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FOREIGN DIRECT INVESTMENT IN INDONESIA:
FIFTY YEARS OF DISCOURSE
J. Thomas Lindblad
To cite this article: J. Thomas Lindblad (2015) FOREIGN DIRECT INVESTMENT IN INDONESIA: FIFTY YEARS OF DISCOURSE, Bulletin of Indonesian Economic Studies, 51:2, 217-237, DOI: 10.1080/00074918.2015.1061913
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ISSN 0007-4918 print/ISSN 1472-7234 online/15/000217-21 © 2015 Indonesia Project ANU http://dx.doi.org/10.1080/00074918.2015.1061913
Fifty Years of
BIES
FOREIGN DIRECT INVESTMENT IN INDONESIA:
FIFTY YEARS OF DISCOURSE
J. Thomas Lindblad
Leiden University
The topic of foreign direct investment (FDI) has been prominent in assessments of
economic development in Indonesia during the past 50 years. In this article I review
Indonesia’s FDI record in a historical perspective; the current urge to control FDI inlows and the need to augment domestic savings and facilitate technology trans -fers are not at all new in Indonesia. I draw in particular on the discourse on FDI in this journal, the Bulletin of Indonesian Economic Studies, giving special attention to
contributions by this journal to the international literature on FDI and its impact. The article demonstrates that the relation between FDI and economic growth has been less straightforward in Indonesia than elsewhere in Southeast Asia. Although
FDI has grown in a restrictive investment climate, on occasion it has failed to do so
despite more liberal conditions. This may be attributed to the sustained role of natu
-ral resources in determining Indonesia’s attractiveness as a host country of FDI.
Keywords: foreign investment, investment policy, economic growth JEL classiication: E220, F21, O160
INTRODUCTION
The international literature on foreign direct investment (FDI) is, of course, enor-mous. The attention given to FDI may on occasion seem grossly out of
propor-tion, considering its contribution in absolute terms to the host country’s gross
capital formation or GDP.1 The older literature stressed push factors, such as
com-parative advantage derived from natural-resource endowments, market access, cheap labour, or higher degrees of eficiency at cheap labour costs (Dunning 1994,
36–39). A complementary approach from the side of demand for FDI emphasised pull factors, such as a reduction of the domestic savings gap, access to advanced technology, and, not least important, competition among potential host countries
(Phongpaichit 1990, 100–107; Lindblad 1998, 8–9). Recent advances in international business theory have highlighted the synergy from combining the internalisa
-tion of imperfect markets with the outward loca-tional strategies of multina-tional
1. In Indonesia, for instance, net inlows of FDI corresponded to 1.0% of GDP in 1970 and 1990, rising only to 2.7% by 1996 (OECD 1999, 52).
enterprises. Today’s multinationals have emerged as key drivers of globalisation, although they have retained a strong regional basis (Rugman and Verbeke 2004; Buckley and Casson 2009; Buckley 2014). A particularly relevant application of
internalisation theory to leading ASEAN economies found that British investors
preferred internal hierarchical inancing when setting up business networks over -seas (Nguyen 2013).
With its rich natural resources, abundant labour supply, and growing domestic market, Indonesia has long been a favoured destination for FDI in Southeast Asia,
offering multinational enterprises ample opportunities for internalisation when
choosing an overseas production location. Yet for some time—since before the 1997–98 Asian inancial crisis—the overwhelming concern among observers has been why Indonesia has not attracted more FDI. In 2006, for example, Indonesia
ranked fourth among recipients of FDI in Southeast Asia, surpassed by Singapore, Thailand, and Malaysia. Only in 2010 did Indonesia move up to second in the region, and still with FDI composing only 18% of total inlows (ASEAN 2014). Today, at long last, the tide seems to have turned. For 2014, FDI inlows were reported to be Rp 307 trillion ($24.9 billion), well in excess of realised FDI during the peak years of the Soeharto period (Jakarta Globe, 28 Jan. 2015).
Assessments of FDI performance in Indonesia—whether FDI has been sizeable enough and suficiently beneicial to the host country—have invariably been tied to a nationalist aim among policymakers to control inlows of foreign capital. At the same time, there has been a perhaps more rational appreciation of the need
to attract FDI in order to close the domestic savings gap and facilitate technology transfers in production. The historical perspective adopted in this article teaches
us that none of this is new. Both the apprehension about (if not outright hostility towards) FDI and the urgency of foreign inancing were already manifest by the
early 1950s (Thee 2010, 51–54).
This article reports on a content analysis of publications in the Bulletin of Indonesian Economic Studies (BIES), the sole academic journal based outside Indonesia that focuses exclusively on the Indonesian economy. The analysis yields two types of information. One type refers to sections on FDI in the Survey of Recent Developments series, with which all issues of BIES open. These surveys
have increasingly been compiled as joint ventures between Indonesian and
non-Indonesian economists—the view from inside out need not coincide with the one
from outside in. Of 148 surveys published between the irst issue of BIES, in 1965,
and the irst issue of volume 51, in 2015, 63 contain sections devoted to FDI. The
second type of information consists of academic or scholarly articles on FDI, in
total 17 articles appearing during the same period, representing the contribution by BIES authors to the international literature on FDI. In addition, the reviews section of BIES has over the years made a more than passing reference to books on FDI and related matters.
My analysis focuses on continuity and change over time, and lends itself read
-ily to a chronological arrangement of argument. Various sequences of luctuating economic growth have been applied in the literature to impose a periodisation on Indonesian development since the inception of Soeharto’s New Order govern
-ment in 1966 (Hill 1996, 15–17; Dick et al. 2002, 203; Van Zanden and Marks 2012, 168–73). I opt for a slightly different solution. I differentiate between three phases, all of which turn out to be roughly the same length:
• 1966–82: economic rehabilitation and windfall gains from the oil boom during
the irst half of the Soeharto administration
• 1983–97: structural change in the economy and continued rapid growth dur-ing the second half of the Soeharto administration
• 1998–2015: the 1997–98 Asian inancial crisis and its aftermath, and demon
-strated resilience during the 2008 global inancial crisis under a succession of
post-Soeharto administrations
Each of these phases can be characterised by changing trends in economic growth. During the irst phase, average growth rates of per capita GDP were high but fall -ing, from 6.5% in 1967–72 to 4.7% in 1972–80. The second phase saw the opposite:
an average rate of per capita GDP growth climbing from 2.8% in 1980–86 to 6.5% in 1986–96. The third phase was marked by an extreme drop in income levels dur
-ing the Asian inancial crisis—of 13% in 1998 alone—and a slow recovery towards an average rate of about 4.0% in the early years of the 21st century (Van Zanden and Marks 2012, 169).
