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.