Indonesia’s governance of Chinese investment: reform, guided openness, and state-led developmentalism

The host-country institutional environment is a main determinant of foreign investment. Until recently, non-discrimination was upheld as a fundamental principle in international trade, but is being eroded by the proliferation of strategic trading arrangements. In Indonesia, Chinese investment has grown massively in recent years, yet when inquired, government officials and business executives respond that foreign direct investment (FDI) policies are non-discriminatory and apply equally to all countries, without special provisions. We analyse the governance of Chinese investment in Indonesia with the aim to identify contextual determinants of investment flows in general and applicable to China in specific. In governance, we include Indonesian policies and regulations, institutional arrangements, and bilateral relations. We find that FDI governance has evolved through three major periods, ‘reform’, ‘guided openness’, and ‘state-led developmentalism’, providing highly different conditions for foreign investors and different accommodation of Chinese investment. We further find that three specific policy programs have contributed significantly to attracting Chinese investment.