To what extent does corruption discourage foreign direct investment (FDI) in Indonesia?
Abstract
Political and economic corruption remains rampant in many nations, particularly Indonesia. This remains a persistent challenge that impacts governance and economic development. Therefore, this article will examine the structural and systematic issues that contribute to widespread corruption, focusing on the weakening Corruption Eradication Commission (KPK) and its implications for legal development. The role that political elites, state-owned enterprises, and foreign investments play in enabling corrupt practices has undoubtedly undermined public trust and, consequently, deters foreign direct investment, exacerbating economic inequality. Despite government-led efforts and international pressure, institutional weaknesses continue to hinder meaningful progress. All things considered, this article will highlight the urgent need for legal transparency, strict anti-corruption policies, and improved governance frameworks to ensure long-term economic and political stability (UNODC).
Introduction
Simply put, a foreign direct investment (FDI) refers to purchasing an asset in another country and a substantial, lasting investment made by a company or government into a foreign concern. Additionally, it provides direct control to the purchaser over the asset, such as purchasing land and buildings. In essence, it is an investment in the form of a controlling ownership in a business, in real estate, or productive assets such as factories in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment (FPI) in that FDI involves a long-term relationship and significant influence over foreign business management. The FPI, the other hand, offers less control and is more focused on short-term financial benefits. FDI investors usually actively manage domestic companies or joint ventures, holding controlling positions.
Additionally, the investment can entail building an international presence, increasing a company’s footprint, or purchasing supplies. Notwithstanding these initiatives, corruption, unclear regulations, and ineffective bureaucracy remain major obstacles to drawing in and keeping international investment. Foreign direct investments significantly influence economic growth. However, corruption may seriously harm investor confidence and trust because it weakens the rule of law, raises operating expenses, and produces an unstable economic climate. These forms of corruption increase business risks, deter investors, and create an unpredictable investment climate. In Indonesia, corruption takes various forms that directly impact FDI. Corruption can take several such as bribery (the payment of unofficial fees to obtain permits, licenses, or contracts), embezzlement (the misappropriation of funds designated for infrastructure and business development), nepotism/cronyism (the allocation of government contracts and approvals based on political connections), regulatory manipulation (the implementation of unfair laws and overly bureaucratic procedures), and judicial corruption (the manipulation of legal procedures through bribery or political influence) (Suwelodhono & Rakhmani, 2020).
However, the impact of corruption on Foreign Direct Investment (FDI) in Indonesia remains nuanced. It can hinder economic growth, while a corruption-free environment can enhance investor confidence, increasing stable economic development and creating jobs and technological advancement. Recognizing the effect of corruption in Indonesia helps policymakers introduce reforms that facilitate transparency and investor attractiveness. It is important to address the corruption issue to improve Indonesia’s position, relative to its Southeast Asian neighbors, as a reliable investment destination and boost its global competitiveness.
The relationship between corruption and FDI
The U.S. mining company has faced regulatory challenges due to the allegations of corruption in Indonesia, leading to renegotiations and increased operational costs. This case heightened uncertainties and ultimately led to the company’s partial divestment. Furthermore, delays and regulatory uncertainty caused Shell to withdraw from a significant gas project in Indonesia in 2023, which may have reflected opaque decision-making procedures. Indonesia struggled to locate a new investor after the business sold its shares. Meanwhile, Vietnam was chosen over Indonesia by electronics companies like Samsung and Intel, presumably because of its more open investment regulations and reduced corruption concerns. Vietnam’s success in luring investors into the electronics sector exemplifies how corruption and bureaucratic barriers in Indonesia may discourage investments and push businesses towards more open markets. Notably, the accusations of corruption in Indonesia presented regulatory issues for the U.S. mining corporation and Shell in particular. The uncertain environment ensuing from these issues eventually led to renegotiations and higher operational costs, resulting in the partial withdrawal of the mining company and Shell’s withdrawal from a major gas project. In both cases, the resulting uncertainty, potentially linked to opaque decision-making processes, influenced investment decisions (Oktiani).
Corruption raises operational costs for foreign investors.
Indonesia’s corporate environment is impacted by corruption in several ways. Contracts, licenses, or permissions may require unofficial payments, also known as bribes; this increases costs and reduces business profitability. Government representatives may also engage in unethical practices and demand money to obtain protection or essential services. Furthermore, inefficient bureaucracy caused by dishonest employees may lead to greater compliance expenses and unnecessary delays in project approvals. A lack of contract protection resulting from corruption in government agencies, courts, and legal bodies, inconsistent law enforcement, and sudden policy changes can all undermine investor trust. Lastly, corruption can cause capital flight and reputation risk when foreign investors hesitate to associate with a market known for corruption scandals, which can stifle investment and economic growth. Additionally, corruption may disrupt economic stability by distorting market competition, leading to inefficiencies and economic stagnation (United Nations).
