Economists caution that Indonesia's efforts to draw in tech investment through protectionist measures could result in unintended consequences.

• Due to Indonesia's "local content policy," Apple has been unable to sell its latest iPhone model in the country until it meets the requirement of investing or sourcing a certain amount of components locally.
• The company is being courted by the government for more investments and onshoring before being granted access to its vast consumer markets.
• According to CNBC, economists believe that the policies do not meet the requirements to attract more foreign direct investments and may have an adverse effect on the developing country.

Economists caution that Indonesia's attempts to entice investment from tech giants like Apple by mandating local investment and manufacturing may not result in sustainable benefits and could ultimately harm the country's economy.

Indonesia's long-standing local content policies, known as "TKDN," have prevented the sale of the latest iPhone model in the country until the company invests or sources more components locally.

Indonesia's deputy industry minister announced on Dec. 3 that the country aims to raise the local content requirement for smartphone investments.

The government has rejected Apple's $100 million proposal for iPhone 16 sales and is now requesting a $1 billion investment in cell phone component production in the country.

The content requirements aim to safeguard local industries and establish a value-added supply chain in Indonesia.

Indonesia is facing competition from other developing Southeast Asian countries, such as Vietnam, for investment and supply chains diverted from China, which may impact their potential ramp-up.

Despite attracting some manufacturer commitments in the past, economists argue that the content policy is still misguided and overlooks the underlying reasons why Indonesia has not successfully drawn in tech supply chains.

Bhima Yudhistira Adhinegara, executive director of CELIOS, stated that the practice is not true protectionism, but rather an attempt to frighten foreign direct investment into the country.

He stated that they believe intimidating large corporations such as Apple will encourage them to invest more in Indonesia.

What's at stake?

If Apple can establish a presence in Indonesia, it could become a promising growth opportunity for the company, according to a previous analysis by an Apple analyst on CNBC.

In the past, Apple had gained favor in the market by establishing "Apple Developer Academies" in the country, which taught students skills such as software development.

In April, while in Indonesia, Apple CEO Tim Cook declared that the company would establish a fourth academy on Bali.

The government is now looking to increase its involvement in Apple's supply chain and wants more facilities to be involved in the production of products.

Officials contend that the worth of Apple's planned investments is less than its sales in Indonesia, asserting that smartphone companies such as Xiaomi and Samsung have invested more.

Indonesia boasts the largest consumer base in Southeast Asia and the fourth-largest population globally.

Despite being a small overseas sales market for Apple, Indonesia's market capitalization is still bigger than its gross domestic product.

According to Arianto Patunru, a board member at the Center for Indonesian Policy Studies, Apple may view Indonesia as a potential entry point for accessing the regional market.

Global tech supply chains, such as Apple's, involve dividing the value-added, meaning each country may only contribute a small amount.

The content policy in Indonesia mandates that 40% of smartphones and tablets must be manufactured domestically.

Will Indonesia's 'scare tactics' backfire?

According to CNBC, most economists believe that content policies will not attract companies like Apple and may have the opposite effect.

FDI attraction in Indonesia has not been successful due to local content requirements, according to Patunru, who believes they may have contributed to the withdrawal of plans by companies like Foxconn and Tesla.

According to Adhinegara of CELIOS, Indonesia's efforts to intimidate companies such as Apple through "scare tactics" could result in unintended consequences.

Adhinegara stated that the lack of clarity in regulations in Indonesia creates uncertainty and negatively impacts the investment climate, with enforcement often occurring on a case-by-case basis.

According to Yessi Vadila, a trade specialist at the Economic Research Institute for ASEAN and East Asia, local content requirements in Indonesia have historically resulted in increased costs, decreased export competitiveness, and productivity losses, with little impact on growth or employment.

Although local content policies have achieved some surface-level successes, economists believe they are not sufficient to attract more investments from companies like Apple.

According to Indonesian economist Krisna Gupta, they have been successful in building factories and facilities, as evidenced by other smartphone makers, including Samsung, investing in the market due to regulations.

Indonesia has implemented protectionist policies, such as tariffs, to encourage greater investments in the country. Additionally, a new law prohibited TikTok's commerce app from operating until the company partnered with a local business.

Holistic approach needed

The strategy may succeed in the short to medium term, but it will face challenges in the long run unless the government improves productivity and the overall business environment.

Gupta stated that Indonesia needs to improve in all areas, as companies take into account various factors such as law enforcement, trade policy stability, and labor market conditions.

He added, "You must invest more because we have a big market and you want to be here, can't you just say so?"

Adhinegara of CELIOS suggests that in order to attract more FDI, the country should prioritize developing competitive infrastructure, enhancing human capital, and providing investment incentives.

Despite not having a large local consumer market like Indonesia, Vietnam has successfully attracted more tech investments, according to economists who spoke to CNBC.

Investment incentives, consistent policies, and strong infrastructure have helped Vietnam outperform its regional peers, according to experts.

The country has successfully established a free trade agreement with Europe, while Indonesia is still working on a deal. Additionally, Vietnam has greatly benefited from the shift in supply chains from China due to rising U.S.-China trade tensions.

Donald Trump's return to the White House may present Indonesia with a prime opportunity to attract diverted manufacturing, according to Adhinegara.

The proposed escalation of tariffs on China by the president-elect could lead to another trade war and disrupt Asian supply chains.

If the Indonesian government does not comprehend why companies such as Apple have opted for Vietnam instead of them in the past, they may lose out again, according to Adhinegara.

Despite an increase in foreign direct investment in Indonesia over the years, the country's FDI as a percentage of its GDP has declined over the past two decades, according to World Bank data.