9-708-420 REV: NOVEMBER 19, 2008 MICHAEL E. PORTER CHRISTIAN KETELS Indonesia: Attracting Foreign Investment “I have realized that nothing will happen in trade unless investment flows into the country. Investment is the key element in driving trade,”1 Dr. Mari E Pangestu, Indonesian Minister of Trade, 2005. After years of political turmoil and disappointing economic growth, the Indonesian government under President Dr. Susilo Bambang Yudhoyono was determined to make 2006 the beginning of a new chapter in the country’s economic development. In the three decades prior to 1996, Indonesia had achieved an average 7% annual GDP growth rate, while the population was growing at an average of close to 3% per year. Since the Asian financial crisis in 1997–1998, Indonesian growth rates had been significantly lower and it was not until 2005 that prosperity regained pre-crisis levels. Indonesia’s leaders recognized that foreign direct investment was vital to restoring growth. While there had been waves of foreign investment in the past, Indonesia’s stock and flow of foreign direct investment (FDI) was low compared to its peers, especially other Asian countries. The net flow of foreign investment had been negative since the mid-1990s. The President had declared that Indonesia was open for business but winning back foreign investors was proving to be a challenge. Country Background With a population of 235 million on 13,000 islands (about 6,000 of which were inhabited) spread over an area of 3,000 x 1,250 miles, the Republic of Indonesia was the world’s fourth most populous nation and its largest archipelago. Located north and south of the equator, the country was bounded by the Indian Ocean to the south and west, the Pacific Ocean to the east, and the South China Sea to the north (Exhibit 1). Indonesia’s closest neighbors were Malaysia, Singapore, Thailand, Papua New Guinea, the Philippines, and Australia. The five principal islands of the Indonesian archipelago were Sumatra; Java; Kalimantan (72% of which was part of Indonesia and known as Borneo); Sulawesi, formerly called Celebes; and Irian Jaya (West Irian) in the western portion of New Guinea. Indonesia's capital city, Jakarta, was located on the island of Java.2 About 40% of the population lived in urban areas, a number that had increased significantly over the last two decades. Levels of prosperity and population density were highly uneven across the different parts of Indonesia, with the three islands of Java, Bali, and Madura accounting for 61% of the population on 7% of the country’s surface area. ________________________________________________________________________________________________________________ Professor Michael E. Porter and Principal Associate Christian Ketels prepared this case with the assistance of David Lane, Senior Researcher in the HBS Global Research Group. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 708-420 Indonesia: Attracting Foreign Investment Indonesia’s population consisted of around 300 distinct native ethnicities speaking close to 750 different languages and dialects. Some, like the people of the Aceh province on the northern tip of Sumatra, had a strong regional identity. In 1999, 45% of the population was Javanese, 14% Sundanese, 7.5% Madurese, 7.5% coastal Malays, and 26% other.3 Another important group was the ethnic-Chinese, descendents of immigrants from China and other parts of South East Asia. Indonesia was predominantly Muslim (86%) and the country was by far the most populous Muslim country in the world. Christians (11%) were the second largest group based on religion. Indonesia was rich in natural resources and had a climate conducive to many forms of agriculture. The country’s large forests had been used for logging, and there were numerous mining activities to exploit deposits of coal, tin, bauxite, copper, nickel, and other minerals. Indonesia also had a significant oil and gas sector, and was one of the leading suppliers of natural rubber. Indonesia’s constitution, originally drawn up in 1945 but amended since 1999, provided for a presidential republic in which the president was the head of state, commander-in-chief of the armed forces, and leader of the executive branch of government. The president and the vice-president were directly elected for five years with a limit of two consecutive terms. The president selected a council of ministers to head the different government agencies. Three coordinating ministers for economics, social issues, and security each oversaw the work of several individual ministries. The People's Consultative Assembly (MPR) was the main legislative body. The MPR contained two lower houses: the People's Representative Council (DPR) with 550 members, and the Regional Representatives Council (DPD) with 168 members. The DPR, with members elected for five-year terms on a proportional representation basis from party lists, was the main legislative chamber. The DPD had representatives from the country’s thirty-three provinces and its role was restricted to legislation on regional issues. Indonesia was divided into 33 provinces and a special capital region. Each province had its own elected parliament and a governor selected by the central government based on parliamentary recommendation. Below the provinces, government functions were organized in sub-regions and villages. Most civil disputes appeared first before a State Court, from which appeals could be heard before the High Court. The Supreme Court heard final appeals or conducted a case review if there was new evidence. Indonesia also had special judicial branches such as a Commercial Court, a State Administrative Court, a Constitutional Court, and a Religious Court. Indonesia was an active member in Association of Southeast Asian Nations (ASEAN), the organization of South East Asian countries, and belonged to Asia Pacific Economic Cooperation (APEC), which covered the entire Pacific area. Relations with Australia, the other large nation in the wider region, had sometimes been tense but were improving.4 Indonesia's Economic History Present-day Indonesia was a collection of regions with long histories as highly developed Hindu and Buddhist civilizations. Around 1350, the Hindu leader Gajah Mada was the first to rule over large parts of modern day Indonesia in a period that was referred to as a "Golden Age." From the late twelfth century, Arab traders started to establish settlements, first in Aceh and then along the main trade routes through the archipelago. Over time, Islam became the dominant faith in the country. European traders started to appear in the early sixteenth century, attracted by island spices like cloves and nutmeg. Dutch traders gained a dominant position, creating the Dutch East India Company in 1602. In 1798, the Dutch East Indies became an official Dutch colony and companies 2 Indonesia: Attracting Foreign Investment 708-420 developed dominant positions in Indonesia, especially in the export of natural resources and the import of manufactured goods from industrialized countries. Sugar, coffee, and spices were the main export goods.5 In the early twentieth century, petroleum, rubber, copra, palm oil, and fibers joined the list of leading exports. The experience during the Dutch colonial period had left a legacy of distrust toward private businesses and foreign capital.6 During World War II, colonial rule came to an end as