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)