1966–82: EARLY NEW ORDER GROWTH
Postcolonial Indonesia after 1945 was simply not a very attractive place for FDI. The increasingly hostile attitude of the Indonesian government culminated in the
takeover and subsequent nationalisation of remaining Dutch-owned private com
-panies in 1957–59, which in turn was followed in 1963–66 by the takeover of British and American enterprises as part of Indonesia’s confrontation policy against Malaysia (Lindblad 2008, 177–207; Redfern 2010). By 1965, after Royal Dutch Shell had divested its assets in Indonesia, scarcely any foreign irms were operating in Indonesia. This outcome was in line with Sukarno’s increasingly socialist ori
-entation after the adoption of Guided Democracy in 1958, but in apparent con
-tradiction to the relatively liberal legislation on FDI enacted by parliament that same year (Lindblad 1998, 103–6). Law 78/1958 on Foreign Investment remained
a dead letter.
Soeharto’s New Order government—in charge, in effect, from 11 March 1966— radically changed the FDI climate while restoring Indonesia’s relationship with the capitalist world economy. A key measure was the strikingly liberal Law 1/1967 on Foreign Investment, which formed part of the deal under which the IMF bailed out bankrupt Indonesia. Interest among presumptive foreign investors was ris
-ing, in particular among Japanese and American irms. The BIES survey in June
1967 noted that the irst major contract granted under the new legislation went to
Freeport Sulphur for mining in West Irian (now Papua).2
Surveys in 1968 and 1969 reported an increasing low of FDI applications,
almost exclusively for the exploitation of natural resources rather than
manu-facturing. These surveys, more often than not authored by the venerable H. W.
Arndt, the founder of BIES, cautioned against equating realised investment with
applications. For the irst time, but certainly not the last, mention was made in
2. Full bibliographical references to BIES surveys are given only when speciic information needs to be linked to individual authors.
the surveys of the many obstacles foreign investors faced when dealing with the Indonesian bureaucracy. In 1970, this theme was elevated to the main topic of a scholarly article that drew readers’ attention to Indonesia’s ‘inadequate and antiquated legislation in such ields as company, land, labour and tax laws’ (Clapham 1970). The article elicited a comment by Mohammad Sadli, then chair of the Investment Coordinating Board (BKPM), the agency executing FDI policy in Indonesia. Sadli admitted there were bottlenecks but urged patience.
At a higher level of abstraction, a couple of articles in 1972–73 sought to link
FDI to the potential for economic growth in Indonesia. In a detailed case study of FDI in logging in East Kalimantan, Koehler (1972) depicted a situation in which
foreign investors reaped excessive short-run proits without paying full economic rents for long-run exploitation of the region’s forest resources. He also pointed to bottlenecks in the bureaucracy and a complete lack of public infrastructure. At a
more aggregated level, Strout (1973) posed the important question of how long economic development in Indonesia would depend on FDI. He concluded that
foreign capital was needed to close not only the foreign-exchange gap but also the savings gap, and, hence, that FDI dependence would last into the 1980s, possibly longer. Some discussion ensued about the merits of a two-gap analysis in eco -nomic theory. Both articles featured a path of eco-nomic development in Indonesia that had FDI serving as a motor of rapid growth. In the event, as stated in several BIES surveys, actual FDI inlows remained moderate in absolute terms, whereas,
paradoxically, economic nationalism seemed to be on the rise. One survey even spoke of ‘domestic economic alarmists . . . who loudly object that foreign inves
-tors are squeezing Indonesian entrepreneurs out of existence’ (McCawley 1972, 17). Sentiments of the Sukarno era were still alive.
Then came the Malari incident—riots in Jakarta in January 1974, during a visit by Japanese prime minister Kakuei Tanaka. Although the demonstrations were ostensibly against perceived excessive Japanese FDI, it is likely that they in fact formed the irst veiled expression of popular discontent with the Soeharto regime.
BIES surveys at irst cautiously said that it was too early to predict the impact, but
within a year the journal afirmed that the investment climate had changed (Arndt 1975, 24). The climate had become more restrictive, in particular because of the
requirement that foreign investors enter into joint ventures with pribumi
(indig-enous Indonesian) partners, whose equity share had to rise above 50% within 10
years. In addition, the government reduced tax incentives and increased pressure
on foreign irms to train indigenous Indonesian staff. The accommodating atti -tude of the early Soeharto years was gone. In the short run, however, approvals
kept increasing, including for large-scale projects such as liqueied-natural-gas installations in Aceh and East Kalimantan; nickel mines in Sulawesi; an alumin
-ium smelter at Asahan, in North Sumatra; and the Krakatau steel plant.
The adverse impact of the Malari incident on incoming FDI became apparent from 1976, but by that time Indonesia was already reaping windfall proits from the oil boom. Indonesia simply did not need foreign capital to the same extent as before. A careful analysis combined external and internal causes of the appar -ent decline in approvals. Investor countries were in recession and Indonesian
manufacturing was not yet ready to switch from import substitution to export
orientation. Foreign investors complied with the transfer of equity to indigenous
partners, often in form rather than substance. It was all too familiar—a revival of the Ali Baba practices that had been rampant during the 1950s, with indigenous
frontmen supported by Chinese Indonesians or foreigners (McCawley and Manning 1976, 32–38). The bankruptcy of Pertamina, the state oil company, did
little to improve the situation, and in 1977 Indonesia was cited as ‘one of the least
attractive foreign investment sites in Asia’ outside mining (Arndt 1977, 13).
The downward trend continued into the late 1970s. As so often, at least some
blame was put on the complicated procedures encountered by potential inves
-tors at BKPM, which handled all applications outside the oil and banking sec-tors.
