Indonesia's Investment Negative List: an evaluation for selected services sectors

In March 2007, Indonesia's parliament approved a landmark new law on investment. Law 25/2007 replaces separate laws on foreign and domestic investment from 1967 and 1968, and provides a single legislative framework for domestic and foreign investment. The law states that all business sectors are open to investment, including foreign investment, unless specified in a presidential regulation containing Indonesia's Investment Negative List (DNI). This paper summarises the results of four sector studies undertaken to review implementation of the investment law. The purpose of the DNI is to provide certainty to investors by documenting restrictions in a single list, thereby eliminating the power of ministries to set their own rules. This paper finds that, in practice, considerable uncertainty remains, arising particularly from the law's implementing regulations. Furthermore, new ministerial decrees and laws appear to bypass the list and may reflect a trend towards greater restriction of foreign investment in Indonesia.     

An evaluation of the saving,investment, and current account balances of five ASEAN economies

This paper evaluates the saving, investment and current account balances (CABs) of five ASEAN economies: Thailand, Singapore, Indonesia, Malaysia and the Philippines over the period 1976 to 1997. The method is to apply a calibrated representative agent model of optimal saving and investment to each of these economies. The model generates optimal saving, investment and CABs for each year from 1976 to 1997 and these are compared with the actual balances. The results suggest that three of the ASEAN countries—Malaysia, the Philippines and Thailand—had below-optimal current account ratios (to GDP) on average over the period 1976 to 1997, for most reasonable values of parameters. This was the result of over-investment for Malaysia and Thailand and under-saving by the Philippines. For Singapore and, to a lesser extent Indonesia, the reverse applies—their current account ratios were above-optimal on average due to over-saving.     

The Surge of Asian NIC Investment into Indonesia 1

Since 1987 a dramatic increase in both domestic and foreign investment in Indonesia, most of it in export-oriented activities, has occurred in response to improvements in a previously unattractive investment climate and in the country's trade regime. Most striking has been the rise in investment by Asia's four ‘newly-industrialising countries’ (NICs): Korea, Taiwan, Hong Kong and Singapore. This paper analyses the factors contributing to this increase and the investment patterns of the four countries. It then focuses on investment in the manufacturing sector, where most of the NIC investments have taken place. The relative importance of each country as a source of investment in individual sectors and industries is examined. The paper concludes that this recent investment surge may yield net social benefits for Indonesia, provided the country continues to adhere to sound macroeconomic and export-promoting policies.     

STRUCTURAL CHANGES IN INDONESIAN INDUSTRY AND TRADE: AN INPUT‐OUTPUT ANALYSIS

This study evaluates the current achievement of industrialization in Indonesia and clarifies what the major challenges are for sustaining industrialization. This is done by examining structural changes in the economy from the period before to the period after economic crisis using the method of input‐output (I‐O) analysis. After tracing the history of economic development in Indonesia, changes in industry and trade between 1995 and 2000 are viewed using skyline chart analysis, industrial linkage analysis, and growth‐factor decomposition analysis. Results indicate that from 1995 to 2000, the manufacturing industry expanded the share of production, strengthened export orientation, and lowered import dependency. However, these phenomena appear to have resulted primarily from slumps in growth factors other than export demand as well as sharp declines in the value of the rupiah. This study shows that the current decrease of investment is a bottleneck in industrialization and indicates an urgent need for Indonesia to improve the investment environment, particularly for foreign investors.     

Business responses to crisis in Indonesia: the 1930s and the 1990s

This article looks at the responses of foreign business firms to crisis in a comparative historical perspective. The focus is on Indonesia in the 1930s and the late 1990s. The main approach is one of case studies in order to gain an insight into strategies of adjustment to deteriorating business conditions. For the late 1990s, such information is supplemented by macroeconomic evidence covering a wider range of firms. The article reaffirms a basic resilience of foreign direct investment in times of economic crisis even when there is an overall economic decline, as in Indonesia in the 1990s. The capacity of foreign firms in Indonesia to adjust successfully was considerable both in the 1930s and the late 1990s. Yet, prospects for a swift recovery are far better in the latter case than in the former period, reflecting the different nature of the two crises.     

FOREIGN DIRECT INVESTMENT IN INDONESIA: FIFTY YEARS OF DISCOURSE

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 inflows and the need to augment domestic savings and facilitate technology transfers 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 natural resources in determining Indonesia's attractiveness as a host country of FDI.     

FDI commitments increase when uncertainty is resolved: Evidence from Asia

How do foreign investors deviate from plans in response to new information? Prior literature shows that how utilized foreign direct investment (FDI) is affected by uncertainty depends on the type of FDI. We examine how utilized FDI differs from planned investments by studying the commitment ratio, defined as the ratio of the two FDI flows, in the context of China, Indonesia, the Philippines and Thailand over 1996–2013. First, we find that the commitment ratio exceeds 1 in China and Indonesia but is lower than 1 in the Philippines and Thailand. Second, we find a higher commitment ratio, which means investments are likely to be a larger fraction of what was proposed, when economic uncertainty regarding the destination country is reduced after a project is proposed and the destination environment is politically stable and financially open.     

