Colin Barry

Indonesia / Attracting Foreign Investment (MOC, Tuesday, Week 8)


Not all FDI is created equal.
Firms seeking low wages are probably not going to make the sorts of investments that will result in dramatic productivity gains.

What does FDI do for a country?
-- Access to additional capital (from outside country) -> helps Balance of Payments
-- Improve business environment (maybe)
-- Create businesses, jobs, wealth, exports (depends on context)
-- Technology transfer

What's attractive about Indonesia (in general)?
-- Buy assets on the cheap, low wages
-- Huge population --- 235M people = big domestic market
-- Natural resources: gas, coal, oil
-- Bali!

So why no FDI under Suharto/Sukarno?
-- Corruption, lack of transparency
-- Dislike of foreigners (legacy of Dutch rule) => Protection of local firms
-- Volatile
-- Lots of ethnicities, lots of islands, lots of languages => hard to build national unity

"Suharto was a real capitalist...he owned 471 companies...17% of the market cap!" -- Hiro Takeuchi

Why no FDI under Reformasi?
-- Decentralization --- making an investment is complex/takes forever to approve
-- Still missing infrastructure
-- Terrorism (Bali bombings in '02, '03, and '05)
Bottom line: lingering macro and microeconomic problems.

Foreign direct investment is NOT the whole answer to national economic development. FDI policy cannot be isolated from larger national strategic decision-making.