions (especially for some laws and
regulations), for instance Investment Coordinating Board of the Republic of Indonesia
(“BKPM”), Ministry or related ministries, Provincial and/or District/Local Governments,
entrepreneur, as well as libraries from comprehensive university in legal science. The rest will be
collected from mass media, and internet.

Foreign Direct Investment Policy as the Method of Controlling Foreign Investment Activities
3. FOREIGN DIRECT INVESTMENT
3.1. Foreign Direct Investment
The activities of investment in the developing country aim to increase the economic growth and
social welfare. Sornarajah defines the foreign investment as the involvement of transfer of
tangible or intangible assets from one country to another for the purpose of their use in that
country to generate wealth under the total or partial control of the owner of the assets. There can
be no doubt that the transfer of physical property such as equipment, or physical property that is
bought or constructed such as plantations or manufacturing plants, constitute foreign direct
investment [5].
In line with such definition, the Foreign Direct Investment activities shall have direct
contribution with the economic growth in the host state where such investment made. This is
different with the portfolio investment when the foreign investor is only related to the movement
of money for the purpose of buying shares in the local company. In both investment, there is
indeed a capital inflow from the investor to the another company, but portfolio investment shall
be categorized as a short-term investment, in which the investor may at any time withdraw their
investment in such country if they think their money can be beneficial to be used for other
investment. Sornarajah also said that the distinguishing element is that, in portfolio investment,
there is a separation between, on the one hand, management and control of the company and, on
the other, the share of ownership in it.
Foreign direct investment reflects the objective of obtaining a lasting interest by a resident
entity in one economy (direct investor) in an entity resident in an economy other than that of the
investor (direct investment enterprise). The lasting interest implies the existence of a long term
relationship between the direct investor and the enterprise and a significant degree of influence
on the management of the enterprise. Four dimension are important: (i) Transfer of capital from
a source country to a host country; (ii) Element of control over management policy and decisions.
An investment less than 10 percent it is referred to as portfolio investment. An investment
between 10% (ten percent) and 50% (fifty percent) ownership is called cooperative arrangement
(no single party holds a majority). An investor has a majority control beginning with 50% (fifty
percent) shareholding; (iii) Parent Company as a source of funds for foreign operations; and (iv)
Balance of payment or capital flows (equity plus intercompany loans reinvestment of profits
(earned by foreign affiliates) [6].
As an effort to expedite the national development and facing the global economic change as
well as the participation of Indonesia in some international cooperation, the Indonesian
Government enacted the law of investment No. 25 Year 2007 on Investment Law (Law No. 25
Year 2007). This law revokes the Law No. 1 Year 1967 on Foreign Investment and the Law No.
6 Year 1968 on Domestic Investment. Thus, the policy of capital investment and the further
implementing regulation comply with the principles and basic policy as stipulated in the Law No.
25 Year 2007. The purpose of investment activities based on the Investment Law, inter alia, to
accelerate national economic growth and to step up investments in order to turn economic
potentials into real economic strength by use of funds derived from both home and abroad.
Indonesia as host country need to utilize the funds from abroad to accelerate the national
economic development. But on the other hand, the foreign investors need the protection of their
investment in host country, so that it is necessary for the host country to enact investment
regulations which provide a legal certainty for the foreign investor as well as accommodate the
sustainable of national economic development.

