More ecommerce opportunity in Indonesia as foreign investment bans are lifted

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Doing business as a foreigner in Indonesia isn’t easy. Several sectors have restrictions on foreign investment to protect local businesses. Ecommerce was one of those sectors affected by the so-called negative investment list.

But the current administration a few days ago lifted some of these restrictions.

Tech in Asia spoke with lawyer Harun Reksodiputro of Allen & Overy about the changes. The firm advises investors on doing business in Indonesia and has studied ecommerce regulations closely.

He says one important update is in the scope of the definition.

The old regulation didn’t differentiate between types of ecommerce business models. It only addressed retail-based ecommerce companies – meaning companies with inventory who sell directly to consumers. E-retail businesses were entirely off limits to foreigners.

The new regulation introduces a category called “trade transactions through electronic systems.” It names four specific models that fall under it: platform-based marketplaces, daily deals sites, price grabbers (presumably sites that aggregate products sold elsewhere), and online classifieds.

All these business models are open to 100 percent foreign ownership, Harun says, if the investment amount is higher than US$7.3 million. Smaller investments are possible, but then foreign ownership is capped at 49 percent. It essentially says if you want to have full control over the business, you have to make a substantial financial commitment. If you bring less money to the table, you have to team up with a local partner.

Still some uncertainties

Foreign investment in retail-based ecommerce companies all the way up to 100 percent is now also possible under the new rules under one condition: the company has to prove it has established mutually beneficial partnerships with small and medium enterprises (SMEs).

But what defines a mutually beneficial partnership? Harun says that itself isn’t spelled out in the negative investment list. Instead, the list refers to a separate law regarding SMEs that has to be consulted to define the partnership.

Harun says online retail in categories like food, pharmaceuticals, apparel, and household goods should all be open to foreign investment. An exception is the sale of alcoholic beverages. This remains off-limits.

While the updated investment regulation is much more specific than the previous one, Harun points out that some uncertainties remain; for example, if a company has a business model that mashes up several of the types mentioned.

According to him, the investment coordinating board will issue a separate guideline to further define the business models contained within the “trade transactions through electronic systems” category. This could help sort out cases where neither of the definitions fit perfectly. This additional guideline, however, has not yet been released.

Good for the industry

Indonesia’s ecommerce practitioners welcome the changes to the investment rules. They assume it will lead to an influx of foreign money and healthy competition, spurring the industry as a whole.