Addressing these issues through reforms and openness is essential to fostering a fair business environment and building a more reliable and trustworthy investment destination. These issues, which include bribery requests, uneven law enforcement, capricious policy changes, and a lack of contract protection, demonstrate how corruption harms Indonesia’s business environment. Additionally, corruption raises company expenses, undermines investor trust, fuels economic instability, and may result in capital flight and missed investment opportunities. A more stable and reliable investment environment must be created for domestic and foreign investors by addressing these issues through reforms and increased transparency. Addressing the underlying causes of corruption, such as weak governance and opaque decision-making procedures, is imperative for a long-term solution.
Corruption in Key Economic Sectors Affecting FDI
IN TERMS OF ECONOMICS
Any corruption used to obtain business licenses, permits, and land ownership rights, be it bribery, causes unfair competition where politically connected firms receive preferential treatment. Smuggling and customs fraud that distort fair trade.
THE IMPACT ON THE FDI
1. Foreign businesses face bureaucratic hurdles that increase costs and project delays.
2. Transparency issues make it harder for investors to assess risks.
3. Corrupt trade practices deter foreign companies from entering the Indonesian market.
IN TERMS OF STATE-OWNED ENTERPRISES (SOEs)
Many SOEs operate with nepotism, embezzlement, fraudulent procurement deals, and diverting public development funds into personal gains. The lack of transparency in government contracts favors politically connected businesses, creating room for many unfair advantages.
THE IMPACTS
1. Many foreign investors will hesitate to form joint ventures with SOEs due to high corruption risks.
2. SOE monopolies in key industries, such as energy, banking, and infrastructure, will discourage private foreign participation.
3. Scandals within SOEs damage Indonesia’s international investment reputation
IN TERMS OF POLITICS
Political corruption affects FDI by creating an unstable and unpredictable business environment.
A. Political Patronage & Cronyism
- Government contracts and business opportunities are awarded based on political affiliations rather than merit. Foreign businesses struggle to compete fairly with local firms linked to political elites.
- Foreign companies may be forced to partner with politically connected firms to gain market access. Investors may face pressure to engage in unethical practices to secure deals.
- Political dynasties control economic resources, limiting fair competition. Countries with stronger anti-corruption measures attract more FDI.
B. Judicial & Legal Corruption
- Court decisions are influenced by bribery and political pressure. Legal uncertainties deter long-term investment commitments.
- Foreign investors lack confidence in the legal system to protect their contracts. Disputes involving foreign investors may not be resolved.
- Weak enforcement of anti-corruption laws allows fraudulent business practices to persist. Businesses fear legal battles in a biased judicial system.
Example:
Lawsuits against foreign companies: Some international firms have faced unfavorable court rulings due to political interference.
C. Election-Related Corruption & Policy Instability
- Vote-buying and campaign financing from business groups create conflicts of interest. Investors hesitate to enter markets where policies change unpredictably.
- Frequent policy shifts due to changing political leadership affect investment stability. Political instability increases capital flight and reduces long-term economic planning.
- Foreign investors may be affected by protectionist policies after elections. Corruption in election financing can lead to policies that favor certain businesses over others.
Indonesia has some similarities in its corruption rates with neighboring countries, as stated in Table 1.
| Country | Corruption level (CPI) | FDI inflow | Political stability |
| Indonesia | Medium-high | Moderate | Unstable due to election-related policy shifts |
| Malaysia | Low | Very high | More predictable policies |
| Vietnam | Moderate | high | Favorable investment climate despite corruption |
| Thailand | Medium-high | Moderate | Political instability affects FDI |
| Philippines | high | low | Weak governance deters investors |
Government Policies and Anti-Corruption Efforts
Indonesia has implemented various policies and established institutions to combat corruption and enhance transparency within its governance structures.
LEGAL FRAMEWORKS
The foundation of Indonesia’s anti-corruption efforts lies in several key legislative instruments:
Anti-Corruption Law:
This law criminalizes both active and passive bribery of public officials, abuse of power, and other corrupt practices (IACA).
– Former President Joko Widodo was named one of the most corrupt leaders in the world by the Organised Crime and Corruption Reporting Project (OCCRP) in December 2024. Widodo refuted these claims, claiming a lack of proof during his administration and attributing them to political rivals. The persistent difficulties in Indonesia’s anti-corruption environment are highlighted by this incident (The Australian).
Anti-Bribery Law (Law No. 11 of 1980):
Specifically addresses bribery in both public and private sectors, aiming to deter corrupt transactions across various industries.
– Systemic problems in law enforcement were brought to light in January 2025 when an investigation found that Indonesian police officers had allegedly extorted money from partygoers at a rave in Jakarta. The effectiveness of the police force’s anti-corruption initiatives was called into question by this incident (Emot).
