Big challenges of improving investment climate<\/p>\n
Vincent Lingga, The Jakarta Post, Jakarta<\/p>\n
Although the government claims otherwise, Indonesia remains
\nthe least attractive among East Asian countries for foreign
\ndirect investment (FDI).<\/p>\n
Its political stability -- one of the strategic factors for a
\ngood investment climate - did in fact strengthened after the
\npeaceful, clean and fair general elections last year. But most
\nother fundamentals for a conducive investment climate remain
\nacutely weak.<\/p>\n
True, FDI has started flowing in, but most of it has been for
\nacquisitions and not green-field projects, the very kind of FDI
\nthe country badly needs to create new productive assets and jobs.<\/p>\n
Judging from the presentations by panelists from developed and
\ndeveloping countries at the Organization for Economic Cooperation
\nand Development's (OECD) two-day Conference on Investment for
\nAsian Development that ended here on Wednesday, the challenges
\nare indeed formidable for Indonesia to regain investor
\nconfidence.<\/p>\n
Most of Indonesia's fundamentals for a conducive investment
\nclimate -- macroeconomic stability, legal certainty, policy
\nconsistency and predictability, and good basic infrastructure --
\nare still very weak. And the government would be well advised to
\nrealize that special incentives for foreign direct investment
\n(FDI) are no substitute for sound macroeconomic policies and a
\nconducive investment climate.<\/p>\n
This clearly shows the crucial role of the government in
\ncreating a good investment climate. While the government has
\nlimited influence on natural resources and other fixed factors
\nsuch as geography, its policies and behaviors play a key role in
\nshaping the investment climate. Put another way, good governance
\nreduces the costs and risks of doing business and minimizes
\nbarriers to sound competition.<\/p>\n
Its rationale is that strong and consistent law enforcement is
\nkey to minimizing government policy-related costs and risks --
\nwhich are quite high in this country -- as well as those
\nregarding regulations on taxation, customs, labor, local autonomy
\nand basic infrastructure.<\/p>\n
Strong legal certainty in turn helps build the credibility and
\ncertainty of government policies and curb corruption and other
\nforms of rent-seeking behavior.<\/p>\n
Policy credibility, certainty and predictability, which also
\nare acutely lacking in Indonesia, are vital for both domestic and
\nforeign investors because direct (not portfolio) investment is
\ninherently forward-looking and long-term in nature.<\/p>\n
Investors expect risks associated with changes in such factors
\nas competition, customer behavior, and market preferences, but
\nthe government can offset these risks by helping to maintain a
\nstable and secure environment for business operations.<\/p>\n
A stable regulatory and policy environment apparently is not
\nsufficient to woo FDI, especially in such countries as Indonesia
\nwith strong nationalistic sentiments. Even though the benefits of
\nFDI in developing countries have been well documented, an
\natmosphere of supportive public opinion is also necessary to
\nnurture conducive political and social conditions for FDI
\noperations.<\/p>\n
The experiences of China, Thailand and Vietnam, which have had
\ngreat success in attracting FDI, shows that investment promotion
\ncannot just be aimed at foreign investors. Such campaigns should
\nalso be targeted at local consumers and workers to persuade them
\nto accept the presence of FDI and for all branches of government
\nto convince them of the advantages of less and more efficient
\nregulation of business.<\/p>\n
Vietnam, a socialist country, which experienced long and
\nbitter experiences with foreign colonialists, is the paragon,
\nattracting US$48.5 billion in FDI in 5,500 projects between 1987-
\n2004. Vietnam's investment officials Nguyen Van Cuong and Nguyen
\nHuy Hoang recounted this at the conference, that enlightening
\ntheir own people of the benefits of FDI has been central in their
\ninvestment promotion campaign.<\/p>\n
This is highly relevant for the Indonesian government that is
\ndrafting legislation for both domestic and foreign investment to
\nreplace the 1967 FDI law and the 1968 domestic investment law.
\nProviding equal treatment to both domestic and foreign
\ninvestment, as the new legislation is being designed to do, is a
\npolitically sensitive issue that needs a strong public-opinion
\nsupport at the House of Representatives.<\/p>\n
Another strong opinion emerging out of the conference warns
\nthe government against putting too much emphasis on the
\ndevelopment of a "one-stop service center" for investment
\nlicensing, because what is designed as a one-stop shop often
\nturns into just another additional stop with an extra
\nbureaucratic layer.<\/p>\n
The government's recent decision to dilute the authority of
\nthe Investment Coordinating Board (BKPM) and put it under the
\noversight of the trade ministry was seen an appropriate move,
\nespecially in light of regional autonomy.<\/p>\n
BKPM, like most similar agencies in most developing countries,
\nhas never been able to operate as a one-stop service for
\ninvestment licensing because most line ministries resist ceding
\ntheir regulatory authority to another agency.<\/p>\n
It would be much better for the government to purse a more direct
\napproach by improving the efficiency of each individual ministry
\nresponsible for particular aspects of investment approvals and
\nincreasing the institutional capacity of investment bureaus at
\nthe provincial and regency-level administrations.<\/p>\n
It would be more appropriate for the BKPM to function mainly
\nas an investment promotion and facilitation agency and as a
\ncentral source of all practical information for businesses,
\nincluding as a matchmaker for joint-venture projects.<\/p>\n
But then, however important investment is for generating
\ngrowth and reducing poverty, it is not a panacea for specific
\npoverty alleviation policies, especially in a country like
\nIndonesia where the level of inequality in society is quite high.<\/p>\n
The government should design an investor-targeting strategy
\nfocusing on stimulating a defined set of investment to selected
\ncategories of industries the government wants to develop in line
\nwith its objective to promote development with equity.<\/p>\n
Such a strategy also allows the government to choose the kinds
\nof FDI it wants and direct them to support its objectives related
\nto employment, technology transfer, export competitiveness,
\nskills development and other development goals.<\/p>",
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"sponsor": "Okusi Associates",
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