Boediono (1980, 28–30), a future vice-president of Indonesia, admitted that the
bureaucratic procedures were in urgent need of improvement. Still, he remained
cautiously optimistic. On a more critical note, Healey (1981, 23) warned that
tougher enforcement of equity transfer regulations would have ‘more inhibiting effects than is generally realized’.
In the meantime, FDI was extending beyond the extractive sector and increas -ingly entering manufacturing, coinciding with a shift among suppliers of FDI away from Western multinationals to newcomers from Asia. This trend was
spearheaded by the reaction of Japanese manufacturers to rising energy costs in the wake of the oil crises of 1973 and 1979. Wells and Warren (1979) were among the irst to spot the change in foreign-investor identity in Indonesia. They dem -onstrated that investors from developing countries in East Asia, including Hong Kong and Singapore, were fundamentally different from the traditional investors from the United States and Western Europe: the newcomers, as a rule, had less product differentiation, less modern technology, and more expatriate staff. Their
conspicuous absence in labour-intensive export manufacturing should, logically,
have suggested opportunities for others to follow.
Meanwhile, statistics on FDI displayed a rising trend over time, although the discourse on FDI was much obscured by dificulties in interpreting the available statistical information. Balance-of-payments data on net capital inlows grossly understated actual investment, whereas igures on approvals published by BKPM vastly exaggerated what was likely ever to reach realisation. For lack of alter
-natives, observers tended to use BKPM approvals as a proxy for the direction
and order of magnitude of FDI. Annual approvals displayed a consistent upward
trend from 1970 to 1975; this increase was followed by a severe setback, which, in
due course, from 1979, turned into a resurgence of approved investment
commit-ments (igure 1). Meanwhile, the share of manufacturing increased signiicantly. The cumulative total for 1967–82 was $12.4 billion, of which two-thirds ($8.3 bil -lion) was in manufacturing.
Confusion arose for at least two reasons. Using approvals as a proxy for FDI trends rested on the unproven assumption that rates of realisation would remain
constant over time and across sectors. An exclusive reliance on the approval ig
-ures of BKPM fostered the misleading impression that Japan was the foremost investing country in Indonesia—simply because the largest share of approvals
was in manufacturing, where Japanese investors were heavily overrepresented. The entire oil and gas sector, with its huge American investment, did not fall
under BKPM jurisdiction. Using unpublished data on realised investment, Hill
(1988, 37) demonstrated that the share of the United States in Indonesian FDI was
as high as 58%, against 11% for Japan (Hill 1984, 32). Combining data on foreign equity participation with BKPM igures, he suggested a realisation rate of slightly below 40%. He noted that the rate of realisation did not change much as the share
of manufacturing in total approvals increased.
An overall resurgence of FDI was clearly one of the foremost features of the
irst half of Soeharto’s New Order regime, up to about 1982, although the FDI climate did become more restrictive from 1974 onwards. Increasing FDI lows
caught much attention in the domestic press and, as shown, in BIES. There was a strong emphasis in BIES on continuous reporting about the latest developments,
rather than a proliferation of academic or scholarly articles. During the irst 16
years of the New Order administration (1966–82), BIES published 22 surveys with
sections dedicated to FDI. In contrast, it published only four major academic arti
-cles on FDI and related subjects. With the exception of one monograph on legal aspects of FDI, all titles in the journal’s reviews section referred to oficial publica -tions with useful information for presumptive investors.3 Among the academic
articles considered here, three—by Koehler (1972), Strout (1973), and Wells and Warren (1979)—raised fundamental issues about the relationship between FDI
and economic growth, drawing attention also to the changing identity of foreign
investors. Persistent bottlenecks faced by foreign investors in dealing with the Indonesian bureaucracy formed a common denominator in much of the reporting.
1983–97: CONTINUED NEW ORDER GROWTH
Indonesia was a latecomer in the general shift towards structural change and
accel-erated industrialisation in Southeast Asia, arguably because of the ‘resource curse’ effects of the oil boom in the 1970s (Coxhead and Li 2008). A comparison within
3. For example, Charles Himawan’s The Foreign Investment Process in Indonesia: The Role of Law in the Economic Development of a Third World Country was reviewed by H. W. Arndt in the July 1981 issue of BIES.
FIGURE 1 Approved Foreign Direct Investment in Indonesia, 1967–82 ($ billion, current prices)
1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 0.0
0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
Total
Manufacturing
Sources: Data from Hill (1988, 36) and BKPM. Note: Excludes oil and gas.
Southeast Asia is particularly illuminating. Thailand, for example, having started
from a comparably low income level in the 1950s, gained a lead over Indonesia dur
-ing the 1970s, ow-ing to an earlier reorientation of its import-substitut-ing manufac
-turing strategy. In terms of technological upgrading as speciically manifested in
manufacturing production, foreign exports, and capital-goods imports, Indonesia
appeared to lag about 10 years behind Thailand (Frankema and Lindblad 2006). A short-term balance-of-payments crisis in Indonesia, caused by the sudden plunge in oil prices in 1982–83, exposed Indonesia’s excessive dependence on oil exports
and prompted the Indonesian government to speed up industrialisation efforts.
Within a decade, the 1980s, the contribution by manufacturing to value added in GDP climbed from 11.1% to 19.1%, while the share of manufacturing in total exports rose from 7.4% to 38.4% (Van Zanden and Marks 2012, 190). This reorien -tation in economic structure ushered in a new phase of economic growth soon to
be characterised by liberalisation and deregulation.