Key Anti-Corruption Institutions
Corruption Eradication Commission (KPK):
Established to investigate and prosecute corruption cases, the KPK operates independently to ensure impartiality in its enforcement actions.
The KPK has maintained a 100% conviction rate in 86 cases involving bribery and graft connected to government budgets and procurements since its founding in 2003. The KPK looked into and forced Sports Minister Andi Mallarangeng to resign in 2012 over corruption claims. This was the first time a minister had quit over graft charges since the KPK’s founding (Smith).
Kortastipikor:
Inaugurated in October 2024, this specialized unit within the Indonesian National Police focuses on combating corruption, reflecting a strategic shift to strengthen law enforcement’s role in anti-corruption efforts (Hogan Lovells).
The Indonesian National Police established Kortastipikor, a specialized unit designed to strengthen the police’s role in combating corruption, in October 2024. This action represents a change in strategy to improve law enforcement’s ability to handle corruption cases.
Recent Initiatives and Policies
Anti-Corruption Collective Action (ACCA) Initiative: This three-year program, which was started in 2022 by the Global Compact Network Indonesia, encourages teamwork in the fight against corruption, especially in the land-based sector (Anti-corruption Collective Action).
Presidential Amnesty Proposal: To recoup embezzled money and discourage further corruption, President Prabowo Subianto suggested in December 2024 that corrupt officials could be pardoned if they returned stolen property (Reuters).
Despite notable accomplishments, including high-profile convictions and the creation of specialized units, Indonesia’s anti-corruption agencies still face difficulties. In order to improve the efficacy of anti-corruption initiatives, allegations against senior officials and instances of police misconduct highlight the necessity for ongoing reforms and strict enforcement.
CHALLENGES PRESENTED
Despite these initiatives, corruption is still a major problem in Indonesia, partly because of the country’s deeply ingrained institutional cultures of patronage. Authorities may not always view acts of bribery or corruption as corrupt, which emphasizes the need for improved training and a change in public perceptions of corruption (UNODC).
International Collaboration
Indonesia works with international agencies like the United Nations Office on Drugs and Crime (UNODC). to bolster its anti-corruption efforts. The goal of private sector partnerships, such as the one with the Indonesian Palm Oil Association (GAPKI), is to advance integrity and transparency in sectors that are vulnerable to corruption. (“Uniting for Integrity: Empowering Stakeholders in the Fight Against Corruption”).
Despite the ongoing difficulties brought on by deeply ingrained cultural norms and systemic problems, these coordinated efforts demonstrate Indonesia’s continued commitment to combating corruption through institutional strengthening, legal reforms, and cooperative initiatives.
V. Potential Solutions and Policy Recommendations
Stricter law enforcement, open governance, business-friendly regulations, and public involvement will all work together to help Indonesia lower corruption and attract more foreign direct investment. Even though previous attempts have yielded inconsistent outcomes, persistent reforms and global collaboration can boost economic growth and investor confidence (Tomagola 78).
1. Strengthening Law Enforcement and Judicial Independence
- Enhance KPK’s Authority: An efficient way to hold corrupt actors accountable and stop bribery is to strengthen the Corruption Eradication Commission (KPK) by enhancing its independence from political influence. KPK’s expanded investigative capabilities will also help to discourage possible misconduct and foster an integrity-based culture in the nation’s public and private sectors (World Law Group).
- Judicial Reforms: Stricter measures are needed to protect the courts’ independence to guarantee fair trials and stop corruption from being used to sway court decisions. The values of justice, equality, and fairness would be protected by making sure that judicial processes are open, impartial, and independent of outside influences. This would also stop corruption from eroding the legitimacy of legal proceedings. A more just and equitable society would result from this, with the rule of law as the foundation for decisions rather than dishonest influences.
- Special Anti-Corruption Courts: The effectiveness of fighting corruption will be greatly increased by enlarging the reach and capability of specialized corruption courts. In addition to ensuring that offenders face prompt consequences and serving as a powerful deterrent against future acts of corruption, this would result in quicker trial proceedings, cutting down on delays. Additionally, because these courts are specialized, they encourage greater expertise, resulting in a more focused and effective handling of corruption cases.
Transparency and Digitalization in Government Transactions
- E-Government Platforms: The risk of corruption can be considerably decreased by implementing and improving digital platforms for public services like permits, procurement, and taxation. This will effectively eliminate the need for in-person interactions between parties. Increased transparency, streamlined procedures, fewer opportunities for corruption, better records, and improved service delivery are all benefits of using digital systems, and these can all help to improve public satisfaction, accountability, and trust (UNODC).
- Asset and Income Disclosure: Enforcing real-time tracking and public disclosure of government officials’ assets and incomes is essential to fostering accountability and transparency in government. Discriminating against and highlighting corrupt practices would help expose any disparities or inconsistencies in official assets, lowering the likelihood of corruption. Additionally, it would promote citizen trust, increase civic engagement, and make governance more transparent (UNODC).