Ary Zulfikar
3.2. The National Investment Law
Through their national legal system, countries impose a variety of measures for different purposes
to control the outflow of capital, both real and financial, from their territories. The type of
instrument employed will depend on the situation the country confronts and its goals in trying to
deal with that situation. With respect to the export of real assets, governments may levy export
taxes as a means to raise revenues, impose quantitative restrictions to make sure that the domestic
market is adequately served, and require the issuance of an export license as a means to prevent
strategic technology from falling into the hands of an adversary. In some cases, a country may
ban completely an investment or capital transfer as a means to pressure changes in another state’s
policies or to bring about a complete change of regime in that country [7].
The restriction on foreign investment varies in each country, depending on the national
objectives and interests of each country. However, the important things to determine the foreign
investment policy is how the implementation of foreign policy does not obstruct the capital flow
from foreign investor to Indonesia, which could support the economic development in a
sustainable manner. The problems of investment activity in a country are not only related to
capital requirement but also include the need of their expertise and experience of foreign investor
in developing business activities in Indonesia that can accelerate the country’s economic growth.
The Government of Indonesia, with its open economic system, has already issued the regulation
on the restriction of foreign capital for any certain business activities, i.e. Negative List of
Investment ("Negative List"). The capital requirements, which open for foreign investor is limited
by capital ownership of certain business, sector in Indonesia. Currently, the Government of
Indonesia has issued the Presidential Regulation No. 44 of 2016 (“PP No. 44/2016”) concerning
the List of Closed Business Activities and Opened Business Activities with Capital Investment
Requirements.
The investment policy should be able to encourage the opportunities in creating the
investment openness, but it still honor the sovereignty of Indonesia to regulate its own investment
law pursuant to the interest of Indonesian economy. Any foreign investors who engage in the
investment activities in a country would expect to be controlling shareholders of the foreign
investment company, which in turn can ensure the repatriation of their investment to the home
country. The legal certainty on the protection and assurance of the repatriation of their investment
is basically the principle of foreign direct investment activity. Therefore, the regulation of foreign
capital restriction policy must be able to guarantee of which.
In accordance with the Presidential Regulation No. 76 Year 2007 on Criterion and
Requirement for the determination of the list of Closed Business Activities and Opened Business
Activities with Capital Investment Requirements shall, as the basis of the issuance of the
Negative List, be based on (i) Protection and development of Micro, Small, Medium and
Cooperative Enterprise; (ii) Joint Operation Requirement; (iii) Capital Ownership Requirement;
(iv) Certain Location Requirement; and (iv) Specific License Requirement.
One of the issues that always arises in the direct investment is the restriction capital ownership
requirements in the invested company which is basically allowed for the foreign investor. There
are some business activities under the Negative List which are open but to some extent the foreign
investor is restricted to have a majority shares in the invested company, even though all
investment comes from the foreign investor. The basic understanding for having majority shares
from the investor side is to have a control of the management of the company. In view of that
there is a restriction of capital ownership on the certain business activities as one of the
requirement of the Negative List, would be eventually resulted the foreign investors may withhold
their investment in Indonesia. Furthermore, the parameter in determining of the number of shares
percentage which are not allowed for the foreign investor under the Negative List is differed from
the quorum and voting requirements for resolutions of a general shareholders’ meeting (GMS)

under the prevailing Law No. 40 Year 2007 on the Limited Liability Company (“Company Law”)
in Indonesia. The quorum and voting requirements under such law defines three types of votes
which constitutes (i) more than one-half of the issued shares of the company for any regular
resolutions, (ii) two-thirds of the issued shares of the company for the amendments to the Article
of Association (AOA), and (iii) three-fourths of the issued shares of the company for merger,
consolidation, acquisition, bankruptcy and/or dissolution. Such quorum and voting requirements
reflect that the investor has a majority control over the company that required by anyone who
inject the significant capital in the invested company under the framework of Foreign Direct
Investment (FDI).
In accordance with the definition by Sornarajah and Roger Ramp as to the difference between
FDI and Portfolio Investment is the amount of shares ownership to be held by the Investor. If the
investor hold the shares only 20% (twenty percent), 30% (thirty percent) or less than 49% (forty
nine) percent, they cannot control over the management as one of element of direct investment.
In accordance with the fact that the share ownership is below than 50% (fifty percent), it can be
categorized as portfolio investment.
In early legal basis of foreign investment in China, there were three major laws, the Law of
People’s Republic of China on Joint Venture Using Chinese and Foreign Investment (“Equity JV
Law”, 1979), the Law of the People’s Republic of China on Enterprises Operated Exclusively
with Foreign Capital (“WFOE Law”, 1986), and the Law of People’s Republic of China on
Contractual Joint Ventures Using Chinese and Foreign Investment (“Contractual JV Law”, 1988)
[8]. Since 2016, China changed its system for government control over foreign investment. The
change was accomplished by revising the statutes concerning wholly foreign owned entities
(“WFOEs”), equity joint ventures and contractual joint ventures and by promulgating a new basic
regulation governing registration of foreign invested entities (FIEs). This change will be
implemented through the issuance of a National Negative List. For FIEs that are not restricted or
regulated under the National Negative List, China Ministry of Commerce (“MOFCOM”) requires
online registration through a national website employing a standard set of documents. The
registration will apply to initial formation of the FIE and to most changes in FIE structure, such
as changes in management, ownership and registered capital [9].
The negative list specifies the industries in which foreign investment is restricted or
prohibited. Those failing under the restricted category are subject to restrictions such as
shareholding limits, and must receive prior approval from MOFCOM. Industries in the prohibited
category are closed completely. For foreign investment in any industry not listed on the negative
list, whereas the foreign investors are given equal treatment to the domestic Chinese investors
[10].
3. CONCLUSIONS
The policy of the foreign direct investment in Indonesia should be used in order to accelerate the
Indonesian economic growth and equitable development pursuant to the prevailing capital
investment legal system in Indonesia, and utilize the foreign investment for the sustainable
economic development. In other countries, not only in Indonesia, they also use the same approach
to control over the foreign investment by issuing the Negative List of Investment. There are 3
(three) categories, “restricted”, “prohibited” and “permitted”. Foreign investor shall have the
same terms as domestic investments.
Indonesia as a developing country still need the foreign investment in order to fulfill the need
of funds to accelerate the national economic growth which are not sufficiently sourced from
domestic investment. Accordingly, for the Industry which are not closed for foreign investor, the
Indonesian Government should undertake any measure to encourage foreign investor to bring
their capital to be invested in the invested company operating in Indonesia. If the Indonesian