While there appeared to be little news to report about FDI in the mid-1980s, the change in identity and targets of foreign investors became a welcome topic
for systematic analysis. Three BIES articles, of which two focused on Japanese
investment, challenged traditional notions about FDI in Indonesia. Thee (1984) argued that Japanese irms were more interested in uncovering the potential of the growing domestic market than in using Indonesia as a platform for labour-intensive manufacturing exports. Along the way, he rejected the well-known
Kojima hypothesis that Japanese investment intrinsically creates more trade than
American investment. He also publicised the practice among foreign partners in joint ventures of lending money to their Indonesian partners, enabling the latter
to purchase equity. He added a note on political economy, which was then far
from common among professional economists writing about Indonesia. Owing to ineficient import-substituting industrialisation, Thee argued, ‘vested interests favouring the status quo which are supported by political power holders become practically impossible to dislodge, even when the high economic costs of these arrangements become apparent’ (105). Similar opinions were later voiced by for
-eign observers of the Indonesian economy (see, for example, Rosser 2002). The other article on Japanese investment, written by Toshihiko Kinoshita, a Japanese economist, revealed that Indonesia ranked second among Japanese over -seas commitments. The article also underscored the strong preference of Japanese
investors for import-substituting manufacturing. Kinoshita expected a continued
steady or slight increase of Japanese FDI in Indonesia during the remainder of the
1980s, but urged for reforms to improve the investment climate. One suggested measure involved simplifying customs clearance at Soekarno–Hatta airport in Jakarta—a bottleneck that, by the time the article appeared in print, had already been removed by subcontracting operations to a Swiss agency. Another request was to allow full equity ownership for foreign investors within the foreseeable future, but the time was not yet ripe for such a radical change to the rules of the
game (Kinoshita 1986).
In a slightly different vein, Balasubramanyam (1984) addressed the important issue of the foreign investor’s choice of industry and technology, decisions with obvious repercussions for the impact of FDI on economic growth and industrial reorientation. He observed a higher capital intensity in foreign-controlled irms; this could almost fully be ascribed to the choice of production techniques. Further
analysis displayed a stronger correlation between labour productivity and wage rates. By way of hypothesis, Balasubramanyam suggested that better manage
-ment and better skills endow-ment in the labour force explained the higher efi -ciency in foreign-controlled manufacturing. Admitting that his efforts were just
the beginning of a long trajectory, he called for a ‘detailed analysis of the role of private foreign investment in Indonesia’ (93), a plea few would disagree with.
The late 1980s, particularly 1988 and 1989, saw a sharp rise in approvals. West Germany and Taiwan were now at the forefront of the expansion of FDI in
man-ufacturing, whereas Japan now lagged behind despite the overall increase in
Japanese overseas investment that followed the Plaza Accord of 1985. One com-mentator presumed that Japanese apprehension might stem from a dispute over production sharing in Asahan, in North Sumatra, to which was added impatience
with reform in Indonesia in general (Simandjuntak 1989, 6–9). The decline of
Japan as a source of FDI stood in ironic contrast to its prominent role in systematic analysis of FDI in BIES in preceding years.
The scholarly discourse on FDI in Indonesia was deepened by looking not only at identities of investors but also at modes of inancing FDI. Langhammer (1988) used data on realised FDI from Bank Indonesia, the central bank, to demonstrate that one-half of implemented FDI was in kind, primarily through imports of
capital goods, rather than in cash. Contrary to expectations, the ratio of loans to
equity in inancing was negatively associated with the ratio of cash payments to deliveries in kind. In addition, Langhammer found a positive statistical associa
-tion between a high degree of loan inancing, on the one hand, and capital inten
-sity in production, on the other. This preference for inancing in kind should be understood in the context of Indonesian legislation, which prescribed a gradual
transfer of equity to local partners. After all, ownership of equipment already in
place is easily altered. Langhammer’s (1988) main inding was an inherent incli
-nation towards trade creation, owing to the manner in which FDI was inanced. The increasing interest in abstract FDI issues was at the time also relected in the publication of a number of important monographs on various aspects of FDI in
Indonesia.4
From 1986 onwards, deregulation evolved as a major priority in economic
policy-making in Indonesia. This occurred in general alignment with worldwide tendencies towards neo-liberalism in capitalist economies; in the speciic case of Indonesia, it boosted the shift in production in favour of manufacturing. In the face of a still rather restrictive FDI regime, deregulation did make Indonesia more attractive as a target for foreign investors. BKPM approvals showed an eightfold increase between 1986 and 1990, with a rapidly increasing proportion intended for exports (Pangestu and Habir 1990, 8–9; Parker 1991, 21).
The newest trend was the rise of the four newly industrialised countries
(NICs)—Hong Kong, South Korea, Taiwan, and Singapore—as ranked by magni
-tude of FDI lows to Indonesia. This phenomenon was irst described systematically
4. Examples include Khong Cho Onn’s The Politics of Oil in Indonesia: Foreign Company– Host Government Relations and Hal Hill’s Foreign Investment and Industrialization in Indonesia,
both reviewed in BIES in 1988, and Robert Dickie and Thomas Layman’s Foreign Investment and Government Policy in the Third World: Forging Common Interests in Indonesia and Beyond, reviewed in 1990.
in an article by Thee, who showed that unique patterns of FDI behaviour applied to each of the four NICs. Thee was optimistic about the trade and developmen -tal effects of NIC investment, expecting little danger of crowding-out and seeing
some potential for an ‘orderly transfer of technology’ (Thee 1991, 86).
Overall optimism about FDI prospects continued into the 1990s. It was with
-out doubt reinforced in April 1992 by a government regulation permitting 100%
foreign equity in joint ventures, under certain conditions—for instance, for large-scale commitments or for those in remote locations within the archipelago. With
the beneit of hindsight, it is clear that the April 1992 regulation anticipated an overhaul of Indonesia’s FDI regime. In October 1993, the government presented some of the provisions contained in its new deregulation package, which included
relaxing equity divestment rules and dramatically reducing the ‘large-scale
cri-terion’ deined in the 1992 regulation. The package also allowed foreign inves
-tors to loat shares on the Jakarta Stock Exchange instead of privately looking for Indonesian partners. Foreign investors reacted favourably to this overhaul (Van der Eng 1993, 20–23). At the same time, however, the government took steps in
the opposite direction: it tightened some regulations and continued to apply the so-called negative investment list (daftar negatif investasi), enumerating branches of industry that were closed to foreign investment altogether.
