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An Introduction to Special Economic Zones in Indonesia

Indonesia’s government has made the development of the country’s special economic zones (SEZ) a priority policy with the aim of attracting over US$50 billion in foreign investment over the next decade, particularly for SEZ-oriented manufacturing.

As of 2022, there are 19 SEZs of which 12 are in operation and the remainder in the construction phase. Eight are designated for tourism with the rest for manufacturing and processing. The concept of SEZs in Indonesia was only announced in 2014 when President Joko Widodo came to power. Buoyed by the success of the country’s free trade zones, SEZs were developed to further increase foreign investments into the country. As such, the first SEZs in Indonesia has only been in operation since 2015, with the majority only beginning operations in 2019.

In establishing the SEZs, the government has sought to diversify away from the island of Java and spread across the country. As of 2021, Indonesia’s SEZs have attracted just over US$5 billion in investments and employed over 28,000 workers.

The SEZs serve as a hub for selected activities from logistics, to export processing activities, to tourism. They are designed in this way to maximize the ready availability of local resources and cater to upstream and downstream industries. For instance, the Arun Lhokseumawe SEZ, located in Aceh province, has its primary activities surrounding petrochemicals, oil and gas, and paper production. The province is known for its vast resources of oil and gas. The Mandalika SEZ, located on the scenic island of Lombok, is being pushed as an SEZ that supports eco-tourism and the agro-industry.

Further, the Kendal SEZ has its primary activities in manufacturing, particularly garment and textiles, automotive furniture, electronics, and food and beverages. The SEZ is found in Central Java province, one of Indonesia’s main manufacturing hubs.

Within an SEZ, the following business activities can be undertaken:

  1. Production and processing;

  2. Logistics and distribution;

  3. Research, digital economy, and technology development;

  4. Tourism;

  5. Energy development;

  6. Education;

  7. Healthcare;

  8. Sports;

  9. Financial services;

  10. Creative industries;

  11. SEZ development and management; and

  12. Procurement of SEZ infrastructure.

Investors operating in Indonesia’s SEZs will find they are supported by well-integrated infrastructure from highways, drainage systems, high-speed internet and communication systems, ports, and airports. Moreover, the Indonesian government has prepared an array of fiscal and non-fiscal incentives, such as an easier immigration process, corporate income tax reductions, and exemptions on import duties and excise duties, among many others.

For foreign investors, entering Indonesia’s special economic zones and taking full advantage of what they offer requires a long-term outlook. Companies must first ensure their industry is suited to the infrastructure and benefits afforded in the SEZs, as well as understand the long-term domestic and regional policies that could impact their industry.

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