Consequence of MNC domination
By Beni Sindhunata
This is the second of two articles on foreign investment in Indonesia.
JAKARTA (JP): Foreign-investment projects are divided into two groups: undertakings fully owned by foreign investors, numbering 1,145 projects with an investment value of Rp 232 trillion (equivalent to US$50 billion), and joint-venture undertakings established with local partners, amounting to 4,418 projects worth Rp 716 trillion.
Try taking away about Rp 100 trillion from this joint-venture group, the amount of the capital participation of the local partners, in accordance with the share composition, which is usually a minority. The result is that the combined investment by foreign investors -- full foreign investment and shares in joint- venture undertakings -- comes to Rp 848 trillion, while domestic investment (plus the domestic shares in joint-venture companies) will total Rp 703 trillion.
Thus, multinational companies (MNC) operating in Indonesia control 55 percent of total national investment. The remainder is under domestic investors, ranging from indigenous and nonindigenous medium-scale businesses to conglomerates and state enterprises.
The dominant position of domestic investment in terms of projects, namely 73 percent, shows that the value and the scale of the investment is relatively small compared to foreign- investment projects. And the foreign investment share becomes even greater considering that the level of investment realization is generally higher than domestic investment.
Finally, we must also note the domination of foreign investors in the real area on a sectoral basis, evident from the latest Indonesian Business Data Center (PDBI) survey.
Of 74 national commodities studied, 34 products (49 percent) are dominated by foreign investors, with the market share also predominant at more than 51 percent.
Eight products in the entire market are completely controlled by joint-venture companies, from the products of petrochemical upstream industry, products of sophisticated technology such as optic cables, down to the beer industry.
Seventy-five percent of 11 companies in Indonesia are under foreign investors, ranging from milk to newsprint.
The domination of foreign investors (for a market share of above 51 percent) has gone up compared to the PDBI survey in 1995. At the time, foreign investment undertakings held a dominant position in 26 commodities, seven of which were under their full control.
In addition, the presence of MNCs here is geared more toward direct investment in the form of joint ventures without taking trademark or license into consideration. This is the reason the market for carbonated soft drinks is not fully controlled by foreign investors because several producers run domestic investment undertakings in the sector although it is understood that all products use the trademarks belonging to MNCs. See table.
The domination is even greater if we include the role of MNCs in the oil sector, where they cooperate with state oil and gas company Pertamina. Of $6.7 billion secured from the export of crude oil and oil and gas refinery output in 1997, 53 percent ($3.6 billion) came from the production of foreign oil companies through product-sharing contracts.
Beyond this there is still $1.7 billion, which is calculated as their part in Pertamina. If the two sums are combined, the total export of crude oil by foreign investors will reach $5.3 billion, almost 80 percent of Indonesia's total export of crude oil. There are pros and cons, depending on where you stand.
On a macro basis, we may conclude that the oft-repeated dichotomy of pros and cons regarding the presence of MNCs is no longer an apt matter for debate. Now that globalization is entering the third millennium, the MNC has become a virtual corporation. We can no longer distinguish whether a MNC is a purely foreign undertaking or a company established abroad by a local businessman and entering Indonesia under the label of foreign investment.
Most important now is how to create mutually profitable businesses on the basis of a win-win solution among relevant companies -- MNCs and their local partners -- or among countries by thoroughly eliminating the negative impacts.
The writer is the chief research officer at the Indonesian Business Data Center.
Table: Market Share of MNCs in Indonesia, 1997 (%)
Type of product Joint Venture Domestic State owned
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1. Aluminum Ingot 100.0
2. Beer 100.0
3. Calcium Chloride 100.0
4. Ethylene 100.0
5. Optic Cable 100.0
6. Propylene 100.0
7. PVC Resin 100.0
8. V C M * 100.0
9. Milk (Powder) 98.0 2.0
10. Refrigerators 90.5 9.5
11. MSG 89.7 10.3
12. Copper Rods 88.9 11.1
13. Tennis balls 87.5 12.5
14. AC Units 86.9 13.1
15. KWH meters 86.9 13.1
16. Spark plugs 80.7 19.3
17. Infusion liquids 79.6 20.4
18. Carbonated soft drinks 78.6 21.4
19. Newsprint* 78.0 12.0 10.0
Source: MNCs in Indonesia (PDBI), November 1998
This table only includes commodities with foreign investment shares of over 75 percent.