Varied motives color investment in RI

Varied motives color investment in RI

By Ilyas Saad and Asep Suryahadi

JAKARTA (JP): Indonesia is currently facing stiff competition
in attracting foreign direct investment from other Asian
countries, particularly China.

The large drop in approved foreign direct investment in
Indonesia reported by the Investment Coordinating Board (BKPM) in
February reflects the fierce competition. The government plans to
issue new deregulation measures soon in order to improve
Indonesia's competitive edge.

Actually, foreign direct investment is not only affected by
pull factors, which determine capital allocation amid recipient
or host countries, but also by push factors, which determine the
size of capital flow out of source countries.

Therefore, in order to formulate correct strategies and
policies to attract investment to Indonesia, the government needs
to assess both the motives of investors from main source
countries and the problems they are facing here.

Recent research shows that enterprises from the United States
continue to be greatly concerned with domestic markets in host
counties when choosing investment locations.

In general, U.S. investors consider developing countries
unattractive for export platforms because of their tendency to
reduce protection and set artificially high wages.

The U.S. entrepreneurs prefer to locate their plants for
export oriented industries in more advanced countries because of
better infrastructure, research and development facilities and
highly skilled labor. They want to maintain their monopolistic
capabilities in producing high quality goods through technology
and capital intensive modes of production.

Japanese firms take a different approach. In the 1960s and
1970s, Japanese investors came to Indonesia with the motive of
exploiting natural resources in order to maintain the continuity
of raw materials supplies for their industries and the
enlargement of their domestic market share through development of
import substitution industries.

Since the middle of the 1980s, the motive has shifted to
developing export platforms along with more widespread production
and marketing networks. Manufacturing of export-oriented
industrial products in Japan is not competitive anymore due to
higher labor costs and the appreciation of the yen.

In the next few years, Japanese enterprises can be expected to
push their investments abroad, but in non-traditional forms such
as technology contracts, management contracts, franchise
arrangements, turnkey projects and production sharing.

This development is supported by higher capabilities in
technology and innovation as a result of intensive research and
development activities. Inter-country transfer of technology
through informational methods and the product cycle process will
be faster.

This will make the monopolistic power and firm-specific
advantages of Japanese enterprises of shorter duration so that
direct investment becomes less attractive for them.

Newly Industrialized Countries (NICs: South Korea, Hong Kong,
Taiwan and Singapore) have become one of the main sources of
foreign direct investment in developing countries, including
Indonesia. Export platforming also seems to be the main motive
behind the flow of capital from the new industrial powers.

They seek the comparative advantages of the abundance of labor
and low wages in developing counties, which have become rare in
their own countries. For export purposes, they also try to
maintain their market share of simple and labor intensive
industrial products in host countries.

In the past, the NICs themselves were recipients of similar
investments from Japan. Now they have lost their competitive
edges in these industries so they have to step into more
technology intensive sectors, although to some extent they remain
in relatively skilled labor intensive sectors, such as
electronics.

The development of technological intensive industries is
conducted through systematic collaboration with Japanese firms.
Japanese companies seem determined to maintain their dominant
power in the production and marketing of electronic goods in
Asian as well as global markets.

In this effort, some well-known Japanese companies have moved
their supervision and research and development centers to NICs,
particularly Singapore.

The movement of foreign direct investment from Japan to NICs
and further to developing countries follows a pattern called the
"flying geese style." It means that Japan as the main source of
technology and capital "is flying" in the forward position,
followed by NICs and then developing countries.

At the micro level, enterprise formation in certain industries
follows a billiard ball pattern. An enterprise which undertakes a
deficiency process will be automatically pushed out to look for a
more efficient location. This means that a company's network will
have a division of labor on a more widespread base area.

Although still relatively insignificant, there is a visible
tendency for the intra-developing-countries capital flow to
increase. Most of those movements are initiated by private
investors who see business opportunities abroad, mainly through
developing market shares.

Another motivation is that they want to start a process of
internationalization for their companies.

Assessment of the motives of investors indicates that
Indonesia is still considered an attractive alternative location
for foreign direct investment. Therefore, it has become very
important now to assess the problems faced by foreign investors
in implementing their investments in Indonesia.

Basically, these problems can be separated into absolute and
supportive conditions.

The first absolute condition involves the low level of
capability and productivity of human resources. There is much
evidence that Indonesian workers are slow in improving their
productivity and have poor capability to absorb new technologies.

The second absolute condition is related to the low level of
quantity and quality of infrastructure, particularly limited
supplies of electricity, a dearth of communication devices and
the lack of clean water.

This is a dilemma because most investment activities take
place on Java where although infrastructure is more extensive
than on outer islands, demand leads to shortages.

Infrastructure development on the outer islands has been left
out of the investment picture almost entirely. This makes it very
difficult for investors to find alternative locations.

There are six problems in relation to supportive conditions
which can be identified. First, distortions in raw or
intermediate materials importation procedures. Many investors
feel obstructed by how slowly the SGS inspector works. In
addition, many customs officials still manage to create as much
red tape as possible.

Second, the use of expatriate staff by investors has to pass
through rigid and difficult procedures. Actually, highly skilled
foreign workers are part of investment activities. Since it is
difficult to find workers with comparable capabilities in
Indonesia, investors find the policy discouraging.

Third, the requirements of 100 percent foreign ownership is
too rigid. The period for transfer of equity to the local partner
is too short. Many investment activities are based on long-term
perspectives.

The requirements disregard the conditions of investing
companies and their local partners' capabilities. This creates an
impression that foreign entrepreneurs are just being used to
develop enterprises which, after they succeed, should be handed
over to Indonesians.

A forced transfer of equity will push the local partner to
look for sufficient domestic capital, while the foreign partner
has to go out along with their capital.

Fourth, the time limit on the land-use license is too short.
The regulation does not differentiate between footloose
industries and resource based industries. In fact, the land-use
needs of the two kinds of industries are very different.

Fifth, distribution and forwarding activities are closed to
foreign direct investment. Investors feel that this has
restricted their room for movement because the current
distribution and forwarding activities by local companies are
considered inefficient.

Sixth, deregulation has not been balanced by reforms in the
bureaucracy.

The list of problems discussed above is by no means complete.
Further research on the subject needs to be done. However, in the
light of the problems identified here, some recommendations can
be set forth.

First, it is advisable for Indonesia as a host country to help
investors assess the risk and uncertainties of their investment
here.

Investors need to be secure in the knowledge that they can
invest safely and profitably in Indonesia. Therefore, the
government should eliminate all ambivalent regulations which
could discourage foreign direct investment.

Second, considering the intense criticism of the quality of
bureaucratic services in Indonesia, the government should put
higher priority on the implementation aspects of every
deregulation measure issued.

Third, the experience of other countries has proved that
foreign direct investment is beneficial to economic development
of host countries. Therefore, it would be better for the
government to direct its efforts toward maximizing the benefit of
foreign direct investment rather than on restricting the room for
movement of investing companies.

The writers are economists. Ilyas Saad is a graduate of
Australian National University.Asep Suryahadi is a graduate of
Pennsylvania State University.