3. Strengthening Business and Investment Climate
- Simplifying Regulations: Reducing regulatory red tape and streamlining bureaucratic procedures would help reduce the likelihood of corrupt practices in business licensing and approval, particularly regarding foreign direct investments (FDI). By streamlining the process and eliminating pointless and complicated steps, corruption would be less likely to occur, and the process would become more transparent and effective, attracting more foreign direct investment into the nation. By lowering the likelihood of corruption and fostering an environment that is more conducive to business, these policies would increase the efficiency and transparency of the business environment and draw in more foreign direct investments.
- Whistleblower Protection: Corruption can be largely prevented by bolstering safeguards and rewarding those who expose wrongdoing, especially in the commercial sector. This strategy makes it safer for people to come forward with information about illegal activity and encourages them to do so. Strong anti-retaliation and protection laws, confidentiality guarantees, and sufficient support networks can all help achieve this. Furthermore, providing rewards like cash or lighter penalties to people who reveal corruption can encourage others to come forward with important information.
- Anti-Corruption Certification for Businesses: Transparency and integrity in corporate operations will be encouraged by establishing a national or ASEAN-wide certification for businesses that adhere to strict anti-corruption regulations. By serving as a benchmark, this certification would let stakeholders, investors, and consumers know that a business upholds the highest standards of governance and ethics. Suppose there is a uniform and regional certification. In that case, evaluating a company’s compliance with anti-corruption regulations and promoting an anti-corruption culture in the business community will be simpler.
4. Public Awareness and Cultural Shift
- Educational Reforms: Establishing a culture of integrity requires anti-corruption education to be incorporated into colleges and universities. A responsible generation will be largely shaped by education regarding the negative impacts of corruption, the value of moral behavior, and the repercussions of bribery and misconduct. Future leaders can support a society that values accountability and transparency by fostering a strong moral compass in the younger generation. Furthermore, anti-corruption education can provide a forum for addressing the complexity of corruption and increasing public awareness, enabling youth to become change agents.
- Media and Civil Society Engagement: To reveal and stop corrupt practices, it is essential to support investigative journalism and encourage civil society organizations to monitor corruption cases. While civil society organizations act as watchdogs, examining corporate and governmental actions and calling for accountability, journalists are essential in exposing corrupt practices. Integrity in journalism and the watchful eye of civil society can work together to create a culture of integrity, encourage transparency, and serve as a potent deterrent against corruption.
- Citizen Participation: Introducing public reporting tools, such as applications or hotlines, that allow people to anonymously report corruption aids in exposing corrupt practices and fostering transparency. These platforms give people a private and secure way to alert the appropriate authorities to questionable or dishonest behavior. More people may come forward and expose corrupt practices if anonymity helps allay fears of reprisals. These reporting systems can also be a great source of intelligence and information for anti-corruption organizations.
5. International Cooperation & Benchmarking
- ASEAN Anti-Corruption Network: An effective fight against corruption requires collaborating with regional organizations to enforce corruption-related crimes across borders and share best practices. Through this partnership, resources, intelligence, and expertise can be shared to combat corruption more effectively. Regional organizations can better coordinate efforts, monitor corrupt practices across borders, and enforce the law by combining their resources and expertise. Higher prosecution rates, harsher penalties, and increased deterrence may result from this collaboration, which would lessen corruption and foster an integrity-based culture.
- FDI Safeguards: One tactical step in the fight against corruption is working with international organizations like the IMF, World Bank, and UNODC to create uniform anti-corruption frameworks for foreign investors. Together, these international organizations’ vast experience in anti-corruption initiatives can help develop uniform standards that foreign investors can follow to guarantee accountability and transparency in their business dealings. A fairer business environment and decreased corruption risks would result from establishing common standards, such as anti-bribery and anti-corruption compliance, incentivizing foreign investors to embrace ethical business practices and adhere to sound business standards.
Conclusion
In Indonesia, corruption continues to be a major obstacle to FDI, raising operating expenses, generating legal ambiguities, and undermining investor confidence. Despite Indonesia’s economic potential, its high levels of corruption make it less attractive to foreign direct investment (FDI) than other ASEAN nations. Even though the government has implemented several anti-corruption measures, including the KPK, Kortastipikor, and digital transparency initiatives, corruption in politics and law enforcement still shows flaws. Strengthening law enforcement, increasing transparency, streamlining business regulations, and encouraging a shift in culture towards integrity are all necessary for Indonesia to improve its investment climate. Indonesia can establish a more stable and investor-friendly environment and promote sustainable economic growth by embracing global best practices and fostering greater regional cooperation.
– By Putu Hannah Dhanya Manggala
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