Manufacturing Illustration. (Photo: Pixabay)

JAKARTA (TheInsiderStories) – Although the manufacturing sub-sector has lost its grip in the Indonesia’s economy, especially after the sector was hurt badly during the 1997-1998 Asian financial crisis, the sector still play important role for foreign direct investment in the country.

Over the past decades, even though the sector remains one of the key growth engine for the whole economy, it is still facing what is called de-industrialization, a term that describes how manufacturing industry plays a lesser contribution in the economy. This trend has trapped Indonesia for the past 15 years.

The contribution of the manufacturing industry to gross domestic product (GDP) continued to decline, prior to the Asian Financial Crisis in 1997-1998, non-oil & gas manufacturing accounted for 30 percent of Indonesia’s GDP. Today, however, the figure is around 22 percent.

Another related factor that causes deindustrialization is the slow development of infrastructure, which particularly been felt since the reform era. This led to high logistics costs and therefore makes the industry less appealing to investors. Meanwhile, the quality of Indonesia’s human resources is also regarded inferior compared to human resources in countries such as China and Vietnam.

More recent factors include protectionist policies in countries like the United States and India. Meanwhile, domestically, logistic problems, the reliance on imported raw materials, and the insufficient power supply form bottlenecks for development of Indonesia’s manufacturing industry.

Fortunately, the recent boost in manufacturing output growth can be attributed to the importance of domestic demand, which has increased particularly for basic metals, food, chemicals, and automotive parts.

Indonesia’s manufacturing sector recorded its fastest growth in 22 months in April as improving domestic demand drove up output and new orders

Last year, manufacturing industry was able to hire 17.01 million workers, where food and beverages industry absorb the most.

The manufacturing industry also become the main investor target, including foreign investors.

Last year, it was still the most popular sub-sector of Indonesia for foreign direct investment (FDI), followed by the mining sub-sector. This sector recorded an investment value of US $ 21.6 billion over the past year with 256 projects last year, higher than tourism industry which only recorded US$17 billion, energy and mineral US$1.18 billion, and trade US$0.47 billion.

However, this industry needs to be given special attention in order to keep it grow well and provide benefits for those involved in it.

The government continues to strive to create a conducive business climate and to facilitate domestic business so investors can increase their investment in Indonesia in building a more inclusive and quality national economy.

Meanwhile, the government will provide the manufacturing industry three tax incentives in an effort to boost the industry. It involves a 200 percent tax allowance for those investors who want to invest in vocation programs to improve training and skills for their workers.

Secondly, a 300 percent tax incentive (from the value of the investment) will be offered to those who invest in innovative products. Thirdly, those who invest in labor-intensive industries that focus on exports can also expect to obtain a tax incentive (the exact amount depending on the number of workers employed in the company).

The government can aim for higher growth of the manufacturing sector in 2018 because infrastructure development is well on its way since President Joko Widodo’s administration.

New harbors, toll roads, airports as well as industrial zones and power plants are being build and some are (nearly) ready. This will reduce logistics costs and make the investment climate more attractive.