Japanese troops overran the Dutch East Indies in 1942. During the war, Sukarno, the popular leader of the Indonesian Nationalist Party, cooperated with the occupying Japanese with the intention of strengthening the independence movement. Two days after the Japanese surrender to Allied forces in 1945, Sukarno unilaterally declared independence and became the country’s first president. Over the next four years, a bitter armed conflict was fought as the Netherlands tried to win back its colony. In the face of international pressure, the Netherlands finally recognized Indonesian independence in 1949. The early years of independence: 1949 to 1965 The provisional constitution of August 17, 1950, provided for a unitary republic.7 Sukarno was elected president by parliament, but no term of office was stipulated by the constitution. In practice, President Sukarno played a dominant role with few checks and balances. His popularity led to powers beyond those prescribed by the constitution. Sukarno aimed to reduce the dominance of Dutch companies that controlled up to 25% of Indonesian GDP, and, to a lesser extent, the companies owned by ethnic Chinese. The FinancialEconomic Agreement (Finec) between Indonesia and the Netherlands provided guarantees for the ownership rights of the Dutch companies, but allowed nationalization under specific conditions. In 1951, the Indonesian government invoked these rules and took ownership of Java Bank, which became the Central Bank of Indonesia. Subsequently, other companies, including utilities and railways, were nationalized. The Indonesian government nationalized all remaining Dutch enterprises in early 1959. The government pursued policies to support indigenous businesses. In April 1950, the Benteng (Fortress) regulation gave indigenous businesses priority for import licenses. Success was limited, as the program mainly created a class of Indonesians that collected profits while the actual businesses were run by ethnic Chinese. The government then attempted to reduce the number of so-called Ali (Indonesian)-baba (Chinese) companies through more stringent controls. In the late 1950s, the government decreed that ownership of rice mills and rural trading businesses had to be transferred to indigenous Indonesians. These efforts did not succeed because of insufficient numbers of indigenous entrepreneurs. In 1955, Sukarno won Indonesia’s first general elections, although there was a surprisingly strong showing by the Indonesian Communist Party (PKI), which gained 16% of the vote. In 1957, Sukarno adopted a more authoritarian policy of "Guided Democracy." Sukarno suspended parliament in 1960 and began to rule by decree. He constituted a Provisional People's Congress which was to meet at least once every five years to oversee policy and elect the president. In 1963, the Congress elected Sukarno president for life. During this period, Sukarno introduced ‘Indonesian-style socialism’ in a “Guided Economy.” State-owned companies and trading houses were created which received preferential financing and monopoly rights for the import of essential commodities.8 Private companies, especially those owned by ethnic Chinese, were excluded from the most lucrative businesses. State-owned industries were set up in fertilizers, cement, paper, chemicals, spinning, and shipbuilding, using foreign loans. The 3 708-420 Indonesia: Attracting Foreign Investment law governing foreign investment was repealed in 1958, leading to deteriorating conditions for foreign investors. Sukarno’s policies let to massive budget deficits and soaring inflation, which exceeded 600% annually. The economy stagnated and was close to collapse by the mid-1960s amid social disorder. In 1960, Indonesia was among the poorest countries in the world.9 Most of the population lived in rural regions and agriculture accounted for more than 50% of GDP (Exhibit 2). The country had become, in the words of one observer, a basket case.10 The Suharto regime: 1965 to 1997 As public support for the government eroded, the military under General Suharto took power, claiming the need to avert a leftist take-over as the Cold War spread to Asia. About 750,000 alleged members of the PKI were killed as the army consolidated its power. In February 1968, Suharto replaced 123 members of the People's Consultative Assembly (Majelis Permusyawaratan Rakyat or MPR). Following his appointment for a five-year term as president in June, Suharto formed a new cabinet with himself as prime minister and defense minister. Suharto relied on the military to maintain security and political stability.11 There was strong central control, with a weak judiciary and a legislature with little power. The civil service dominated by technocrats vigorously pursued economic modernization. Power effectively rested with the civil service association Golkar, a group that included all civil servants and served as Suharto’s base of power. In July 1971, the first general elections since 1955 were held for portions of two reconstituted national bodies, a 460-seat house of representatives (Dewan Perwakilan Rakyat or DPR), and a 920seat MPR. In March 1973, the MPR elected President Suharto to a second five-year term; he was reelected to a third term in 1978, a fourth in 1983, a fifth in 1988, a sixth in 1993, and a seventh in 1998. Inheriting a bankrupt economy, Suharto’s top priority was a quick recovery. He moved to regain macroeconomic stability and managed to control inflation. Conditions imposed by the International Monetary Fund (IMF) and the World Bank played a role in setting macroeconomic policies. An influential group of economic advisors from the University of Indonesia, called the Berkeley Mafia,12 all recent graduates from Berkeley, also exercised an influential voice in favor of stable macroeconomic policies.13 The Foreign Investment Law of 1967 and the Domestic Investment Law of 1968 reopened the door to investment, making it easier to secure government approvals. The Inter-Governmental Group on Indonesia (IGGI), an international group of countries and international financial institutions lending to Indonesia, was established in 1967 by the Netherlands to coordinate multilateral aid to the country. The government also started to rehabilitate the dilapidated physical infrastructure and began investing in rural development. Initially, the Suharto government removed many of the barriers that had inhibited private enterprise, curtailing the activities of the state-owned companies and limiting preferential credits and import concessions. However, the oil booms of the 1970s led to a gradual reorientation of economic policy14 towards an ambitious state-led industrialization program of establishing large-scale, capital-intensive industries. These efforts gained a ‘high-tech’ bent when Dr. B.J. Habibie, a German-trained engineer that had been technical director at a major German aerospace company, was appointed Minister of State for Research and Technology. He initiated ventures in aircraft assembly, ship building, and eight other industries which he considered of ‘strategic importance’ and which were nurtured behind significant trade barriers.15 A group of large domestic business groups emerged under the patronage 4 Indonesia: Attracting Foreign Investment 708-420 of senior government and military officials that operated in sectors such as textiles, electronics, transport equipment, and