A decisive change in Indonesia’s FDI climate came on 2 June 1994, with the
enactment of Government Regulation 20/1994 on Share Ownership in Foreign
Direct Investment. From being known as one of the least welcoming destinations
for foreign investment among the capitalist economies of Southeast and East Asia,
Indonesia became one of the most promising host countries, combining liberal leg -islation with a massive endowment of natural resources and a huge and rapidly
growing domestic market for manufactured goods. In historical perspective, the FDI regulation of 1994 needs to be understood as the outcome of preceding exter -nal and inter-nal changes—in particular, of increasing competition from China and economic restructuring at home. The regulation ordained relaxed divestment conditions, permitting levels of foreign equity ownership of 95%–100%. The need
for foreign investors to ind local shareholders disappeared and several sectors
were now opened up for foreign investment, although other important ones—for instance, domestic retail trade—remained closed.
The response of foreign investors was immediate and strong. In 1994, BKPM approved $24 billion of investment, three times as much as in 1990. Approvals climbed further still in 1995, to around $40 billion, as the FDI boom reached its peak (igure 2; Hobohm 1995, 10; Parker and Hutabarat 1996, 25). Yet observers were quick to point out the discrepancy between approved and realised invest
-ment, which was assumed to be wider in Indonesia than in most host countries
to FDI in Asia.
The year 1996 was marked by huge capital inlows. The deicit on the current account of the balance of payments was growing rapidly, which, in hindsight, could have been interpreted as a warning sign.5 Already before the 1997–98 Asian
inancial crisis began, BKPM approvals were falling. Extrapolation on the eve of the crisis suggested that the total number of approvals in 1997 would reduce FDI
5. Compare with ‘Emerging Asia’s Sombre Era’ (Economist, 24 Aug. 1996).
volumes to the level that had prevailed in 1994. At the same time, there were signs
of reawakening economic nationalism—for instance, a ban on foreign participation in the palm-oil sector, a measure that ostensibly served to protect the interests of the major producers in Sumatra (Lindblad 1997, 25–31). On the whole, much pub
-licity was given at this time to joint ventures between foreign investors and privi -leged domestic partners with direct access to the apex of political power. Scandals
included the Bre-X gold-mining debacle and Indonesia’s national car project, both
cases in which the children of President Soeharto were heavily implicated.
The function of FDI as a key indicator of economic development was sustained and possibly strengthened during the second half of Soeharto’s New Order gov
-ernment, especially after the liberalisation of the FDI regime in 1994. The wide
attention given to FDI in the press on occasion seemed disproportionate,
con-sidering that domestic investment contributed far more in absolute terms to the country’s gross ixed capital formation. But the expected contribution of FDI to
economic development was perceived primarily in qualitative rather than quanti-tative terms, especially with regard to technology transfers. Economic
restructur-ing, deregulation, liberalisation, and the emergence of new East Asian investors reinforced one another in engendering the FDI boom that preceded the crisis. This process was covered by 20 BIES surveys published during 1983–97 with sections devoted to FDI. The emphasis of these surveys was generally on the changing FDI
regulations and the luctuations in FDI volumes.
The academic discourse on FDI in Indonesia matured during this period, in the
sense that more penetrating analyses were presented. Out of ive academic arti
-cles on FDI published in BIES between 1983 and 1997, two (Balasubramanyam
1984; Langhammer 1988) systematically linked FDI to eficiency and trade cre
-ation. The three others (Thee 1984, 1991; Kinoshita 1986) explored the unique
FIGURE 2 Approved Foreign Direct Investment in Indonesia, 1983–97 ($ billion, current prices)
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 0
5 10 15 20 25 30 35 40 45
Sources: Data from Ramstetter (2000, 37) and BKPM. Note: Excludes oil and gas.
characteristics of Asian investors, both Japanese irms and NIC investors. In
hindsight, these two sets of articles complemented each other in a way neither planned nor intended.
1998–2015: REFORMASI AND BEYOND
On the eve of the 1997–98 Asian inancial crisis, few observers, whether at home or abroad, would have disputed the assessment that Indonesia’s ‘economic fun
-damentals are strong’ (Parker and Hutabarat 1996, 26). But crisis struck unexpect
-edly, with the rupiah beginning its freefall on 14 August 1997 and the Indonesian government reaching its irst agreement with the IMF on 31 October. The crisis quickly spread from the inancial sector to the real economy, and FDI was soon severely reduced. By March 1998, BKPM approvals had fallen to less than half the level that had prevailed in 1977. The banking sector was in disarray, bankruptcies multiplied, and substantial volumes of private capital lowed out of the country. Net FDI lows, as inferred from oficial balance-of-payments statistics, declined by $1.3 billion in 1998. Together with a net outlow of $4.7 billion in 1997, this decline translated to a loss of $6 billion in two years (Hill 1999, 36). Social disorder and political instability further undermined conidence in Indonesia among for
-eign investors. The contraction continued unabated.
‘Reform’ (reformasi) was the favoured battle-cry in 1998 among opponents
of the Soeharto regime, but the expression soon gained acceptance in all seg
-ments of Indonesian society. In October 1999, it was engraved as the label for the political coalition behind Abdurrahman Wahid’s presidency (Van Dijk 2001,
464). Considering the widely felt urgency of reform and the actual, often radical changes that occurred after the fall of Soeharto, it is convenient to classify his three immediate successors as the reformasi presidents: B. J. Habibie (May 1998–
October 1999), Abdurrahman Wahid (October 1999–July 2001), and Megawati Sukarnoputri (July 2001–October 2004). All three presidencies were relatively short, and all displayed, to varying degrees, a confrontation between high expec -tations and disappointing outcomes.
The verdict on Indonesia’s macroeconomic performance during the immedi
-ate aftermath of the inancial crisis, when under IMF tutelage, was not favour
-able. Real per capita GDP continued to decline under Habibie, in 1999, recovering
somewhat only after 2000 (derived from Van der Eng 2010, 306). The annual
growth rate scarcely touched 3% during the presidencies of Wahid and Megawati, despite the latter’s highly publicised ‘dream team’ of economic policymakers. The slow pace of recovery was later ascribed to the need to restore political stability above all else, and to a lack of consistent pro-growth policies once stability had been achieved (Boediono 2005).
FDI at the time served as a kind of thermometer of the robustness of eco
-nomic recovery. A return of capital that had led the country in late 1997 and 1998, together with revived conidence among foreign investors, would signify
a return to the path of rapid growth that had prevailed during the Soeharto era.