Hypergrowth in an East Asian NIC: Public policy and capital accumulation in Singapore

Singapore has produced the world's highest investment ratios, known to account for growth more rapid than in any other less-developed country over the past three decades, but such high investment needs explanation. We trace Singapore's public policy of increasing tax concessions and infrastructural spending—in effect subsidies to private firms—and use an open-economy, neoclassical model to show how, by attracting “footloose” foreign capital and raising investment levels, these policy measures can drive growth. The consequent transformation of living standards in Singapore suggests, in accordance with theory but contrary to most practice, that for some less-developed countries effectively zero tax on foreign direct investment may be a beneficial strategy. Yet for both Singapore and other would-be late industrializers, major issues of development strategy arise from the kind of input-driven growth analyzed in this article.     

Trade effects of foreign direct investment: Evidence for Taiwan with four ASEAN countries

Trade Effects of Foreign Direct Investment: Evidence for Taiwan with Four ASEAN Countries. —This paper examines the trade effects of foreign direct investment (FDI) between Taiwan and each of the following four ASEAN countries: Indonesia, Malaysia, the Philippines, and Thailand. Regression results show that Taiwan's outward FDI has a significant positive effect on exports to and imports from the host country, whereas no such effects were consistently found for inward FDI from the same country.     

Investment penetration in manufacturing and extraction and external public debt in Third World states

This research examines the contention that foreign investment is positively related to external public debt accumulation by Third World states. Three hypotheses are examined: (1) that flows of foreign investment are negatively related to increased debt over the short-run; (2) that stocks of foreign investments are positively related over the long-run and (3) that the effects of foreign investment should differ according to their sectoral location, with higher investments in manufacturing producing greater borrowing, and investments in extraction being unrelated to debt accumulation. The results show that stocks of investments in manufacturing are strongly related to borrowing only among American states, with the effects being immediate, and not long-term. Only African states were affected by flows, with these effects being long-term and positive. Extraction investments were not related to debt accumulation. These findings indicate that the mechanism by which foreign investments affect debt accumulation varies from region to region. The repatriation of profits and local borrowing by foreigners appears to have the greatest impact among American states, while attempts to maintain foreign-induced growth is the key effect in Africa.     

论东亚各国资本移动自由化的影响——资本移动自由化的文献综述

亚洲各国的资本移动自由化开始于20世纪80年代后期至90年代之间。历经90年代后期的金融危机,亚洲各国的资本移动情况各不相同。以韩国为例,亚洲危机之后,外资流入股市的比例激增;另一方面,流入印尼和菲律宾的外资则多为外债的借入,投入股市及直接投资的比例几无成长。在中国,以其独特的外资管制政策抑制投入股市的总额之外,90年代后期起,更快速的开放国外直接投资的资本进入。文章拟就有关国际资本移动自由化既存的研究作简单回顾,同时考察亚洲各国对外资管制多样化的各种重要论述。     

Effects of public investment on sectoral private investment: A factor augmented VAR approach

Public investment decreases aggregate private investment in both neoclassical and Keynesian models. There are no findings, however, on how public investment affects private investment on a disaggregated basis, such as sectoral private investment. More specifically, previous research has neglected the distinctions of sectoral investment behavior in response to public investment and the possibility of crowd-in effects in some industries, such as industries blessed with public demand. Meanwhile, public investment decreases sectoral private investment not only by keeping rental cost high, but also by differences in the resource misallocation effect of public investment itself; one sector receives a positive wealth effect while another suffers the opposite. In this paper we use a factor-augmented VAR (FAVAR), a model capable of analyzing large-scale VAR models, to investigate the extent to which public investment is crowded out or crowded in in different categories of industrial investment. Our results demonstrate that public investment confers different effects, both quantitative and qualitative, in individual sectors. This implies that public investment reaps different benefits in different sectors and that it can bring the worse effect of resource misallocation on some sectors.     

Dawn of Industrialisation? The Indonesian Automotive Industry

This article traces the development of industrial policy towards the Indonesian motor industry within the automotive global value chain. Showing the current dominance of Japanese motor assemblers in Indonesia, it notes the rather undeveloped nature of the locally owned supporting industry, particularly compared with that of neighbouring Thailand. Most investment in auto-parts production has been by foreigners. Nevertheless, Indonesia's rapid domestic-market growth has allowed it to attract foreign automotive investment without having to offer excessively generous incentives. While the continued entry of foreign suppliers of auto parts into Indonesia offers opportunities for local suppliers to upgrade their productive capabilities, it also limits their chances of becoming first-tier suppliers themselves. Japanese automotive investors are optimistic about Indonesia's export potential, more so than Malaysia's.     