pharmaceuticals. The government used some of its oil revenues to invest in health, education, infrastructure, and rural development. In the two decades after 1975, infant mortality fell by half and universal primary education was achieved. Problems remained, however, in access to basic health, sanitation, and education facilities, especially for women. In 1973, the government launched a small enterprises development program (KIK/KMKP) to provide subsidized loans to small and micro enterprises.16 The program’s default rate rose throughout the 1980s, driven by corruption, poor training and operational practices, and inadequate default penalties. In 1990, the program was terminated and a new program (KUK) was launched that required all banks to allocate at least 20% of their loan portfolio to small enterprises. Banks, especially the private ones, were reluctant and found ways around the regulation. Programs like the Small Industries Development Program (BIPIK), launched in 1980, provided technical assistance to small companies, but were rated poorly in terms of results. After riots erupted in 1974 protesting an ‘over-presence’ of foreign investment, especially Japanese companies that had increased their presence in areas such as electronics assembly, the government required foreign investors to take minority stakes in joint ventures with Indonesian partners. State banks were limited to lending to domestic companies. As in the 1950s, the main effect of these regulations was to create a class of indigenous (pribumi) Indonesians that fulfilled the domesticity requirement while operational control remained with foreign companies or ethnic Chinese. The second oil shock in 1978 with its rising oil prices further accelerated the introduction of local preference regulations. Restrictions on foreign investors were expanded and affirmative action for pribumis was increased, with specific industries and government procurement contracts under a certain threshold reserved for indigenously-owned companies. By 1980, some 70% of total capital investment was made by state-owned enterprises and the public sector. A devaluation of the rupiah that year was intended to make it easier for Indonesian companies to export. As the oil price tumbled in 1982, the government was forced to abandon its aggressive industrialization strategy. It acted quickly to reestablish macroeconomic stability, curtail spending and adopt market-based policy measures to restructure the economy. Deregulation of the banking sector in 1983 and 1988 increased competition and improved access to capital. In 1985, the operations of the hitherto corrupt and inefficient customs service were contracted out to a Swiss company.17 Economic growth was restored and the share of oil and gas exports to total exports declined from over 70% in 1983 to 40% in 1988. Imports grew strongly, however, and external debt rose to $57 billion; the debt service ratio (debt repayments relative to export revenues) reached 40% by 1989. The focus of economic policy shifted from import-substitution to export-promotion. In 1986, the government introduced different programs, including a ‘duty exemption and drawback scheme’, a bonded factory program, and export processing zones, that enabled exporting companies to import supplies at market prices without tariffs.18 Exports were dominated by foreign-owned companies, while the large Indonesian business groups remained largely domestic. Korean and Taiwanese companies became significant investors in Indonesia during this period, concentrated in laborintensive industries. There were successive rounds of trade reform in the late 1980s, and restrictions for both foreign and domestic investment were gradually relaxed between 1986 and 1994, especially for export- 5 708-420 Indonesia: Attracting Foreign Investment oriented investments19 In 1989, the Singaporean Deputy Prime Minister, Goh Chok Tong, launched the idea of a growth triangle between Singapore and neighboring regions of Malaysia and Indonesia. The Indonesian island of Batam, located 21 kilometers south of Singapore, started attracting laborintensive activities from Singapore. In the early 1990s, the government pressured large business groups to assist small companies with management, technology, and access to finance. State-owned enterprises were required to set aside 5% of their profits to help small companies upgrade. Follow-up studies on these policies found little sustained benefits for the companies involved. Throughout the first half of the 1990s, Indonesian growth was strong.20 Agriculture dropped from 51% of GDP in the 1960s to 17% in 1997 while the share of industry rose from 28% to 42%.21 Indonesia made it into the World Bank’s list of ‘high-performing Asian economies,’ alongside Japan, Malaysia, Thailand, Singapore, Taiwan, and South Korea. Exports contributed to growth, although several observers noted that exports were concentrated in a few industries in which Indonesia competed mainly on low wage costs. Indonesia’s foreign policy became more assertive. When the Dutch head of the IGGI, the group of sovereign lenders to Indonesia, criticized the killing of demonstrators in East Timor by the Indonesian military, Indonesia stopped cooperation with this group and terminated all Dutch government and NGO aid projects in the country. The IGGI was soon after revived without Dutch participation. The incidence was widely seen by the World Bank and others as a sign that openly criticizing Indonesian’s internal policies was problematic.22 Poverty rates continued to fall, from 40% of the population in the mid-1970s to 11% by 1996.23 Despite this progress, a large proportion of the population continued to live on incomes just above the poverty line, and inequalities between regions and ethnic groups persisted. The proportion of the population living on less than $1 a day ranged from 3.4% in Jakarta to 41.8% in Papua (Irian Jaya).24 In 1995, Indonesia became a member of the World Trade Organization (WTO) and made a commitment to reduce all tariffs to 40% or less within the next decade. The commitment would not apply to industries on an exclusion list, which included portions of the automotive and steel industry. It also had limited effect on import licenses that often were much more restrictive and marred by corruption. In 1992, Indonesia had initiated with its ASEAN members the ASEAN Free Trade Area, a program for phased regional tariff reductions through the year 2008, later moved forward to 2003.25 Countries kept higher tariffs for some sensitive industries, but in most industries, tariff rates came down significantly over the next several years. A number of trade reforms were also implemented during the mid-1990s. While there was a general trend towards liberalization, some economists complained that progress was slow and not comprehensive enough. There was also concern about exemptions that created advantageous market positions for companies related to Suharto’s family and his associates. Suharto’s second son, for example, was awarded the sole right to purchase the products of citrus farmers in West Kalimantan. Cars produced in a national car project under the leadership of Suharto’s youngest son were exempted from the 35% luxury tax. State banks accounted for 40% of all assets in 1997 and had a high share of problem loans. Private banks were under the control of a small number of family-owned conglomerates