fbpx Foreign direct investment is not coming to Indonesia. Really? - Edimon Ginting | Asian Development Bank

Foreign direct investment is not coming to Indonesia. Really? - Edimon Ginting

Op-Ed / Opinion | 18 September 2019

The economic topic receiving most attention in the last few days is certainly that of foreign direct investment, or FDI, thanks to the World Bank, which brought this issue to Indonesia’s President Joko Widodo’s attention. One of the key messages was that, FDI is simply not coming to Indonesia. The evidence cited was that 33 investors have exited People’s Republic of China (PRC) since June due to the escalating trade war.  Most shifted their investment to Viet Nam and, crucially, none came to Indonesia. Since attracting FDI is one of President Jokowi’s priorities, his reaction to this was swift. All ministries involved in facilitating FDI had to address the problem fast. Intrigued by the news coverage, I did some online research on the issue. To my surprise, it barely hit the headlines in PRC and Viet Nam but there was a huge amount of coverage on President Jokowi’s reaction. This prompted me to dig deeper to get to the heart of the matter.

Total FDI to Indonesia is still rising

Firstly, this is a key fact: total FDI in Indonesia is still rising. After an absence from the FDI destination list for a few years after the 1997–1998 Asian Financial Crisis, Indonesia was back in the top 10 destinations following the 2007–2008 Global Financial Crisis (Table 1), thanks to reforms during the government of former President Yudhoyono as well as improved domestic economic growth prospects.

Table 1: Top Recipients of FDI in Asia (US$ million)

2003-2007 Annual Average

 

2008-2016 Annual Average

People's Republic of China

        68,555

 

People's Republic of China

       120,538

Hong Kong, China

        36,251

 

Hong Kong, China

         92,247

Singapore

        27,303

 

Singapore

         50,146

Australia

        17,090

 

Australia

         47,019

India

        12,680

 

India

         35,763

Republic of Korea

        10,387

 

Indonesia

         14,171

Thailand

          7,286

 

Kazakhstan

         10,867

Japan

          6,592

 

Republic of Korea

           9,692

Malaysia

          5,164

 

Viet Nam

           9,285

Kazakhstan

          5,124

 

Malaysia

           9,281

2017

 

2018

People's Republic of China

      134,063

 

People's Republic of China

139,043

Hong Kong, China

      110,685

 

Hong Kong, China

115,662

Singapore

        75,723

 

Singapore

77,646

Australia

        42,294

 

Australia

60,438

India

        39,904

 

India

42,286

Indonesia

        20,579

 

Indonesia

21,980

Republic of Korea

        17,913

 

Viet Nam

15,500

Viet Nam

        14,100

 

Republic of Korea

14,479

Japan

        10,430

 

Thailand

10,493

Malaysia

          9,399

 

Japan

9,858

Source: United Nations Conference on Trade and Development. World Investment Report 2019 Statistical Annex Tables. Accessed September 2019.

President Jokowi continued the FDI-friendly policy when he took office in 2014 and FDI flows to Indonesia continued to increase. In nominal terms, FDI flows to Indonesia in 2018 increased by $7.8 billion compared to the annual average flows in 2008–2016, higher than the increase in India and Viet Nam over the same period at $6.5 billion and $6.2 billion, respectively. So why the perception that FDI is not coming to Indonesia?

FDI to manufacturing is declining

Most FDIs to Indonesia in the last few years have been channeled to non-manufacturing sectors. The top five destination of FDIs in Indonesia have been renewable energy, mining, chemical, real estate, and metals. After that, sectors of choice were services such as hotels, information technology, and finance. Only at number 10 does a manufacturing sector—the automotive industry—figure. Broadly speaking, FDI to manufacturing in Indonesia has been shrinking in the last few years, whereas foreign investment in Viet Nam’s manufacturing sector has been surging.  Somehow, foreign investors see Indonesia’s strength lying outside manufacturing. When they come here, they gravitate to natural resources, tourism, and other booming service sectors. And those investors who do look at manufacturing, such as automotives, do so to tap the domestic market.


Source: Haver and Indonesia’s Coordinating Investment Bureau (BKPM)

Reflection

It is these key facts that underlie the reasons why those 33 investors opted to overlook Indonesia. Trade tensions, by their very nature, affect export-oriented manufacturing sectors the most. So, when investors need to find a new home, naturally they go to places that are also export-oriented.  Viet Nam is ahead of most other Asian countries in this respect since it has always espoused an export-oriented growth strategy. A progressive FDI policy supports that. The country also has a good education system considering its level of development capable of producing an ample quantity of skilled labor that can participate in a wide range of manufacturing. Geography helps too. Viet Nam exports more to PRC than any of its competitors in part because it is located right next door.

The World Bank advised the Indonesian government to address FDI policy credibility, certainty, and compliance with President Jokowi’s policy.  This is something the government has been working on, which is why FDI has been increasing in the past few years. But to match Viet Nam in attracting FDI to manufacturing, the government will need much more than that. The long-term challenges in the inflexible labor market needs to be addressed. Schools and colleges need to produce graduates with better skills, which can nicely match with industry’s needs. Additionally, Indonesia’s export-oriented sectors not only need an FDI-friendly policy, but it also needs progressive policies to attract manufacturing investors. PRC and now Viet Nam are examples of countries that have benefited from progressive FDI policies. Yes, there are costs associated with progressive FDI policy. One of them is the need to accommodate a small number of foreign workers. But the benefits are much larger, including increasing productive employment, inclusion into the global value chain, and, more importantly, opening wider opportunities for learning and chances to be part of the global technological innovation. Finally, to ensure investors come to Indonesia and stay here, the government should make sure all parts of the FDI engine are working smoothly and in sync under a strong and effective coordination framework.