Investment location Indonesia: Relevance regained<\/p>\n
The government has again relaxed restrictions on foreign
\ninvestment. Noted economist Djisman Simanjuntak strikes a
\npositive note in his analysis.<\/p>\n
JAKARTA (JP): In the eight years since the announcement of the
\nfirst major policy reform in May 1986 the investment policy of
\nIndonesia has changed a great deal. However, some sensitive
\nissues were carefully avoided until the announcement on June 2,
\n1994 of a breakthrough package that virtually allows foreign
\ndirect investment (FDI) all over the country.<\/p>\n
One hundred-percent FDI is now allowed throughout Indonesia.
\nNo divestment is required within the first 15 years of commercial
\noperation. Thereafter, only a symbolic divestment is prescribed
\nwhich can easily be fulfilled through public offering or direct
\nplacement. Required local equity in a joint venture is five
\npercent and the compulsory increase to at least 51 percent is
\ndone away with.<\/p>\n
Equally important is the opening to joint venture of the
\nutility sectors, air and railway transportation,
\ntelecommunication and some others, including mass media, with a
\nrequired local equity of five percent. FDI can also take the form
\nof acquiring an existing company.<\/p>\n
The media community has already protested and asked the
\ngovernment to reconsider the opening of their industry, believing
\nthat mass media is different from other businesses. However, this
\nshould not be mistaken as a sign of a gross opposition to the
\nbold FDI initiative. Indonesia needs huge investment to reach its
\ngrowth, employment, and export targets at a time when the banking
\nsector is crippled and is unlikely to play the dominant role it
\nused to in investment financing.<\/p>\n
There was also disappointment among many Indonesians when the
\nworldwide FDI boom of 1987-90 ended with only a minor spill-over
\nto Indonesia. As the annual flow of worldwide FDI rose from US$
\n79 billion in 1986 to $204 billion in 1990, the inflow to
\nIndonesia rose only to $1 billion while China, Singapore,
\nMalaysia and Thailand were awash in it.<\/p>\n
The reasons most frequently given by foreign investors for
\ntheir reticence to place money here were precisely related to
\ngovernment regulations, particularly the local equity
\nrequirement.<\/p>\n
Change was clearly needed. Given the emergence of a global
\neconomy, foreign investment has gained in importance as a way of
\nestablishing access to foreign markets and technology.<\/p>\n
Assuming everything else remains the same, the bold investment
\ninitiative constitutes a substantial boost in Indonesia's
\nattractiveness as an investment location. After all, Indonesia
\ncan complement good policy with a number of advantages that are
\nlacking in many other countries in the same strategic group.
\nHowever, the effectiveness of FDI policy is conditional on many
\nother factors.<\/p>\n
The June initiative, though rather late, is still very
\nimportant. The world economy is currently entering a new wave of
\nmega development. The Uruguay Round Agreements are due to be
\nimplemented starting in 1995.<\/p>\n
It is expected to result in a surge in world trade,
\nparticularly in clothing, textiles, footwear and miscellaneous
\nmanufactures, areas in which Indonesia has crafted a relatively
\nhigh comparative advantage. The Uruguay Round Agreements are
\nbound to change the comparative advantages and attractiveness of
\nindividual economies.<\/p>\n
Hence, investment relocation will get another boost. When this
\nnew wave of relocation takes place, the June 1994 initiative will
\nturn out to be instrumental in directing this relocating capital
\nto Indonesia.<\/p>\n
Obviously, capital flows are also a function of macroeconomic
\nperformance and basic policy orientation in the countries of
\norigin. While the recessions in Japan and Europe have resulted in
\na slowdown of investment in the last three years, the expected
\nrecovery of these major economies may reverse the trend.<\/p>\n
Area-wise the United States is gaining importance as an origin
\nof foreign investment. The Clinton administration has committed
\nitself to helping American business go global. Emphasis is given
\nto major industries such as electricity and telecommunications in
\nmajor developing countries such as Indonesia.<\/p>\n
The deregulation will strongly improve Indonesia's position
\nvis-a-vis China, which on its side is having troubles with hyper
\ngrowth and, thereby, is forced to reduce the speed of
\ndevelopment.<\/p>\n
A final important note on the domestic scene. Investors rate
\npolitical stability as very high in their decision on location.
\nThis is where the recent Medan incident, relentless political
\ngossiping and increased frequency of labor disputes come in as a
\ndiscouraging background to the new regulation.<\/p>\n
Finding a democratic and peaceful solution to these problems
\nrather than burying them under the carpet is imperative, if the
\ninitiative is to bring about the intended result.<\/p>\n
The June 1994 initiative will seriously be handicapped unless
\nsimilar progress occurs in trade policy. Indonesia will have to
\ngo beyond the commitment it has made in the Uruguay Round in
\norder to complement the June 1994 initiative. In other words, the
\nproject of transforming the Indonesian economy into an
\ninternational market economy is yet to be completed.<\/p>\n
Wise men among Indonesian officials know that the meaning of
\npolicy change lies in its implementation. The new package can
\nonly bring benefit if its consequent implementation remains
\nfaithful to its direction and goals.<\/p>\n
Even though miracles happen only rarely, the Indonesian people
\nand foreign investors have the right to expect that compliance to
\ngood governance will increase over time. Given this, the ball is
\non the side of the investors. As is often the case in life, first
\nmovers enjoy an array of advantages.<\/p>\n
The writer is executive director of the Prasetiya Mulya
\nManagement Institute.<\/p>",
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