and aggressively extended loans to related companies, many of which did not meet prudent lending standards. Indonesia registered the highest concentration of corporate ownership in the region in the 1990s, with 10 families controlling more than half of the corporate sector. The Suharto family alone accounted for 17% of market capitalization, owning 417 companies.26 The military also controlled a 6 Indonesia: Attracting Foreign Investment 708-420 significant group of companies, especially in more rural regions, which were an important source of financing for military units and senior officers. During the Suharto era, the World Bank’s total lending to Indonesia had been $25 billion and World Bank staff viewed the country’s progress from 50% to 300% of India’s GDP per capita over the last three decades as a success story. The World Bank had avoided criticizing the corruption around Suharto too openly, but James Wolfensohn, president of the World Bank, visited Indonesia in 1996 and made a point of visiting with non-governmental organizations (NGOs) that were corruption critics.27 Yet the World Bank approved loans that same year that stabilized the state-owned banking system weakened by loans given to politically well-connected but financially questionable projects. The Asian Crisis: 1997-98 In July 1997, the Asian Financial Crisis began in Thailand, as the Central Bank of Thailand was forced by market pressures to float the Thai currency. Many countries in the region had experienced rapid growth and huge inflows of foreign capital in recent years, but by 1997, investors had become concerned about the ability of Asian countries and companies to service their foreign debt. Currency traders started to bet on devaluation. The Indonesian rupiah had been trading under a managed float, but the trading band was widened from 8% to 12% and the rupiah came under severe speculative attack. On August 14 , 1997, a free-floating exchange rate regime was adopted. The rupiah and Jakarta Stock Exchange touched historic lows in September. Moody's downgraded Indonesia's long-term debt to junk bond status. Real GDP contracted by more than 13%, more than in any other Asian country. As inflation reached 70%,28 steep hikes in food prices led to riots throughout the country and more than 500 people died in Jakarta alone. By January 1998, the Rupiah was in free fall, reaching rupiah 17,700 per $1, a devaluation of 700% in just six months. On November 5, 1997, the IMF approved a $10 billion Stand-By-Arrangement, but the crisis intensified when companies became technically insolvent as the value of their $-dominated obligations exceeded their assets. The Jakarta Initiative Task Force (JITF) was established to mediate between Indonesian companies and foreign creditors, but progress was slow. With a large number of nonperforming loans, the Indonesia Bank Restructuring Agency (IBRA) was created to take over failing banks. Their rescue proved to be the most costly consequence of the crisis for the government. Capital flight worsened when investors feared that Indonesia would curtail capital mobility, a step taken by neighboring Malaysia. The failure of the government to close down some insolvent banks close to Suharto, a key condition of the IMF, further eroded the market confidence. 1998 – 2004: ‘Reformasi’ In May 1998, Suharto was forced to step down as the inability of his government to deal with the crisis had severally eroded his support among Indonesians. Golkar, the organization of civil servants that had been the pillar of Suharto’s regime, remained an important political force and there was only limited prosecution of those connected to the former regime. The period after Suharto’s fall became known as ‘Reformasi,’ the Indonesian word for reformation Suharto was succeeded by his vice-president, B. J. Habibie.29 Habibie sought to reduce the role of the military in Indonesian politics and promised major political and economic reforms. He introduced legislation to hold Indonesia’s first democratic elections in 34 years, which took place on 7 708-420 Indonesia: Attracting Foreign Investment June 7, 1999. The secular-nationalist Indonesian Democratic Party-Struggle (PDI-P) led by Megawati Soekarnoputri, Sukarno’s daughter, gained the highest number of votes but no overall majority. The IMF approved substantial credit in exchange for strong commitments by the Indonesian government for structural reforms.30 With its long history of close collaboration with the Suharto regime, the World Bank “was seen by many as part of the problem rather than the solution”31 and trust in the Bank was low. Grass-roots World Bank programs that by-passed central government, like the community-driven Kecamatan Development Program, were given priority. These programs gave local communities a choice in setting their own infrastructure spending priorities and imposed new standards of openness and governance.32 By mid-1999, macroeconomic stability improved, with the rupiah appreciating to 7,000 per US-$ from its low of 12,000 in mid-1998. Inflation dropped into single digits and interest rates fell. Large Indonesian business groups worked to reduce heavy debt burdens, and restructured through divestments and increasing focus.33 Traditionally well-connected with the Suharto regime, the business groups were also seeking to build contacts with the new government. Among the first economic policies introduced by the Habibie government was a new Competition Law in 1999. A commercial court and a bankruptcy court were created to strengthen the position of creditors. The government announced a privatization program, but there were no sales of stateowned enterprises in 1999 and 2000 and a minority stake in PT Telecom was sold in 2001. In 1999, the government amended the corruption law to stiffen penalties and establish an independent Anti-Corruption Commission (ACC).34 Pending the enabling legislation, a decree established an ad hoc task force within the attorney general’s office. The task force experienced serious difficulties in becoming operational and was declared unconstitutional after losing a case against three Supreme Court justices. By late 2002, the Anti-Corruption Commission legislation was finally approved and the first commissioner was appointed in December 2003. A special anticorruption court was established in 2004. Habibie identified the decentralization of public decision making as a key priority.35 Law 22 on Regional Autonomy, and Law 25 on Fiscal Balance between the Center and the Regions (districts and municipalities), were passed in 1999. Eleven policy areas (health, education and culture, agriculture, communications, industry and trade, capital investment, environment, land cooperatives, manpower affairs, management of natural resources, and urban development) were designated for decentralization to the regional and local levels beginning on January 1, 2001. One-third of all government spending was decentralized.36 The central government was given 30 days to review whether regional regulations were in conflict with national ones; after this period, they became law. In October 2004, the parliament clarified the responsibilities of the different levels of government and limited the scope for additional taxes to be imposed at the local level. The stabilization of the economy came too late to save Habibie, who had run into increasing political difficulties.37 