Foreign investments have played a key role in the Indonesian economy since the turn of the 20th century. The Dutch were for decades the principal foreign investors in Indonesia, involving themselves heavily in the production of sugar, cinchona, coffee, tobacco, rubber, and oil. UK investments were in oil, rubber, and manufacturing. Rubber estates, particularly those in northern Sumatra, were operated by Belgian, UK, Danish, French, Norwegian, Swiss, and US individuals and companies. In the dispute with the Netherlands over Irian Jaya, the Indonesian government took over Dutch enterprises in the country and seized Dutch assets. Although Indonesians recognized that foreign capital was needed to develop their economy, government policies were ambiguous and hesitant throughout the 1950s and early 1960s. The foreign investment law of 1958 attempted to provide certain guarantees to foreign investors and to establish safeguards for Indonesian interests. At the same time, the government guaranteed some foreign-owned industrial enterprises that they would not be expropriated by the state or nationalized for a maximum period of 20 or, in the case of large agricultural enterprises, 30 years. In November 1964, the government began to reverse this policy by nationalizing all British-owned commercial enterprises and placing them under direct Indonesian management and control. A decree of 25 February 1965 nationalized all US-owned rubber plantations in northern Sumatra, and another decree of 19 March placed three oil companies—two of them US companies—under the supervision and control of the government. Finally, on 24 April 1965, President Sukarno ordered the seizure of all remaining foreign property in Indonesia. This policy was again reversed after the ouster of Sukarno.
During 1967–70, the confiscated estates were gradually returned to their former owners (except in cases where the owner opted to accept compensation). The Foreign Capital Investment Law of 1967 governed foreign direct investment. The overall flow of private investments from overseas sources increased during the early 1970s, in response both to liberal terms offered under the Suharto government and to favorable world markets for Indonesian oil and other primary products. The annual flow of foreign investment funds approved by the government increased from $333 million in 1972 to $521 million in 1973 and to $1,050 million in 1974. Some 65 US firms invested more than $1 billion in petroleum enterprises during 1967–74, accounting for about 90% of the country's total production; in 1975 alone, an additional $1.2 billion was spent in the oil sector by US interests. During 1967–85, Japanese investments led all others in nonoil sectors, totaling $3.9 billion; US investors were second, supplying $1.4 billion. In all, between 1967 and 1980, a total of $8 billion was invested by foreign companies, of which $6.6 billion was in the petroleum sector. Between 1982 and 1985, direct foreign investment averaged $242.3 million annually. Since 1973, all foreign investment has been channeled through the Investment Coordinating Board (BKPM), and Indonesian partners were mandated for all foreign concerns established after 1974. Among the incentives for investment approved in 1986 were regulations allowing foreign investment in more industries (arms production is still prohibited) and granting foreign partners in joint ventures the right to distribute the products themselves. The Negative Investment List, 1989 and as amended in 2000, specifies the business areas that are closed to, or impose limitations on, foreign investors.
Between 1967 and 1992, more than 1,590 manufacturing projects involving $59 billion in foreign investment were approved by the BKPM. Japan was a major investor accounting for 21% of the total, along with Hong Kong (9%), and Taiwan (7%). Foreign investment in manufacturing in Indonesia has been facilitated by the rising cost of labor and inputs in other Asian countries, incentives offered by Indonesia, easing of restrictions, and the streamlining of investment procedures. In 1993 new regulations on the requirements for share ownership in companies invested with foreign capital amended the 1967 Foreign Capital Investment Law, as well as streamlining the investment approval process, and reducing import tariffs on various goods. A new deregulation package approved in June 1994 further increased incentives for foreign investment by allowing 5% to 51% foreign ownership in infrastructure (harbors, electricity, telecommunications, shipping airlines, railways, and water supply). New foreign investment approvals for 1992 to 1998 were estimated at a total of $160 billion. From 1967 to 1998, Japan received approval for investments in Indonesia totaling approximately $35 billion; the United Kingdom, $24 billion; Singapore, $18 billion; and Hong Kong, $14 billion. In 1998 and 1999, new regulations paved the way for increased foreign investment; including concessions to foreign interests in distribution and the financial sector, tax concessions, and simplification of the licensing process. Sectors that remain closed to foreign investment include freshwater fishing, forestry, public transport, broadcasting and film, and medical clinics. More than one-third of the investment since 1967 has been in the chemicals industry, followed by mining, and natural gas.