Targeting investors

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.