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.