A new paradigm emerges for investments

By Muhammad Sauri Hasibuan

JAKARTA (JP): The requirements for successful investment have changed dramatically with the onset of the 21st century. Investments are no longer the private affairs of the investor but are becoming affairs of all different groups in society, who are now stakeholders. New investments have to meet the concurrence of dominant stakeholders.

Past investments deemed to have been unfairly pursued, have resulted in stakeholders demanding justice in various forms. Witness the recent case of Arutmin (an Australian mining investment in South Kalimantan) where there was a local popular uprising that disposed of the original owners.

One could add to the list. It arose because of the government's inability to handle the case properly. Indeed, the biggest threat to investment at the moment arises from the inability of the current system of governance to convince various groups of stakeholders of the necessity and justice of various investment proposals.

As a consequence of this liability and of past mistakes, investors are now seen to be in an unfavorable light and even in direct enmity by many, especially those in the provinces. Investors are seen as a greedy group of people, caring only about their narrow self-interests to the detriment of other stakeholders. What can be done to mitigate such negative attitudes toward investors as businessmen and to increase the social sustainability of investments?

There is now a big opportunity for investors to participate in improving the system of governance and at the same time gain popular acceptance, especially among those in the provinces. This is done by investing relatively small sums of money to help redesign the system of governance in the provinces.

Redesigning the system means uprooting old assumptions and modes of thinking and behavior. The old framework emphasizes growth as the operational objective and from this flows basic policies in terms of resource allocation to support such basic policies, including those of investment decisions.

The new framework emphasizes the total factor productivity component of growth as the focus of policies with the expectation that the new growth will not only be higher, with a given amount of new inputs, but also more sustainable and equitable.

Providing expertise to locals is one example. To differentiate the new from the old, one may cite the Total Factor Productivity (TFP) paradigm.

This new framework should guide companies in making new investment decisions. The new orientation essentially says that one needs to emphasize humans as a source of growth. To obtain sustainable company growth, one needs the empowerment of the labor force as the source of growth. This implies the promotion of all types of human capital such as skills and proper governance. Investors can then maximize inputs without jeopardizing other stakeholders.

The relevant skills of the labor force are necessary to promote productivity and efficiency in the use of resources. But, to have these skills usefully deployed, there is a need for the suitable arrangement of relations among the people themselves and between them and the institution in which they operate.

The very concept of TFP also assumes the free flow of information, transparency and accountability, love of knowledge and their application, as well as the potential of humans despite their frailties. One can safely say that there is need for proper governance in management relations in the traditional sense of the word, both inside and outside the company, especially with respect to making investment decisions.

So how could investors participate in improving the governance system, especially in the region they are investing, so the labor force could be effectively deployed?

Potential investors can play a role, for example, by conducting various training sessions to improve local small and medium-sized entrepreneurs.

Local government used to be responsible for funding training activities and strategies, but there was not enough participation from local entrepreneurs.

Training activities might not be very meaningful to the needs of trainees. A holistic approach is now needed. Since the government has gone bust, potential investors can play a role.

New training sessions should place importance on organizational arrangements and how to apply the information and knowledge gained for the production process of small and medium- sized enterprises.

In this context, skills refer to the technical skills relevant to a particular line of business; administrative skills in resource management; interpersonal skills to promote proper governance of employees.

Local entrepreneurs would be ready to maximize their TFP by joining such sessions. Investors could also gain proper public exposure and insight into the kinds of needed investments (maximizing the potential of inputs).

Small and medium enterprises would also benefit from international networks in their desire for a higher share of international growth markets. Training sessions could become a model for future business-community partnership.

Investors will eventually be seen as an institution that has performed responsibly through its contribution of creating good corporate citizenship.

The writer is an economic observer and business practitioner based in Jakarta.