While keeping a close eye on political struggles, ethnic strife, and the threat of
disintegration, foreign investors were inclined to adopt a wait-and-see attitude
until Chinese Indonesian businesspeople had begun repatriating capital from safe
havens in Singapore and Hong Kong.
In a vain attempt to restore at least some of the lost momentum, the Habibie government took a further step towards liberalisation in May 1999, by agreeing to 99% foreign equity ownership in banking and allowing foreign banks to open branch ofices throughout the country. But the contraction continued, accompa
-nied by rising interest rates and falling imports of capital goods (Booth 1999, 14). Divestment by foreign irms continued into 2000, but then there were hesitant signs that the tide might be turning. Some fresh investment was undertaken, although
not in manufacturing and not yet at impressive volumes. Atypical FDI from Asian
sources tended to target isheries, forestry, and agriculture (Ramstetter 2000, 33–38). The effects of the inancial crisis on Indonesia fostered an impressive body of academic literature, but not speciically linked to the boom and bust of FDI in
the late 1990s. The general theme of FDI and its importance to economic
devel-opment in Indonesia was at the time covered by only one academic article, by
Eric Ramstetter (1999), who used data from manufacturing in Indonesia in the
early 1990s to explore the relationship between FDI and foreign trade. As could be expected, he established a positive correlation between foreign ownership and trade propensities, albeit more so for exports than imports. Ramstetter employed theories of irm-speciic advantage to argue that ownership patterns determined
trade propensities, rather than the other way around. His concluding policy rec-ommendation was to avoid restrictions on foreign equity ownership, which may have appeared curiously out of place in the midst of a severe crisis.
Ramstetter’s generalised analysis was complemented in a different vein by
my article on South Korean investment in Indonesia, which also incorporated
experiences from the crisis itself. My sketch of the chronology and characteristics of Korean irms operating in Indonesian manufacturing embraced case studies illustrating the technological upgrading from labour-intensive to capital-inten
-sive production (Lindblad 2000). During the immediate aftermath of the inancial crisis, observers of FDI in Indonesia were inclined to focus on the prospect of a speedy resurgence of FDI rather than engage in more theoretical or abstract
analysis.
A reversal of the downward trend in FDI was prevented by a series of scan
-dals and mounting uncertainties in the Indonesian business world. In 2001 the Canadian insurance company Manulife lost what appeared to be a straight-forward lawsuit to an Indonesian rival rumoured to have bribed the judges. This debacle showed that business in Indonesia was subject to the ‘law of the jungle’, and, as deplored by one observer, ‘perhaps even more so than in the late Soeharto era’ (Dick 2001, 31). The implementation of an exceptionally far-reaching decen
-tralisation in 2001 added to the uncertainty among foreign investors, notably about how local authorities would react to the intended foreign acquisition of assets held by the Indonesian Banking Restructuring Agency, which were coming up for divestment. Worries about the low ebb in investor conidence continued to haunt media reporting, and, on occasion, Indonesia was depicted as a high-risk destination for FDI (MacIntyre and Resosudarmo 2003, 148).
The irst presidential term of Susilo Bambang Yudhoyono, from 2004 to 2009, can be seen as the time when Indonesia moved beyond the immediate aftermath of the inancial crisis and the change of political regime. The three reformasi
presi-dencies brought political democratisation, administrative reform, and a certain measure of economic stability, all without jeopardising national unity. A sustained
improvement, real per capita GDP grew at more than 4% annually and contrib
-uted to a cautious new optimism among observers of the Indonesian economy.
Still, the investment climate remained gloomy, with incessant calls for reform and
leading Japanese irms shunning Indonesia in favour of China (Aswicahyono and Hill 2004, 298). Investors kept complaining about widespread corruption, to which was now added alarm because of mounting Islamic radicalism.
In August 2005, the Yudhoyono government announced its intention to
radi-cally reform the FDI regime by combining legislation on domestic and foreign investment, abolishing the intermediary role of BKPM, and streamlining invest
-ment procedures. This announce-ment was followed in February 2006 by a gov -ernment regulation outlining the trajectory of reform. A progress report in April
2006 indicated that targets were being met, but some were admittedly easy to fulill. Doubts were expressed about the Yudhoyono cabinet’s ability to improve the FDI climate in Indonesia; the government was said to be ‘backing away from an initial more market-oriented stance’ (Manning and Roesad 2006, 158). At this point Indonesia was assigned what will probably be its lowest ever score for FDI conditions, ranking just above the Democratic Republic of Congo and Zimbabwe
in international assessments (160).
The relationship between foreign ownership and eficiency in production con
-tinued to interest Ramstetter, who, jointly with a Japanese associate, Sadayuki Takii, pursued this theme further in an analysis embracing both the pre-crisis FDI boom and the crisis itself. Takii and Ramstetter (2005) startled readers by pointing out the apparent contradiction between capital outlows and the rising impor
-tance of foreign irms in manufacturing during 1997–2001. An explanation was found in acquisitions of equity by foreign participants in joint ventures at iresale prices when Indonesian partners went bankrupt. Takii and Ramstetter reafirmed the positive correlation between majority foreign ownership and high produc
-tivity, particularly in chemicals, metals, and transport equipment but less so in
textiles and footwear. At a later stage, Ramstetter extended his analysis of the
relations between foreign equity participation, labour productivity, and export orientation into a comparison between Indonesia and Thailand (see Ramstetter
and Sjöholm 2006, reviewed in the August 2007 issue of BIES).
At long last, in March 2007 parliament passed Law 25/2007 on Investment, which covered both domestic and foreign investment in Indonesia. The new law allowed 100% foreign equity ownership across the board, and was greeted with satisfaction by foreign investors. More iscal incentives were envisaged and investment procedures were supposed to be streamlined. Yet, to the disap
-pointment of many, BKPM retained its central coordination role. This was seen as devising a ‘possibility of retreat from reform’ (Narjoko and Jotzo 2007, 155). Some months later the Indonesian authorities published a revised version of the
negative investment list. The zeal of genuine reformism that had characterised
Yudhoyono’s irst term now seemed blurred by contradictory signals.
