Tax breaks no holiday for multinationals: U.S. expert
Tax breaks no holiday for multinationals: U.S. expert
JAKARTA (JP): Multinational investors do not regard tax
holidays as important when considering foreign direct investment,
a senior American economist said yesterday.
Speaking at a seminar on trade and Investment at the Sangri-La
Hotel, the USAID-funded Trade Implementation and Policy (TIP)
Program's chief economist, William E. James, said a survey of
multinational investors showed macroeconomic stability and
relatively high economic growth were the main reasons for foreign
investors to open businesses in a country.
"Special incentives such as a tax holiday are unlikely to have
more than a marginal effect on investment flows but are likely to
spawn misallocation of time, resources and efforts," he said.
James said restrictions on share ownership, requirements on
local contents and restrictions on foreign transactions were
viewed as strong disincentives for foreign direct investment.
The seminar was organized by the Asian Region International
Association of Cooperating Organizations (ARIACO). Other speakers
included Indonesian businessmen Sofyan Wanandi, Soedarpo
Sastrosatomo, former Indonesian central bank governor Adrianus
Mooy and ANZ Bank executive director Alister T. Maitland.
James said for U.S. multinationals, the lack of effective
enforcement of intellectual property rights was a strong
disincentive to foreign direct investment in the manufacturing
sector, particularly when it was combined with ownership
restrictions.
Special incentives offered to firms to invest in low-income
regions or in export processing zones may encourage some
investment but was not the best policy, he said.
"Such approaches are not optimum from the standpoint of
development of the local industry through sub-contracting,
technology transfer and a competition policy," he said.
The Indonesian government recently announced a plan to
introduce corporate tax breaks for investors operating in eastern
Indonesia, the country's least developed region.
However, James did not make his comments in connection with
Indonesia's planned tax incentive.
James said an interesting policy question for Indonesia, was
the role of wholly-owned (at least 90 percent foreign owned)
manufacturers in exporting.
Dichotomy
The survey compiled by the Central Bureau of Statistics, found
a strong dichotomy existed between wholly-owned foreign
manufacturing establishments and those which were joint ventures
(less than 90 percent foreign owned), he said.
"The former have much higher export orientation than the
latter, even when one controls for industry effects and other
policy effects," he said. "Is it coincidence that export
performance rises dramatically when foreign share ownership
reaches at least 90 percent."
He said that there was a similar correlation between high
foreign ownership levels and exports in Singapore, which has very
few ownership restrictions.
Indonesia, therefore, might consider eliminating the
divestment requirements of foreign owners along with further
streamlining the process by which investors get access to land
and buildings to facilitate investment.
"I need not worry that foreign direct investment will become
dominant in the Indonesian economy, if anything industrial survey
data indicate a rising share for domestic privately owned
manufacturing establishments in value added goods and exports,"
James said.
He noted that a market open to importing capital equipment and
the freedom to invest were strong leading indicators of future
economic growth and performance of non-oil exports.
Indonesia can enhance its investment climate by reducing
domestic distribution and marketing restrictions on foreign-owned
firms, and by improving its enforcement of intellectual property
rights and maintaining its good record of economic management and
high growth, he said. (hen)