Consequences of MNC domination

Consequences of MNC domination

By Beni Sindhunata

This is the first of two articles on foreign investment in
Indonesia.

JAKARTA (JP): In the past six months, widespread allegations
of corrupt practices in mega-projects involving multinational
companies (MNCs) and billions of U.S. dollars imply the position
of dominance that foreign companies have assumed in Indonesia.

As a result, there are an increasing number of MNCs, in the
form of joint-venture companies established under a foreign
investment scheme.

This article will not probe corruption, collusion and nepotism
practices involving MNCs and their domestic partners. It only
focuses on a number of relevant domestic and global aspects to
the MNCs existence through their joint-venture companies.

Global investment in the 1990s shows a strategic trend that
can be connected to the fate of over 300,000 joint-venture
companies owned by some 45,000 MNCs across the world,
particularly in developing countries.

This strategic trend includes the shrinkage of state loans as
a source of investment funds for global development from 55.9
percent in 1990 to 14.7 percent in 1997. On the other hand,
private sector loans have risen from 44.1 percent to 85.3
percent.

The pattern or mechanism of private investment has also
changed. The market share, or the role of commercial loans and
direct investment, tends to drop, while financing through equity
portfolios rise, although in absolute terms the earlier patterns
still dominate.

Equity portfolios have risen from 3.30 percent to 10.00
percent, direct foreign investment has dropped from 55.2 percent
to 40.1 percent and commercial loans have gone down from 37.4
percent to 34.4 percent.

Meanwhile, the World Investment Report (UNCTAD, 1997) reveals
a number of midterm behavioral trends MNCs are expected to follow
up to 2001.

One of these strategic trends is that the more export-oriented
affiliates an MNC has, the greater their role as foreign-exchange
earners will be.

Another strategic trend is that the pattern of merger,
acquisition, alliance and joint venture will be the main pattern
in the process of globalization and market expansion.

Also included in these strategic trends is that domestic and
regional marketing access and potential will continue to be
foreign investors main consideration in determining the location
of investment.

The report says that small and medium sized enterprises will
be concentrated, and will benefit from globalization, while
direct foreign investment will be more concentrated in the
sectors of infrastructure, distribution, automotive and non-
financial services.

In a way, the global change will affect the direction taken by
MNC investment in Indonesia, along the lines of the priority
scale of development and the attraction of sector investments.

This is seen in the change of sectors which were the focus of
foreign investment between 1990 and 1997. The share of the
intermediary industry (processing) rose from 60.6 percent in 1990
to 72.5 percent in 1997, while in the upstream industry (raw
material producers) the share rose from 0.9 percent to 2.4
percent over the same period. Meanwhile, in the downstream
industry (finished product producers), the share dropped from
38.5 percent in 1990 to 25.1 percent in 1997.

This investment flow is certainly not independent of inter-MNC
rivalries in winning potential domestic markets as a basis for
export products. This must be linked with the presence of a
powerful triad, namely the European Union, Japan and the United
States. Plus, there are the NICs (the four Asian tigers, some of
which have now turned into paper tigers).

The latest survey by the Indonesian Business Data Center
(PDBI), entitled "MNC in Indonesia (November, 1998) concludes
that this power triad jointly controls 60 percent of a total US$
213 billion of foreign investments in Indonesia, while in the
case of NICs, they control only 25 percent of total foreign
investments in this country.

Country by country, Japan tops the list with US$ 34.3 billion,
followed by Britain (US$ 21.3 billion), Singapore (US$ 18.1
billion), Hong Kong (US$ 14.1 billion) and Taiwan (US$ 12.6
billion).

All told, from 1967 up to June 1998, total investments stood
at US$ 700 billion for 6,347 licenses for joint projects.
However, owing to changes in these investment plans, only 6,035
projects have been realized. Investment plans of US$ 14.9
billion, for example, have been canceled as the licenses for 335
projects have been revoked.

Another reason for this realization failure is that 23
projects have been merged with a total combined investment of US$
1 billion. In other cases, the status of some projects has been
transferred.

On a national scale, the accumulation of investment under the
dichotomy of foreign and domestic investment schemes has
indirectly affected the myth of economic dominance assumed by
national private businesses (non-indigenous conglomerates). In
fact, companies set up under the foreign investment scheme, with
the majority of the shares being controlled by their foreign
partners, have been playing a greater role in the economy, as
shown in the following table.

Between 1967 and 1997, approval was granted to 5,563 foreign-
investment projects, with a planned investment totaling US$ 204
billion or Rp 949 trillion (with the average exchange rate of Rp
4,650 to the dollar in 1997). As for domestic investment
undertakings, 10,946 projects with planned investments of Rp
602.8 trillion were approved over the same period.

The combination of foreign and domestic investment projects
added up to 16,509 projects with planned investments worth Rp
1,551 trillion. This was the real power of national investments
in the past three decades, and this was one of the engines for
the growth and creation of the national economic aggregate.

The writer is the Chief Research Officer at the Indonesian
Business Data Center.