It was rather quiet on the frontier of academic articles on FDI in Indonesia at
this time, as profound analytical exercises ceded to continual worries about the lack of improvement in the FDI climate. The reviews section of BIES remained alert, calling attention to several monographs on, among other topics, crony
cap-italism under Soeharto (Hill 2008) and constraints encountered by investors in
rural areas (Satriawan 2010).
GDP growth in Indonesia accelerated from 4.3% in 2004 to 6.1% in 2008,
tes-tifying to the long-awaited recovery from the Asian inancial crisis.6 FDI at last
started to increase, after a highly erratic performance during the early years of
the 21st century (igure 3). Reporting on FDI in Indonesia remained marred by the methodological dificulties of reconciling the readily available BKPM data on approvals with scarce data on realised investment from Bank Indonesia (Lindblad
and Thee 2007, 20–23).
The impact on the Indonesian economy of the 2008 global inancial crisis was
relatively mild compared with the effects in Western countries. Indonesian exports
did decline, but so did imports, and the Yudhoyono government responded with iscal expansion and prudent monetary policies (Van Zanden and Marks 2012, 207;
Resosudarmo and Yusuf 2009). GDP growth dropped to 4.5%, which, of course, was a far cry from the extreme fall in income experienced in 1998. Recovery was
swift, as elsewhere in Southeast Asia, and GDP growth was back to nearly 7.0% by 2010. Indonesia’s greater resilience to the 2008 crisis compared with that of 1997–98, can be ascribed to less exposure to luctuations in short-term movements in the international capital market and improvements in the supervision of the inancial sector at home. Lessons had been learnt from the extreme predicaments
of the late 1990s (Hill 2013, 477–78).
The situation for FDI in Indonesia was radically different at the time of the
global inancial crisis compared with the Asian inancial crisis. In 1997, the crisis
6. Data on post-2000 GDP growth are drawn from the websites of the Asian Development Bank (http://www.adb.org) and Badan Pusat Statistik, Indonesia’s central statistics agen -cy (http://www.bps.go.id).
FIGURE 3 Approved Foreign Direct Investment in Indonesia, 1998–2008 ($ billion, current prices)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 0
2 4 6 8 10 12
Source: CEIC Indonesia Premium Database. Note: Excludes oil and gas.
had struck at the peak of a boom in incoming foreign investment; in 2008 and subsequent years, FDI in Indonesia was still struggling to recover. Conditions for
a recovery were far from ideal. Hesitation among foreign investors was
aggra-vated by the stubbornly bad reputation of the FDI climate in Indonesia. Within
Southeast Asia, Indonesia had a hard time competing with Thailand and Vietnam.
Japanese investors were particularly apprehensive, assigning a declining rank of
preference to Indonesia. Some considered scaling down existing activities. The
obvious conclusion was that ‘much remains to be done to improve the climate for doing business’ (Thee and Negara 2010, 279).
Signs of improvement were clearly visible from 2009 onwards (igure 4). Reliance on BKPM approvals ceased, since data were now readily available on realised FDI. The improvement was particularly strong in branches of manu
-facturing that used sophisticated technology—notably chemicals, metals, and machinery. Singapore was the single largest supplier of realised FDI in 2012 but
shared the leading position with Japan in 2013.
There was also a revival of the academic discourse on FDI in Indonesia. In
a joint article, Robert Lipsey and Frederik Sjöholm noted that the ratio of FDI
to GDP was lower in Indonesia than almost anywhere in Southeast Asia. The
chief explanation was found in competition between host countries. Lipsey and Sjöholm argued that American irms chose to locate their labour-intensive pro
-duction in Indonesia only when alternatives were not available elsewhere. They
concluded that environmental conditions such as infrastructure, education, and
corruption become all-important as soon as investors can pick a host country at will (Lipsey and Sjöholm 2011). It was the responsibility of Indonesian policymak
-ers to provide better conditions.
A similarly critical undertone hid behind an appraisal by Magiera (2011) of the oft-revised negative investment list for FDI in Indonesia. Magiera’s selection of
FIGURE 4 Realised Foreign Direct Investment in Indonesia, 2008–14 ($ billion, current prices)
2008 2009 2010 2011 2012 2013 2014 0
5 10 15 20 25 30
Sources: Data from BPS (2014) and Jakarta Globe, 28 Jan. 2015.
case studies from the services sector was aligned with contemporary efforts by the ASEAN community to remove obstacles to trade investment between member
states. Designated services included express delivery, telecommunications, and hospital treatment. He came to a harsh judgement: even if the legislators had had
good intentions, these were obstructed by regulations in the implementation stage. Eventually, the outlook for FDI in Indonesia appeared less bleak than it had
for a long time. International ratings agencies upgraded Indonesia to the
invest-ment grade that it had lost in 1997. Recovery was attributed to the ‘buoyancy’ of the economy at large and the considerable potential of the domestic market rather than to any substantial improvement in conditions for FDI (Burke and Resosudarmo 2012, 307–9). Indonesia had moved forward but was still suffering from stiff competition from neighbouring host countries. Attention increasingly focused on bottlenecks in physical infrastructure. Such was the situation when Joko Widodo was inaugurated as president of Indonesia in October 2014.
The academic discourse on FDI in Indonesia has recently been enriched by fur
-ther sophisticated statistical analysis on the relation between FDI, foreign trade, and energy use; saving scarce sources of energy recently became a national prior -ity. Rahmaddi and Ichihashi used cumulative data on realised investment during
1990–2008, a total of $109 billion, to demonstrate that more exports were gener
-ated in capital- and technology-intensive manufacturing than in labour-intensive branches or outside manufacturing altogether. They concluded that Indonesia has exhausted its one-time comparative advantage attributable to low wages.
They argued that lower tariffs on imports of inputs into high-tech manufactur-ing would have a more than proportional positive impact on exports (Rahmaddi
and Ichihashi 2013). Ramstetter and Narjoko called attention to the hitherto rarely
explored theme of FDI and energy use in production. They compared the
indus-trial censuses in 1996 and 2006 at the level of individual plants, observing that the use of energy remained by and large the same. They found only a weak cor
-relation between the degree of foreign equity ownership and energy intensity in production, and stressed that multilateral irms consumed less energy at higher levels of productivity. There was therefore no reason to think that FDI would undermine the national priority of saving energy (Ramstetter and Narjoko 2014).
