The increasing minimum wage in Indonesia is pushing away foreign investors, as labour costs remain an essential factor in choosing a market to set up business activities.
The minimum wage will increase 12.77% overall in 2015 among the 29 provinces that have already confirmed the changes. For this year, Bangka Belitung province has the highest minimum wage increase of 28%, while Riau has the lowest with 0.58%.
Local governors establish the basic salaries in their provinces, resulting in varying minimum wage levels across the country. Thus, investors tend to relocate from traditional investment areas and spread their investments to more cost-effective locations.
“It is interesting to note that a growing proportion of direct investment, both foreign and domestic, is going to areas outside of the country’s traditional industrial heartland,” said Lianna Plaut, country director at Global Business Guide Indonesia, a business intelligence company.
Ms Plaut added that foreign investors still prefer West Java, but they have significantly curtailed their commitment to Jakarta from 39.7% of the country total in 2010 to 16.5% in the first nine months of 2014.
Long-term data from greenfield investment monitor fDi Markets shows that Jakarta has been the top destination city accounting for one-quarter of projects tracked during the period January 2003 to December 2014. Project volume in this destination city peaked in 2013, with 55 projects tracked.
Ms Plaut said that Central Java is becoming a hub for textile investment given the low minimum wage and living costs, the weakness of local labour unions and the availability of infrastructure. She added that both local and foreign textile and garment producers are shifting their investments to this region.
“The greatest impact of the minimum wage increase on foreign investors’ decisions depends on the industry that the investor is engaged in and their objectives for entering Indonesia,” said Ms Plaut.
The footwear industry, for example, has suffered heavily due to increasing minimum wages, with several investors cancelling FDI projects.
“Conversely, the electronics manufacturing sector and textile and garment manufacturing sectors have not been hit as hard, with a number of high profile FDI projects being announced, including by [electronics companies] Samsung and Foxconn,” said Ms Plaut.
She pointed out that the impact of increasing minimum wages is also related to which provinces foreign investors choose to target their investments.
Ms Plaut added that textile and garment producers are shifting from China to take advantage of Indonesia’s readily available labour force, as well as the rare presence of both upstream and downstream industries, both of which are well established.
The rising minimum salary in Indonesia carries important implications for workers’ welfare equality and increment financing for local income tax revenues, said Al Hakim Hanafiah, a partner and founder at law firm Hanafiah Ponggawa & Partners.