He was forced to resign in October 1999 by the People's Consultative Assembly (MPR). Abdurrahman Wahid, a well-respected Muslim cleric, was chosen as president. Megawati Soekarnoputri became his vice-president. The Wahid administration proved no more effective in implementing economic and political reforms against powerful interest groups. While unions had held little, if any, independent power during the Suharto regime, they became significantly more influential. In 2000, the parliament approved the Trade Union Act, later followed in 2003 by the Basic Manpower Act, which gave unions a significantly stronger position in labor relations.38 Concerns about the slow pace of reforms once again undermined macroeconomic stability. The rupiah devalued, and inflation picked up. Bank Indonesia was slow to respond, and pressure rose to rewrite 8 Indonesia: Attracting Foreign Investment 708-420 the central bank law and remove top management. Wahid was eventually removed from office by parliament in July 2001. Megawati Soekarnoputri became the third president in three years of post-Suharto Indonesia, promising to address widespread problems of corruption and poor governance. In 2001, a constitutional amendment was passed to form an independent judicial commission, charged with nominating justices for the Supreme Court and overseeing improvements in the judicial system. By 2003, the Supreme Court had drafted blueprints for personnel management, financial management, and the education of judges. In 2001, a new oil and gas law created a new regulatory agency for oil, an agency for gas, and removed these regulatory functions from the state-owned petroleum company (Pertamina) which became a limited liability company (LLC). Implementation of reforms, however, was slow. Production sharing agreements with foreign investors became more attractive and offered comparable terms to other countries in the region by 2006. The telecommunication sector was liberalized in 2002. New entrants no longer needed to partner with one of the two incumbents, though foreign ownership in the sector remained capped at 49%.39 A law to liberalize the electricity sector was passed in 2002 as well. Indonesia in Transition The People's Consultative Assembly approved constitutional amendments in 2002 that would take effect for the presidential elections in 2004. Seats in parliament would no longer be reserved for the armed forces, and the assembly rejected the imposition of Shari'ah, the Islamic law for Muslims. After 2004, a second standing body would be created as a senate—the Regional Representative Council. Parliament would no longer elect the president who would be directly elected by the public. President Megawati initially opposed direct elections, but later accepted them.40 In October 2002, a terrorist bomb on the island of Bali killed more than 200 people. Another attack in August 2003 killed twelve people in the Marriott hotel in central Jakarta. In both instances, a militant Islamic group was suspected for the attacks. Indonesia became seen as an unsafe place for business or tourism. In 2003, President Megawati announced in her budget speech that Indonesia was able to graduate from IMF support. Indonesia was the last of the Asian countries to graduate, with a slower recovery process than its neighbors. A white paper, “Economic Policy Package Pre and Post IMF,” in September 2003 outlined over 100 specific commitments by government to maintain macroeconomic stability, restructure the financial sector, and increase investment, exports, and employment. The plan announced the creation of an investment and trade team to coordinate efforts on investment climate and the Anti-Corruption Commission. President Megawati declared 2003 to be the year of investment. A year later, however, domestic and foreign investment rates were still low and there was little sign of improvement.41 By 2003, 83% of investment was in construction and real estate development. The Megawati administration implemented the tariff reductions that had been agreed to under the ASEAN Free Trade Agreement in 1992, but repeatedly expressed concerns about the fast pace of liberalization and used emergency exit clauses to retain protection for some sectors. A new labor law significantly raised hiring costs and set severance pay higher than elsewhere in the region. Individual provinces set their own minimum wage levels.42 9 708-420 Indonesia: Attracting Foreign Investment GDP growth increased from 0.3% in 1999 to 5% in 2004, prosperity growth turned positive reaching 3%, unemployment fell and the poverty rate dropped from 19.1% in 2000 to 16.6% in 2004. External public debt declined from about 103% of GDP in 1999 to 59.8% in 2004. The rupiah recovered to about 8,500 per dollar and inflation fell, but stagnant tax collection remained a challenge for government finances.43 By the end of 2004, there was full utilization of production capacity for the first time since the 1997–1998 crisis. In April 2004, the parliamentary elections resulted in Golkar becoming the largest party with 23% of the vote. President Megawati’s PDI-P saw a drop in support and ended up as the second-largest party. The First Elected President Dr. Susilo Bambang Yudhoyono, from the small secular-nationalist Democratic Party (PD), won a 61% victory over President Megawati in the final round of voting in September 2004 and became Indonesia’s first directly-elected president.44 He announced a “100-Day Plan” of economic reforms, including more active engagement in ASEAN and with the WTO. The plan included measures to improve the business environment, improve labor laws, liberalize trade, tackle corruption, lower taxation, utilize public-private partnerships for infrastructure investment, and address poverty. In December 2004, an earthquake and tsunami struck the Indian Ocean region, leaving over 150,000 dead in Indonesia alone. The government provided emergency aid in Sumatra and the Aceh peninsula. In March 2005, an earthquake in Sumatra led to additional devastation. While the effect of overall GDP was limited, the Asian Development Bank expected an increase of one million people in the number of Indonesians in poverty.45 Later in 2005, two bombs exploded in Bali, killing more than 20 people, another blow to confidence. In May 2005, Coordinating Minister for the Economy, Aburizal Bakrie, announced legislation to improve aspects of the business environment. Policy packages on infrastructure, the investment climate, and the financial sector were at different stages of implementation in 2006. Progress had been the greatest in the financial sector. Revisions to the labor law proposed in April 2006 were on hold after strong resistance from the labor unions. Business-friendly tax measures were held up in parliament and not expected to take effect before 2008. The investment law was soon to be passed by parliament, but decrees specifying implementation were still being negotiated.46 Numerous provincial laws deemed to be obstructing trade and investment were under review by the central government. Regional governments had been unable to implement needed infrastructure investments given limited capacity, which had left government budgets with significant surpluses. Public private partnerships were to be used for infrastructure upgrading, but interested foreign companies were being deterred by unclear rules on the government’s role and