Ary Zulfikar
Government would like to impose the shareholding limit for the foreign investor under the
Negative List regulations, it should refer to the parameter of quorum and voting requirement as
implied in the Company Law in order to give the foreign investor control over the foreign
investment company which in line with the amount of investment injected by the said foreign
investor.
In view of that by introducing the “encourage” category for foreign investor and the limitation
of shareholding in the invested company conform to the parameter used in the Company Law for
the possession of, at least, majority shares in the invested company that would provide the legal
certainty for foreign investor in securing their investment in Indonesia. On the other hand, the
Indonesian Government shall easily have control and asking their commitment of investment
over the foreign investors who owned the majority shares in the invested company rather than if
they only have small portion of shares in such company.
REFERENCES
[1] Salacuse, Jeswald W., and The Three Laws of International Investment: National,
Contractual, and International Frameworks for Foreign Capital, UK, Oxford University Press,
First Edition, 2013, page 3.
[2] Treves, Tullio, Seatzu, Francesco and Trevisanut, Seline, Foreign Investment, International
Law and Common Concerns, New York: Routledge, 2014, page 47.
[3] Goldman, Jorge A Huerta, Domestic, Regional and Multilateral Investment Liberalization:
Regulation of Foreign Investment, Challenges to International Harmonizaton, edited by
Zdenek Drabek and Petros Mavroidis, Library of Congress Cataloging-in-Publication Data,
2012, page 67.
[4] Riswanto, A., Saribanon, E., & Gaffar, V. (2018). The importance of the cultural and gender
outlook on consumer behavior studies: An Indonesian perspective. Arthatama Journal of
Business Management and Accounting, 2(1).
[5] Wiradipradja, E. Saefullah, Penuntun Praktis Metode Penelitian dan Penulisan Karya Ilmiah
Hukum, CV Keni Media, Bandung 2015, page 25.
[6] Sornarajah, M., The International Law on Foreign Investment, Cambridge University Press,
New York, First Published 2010, page 7.
[7] Handani, N. D. (2018). Muslim students' awareness on halal products: A study in a non-
Islamic country. Arthatama Journal of Business Management and Accounting, 2(1).
[8] Ramp, Roger, Foreign Direct Investment in Emerging Markets – Vietnam and Korea, Seminar
Paper, Berlin School of Economics, Course: International Corporate Finance, 2009, page 1.
[9] Salacuse, Jeswald W., and The Three Laws of International Investment: National,
Contractual, and International Frameworks for Foreign Capital, UK, Oxford University Press,
First Edition, 2013, page 34.
[10] Enright, Michael J. Developing China: The Remarkable Impact of Foreign Direct Investment,
Routledge, New York, 2017, page 11.
[11] China’s New Foreign Investment Law, Retrieved from
https://www.chinalawblog.com/2016/10/chinas-new-foreign-investment-law-less-than-
meets-the-eye.html, 1 December 2017.
[12] Susilo, D.E. (2018). The Effects of Corporate Social Responsibility on Corporate Value.
Arthatama Journal of Business Management and Accounting, 2(1).
[13] Foreign Investment Catalogue Opening Access New Industries, Retrieved from
http://www.china-briefing.com/news/2017/07/11/china-releases-2017-foreign-investment-
catalogue-opening-access-new-industries.html, 1 December 2017.
[14] Khairuunnisa, I., & Supriatna, E. (2018). Analysis of Women's Economic Empowerment in
Sukabumi City. Arthatama Journal of Business Management and Accounting, 2(1).

[15] Ivanova V. N., Shatin A. Yu and Zhukova N. V, Priorities of Attracting Foreign Direct
Investment to Developed and Developing Countries of the World Economy, International
Journal of Mechanical Engineering and Technology, 9(11), 2018, pp. 2389– 2395.
[16] Arkadiusz Mironko, The Impact of Human Capital and Skill Availability On Attraction of
Foreign Direct Investment (FDI) Into Regions within Developing Economies, International
Journal of Management, 9 (3), 2018, pp. 139– 163.

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