Indonesia's efforts to attract capital from Apple and other technology companies through local investment and manufacturing requirements are insufficient to deliver long-term returns and could backfire, economists warn.

Because of long-standing Indonesia local content policies, or "TKDN," Apple it could not sell its latest iPhone model in the country until it invests or procures more components locally.

On December 3, the deputy minister of industry of Indonesia he told reporters that the country plans to increase the local content requirement for investments on smartphones.

The plans come after the government turned down $100 million Apple's proposal aimed at paving the way for the sale of the iPhone 16. Instead, the government is now asking Apple to invest $1 billion in the production of mobile phone components in the country.

The content requirements, which apply to various industries ranging from solar panels to electric vehicles, aim to protect local industries and create a value-added supply chain in Indonesia.

Their potential growth comes at a time when Indonesia is competing with other developing Southeast Asian countries, such as Vietnamto attract investment and supply chains diverted from China.

However, although the content policy has drawn commitments from some manufacturers in the past, economists say it remains misguided and ignores many of the deeper reasons why Indonesia has failed to entice tech supply chains.

"I call it pseudo-protectionism. It's less about protecting the domestic market from imported products and more about trying to scare away foreign direct investment in the country," said Bhima Yudhistira Adhinegara, executive director of the Center for Economic Studies. and of Law (CELIOS), an Indonesian think tank.

"They think that if they scare big corporations like Apple, they will invest more in Indonesia," he added.

Apple analyst he previously told CNBC that Indonesia would be a promising growth opportunity for the Cupertino-based company if it is able to gain a foothold in the market.

Until recently, Apple had won goodwill in the market by building "Apple Developer Academies" in the country, where students are trained in skills such as software development.

During a visit to Indonesia in April, Apple CEO Tim Cook announced that the company will open fourth academy in Bali.

However, the government is now looking further into Apple's supply chain and wants more facilities involved in the actual manufacturing of products.

The officers should too he said that the value of Apple's previously proposed investments is lower than that of its Indonesian sales, arguing that smartphone companies such as China's Xiaomi and South Korea's Samsung have invested more.

On the Indonesian side of the table, it has the largest consumer base in Southeast Asia and the fourth largest population in the world.

Still, Indonesia is a small overseas sales market for Apple, with few consumers wealthy enough to buy a high-end iPhone, economists said. The company's market capitalization alone is larger than Indonesia's gross domestic product.

On that note, Apple may be more interested in using Indonesia as a gateway to the regional market, said Arianto Patunru, a board member at the Center for Indonesian Policy Studies.

He added that global technology supply chains such as Apple involve the cutting of added value, so each country can only contribute a small amount.

Indonesia's content policy requires 40% of smartphones and tablets to be made locally.

Most economists who spoke to CNBC said they don't believe content policies work to attract companies like Apple and instead have the opposite effect.

"Local content requirements have not succeeded in attracting FDI to Indonesia. On the contrary," said Patunru, suggesting that they have contributed to companies such as Foxconn'su Teslathe withdrawal of plans in the country in recent years.

Instead, Indonesia's attempts to use "scare tactics" towards companies like Apple "may backfire," according to Adhinegara of CELIOS.

"I think it's very bad for the investment climate in Indonesia and it creates uncertainty about regulation," Adhinegara said, noting that regulations often seem to be enforced on a case-by-case basis.

Yessi Vadila, trade specialist at the Institute of Economic Research for ASEAN and East Asia, said that local content requirements in Indonesia have historically been linked to increased costs, decreased export competitiveness, and loss of productivity while offering little impact on growth or employment.

Other economists noted that local content policies have brought some surface-level successes in the past, though they said they would not be enough on their own to attract more investments from companies like Apple.

"I would say that they have succeeded in trying to build some factories and facilities," said Indonesian economist Krisna Gupta, noting that other smartphone makers, such as Samsung, have he had to invest in the market due to regulations.

In addition to its local content requirements, Indonesia has also implemented other protectionist policies, including tariffs, to drive greater investments into the country. Last year, a new law banned TikTok's trading app until the company invested through a local partner.

Still, while Gupta said the strategy may find some success in the short to medium term, it will be met with problems in the longer term unless the government is also able to increase productivity and climate general commercial.

"Indonesia will need to up their game overall," Gupta said, noting that companies consider a range of factors, including law enforcement, trade policy stability, and the labor market.

"They can't just say, we have a big market; you have to be here, so please invest more," he added.

To attract more FDI, the country must prioritize building competitive infrastructure, building human capital, and offering investment incentives, according to Adhinegara of CELIOS.

Economists who spoke to CNBC pointed to Vietnam as a country that managed to attract more technological investments despite not having a local consumer market like Indonesia.

Instead of strict local content requirements, Vietnam has successfully grown investment incentives, consistent policies and strong infrastructure relative to its regional peers, they said.

The country also managed to establish a free trade agreement with Europe, while Indonesia is still trying to reach terms on agreement. Vietnam has also been one of the main beneficiaries of shifting supply chains from China amid growing trade tensions between the US and China.

According to Adhinegara, Indonesia may soon be presented with a prime opportunity to attract diverted manufacturing, with Donald Trump set to return to the White House.

The president-elect has proposed a massive escalation of tariffs on China, which could spark another trade war and disrupt Asian supply chains.

However, unless the Indonesian government understands why companies like Apple have chosen Vietnam over it in the past, they may lose out again, Adhinegara said.

While Indonesia's foreign direct investment has been growing over the years, its FDI as a share of GDP has only declined over the past two decades, according to data from the World Bank.