concerns about projected rates of return. In 2005, the government had taken the final step to remove fuel subsidies, historically a hugely expensive part of Indonesia’s social transfer system. The subsidies had provided large benefits, which went disproportionately to higher-income households. Market fuel prices went up by about 150% throughout 2005, and triggered widespread public protests. The government had launched a compensation program for the poor during the first round of price increases (29%), but their design and implementation had been poor. A national energy policy would outline a broader plan to align the country’s energy prices across all sectors to market levels by 2010.47 10 Indonesia: Attracting Foreign Investment 708-420 Indonesia’s economy in 2006 The Indonesian economy had registered an average annual GDP growth rate of about 5% since 2000. GDP per capita was at about $3,500 per capita (PPP adjusted), roughly on par with India but behind the Philippines, China, Thailand, and Malaysia. GDP per capita had grown at 3% over the same period. Poverty rates had fallen recently after the worsening in the aftermath of the 1997 crisis, but rising prices for rice, a staple food still protected by trade barriers, had affected low-income groups.48 Close to half of the Indonesian population had income at or near the poverty level, measured by a PPP-adjusted income of $2 or less per day (Exhibit 3). Poverty was especially high in some of the more rural regions. Unemployment, at 10% had been rising over the last few years as 2– 2.5 million Indonesians were entering the labor market every year, significantly above the number of new job openings. Productivity in Indonesia was about 60% of the Thai level and 33% of the Malaysian level. India, whose productivity levels had been far below Indonesia’s, had caught up. Studies by the World Bank and others suggested that Indonesian productivity in textiles, electronics, and automotive was lower than in peer countries in the region. Domestic investment rates remained low (Exhibit 4), and there had been a net outflow of foreign capital since 1997 (Exhibits 5 and 6a, 6b). Indonesia’s overall market share in global exports had been roughly stable since 1997 (Exhibit 7).49 Natural-resource intensive industries continued to account for a significant share of exports and Indonesia had gained position in some labor-intensive industries that were, however, falling in absolute size.50 Indonesian macroeconomic conditions were stable or improving. The government budget was balanced and public debt had fallen steadily from about 90% in 2000 to about 50% of GDP, comparable to other countries in the region.51 About half of debt was denominated in foreign currencies and debt service accounted for about 53% of non-oil government revenues. Lending by international donors like the World Bank, the Japan Bank for International Development, and the Asian Development Bank had significantly decreased. Monetary policy was viewed as relatively effective and government was expected to raise interest rates to push inflation below 10% by the end of 2006. The country had registered a significant current account surplus, benefiting from strong oil export revenues, falling interest payments on foreign debt, and moderate growth in domestic demand. The real exchange rate had appreciated over time, reaching about 80% of the pre-Asian crisis level, similar to other Asian countries. Indonesia suffered from high levels of corruption52 and ranked low on most indicators of governance, including government effectiveness.53 There were increasingly complex and diverging rules and regulations at the provincial and municipal levels. Business environment Indonesia‘s business environment was seen as gradually improving in the post-Suharto period; with the exception of 2005.54 In 2006, Indonesia ranked below Malaysia but slightly ahead of Thailand in the Business Competitiveness Index of the Global Competitiveness Report (Exhibit 8). The narrower World Bank “Doing Business” analysis ranked Indonesia below all other ASEAN countries, China, and the Asian tigers in important aspects of business regulation (Exhibit 9).55 Many aspects of the business environment, especially physical infrastructure and regulations affecting business, varied substantially across Indonesian regions.56 In education, Indonesia lagged behind other Asian countries. Spending on education accounted for 9.8% of total government expenditure in 2002, compared to 28% in Thailand, 20% in Malaysia, 14% in the Philippines, and 13% in Korea. The gap was biggest in secondary and tertiary education, 11 708-420 Indonesia: Attracting Foreign Investment with the primary education system in Indonesia about on par with regional peers. Fees for secondary schools created a barrier for children of low-income families.57 Indonesia’s infrastructure had suffered from low investment after the Asian crisis, and many small companies in rural regions reported difficulties in getting their goods to market.58 In telecom, Telekomunikasi Indonesia, 65% government-owned, was the largest provider, competing with Indosat, 42% owned by a Singaporean company and 16% government-owned. The electricity sector suffered from insufficient capacity and low investment. The Constitutional Court had annulled a 2002 law to open the industry to private competitors, and PLN, the state-owned utility, remained the dominant supplier. PLN was required to charge equal electricity rates across provinces despite significant differences in costs, with government subsidies covering its losses.59 In 2005, the President had instructed the bureaucracy to reduce the number of days required to obtain an investment license from 151 days to a month. Parliament approved amendments to the bankruptcy law in 2004 to avoid arbitrary use of the law to threaten foreign firms with a bankruptcy declaration if they failed to make payments demanded by a local business. Research and development (R&D) spending was 0.05% of GDP in 2001, the most recent year for which comparable data was available, versus 0.69% in Malaysia, 1% in China, and 2.9% in Korea. The Department of Industry had introduced tax incentives for company R&D, but they were seen as largely ineffective. The bulk of R&D financing came from the government (69% in 2001), and most went to the large universities or government laboratories, like the Indonesian Institute of Science (LIPI) and the Agency for the Assessment and Application of Technology (BPPT). Indonesia’s financial sector was limited for the size of the country.60 Overall, bank credits to the private sector were about 20% of GDP, versus 80% to 120% in the other countries in the region. As of 2003, there were 138 banks, with the top 10 banks accounting for 70% of banking assets. State-owned banks held 44% of all assets, above pre-crisis level. State-owned provincial development banks were growing quickly. The financial sector suffered from the corruption and inefficiency in the judicial system and from incomplete property rights. In rural regions, less than 25% of land had an official title. Bank lending was low due to conservatism from the Asian crisis and fears of corruption accusations if loans went sour. Indonesian tax rates were roughly in line with other countries in the region.61 Following the new decentralization law which allowed regions to impose new taxes unless the federal government