Understanding foreign direct investment in Indonesia

• Pages: 28-50
• Date: 21 March 2016
• Published date: 21 March 2016
• DOI: https://doi.org/10.1108/JITLP-01-2016-0003
• Author: Sasidaran Gopalan,Rabin Hattari,Ramkishen S. Rajan
• Subject Matter: Strategy,International business,International business law,Economics,International economics,International trade

Understanding foreign direct

investment in Indonesia

Sasidaran Gopalan

Lee Kuan Yew School of Public Policy, National University of Singapore,

Singapore, Singapore

Rabin Hattari

Asian Development Bank, Jakarta, Indonesia, and

Ramkishen S. Rajan

School of Policy, Government and International Affairs (SPGIA),

George Mason University, Arlington, Virginia, USA and Lee Kwan Yew School

of Public Policy, National University of Singapore, Singapore

Abstract

Purpose – This paper aims to examine the dynamics of foreign direct investment (FDI) inows into

Indonesia. It is interested specically in analysing and deliberating on two important policy questions:

First, are all kinds of FDI useful from a policy perspective and what does the existing data on FDI reveal

about the type of FDI inows into Indonesia? Second, does the existing data help understand the extent

of de facto bilateral linkages between Indonesia and other countries?

Design/methodology/approach – The paper offers an in-depth case study of Indonesia using

extensive exploratory data analysis on FDI inows into Indonesia. As discussed in the paper, the data

investigation uses and reconciles available FDI data both from national and international sources to

understand the usefulness of such data for policy analysis.

Findings – A data investigation of the trends in different types of FDI ows reveals a discernible

downward trend in the ratio of mergers and acquisitions (M&A)–FDI ratio over the years. The paper

argues that from a sequencing perspective, while a medium-to-long-term framework encouraging both

domestic and foreign Greeneld investments could help Indonesia regain its growth luster, in the near

term much more attention needs to be paid to FDI inows in the form of M&As. Further, reconciling FDI

and M&A data might help identify the original sources of FDI ows because existing data are based on

ow of funds rather than ultimate ownership.

Practical implications – Since the Asian nancial crisis, Indonesia has successfully embarked on a

phase of economic and political transition post-Suharto, with the cornerstones of such a strategy being

a process of greater democratisation and decentralisation. However, there have been growing concerns

of economic growth stagnation in recent years. One of the policies to revive the economy’s lustre

adopted by the government has been to attract greater FDI inows. In this light, this paper examines the

dynamics of FDI into Indonesia and deliberates on what kinds of FDI policymakers should focus on

attracting to restore the country’s growth lustre.

Originality/value – The question of whether a policy to attract FDI should be careful in

distinguishing the kind of FDI it wants to attract has not been sufciently addressed in the related

literature. This paper provides a framework to understand the different macroeconomic policy

implications of types of FDI and provides extensive data analysis to not only understand the types of

FDI but also sources of bilateral FDI inows to Indonesia by reconciling FDI and M&A data.

Keywords Indonesia, Greeneld, Mergers and acquisitions, FDI inows

Paper type Research paper

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1477-0024.htm

JITLP

15,1

28

Received 12 January 2016

Accepted 22 January 2016

Journalof International Trade Law

andPolicy

Vol.15 No. 1, 2016

pp.28-50

©Emerald Group Publishing Limited

1477-0024

DOI 10.1108/JITLP-01-2016-0003

1. Introduction

Indonesia has been hailed as a signicant regional power that brings with it years of

experience as a “regional architect” reected in the frontline role it has played in the

nurturing of a variety of regional co-operation initiatives in the Association of South

East Asian Nations (ASEAN) bloc (Shekhar, 2015) – the most recent one being the

spearheading of the ASEAN Economic Community signed in November 2015. Being not

only the fourth largest country in the world with more than 17,000 islands but also the

largest country in the ASEAN bloc comprising about 40 per cent of ASEAN’s total

population, Indonesia has not only been recognized as a “model democracy” for the

world but also a natural regional leader by default whose political fortunes will continue

to wield a decisive inuence in shaping the regional architecture in ASEAN (Poole, 2015;

Brooks, 2011).

Indonesia embarked on a phase of economic and political transition post-Suharto,

with the cornerstones of such a strategy being a process of greater democratisation and

decentralisation[1]. The recovery from the Asian nancial crisis (AFC) along with a

period of greater stability and selected economic reforms allowed Indonesia to record an

average annual growth of about 5.5 per cent between 2002 and 2008 (Figure 1).

Indonesia’s growth has been consistently above the world average growth rate

though it lagged the corresponding growth rates in the other two Asian giants, China (11

per cent) and India (7.5 per cent). However, one of the distinguishing features of

Indonesia’s growth story has been its ability to maintain consistent, stable and robust

economic growth since 2002 even during the global nancial crisis (GFC) of 2008-2009.

This period of stability, coupled with the victory of President Joko Widodo in the 2014

elections which consolidated the country’s democracy, reignited world interest in

Indonesia.

Amid the various positives, there have been serious concerns expressed about the

country’s gradually declining growth rates since 2012 and its growth trajectories

moving forward. There has been increasing pressure on the Indonesian government,

and especially on its newly elected President Jokowi to revive a faltering economy. A

signicant difference in the growth rates between Indonesia and the other Asian giants

like China and India is the stagnation in investment rates in Indonesia as compared to

China and India until the GFC. Though average investment rates in Indonesia rose

–2

0

–4

2

4

6

8

10

12

14

16

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

World (RHS) China India Indonesia

Source: World Development Indicators, World Bank

Figure 1.

Real GDP growth

rates (per cent)

29

Foreign direct

investment