RI's foreign investment and technological development<\/p>\n
By David Ray<\/p>\n
MELBOURNE (JP): In my articles last year in this paper I
\nargued that producing and using \"ideas\" (technology) was crucial
\nto Indonesia's continued development. \"Producing ideas\"
\nessentially means product and process innovation as well as
\nresearch and development, while \"using ideas\" means exploiting
\ntechnology that is already available in advanced countries. The
\nfocus of this article is on the latter.<\/p>\n
For many developing countries like Indonesia, the most common
\nmethod of learning and using foreign technology is through some
\nform of contact with transnational corporations. Technology
\ntransfer from such corporations to local firms can be generated
\nthrough a licensing agreement or through direct foreign
\ninvestment.<\/p>\n
The type of foreign investment attracted to a country is
\nindicative of the host country's technological capacity. Higher
\nhuman capital levels and a better-developed science and
\ntechnology infrastructure would not only attract more technology-
\nintensive foreign investment but also facilitate greater
\ntechnology transfer.<\/p>\n
In Indonesia's case however there is widespread skepticism
\nabout the technological benefits from inflows of foreign
\ninvestment, or resulting spin-offs. Much of the recent inflows of
\nforeign investment have been in low-tech labor-intensive
\nmanufacturing, such as textiles, garments, shoes, consumer
\nelectronics consisting primarily of assembly operations using
\nimported parts and components.<\/p>\n
Critics such as Technology Minister Habibie see such
\ninvestment as \"footloose\", suspecting that it will simply
\nrelocate elsewhere whenever domestic wage rates get too high, and
\ncan therefore not be relied upon to help generate a stronger
\nindustrial structure.<\/p>\n
Much of the dramatic increase in foreign investment approvals
\nover the past 7-8 years reflect the trend for relocation of
\nforeign industrial firms to Indonesia.<\/p>\n
The recent liberalization of foreign investment laws, plus the
\nrelatively low wages and less stringent environmental regulations
\nhave made Indonesia a popular destination for relocation
\ninvestment from firms in Japan, the United Kingdom, the United
\nStates, Taiwan and Singapore.<\/p>\n
The key issue for Indonesia is whether these investments
\nrepresent the relocation of a number of \"sunset\" industries that
\ncontribute very little to the host country's technological
\ndevelopment, or whether such investment is becoming more
\nknowledge-intensive commensurate with Indonesia's need to \"move
\nup the technology ladder.<\/p>\n
To explore this issue I shall use methods developed here at
\nthe Center for Strategic Economic Studies as a means to construct
\nan index of technology composition for Indonesia's incoming
\nforeign investment.<\/p>\n
Using this approach we can divide Indonesia's foreign
\ninvestment into 22 main industry groups according to their degree
\nof knowledge-intensity. This is measured by the average level of
\nResearch and Development expenditure per unit of production in
\nthose industry groups for the OECD countries taken as a whole.<\/p>\n
The highest R&D-production ratios are found in industries such
\nas aerospace (20.2%), computers (12.4%) and electronics (10.8%)
\nwhilst the lowest are in the wood and furniture (0.1%), paper and
\nprinting (0.2%) and textiles and clothing (0.2%) industries.<\/p>\n
The investment data are then weighted using these R&D ratios,
\nsummed and rebased to produce an index of technology composition
\nwhereby an index value greater than one indicates that inflows of
\nforeign investment are concentrated in industries with a high R&D
\nintensity, while a value less than one indicates a concentration
\nin industries with low R&D intensities.<\/p>\n
Empirical results suggest that there is a general upward trend
\nin the technology composition index of foreign investment.
\nHowever, the series is very uneven due to the \"lumpiness\" of the
\ndata, as there are large jumps in investment approvals for
\ncertain industries. The upward trend of the technology index is
\nmade significantly clearer using five year averages (see
\ngraphic).<\/p>\n
There are however a number of important caveats that need to
\nbe mentioned before interpreting these results.<\/p>\n
Firstly, it must be remembered that the index has been
\nconstructed using R&D-production ratios from the OECD countries
\nfrom the late 1980s.<\/p>\n
However for any specific country, be it developed or
\ndeveloping, the R&D intensity of production might be quite
\ndifferent to that of the OECD average, reflecting the unique
\nconditions of that country at that time.<\/p>\n
One of the key problems with this approach is that it assumes
\nthat the knowledge-intensity of activities in, say, the
\nelectronics and pharmaceutical industries in the OECD countries
\nwould be the same as that in Indonesia.<\/p>\n
In the OECD such industries focus their activities more toward
\nresearch and design in stark contrast to Indonesia where the
\nelectronic and pharmaceutical industries are involved in mainly
\nassembling and packaging with little or no R&D activities.<\/p>\n
Another important caveat relates to what exactly the data
\nrepresents. Due to data constraints, the above empirical analysis
\nfocuses on investment approvals rather than realized investment.<\/p>\n
This has become standard practice for those researching both
\ndomestic and foreign investment in Indonesia. Only about 40-50%
\nof approved investment is realized. This reflects, amongst other
\nthings, the complicated bureaucratic procedures involved in
\ninvesting in Indonesia, and the fact that investors file multiple
\napplications and later seek capital backing for successful
\nprojects.<\/p>\n
Some Indonesian economists argue that there is little point in
\nrelying on the BKPM (Investment Coordinating Board) data to
\naccurately measure the inflow of foreign investment. For the
\npurposes of this study, however, the BKPM data is able to show
\nwhat type of foreign investment is attracted to the Indonesian
\nmanufacturing sector. As the above graph indicates, foreign
\ninvestment over the past few decades has gradually become more
\nknowledge-intensive commensurate with Indonesia's need to climb
\nthe \"technological ladder.\"<\/p>\n
The writer is a researcher\/doctoral candidate\/consultant at
\nthe Center for Strategic Economic Studies, Melbourne Australia.<\/p>",
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