To attract more foreign direct investment (FDI) from Japan, Indonesia needs to take a good look at what's happening in local markets.
The reason is that motives make Japanese investors go overseas have shifted -- from a need for low production costs to an interest in the potential of local markets, a seminar concluded on Tuesday.
"Previously, Japanese investors considered low production costs, including the cost of labor and raw materials, the main reason for investing in a country.
"Now they consider local market, including future growth potential and the size of the market, as the main factor," Japan Bank for International Cooperation (JBIC) senior economist Susumu Ushida told the seminar.
JBIC data showed Indonesia in 2007 as the 8th most-promising country for overseas business, far below neighbors Vietnam and Thailand, coming in third and fourth, respectively.
University of Indonesia economist Faisal Basri said in response to such trends, the government should improve domestic markets to attract FDI from Japan investors.
"It is time for the government to improve the market. Indonesia actually has enough potential, if not huge."
However, according to JBIC, intense competition with other companies, poor infrastructure and security, and social instability are among the obstacles confronting Japan-based companies who wish to do manufacturing or otherwise invest here.
Of the development elements regarded as problematic, electricity, communications and road networks are considered most daunting.
Should the government fail to address these immediately, Japanese capital will flow to Indonesia's neighbors, especially Thailand and Vietnam.
JBIC director general Masaaki Amma said Japanese investors now perceived Thailand and Vietnam as ahead of Indonesia in attracting FDI.
The investors said Indonesia hadn't done enough to improve its investment climate.
Japan is one of Indonesia's largest investors. Between 1967 and 2007 Japan pumped some US$40 billion into the country and last year was ranked No. 4 in terms of Indonesian FDI, according to the Investment Coordinating Board (BKPM).
To address infrastructure problems, BKPM deputy chairman for investment planning Luky Eko Wuryanto said the government this year allocated Rp 59 trillion (about $6.43 billion), far above 2007's Rp 41.8 trillion.
"About Rp 16 trillion will go to road development," he said.
Bad roads in the country have increased transport and vehicle maintenance costs, in turn driving up the price of goods.
"There will be impediments (in securing funds from Japanese investors) unless the government improves the infrastructure," said Indonesia-Japan Economic Committee head Kusumo Martoredjo.