The deal was signed Wednesday during the visit of Indonesian President Susilo Bambang Yudhoyono to Singapore.
Singapore Prime Minister Lee Hsien Loong said the investment agreement would be "a very useful signal to investors that Indonesia welcomes investments and is moving to enhance the conditions for investments in Indonesia, and it will be noted by people from many countries."
Singapore was among the top five foreign investors in Indonesia last year, with money flowing mostly into manufacturing, trading, property and telecommunications. The new agreement will give most-favored-nation treatment to investments between the two countries.
It will also include freely convertible and transferable compensation in case of nationalization. Investment disputes which cannot be resolved will be referred to the International Center for Settlement of Investment Disputes.