Jakarta – Indonesia's foreign direct investment pledges slumped 35 per cent last year compared with 2001, a bad sign for economic growth and a reminder of the nation's reputation as a tough place to do business.

State investment agency BKPM said in a statement on Tuesday that foreign investment approvals last year fell to US$9.74 billion from US$15.06 billion in 2001.

It said just over 1,000 new projects were approved last year, down from 1,180 projects in 2001. The agency gave no reason for the falls in pledges.

However, many investors have reduced their exposure to Indonesia since its plunge into political and economic turmoil in the late 1990s. They have remained wary ever since in light of concerns over the legal system, corruption, rising labour costs and security.

Businessmen were further alarmed after the terrorist attacks on Bali island last October killed nearly 200 people. "Investors face great uncertainty when they invest here," said Mr Chatib Basri, an economist at the University of Indonesia.

He cited industrial disputes and lower competitiveness with other countries such as China.

Domestic investment approvals were also down, shrinking 57 per cent to 25.26 trillion rupiah last year from the previous period, said the statement. The figures exclude the oil and gas sector. Data for pledges in this industry were not available.