Focusing in particular on automotive manufacturing in Indonesia, Natsuda,
Otsuka, and Thoburn (2015) stressed the prominence of FDI in this industry, even claiming that the embarrassing failure of the national car program in the mid-1990s may have turned out to be a blessing in disguise by paving the way for more commitment of foreign capital. Drawing on a historical sketch since the late
colonial period, these authors offered a relatively optimistic assessment of the future expansion of FDI-controlled car production in Indonesia.
After the immediate urgencies of reformasi had been addressed and political
stability restored, economic growth in Indonesia resumed, albeit at a lower rate than in the heyday of the Soeharto regime. Yet, for several years, the rehabilita -tion failed to apply to FDI. The struggle to recover the momentum lost during
the Asian inancial crisis lasted far longer than expected. This was unequivocally
mirrored in the literature. Between 1998 and April 2015, BIES published 21 sur
-veys with separate sections on FDI, almost all discussing bottlenecks in the FDI climate and urging for improvement. Meanwhile, the academic discourse devel
-oped in a somewhat haphazard manner, with periods of silence preceding a lurry
of publications towards the end of the period. Five of the eight academic articles on FDI published between 1998 and April 2015 appeared in 2011 or later. The most proliic author, Ramstetter, consistently linked FDI to other economic vari
-ables, in the process being followed by one (Rahmaddi and Ichihashi 2013) on the effects of FDI on foreign trade. Three of the eight articles—by Lipsey and Sjöholm (2011), Magiera (2011), and Natsuda, Otsuka, and Thoburn (2015)—elaborated on Indonesia’s FDI in an increasingly competitive regional setting, whereas one, my own contribution (Lindblad 2000), focused on a single investor identity. The belated revival of the academic discourse on FDI in Indonesia has brought with it
a welcome variety of topics and methods.
CONCLUSION
FDI is viewed far more positively now than it was 50 years ago, worldwide as
well as in Indonesia. Its potential contribution to rapid growth and economic restructuring is widely acknowledged in the wider scholarly literature on FDI, as well as among economic policymakers. The overall frame of reference for FDI has changed dramatically, which makes it all the more rewarding to review the
reporting on FDI and the FDI climate in Indonesia over a long period. The
con-tinuous reporting by BIES since the mid-1960s highlights the relation between the
FDI climate and actual FDI, as well as between FDI and economic growth. While admitting the political necessity of exerting some measure of control over inlows
of foreign capital, the reporting in BIES consistently underscores the economic necessity of reducing the domestic savings gap and gaining access to advanced technology. The attitude of BIES towards FDI in Indonesia has remained unequiv-ocally positive over the past 50 years.
A successive improvement of conditions for FDI in East and Southeast Asia has
more often than not been accompanied by a signiicant increase in the volume of incoming FDI. This applies to neighbouring countries in Southeast Asia (such as Thailand, Malaysia, and Singapore) from the 1970s and obviously to China from the 1980s. The relation between rising FDI and rapid economic growth has by and large been equally straightforward. This has not quite been the case in Indonesia, as has been demonstrated by the reporting in BIES. The FDI climate
in Indonesia has undergone radical changes—notably in 1974, when it became more restrictive, and again in 1994, when it became less restrictive. FDI inlows
continued to increase throughout the intervening 20 years, reaching a spectacular
peak in response to liberalisation in the mid-1990s. The Asian inancial crisis seri
-ously eroded conidence among foreign investors, and it was several years into the 21st century before any appreciable recovery of incoming FDI took place. In other words, rising FDI in Indonesia has, since the mid-1960s, been associated with both deteriorating and improving conditions for such investment, whereas policy measures to attract foreign capital at other times proved to be of no avail.
The relation between FDI and economic growth has also been less straightforward in Indonesia than in neighbouring countries. Rapid economic growth in the 1970s and 1980s was, in the irst place, fuelled not by mushrooming FDI inlows but by the oil boom and an accelerating, belated industrialisation. A strong positive link between FDI and economic growth materialised only in the mid-1990s and was not sustained. The Asian inancial crisis brought a dramatic
halt to fresh FDI and economic growth. Signiicantly, the former recovered far
more slowly than the latter.
The main reason that Indonesia has in the long run deviated from the
conven-tional pattern of rapid economic growth fuelled by FDI may be found in the con -tinuous and sustained overriding importance of natural resources in attracting foreign investment. Investment in sectors such as mining and oil and gas
exploita-tion is inevitably accompanied by a rigidity in terms of locaexploita-tional choice for the
investor. Such a rigidity implies a measure of insensitivity with respect to changes
in the investment climate; investment will be undertaken anyway as long as condi -tions do not deteriorate too far. That is one side of the coin. At the same time, an
excessive dependence on exports utilising natural resources is bound to have an
effect on the real exchange rate. The very volatility of the Indonesian currency may act as a deterrent for foreign investors targeting manufacturing production for
pur-poses of exports. Foreign investors seeking to beneit from the rapidly expanding domestic market for consumer goods in Indonesia are less likely to be bothered by a volative exchange rate if they operate in a segment of the market where exposure
to competition from imports is limited. In short, a juxtaposition of exchange-rate
theory and strategies pursued by foreign investors may shed light on the intricate relation between FDI and economic growth in Indonesia during the past 50 years.
The continuous reporting in BIES on FDI in Indonesia has exposed the unique
or peculiar role played by FDI in Indonesia’s economic growth over the past 50 years. This applies equally to the FDI climate compared with actual FDI inlows and the relation between FDI and economic growth. In addition, the long-term
perspective of half a century in a specialised academic journal such as BIES has unveiled fundamental changes in targets and investor identities: more manufac-turing rather than exploitation of natural resources, more Asian than Western. Such changes may not necessarily deviate much from similar shifts of emphasis in FDI patterns elsewhere in Southeast and East Asia. However, they do generate
a number of new and important issues concerning the ultimate impact of FDI on
Indonesian development.
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