objected, however, total taxes were increasing as more provincial and local taxes were introduced. A new national law had been passed to define the maximum level of taxation for the different levels of government. There were laws to protect intellectual property (IP), and a U.S. software company had won a landmark case against five Indonesian retailers in 2001 that were selling computers with pirated software. However, the effectiveness of intellectual property protection in Indonesia remained problematic. In 2004, the U.S. government had again put Indonesia on the watch list of countries with weak intellectual property rights standards. Foreign companies also complained about the lack of timely decisions by the Indonesian judicial system, a general problem that affected IP cases as well. In the labor market, conditions had worsened in the years after the Asian crisis, making Indonesia one of the most inflexible labor markets in Asia. Minimum wages had increased much faster than productivity and were much higher relative to average wages than before the 1997 crisis. The devolution of minimum wage setting to the regions in 2001 had added another level of complexity. A new labor law was under discussion.62 The World Bank reported that termination costs were significantly higher than in other countries in the region. 12 Indonesia: Attracting Foreign Investment 708-420 Indonesia was among the most open countries in Asia in terms of formal trade rules, with tariff rates averaging around 7% in 2006, which was less than half the level of before the Asian crisis. However, some sectors, like automobiles, remained under higher protection.63 Indonesia had significantly reduced non-tariff barriers since the crisis but was not a party to the WTO Government Procurement Agreement. Competition laws were introduced beginning in 1999 but enforcement was spotty. The Commission for Supervisory of Business Competition (KPPU)64 lacked clear authority and procedural regulations, which resulted in many of its decisions being overruled by the courts. Government was working on a revision of the law in 2006 that it hoped to submit to parliament in 2007. A presidential decree in 2000 had created more transparency in procurement. Government had conducted a number of audits at large state-owned enterprises. Despite clear evidence of irregularities, however, no remedial action had been taken. Indonesian Clusters Indonesian exports were dominated by oil and gas, mining, and other natural-resource and agricultural goods. Electronics, automotive parts, textiles, footwear, and other labor-intensive activities were also significant (Exhibits 7 and 10). Service exports were limited, restricted largely to tourism. The oil and gas sector accounted for 10% of GDP and 25% of export revenues as of 2005.65 Indonesian production had been in decline for many years due to low investment rates, similar to other parts of the economy. Indonesia’s production was about 20% below its Organization of the Petroleum Exporting Countries (OPEC) quota, and proven reserves had fallen by half since 1983. Environmental concerns were also rising. Drilling for gas, an Indonesian company had triggered a mudflow in east Java in May 2006 that displaced 25,000 people and disrupted the local economy.66 The mining sector included a variety of minerals and metals. Indonesia had particularly strong positions in tin, copper, and nickel, and had also benefited from the increasing demand in Asia for coal. Mining accounted directly for 2% of Indonesian GDP and 35,000 employees, with a significantly greater role in particular regions.67 Exploration activity was limited and global mining companies rated investment conditions in Indonesia as poor relative to other locations. One concern was the conflict between mining contracts and subsequent environmental regulations for the protection of forests that declared much mining activity illegal. For example, the government had recently announced that it would revoke export licenses for tin mines that did not meet stringent environmental regulations at a standard that would put most operators out of business.68 Tourism accounted for a significant share of employment and was especially important in some regions like Bali.69 The number of foreign visitors to Bali had grown most dramatically since the early 1990s, reaching more than one million per year by 2006. Demand from tourists also benefited related clusters, such as the textiles and apparel cluster. Bali alone accounted for about 25% of all tourism to Indonesia. The terrorist attacks on the island in 2002 and 2005 had been a significant disruption and low occupancy rates remained a problem. Forest products remained an important cluster.70 Since the 1990s, the focus had shifted to pulp and paper products, the third transformation of the cluster from timber (1970s) and then plywood (1980s). A doubling of the export tax for timber to 20% in 1978, followed by an outright ban on such 13 708-420 Indonesia: Attracting Foreign Investment exports in 1985, had pushed companies into downstream activities. Illegal logging, however, remained a problem. Indonesia had traditional networks of small companies at the village level.71 Most of these focused on rudimentary production activities tied to natural resources and agriculture, with many of the characteristics of an informal economy. While there had been some success stories, such as the roof tile cluster in Karanggeneng (Java) and the wooden furniture cluster in Jepara (Java), most small company networks had not managed to improve their sophistication and size. Policies for small- and medium-sized enterprises (SMEs) benefited these companies, but fell far short of a broader cluster development agenda. Indonesian Companies In 2005, about 50% of the top 100 Indonesian companies were owned by a dominant single shareholder or group. State-owned enterprises (SOEs) were estimated to account for up to 40% of GDP and had continued to have strong presence in sectors like financial services, electricity, oil and gas, telecommunications, cement, fertilizer, steel, mining, agriculture, and transport.72 Privatization had been slow. The 2003 SOE law set rules for managerial independence from the government, although the public service obligations of some SOEs blurred the lines of independence. Pertamina, the oil and gas company, received significant subsidies to compensate for the artificially low prices it charged in the residential market and to some other SOEs. The Indonesian private sector was characterized by a few large conglomerates and a huge number of small and micro enterprises. In the large conglomerates, governance was limited though improving. Ownership concentration had fallen, financial reporting had become more transparent, and the Code of Good Corporate Governance introduced in 2001 had set clearer standards for behavior. In a 2004 report, the World Bank pressed for further improvements in the disclosure of cross-ownership and related-party transactions. Small and micro enterprises, many of which were active in rural agriculture, had traditionally been seen as needing protection from competition. Article 50 of the Indonesian Competition Law exempted small scale-enterprises from legislation against anti-competitive behavior. Indonesia also had, like India, created a scheme that reserved specific sectors or sub-sectors for small and micro enterprises or