ERIA - Economic Research Institute for ASEAN and East Asia
ERIA - Economic Research Institute for ASEAN and East Asia
15/07/2024 | News release | Archived content
Indonesia's Local Content Requirements at the 19th IRSA
Indonesia's Local Content Requirements at the 19th IRSA
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Ambon, 15-16 July 2024: The 19th Indonesian Regional Science Association (IRSA) Conference brought together leading economists, policymakers, and industry experts to discuss pressing economic issues. A key highlight of ERIA's session at the conference was the impact of local content requirements (LCRs) on Indonesia's economy.
As global value chains fragment, countries like Indonesia are implementing LCRs to boost domestic production and employment. Since 2010, Indonesia's LCR policies have aimed to reduce import dependence, protect local industries, and create jobs, particularly focusing on the upstream oil and gas (OG) sector.
The 2013 MEMR Regulation No.15 mandates firms in the OG sector to prioritise domestic inputs, setting minimum local content percentages and imposing fees on non-compliant firms. This regulation affects a significant portion of Indonesia's economy, including 8.3% of gross output and 11.9% of value added in 2012.
An analysis by Dr Lili Yan Ing and Dr Rui Zhang quantifies the impact of these LCRs on Indonesian manufacturing. As presented by Prof. Mari Pangestu, Managing Director of Development Policy and Partnerships of the World Bank, the study incorporates LCR compliance decisions into an economic model, revealing a complex picture. Firms must weigh the costs of compliance, such as restricted imports and inefficiencies, against a 15% fee for non-compliance.
While LCRs cause a significant reallocation of sales within the OG sector - benefiting compliant firms and penalising non-compliers - the overall impact on aggregate sales, value added, and employment is modest. Compliant firms see a slight increase in employment and local content, but higher domestic input costs marginally decrease local content in other firms.
The findings suggest that while LCRs can shift market dynamics and support local industries, their broader economic benefits may be limited by unintended consequences, such as increased costs and inefficiencies.