Investment location Indonesia: Relevance regained

Investment location Indonesia: Relevance regained

The government has again relaxed restrictions on foreign
investment. Noted economist Djisman Simanjuntak strikes a
positive note in his analysis.

JAKARTA (JP): In the eight years since the announcement of the
first major policy reform in May 1986 the investment policy of
Indonesia has changed a great deal. However, some sensitive
issues were carefully avoided until the announcement on June 2,
1994 of a breakthrough package that virtually allows foreign
direct investment (FDI) all over the country.

One hundred-percent FDI is now allowed throughout Indonesia.
No divestment is required within the first 15 years of commercial
operation. Thereafter, only a symbolic divestment is prescribed
which can easily be fulfilled through public offering or direct
placement. Required local equity in a joint venture is five
percent and the compulsory increase to at least 51 percent is
done away with.

Equally important is the opening to joint venture of the
utility sectors, air and railway transportation,
telecommunication and some others, including mass media, with a
required local equity of five percent. FDI can also take the form
of acquiring an existing company.

The media community has already protested and asked the
government to reconsider the opening of their industry, believing
that mass media is different from other businesses. However, this
should not be mistaken as a sign of a gross opposition to the
bold FDI initiative. Indonesia needs huge investment to reach its
growth, employment, and export targets at a time when the banking
sector is crippled and is unlikely to play the dominant role it
used to in investment financing.

There was also disappointment among many Indonesians when the
worldwide FDI boom of 1987-90 ended with only a minor spill-over
to Indonesia. As the annual flow of worldwide FDI rose from US$
79 billion in 1986 to $204 billion in 1990, the inflow to
Indonesia rose only to $1 billion while China, Singapore,
Malaysia and Thailand were awash in it.

The reasons most frequently given by foreign investors for
their reticence to place money here were precisely related to
government regulations, particularly the local equity
requirement.

Change was clearly needed. Given the emergence of a global
economy, foreign investment has gained in importance as a way of
establishing access to foreign markets and technology.

Assuming everything else remains the same, the bold investment
initiative constitutes a substantial boost in Indonesia's
attractiveness as an investment location. After all, Indonesia
can complement good policy with a number of advantages that are
lacking in many other countries in the same strategic group.
However, the effectiveness of FDI policy is conditional on many
other factors.

The June initiative, though rather late, is still very
important. The world economy is currently entering a new wave of
mega development. The Uruguay Round Agreements are due to be
implemented starting in 1995.

It is expected to result in a surge in world trade,
particularly in clothing, textiles, footwear and miscellaneous
manufactures, areas in which Indonesia has crafted a relatively
high comparative advantage. The Uruguay Round Agreements are
bound to change the comparative advantages and attractiveness of
individual economies.

Hence, investment relocation will get another boost. When this
new wave of relocation takes place, the June 1994 initiative will
turn out to be instrumental in directing this relocating capital
to Indonesia.

Obviously, capital flows are also a function of macroeconomic
performance and basic policy orientation in the countries of
origin. While the recessions in Japan and Europe have resulted in
a slowdown of investment in the last three years, the expected
recovery of these major economies may reverse the trend.

Area-wise the United States is gaining importance as an origin
of foreign investment. The Clinton administration has committed
itself to helping American business go global. Emphasis is given
to major industries such as electricity and telecommunications in
major developing countries such as Indonesia.

The deregulation will strongly improve Indonesia's position
vis-a-vis China, which on its side is having troubles with hyper
growth and, thereby, is forced to reduce the speed of
development.

A final important note on the domestic scene. Investors rate
political stability as very high in their decision on location.
This is where the recent Medan incident, relentless political
gossiping and increased frequency of labor disputes come in as a
discouraging background to the new regulation.

Finding a democratic and peaceful solution to these problems
rather than burying them under the carpet is imperative, if the
initiative is to bring about the intended result.

The June 1994 initiative will seriously be handicapped unless
similar progress occurs in trade policy. Indonesia will have to
go beyond the commitment it has made in the Uruguay Round in
order to complement the June 1994 initiative. In other words, the
project of transforming the Indonesian economy into an
international market economy is yet to be completed.

Wise men among Indonesian officials know that the meaning of
policy change lies in its implementation. The new package can
only bring benefit if its consequent implementation remains
faithful to its direction and goals.

Even though miracles happen only rarely, the Indonesian people
and foreign investors have the right to expect that compliance to
good governance will increase over time. Given this, the ball is
on the side of the investors. As is often the case in life, first
movers enjoy an array of advantages.

The writer is executive director of the Prasetiya Mulya
Management Institute.