Promoting economic ties with Indonesia

Dr. Yul Kwon, researcher at Korea Institute for International Economic Policy (KIEP)

Economic relations between Indonesia and Korea have expanded significantly over the past decades.

Corresponding to Indonesia's potential as one of the largest emerging markets, Korea's trade with Indonesia has been growing remarkably and the attractiveness of Indonesia as an investment location for Korean companies has consolidated the economic relationship between the two countries.

In 2000, Indonesia became Korea's 10th largest trading partner and its third largest investment destination in cumulative terms. This largely derives from the complementary industrial structures and efforts by the private and public sector.

Although bilateral trade and investment between the two countries decreased sharply due to the Asian economic crisis, economic relations between the two counties have rapidly recovered.

In particular, bilateral trade rebounded to US$5.9 billion at the end of 1999 and expanded to $8.8 billion last year, higher than the precrisis level.

Korean exports to Indonesia increased 38 percent to hit $3.5 billion in 2000 while imports from Indonesia reached $5.3 billion, which included crude oil ($1.1 billion) and Liquefied Natural Gas ($1.8 billion).

Currently Korea's exports to Indonesia are concentrated in electronics, chemical products, textile and machinery.

As Indonesia develops, bilateral trade in machinery and equipment has increased since the l990s, and its abundant resources, which made it an attractive location for labor- intensive electronics as well as textiles, have resulted in greater linkages of the two countries.

This implies that the rapid expansion of bilateral trade has been partly the result of an increase in Korea's investment in Indonesia.

Since the mid-1980s, Korean firms have looked to Indonesia as a source of inexpensive labor as well as abundant natural resources.

Korean firms also exported manufactured goods produced in Indonesia to developed countries. Such a strategy allowed these firms to avoid trade barriers to Korean products in third country markets.

As a result, Korean investment in Indonesia began to increase in the late 1980s and it was concentrated in labor-intensive industries such as footwear, textiles and electronics.

Even though Korea's investment in Indonesia declined in 1993 and 1994 because many Korean companies invested heavily in China, it again increased as large Korean conglomerates began investing in Indonesia.

As purchasing power in Indonesia became diversified, Korean firms also began to shift their investment pattern to market- oriented investment after the middle of 1990s.

As of December 2000, Korea has invested $1.7 billion in 448 projects in Indonesia, as the third largest investment destination.

Technology transfer is becoming an important aspect in the flow of Korean investment in Indonesia.

At the early stages, technology transfer accompanying Korean investment in Indonesia was scarce because most investment headed to small and medium-size enterprises that lacked transferable technology.

However, as Korean companies' investments in Indonesia have diversified, the technology transfer is growing recently.

Also, Korea intends to maximize mutual gains through increasing industrial cooperation through technology transfer.

There are many promising industries for increased bilateral cooperation such as information and technology, construction and the energy development sector.

In particular, the partnership of Korean and Indonesian business in energy development can produce the most remarkable results.

Indonesia has been a stable supplier of energy and natural resources for Korea, it is Korea's sixth largest supplier of oil and provides two-thirds of all LNG that Korea consumes.

In this respect, Indonesia's abundant energy resources promise greater future partnership prospects for bilateral industrial cooperation.

This is because Indonesia and Korea will greatly benefit through the joint utilization of the capabilities and know-how in Indonesia's oil and gas development projects.

Thanks to economic structural changes and continuing reform measures in the two countries, the economic relationship between Indonesia and Korea have recovered rapidly.

The two countries need to make more efforts to build upon a new foundation for bilateral cooperation in order to accelerate the growth of bilateral economic activities in the 21st century.

First of all, to further increase industrial cooperation, we have to enhance the bilateral partnership in the private sector.

In this respect, the transfer of appropriate technology and expanding capital inflows are major instruments with which we can promote industrial cooperation between Indonesia and Korea.

Industrial cooperation will be highly productive if it is conducted in areas such as the transfer of IT technology and the development of human and natural resources.

If this is coupled with the transfer of Korean industrial technology to Indonesia, it will enhance the overall effect of the bilateral economic cooperation on the industrial and economic development in Indonesia.

This cooperation promises good results in the key areas of Indonesia's industrialization. We have to formulate a comprehensive and concrete long-term plan encompassing industrial and technological cooperation as well as resource development.