Is Indonesia attracting global digital investments ahead of India?

By Lee Kah Whye
Singapore, December 21 : There has been a recent upsurge of interest in the growing digital economy of Southeast Asia's largest economy, Indonesia.
The archipelago nation of Indonesia stretches across four time zones, 17,500 islands and over 5,120 kilometres east to west. It has the world's fourth-largest population and one of the world's fastest-growing middle classes with a GDP of USD 1 trillion, which accounts for one-third of Southeast Asia's economic output.
The size of Indonesia's middle class is estimated by the World Bank to be 52 million people or about 20 per cent of its 270 million population. In comparison, those defined to be in India's middle class is approximately 350 million or 25 per cent of the population which is significantly higher than Indonesia's.
Indonesia's GDP is also dwarfed by India's USD 2.8 trillion but with a population five times smaller, Indonesia has a much higher per capita GDP.
Latest data from the Asian Development Bank shows that, India's economy is expected to bounce back to grow by 8 per cent in 2021. Whereas Indonesia's economy suffered a mere one per cent decline and expected to recover and grow at 5.3 per cent next year. Based on this, Indonesia's economy appears to have weathered the COVID-19 disruptions.
This is reflected in foreign direct investments this year. The UN Conference on Trade and Development (UNCTAD) said in June this year that foreign direct investment (FDI) in India was USD 650 million for the first quarter of this year, about 13 per cent of the USD 51 billion for the full year of 2019. Majority of this is in digital tech companies and businesses.
In comparison, Indonesia saw USD 2.8 billion invested in its internet sector in the first half of 2020 which is already 88 per cent of the 2019 total investment of USD 3.2 billion. It has grown five-fold in five years and expected to be valued at USD 44 billion in 2020, by far the largest in Southeast Asia. This is based on a research report titled "E-Conomy SEA 2020" released in November by Bain and Co. sponsored by Google and Singapore government investment firm, Temasek. The same report projects that Indonesia's digital economy will be worth USD 124 billion by 2025.
Although Indonesia's digital economy has been impressing of late, India's is still vastly larger and expected to be almost 3 times the size of Indonesia's in 2025. A research report published in 2019 by management consultant McKinsey & Co projects that it will reach a value of between USD 355 billion to USD 435 billion by 2025. It was approximately USD 200 billion in 2019.
Besides economic reasons, diplomatic friction with the world's two largest economies may possibly be another reason for the shift in investment focus.
Since the current US administration came into office in 2017, trade tensions have risen, particularly over tariffs, foreign investment restrictions, intellectual property rights, medical devices, e-commerce and data localisation, and the cap on H-1B visas for Indian professionals. This is not helped by the inconsistent trade and foreign policies of the outgoing Trump administration.
There is also the ongoing spat between the US and China which has resulted in US companies looking for investment opportunities outside of China.
In addition, new tough rules were introduced by India back in April to ostensibly screen foreign direct investments from neighbouring countries amid the COVID-19 pandemic. This led to Chinese firms assume that this is targeted at them since they are the most significant investors in India among its neighbours. They are concerned this move will affect projects and delay deals.
Before that, research firm Brookings had said that planned investments in Indian firms by China companies stood at more than USD 26 billion with planned projects, which included automobiles to digital tech.
Since then, the trade stand-off between India and China has escalated with the former backlisting another 43 Chinese apps in November bringing the total number to over 200. Funding for tech startups has also slowed with the USD 100 million investment in Zomato, promised by Ant Group, yet to materialise.
Shunwei Capital, started by the founders of consumer electronics firm Xiaomi, and Ant Group-backed BAce Capital has switched their investment focus to Indonesia. Tuck Lye Koh, the co-founder of Shunwei, told The Financial Times that it is planning to seal more deals in Indonesia and that it is "not making new investments in India for now" and would focus instead on managing its existing portfolio companies.
Indonesia has seen overall funding in its internet sector rising despite a slowdown of funding in mature digital companies in e-commerce, transport and food, travel and media. The increase is led by record investments in fintech which saw a jump of 40 per cent from 2018 to 2019 continue into the first half of 2020. The Bain & Co. report also uncovered a rising trend in the funding of "HealthTech" and "EdTech" (education technology) firms.
Among those firms which have placed stakes in Indonesia firms is Microsoft, announced in November that it had made a "strategic investment" in e-commerce startup Bukalapak. The US tech giant participated in a USD 100 million funding round together with GIC, Singapore's sovereign wealth fund, and Emtek Group, an Indonesian technology, telecommunication and media conglomerate.
In late October or early November, filings made to Indonesian authorities indicate that Google invested in Tokopedia, alongside Singapore's investment firm Temasek. Both investors are said to have pumped USD 350 million into the e-commerce platform.
These investments follow Facebook's and PayPal's cash injections into Gojek in June. Google is already an investor in the company which started as a ride-hailing app and super-app aspirant which today has the most widely accepted e-payment platform in the country.
If truth be told, India is not lacking for FDI in its digital sector. Recent headlines include the Facebook USD 5.7 billion injection into Reliance Jio's platform and Google's USD 10 billion for India Digitization Fund to help accelerate India's digital economy.
The collaboration between Facebook and Jio is aimed at helping create "new ways for people and businesses to operate more effectively in the growing digital economy." This is expected to encompass bringing together JioMart and WhatsApp to connect people and businesses and eventually provide a seamless mobile e-commerce experience.
"This investment underscores our commitment to India, and our excitement for the dramatic transformation that Jio has spurred in the country. In less than four years, Jio has brought more than 388 million people online, fuelling the creation of innovative new enterprises and connecting people in new ways," said David Fischer, Chief Revenue Officer of Facebook in a joint media release with Ajit Mohan, VP and Managing Director, India, in April.
(Disclaimer: The views expressed in this column are strictly those of the author)