Targeting investors
The 2002 World Investment Report of the Geneva-based UN Conference on Trade and Development (UNCTAD) provides further confirmation of the steady flight of capital from Indonesia since 1998, as reflected in its net resource outflows of US$3.27 billion in 2001.
Though the foreign direct investment (FDI) outflow was less than the $4.55 billion that left the country in 2000, the trend was nevertheless quite alarming because all other Asian countries posted positive FDI flows.
The report shows the extent to which Indonesia has become a pariah among foreign investors since the 1997 economic collapse that set off the political crisis in 1998. It plunged the country into almost every kind of uncertainty as it grappled with the transition from one with an authoritarian, centralized government to one with a democratic, decentralized administration.
But as conditions overall have now become more stable and the overall reform movement is progressing on the right track, albeit haphazardly, it is now high time for the government to implement a concerted program to return the country to the list of FDI destinations.
In this context, the UNCTAD report recommends a more effective promotion strategy to attract FDI, which is relevant for Indonesia and other developing economies too. Obviously, this strategy is effective only after physical, legal and institutional infrastructure, essential for business operations, is already in place above a minimum threshold.
It suggests an investor-targeted strategy that, instead of trying to attract FDI in general, focuses promotional efforts on wooing a defined set of FDI flows to selected business sectors the host country wishes to develop in line with its development objectives.
An investor-targeted strategy is considered much more effective, not only because of its higher cost-effectiveness and the heightened competition to attract FDI. It also allows a country to choose the kind of FDI it desires and direct it to support its objectives related to employment, technology transfer, export competitiveness, skill development and other development goals.
An investor-targeted concept also helps a country to screen out foreign investors that intend to exploit only its static comparative advantage, with minimal spillover to the local economy and with little long-term contribution to bolstering its export competitiveness.
UNCTAD also shows how FDI has been directly tied in to international production systems that have expanded steadily to harness comparative advantages from various countries into strong competitive advantage. It also points to the increasingly important role of transnational companies (TNCs) in this development.
Greater export competitiveness is essential as it helps a country to diversify away from heavy dependence on a few primary commodity exports and move up the skills and technology ladder, essential to increasing local added-value and to sustaining wage rises.
Export activities also expose domestic companies to higher standards and provide them with opportunities for easier access to information. However, at the same time, they subject such companies to greater competitive pressures, thereby forcing them to try harder to acquire new skills and capabilities.
TNCs have indeed proved themselves capable of greatly helping countries to strengthen their export competitiveness, as can be noted from their expanding role in world exports. It is therefore essential to direct investor-targeted programs to export-oriented TNCs or their affiliates.
But host countries need to design policies and incentives to encourage linkages between foreign affiliates of TNCs and local suppliers because such linkages are often a key channel for the diffusion of skills, knowledge and technology to domestic companies.
However, international production systems can operate efficiently only when companies have easier access to imported inputs. Hence, smooth import flows should be made an integral part of investor-targeted programs to attract export-oriented FDI or TNCs.
This is precisely the main objective of the contingency measure (pre-shipment inspection of imports) that Industry and Trade Minister Rini M. Soewandi has recommended to President Megawati Soekarnoputri.
It would indeed be rather futile to attract export-oriented TNCs or FDI in general if import clearance were highly cumbersome, requiring time to bribe corrupt customs officials or involving silly disputes over customs classifications with officials who lacked the technical competence necessary.
A number of foreign investment ventures established in the country are already seeking the exit way at the least-cost method, due to their frustrations with arduous import clearance and other issues related to labor, taxation and legal problems.
It is therefore critical for the government to act firmly to ensure fast and efficient import clearance and to prevent both smuggling and underinvoicing of imports from causing distortions on the domestic market.