Aid for Trade in Developing Countries: Complex Linkages for Real Effectiveness*

Abstract: Aid for trade is intended to support the integration of developing countries into the world trading system. Although this form of aid is being hailed as a promising new development tool, it lacks the strategic dimension that it needs if it is to be truly effective and fulfill donors' policy commitments. From a theoretical perspective, this paper presents the various aid‐for‐trade categories and analyzes the linkages between foreign direct investment, aid for trade and development. It also presents a typology of trade‐related needs for a panel of countries, to serve as a guide for donors in formulating their aid supply strategies. This typology reveals a number of disparities between countries and regions, as well as a low level of regional integration. Trade‐related needs are particularly significant in West Africa and East Africa, and substantial in the infrastructure sector. This paper also stresses the importance of refining the formulation of actual demand by beneficiaries, structuring the aid supply in accordance with donors' specific areas of expertise and enhancing coordination among the various stakeholders, both public and private. Lastly, further trade liberalization will not by itself suffice to generate strong growth and improve the geographical and sectoral distribution of foreign direct investment. Factors such as political stability, the business climate, physical infrastructure, institutions and human capital also play a fundamental role. Of particular importance is the coherence of trade, sectoral, macroeconomic and tax policies, not only within each country and region but also between industrialized and developing countries.     

An empirical assessment of the relationship between competition policy and investment

The relationship between competition policy and investment is empirically examined. Empirical findings suggest that increasing market competition has a positive and robust impact on the share of total investment in GDP per capita. Developing countries enjoy benefits from competition legislation efficiency improvement, whereas the reduction of government anti-competitive price control intervention enhances the good investment environment in developed countries. In relation to the potential impacts of ASEAN competition policies, if ASEAN-4 countries (Indonesia, Malaysia, Philippines, and Thailand) become as competitive as Singapore, the investment shares are expected to increase to approximately 2–4%. Further, foreign direct investment inflows from the 30 OECD countries are expected to increase roughly 0.6–1.2%.     

Sectoral shifts and rates of profit

Summary In this paper the role of the capital market is analysed onthe base of a dynamic two-sector model of a closed economy. The way in which the allocation of investment is related to sectoral differences in the rate of profit and to diverging sectoral capital needs as well, turns out to be of great importance for the whole economy. Conclusions are drawn with regard to the long-run equality of profits after an initial disturbance. The role of the capital market is analysed too in connection with the functioning of sectoral labour markets. As far as unemployment and differing sectoral unemployment rates are concerned, the importance of the labour markets is obviously overwhelming. On that base it is possible to make some remarks on macroeconomic and sectoral investment policies with regard to employment.     

Foreign direct investment in crisis and recovery: lessons from the 1997–1998 Asian crisis

Is foreign direct investment more resilient at the onset of an economic crisis and the subsequent economic collapse in a host country compared to other forms of foreign capital inflows? Are affiliates of multinational enterprises in a crisis‐hit country better equipped to withstand a crisis and aid the recovery process by readjusting their investment, production and sales strategies compared to local firms? This article examines these issues in the context of the 1997–1998 economic crisis in Thailand, Malaysia, Indonesia, Korea and the Philippines. The findings suggest that foreign direct investment was a relatively stable source of foreign capital in the crisis context and that the affiliates of multinational enterprises were instrumental in ameliorating the severity of economic collapse and facilitating the recovery process.     

Japanese Investment in Indonesia: Problems and Prospects

The majority of Japanese investment in Indonesia is import-substitution orientated and located primarily in manufacturing. Declining Japanese investment in recent years is attributable partly to economic factors such as the drop in the price of oil and the higher cost of imports resulting from the devaluation of March 1983 But it is also due to Indonesian government policy. The author suggests a number of ways in which the Indonesian government could establish conditions more favourable to foreign investment.     

Competition among developing countries for foreign investment in the eighties — Whom did OECD investors prefer?

Conclusions Developing countries including the NIEs failed to maintain their shares in total foreign investment of all major OECD countries in the eighties. Shares were generally lower by 1988 than ten years ago. This negative trend can be observed for investment in manufacturing in particular, but also for non-manufacturing. Middle East and SubSaharan African countries came down to negligible shares, while shifts in shares mainly occurred between Latin America as a losing region and the Asian NIEs as winners. In absolute terms, however, Latin America remained a major host area. Within the regions, trends towards concentrating investment on few countries proliferated from Latin America where such concentration was traditionally high, to Asia with Singapore, Malaysia, Indonesia, and partly Hong Kong, in the lead. Against this background, home countries widely continued to maintain their traditionally preferred strongholds as did Japan in Southeast Asia, West Germany in Brazil and Argentina, the US in Latin America in general, and the UK in Commonwealth countries. Such patterns remained stable over time, but differed from each other.