joint ventures involving such enterprises. These regulations were not believed to be very effective. Attracting Foreign Investment Indonesia had a long history of foreign direct investment, with Dutch companies having been dominant in most parts of the Indonesian economy until the early decades of the twentieth century, especially the extraction of natural resources, utilities, and trade. Many Dutch companies had been awarded dominant market positions by the Dutch government, and were perceived as instruments of colonial suppression and extortion. In the decades up to World War II, companies from other Western nations, especially the United Kingdom and the United States, invested in Indonesia. Most of these companies were active in oil and other natural-resource based industries. After independence, the Indonesian government nationalized many foreign companies, especially those from the Netherlands. However, some large U.S. and U.K. companies remained active in the country. In the 1950s, Indonesia was among the top three Asian locations for U.S. investors, along 14 Indonesia: Attracting Foreign Investment 708-420 with India and the Philippines.73 In the 1970s and 1980s, Japanese, Singaporean, and Taiwanese companies became leading investors in Indonesia, especially in manufacturing. In the late 1980s and early 1990s, Indonesia experienced an investment boom. Successive reforms in the 1980s had made the country more attractive to investors, and Korean and Taiwanese companies began relocating their labor intensive operations to Indonesia (as well as other southeast Asian countries) around 1990. Indonesian textile exports doubled from 1989 to 1993, and became Indonesia’s largest non-oil export. As global FDI flows increased in the early and mid-1990s, more foreign investors entered the country. Between 1995 and 2005, however, China rose to become by far the largest destination for FDI in Asia, alarming many observers in the ASEAN region.74 The ASEAN Investment Area (AIA) agreement, signed in October 1998, was intended to improve the attractiveness of ASEAN countries compared to China through more transparent investment rules. It was initially focused on manufacturing but was to be extended to services over time. Many foreign companies looked for a second production base in Asia—the so-called ‘China + 1 strategy’—to manage country risk and rising costs in China.75 Much of the FDI flowing into China went into export-oriented businesses that assembled products from imported materials and parts. According to a study by the Japanese Foreign Trade Agency (JETRO), products assembled from foreign inputs accounted for more than 70% of Chinese exports.76 In Malaysia, the Philippines, and Thailand, this ratio had dropped to up to 50%, signaling higher value-added activities in these countries. Indonesia, however, was much closer to the Chinese levels. During the Asian Crisis, FDI inflows into Indonesia collapsed and net inflows were negative for most years until 2003. A number of Korean and Japanese companies operating in Indonesia relocated to other countries in the region, including Vietnam, citing Indonesia’s negative investment climate.77 While there was improvement in 2004 and 2005, Indonesia continued to lag far behind most of its neighbors in attracting investment. The experience of the shoe industry was typical. When the European Union imposed quotas on shoe imports from Vietnam and China in 2006, Indonesia was a natural alternative. Adidas, the German sportswear company, already sourced about 23% of its global shoe orders from factories in Indonesia. Yet two of these factories, owned by South Korean companies, were closed as stringent labor laws were introduced.78 As of 2006, Japanese companies remained the largest group of foreign investors in Indonesia, followed by companies from Korea and Taiwan. Asian investors led by Singapore and China had been the leading investors after the Asian crisis, while companies from Europe and North America had lagged.79 The stock of foreign investment continued to be concentrated in natural-resource based industries, with a third or less in manufacturing. Close to 60% of FDI inflows after the crisis had gone into manufacturing, metal mining and chemicals in particular. Since 2004, services had gained in importance. Foreign Investment Rules and Regulations Indonesia had a history of fluctuating incentives for foreign investors. The 1967 law for foreign investment granted investors up to five years tax holiday from corporate tax and withholding tax on dividends.80 Three years of tax holidays would be given if the investment reached more than $2.5 million in the first two years and earned/saved foreign exchange. Additional years of tax holidays could be awarded if the investment in infrastructure was above $15 million, was made outside of Java, or was one of the first to companies to enter an industry. The incentives were extended to domestic investors in 1968. 15 708-420 Indonesia: Attracting Foreign Investment The Technical Team for Foreign Investment was established in 1967 to handle incoming applications (it became the Capital Investment Coordination Agency (BKPM) in 1973). In 1970, the investment law was amended, giving preference to specific priority sectors. Incentives were granted by the Ministry of Finance through its representatives in BKPM. In 1977, BKPM further specified lists of industries that were closed, open for FDI but with no tax incentives, and open for FDI and qualified for tax incentives. In 1984, all tax incentives were eliminated based on advice from the Harvard Institute for International Development. This move was criticized by BKPM officials and some foreign investors, especially the Japanese. However, more foreign investors preferred general lowering of taxes to special investment incentives. In 1994, tax incentives started to come back when the government awarded ExxonMobil an attractive division of revenues from a natural gas field in the Natuna Sea. Two years later, investment incentives were reintroduced more generally. Under the new scheme, an interministerial team had discretion for case-by-case decisions. In practice, President Suharto made the decision which often benefited companies related to his family or associates.81 In 1998, the tax incentives were again eliminated under pressure from the IMF. An amendment to the tax law in 2000, however, offered new incentives in the form of investment allowances, accelerated depreciation, and longer loss carry forwards on investments. As of 2006, Indonesia provided tax concessions in the form of temporarily reduced tax rates but no tax holidays (i.e., zero tax rates) as was customary in other countries82 (Exhibit 11). Indonesia did not grant up front cash payments to investors to cover training or site investments. “Our competitors, like Chennai, Bangkok, and Hanoi, are offering more attractive incentives,” complained Ismeth Abdullah, governor of the Riau Islands province close to Singapore in a 2005 interview.83 The foreign investment law dating back to 1967 remained the legal basis for foreign investment, permitting investments except for a “Negative List.”84 The Negative List closed some sectors completely (for example), while requiring joint ventures with Indonesian partners in others such as electricity production. The law stipulated a 30-year limit for land titles to real estate. While no investor had been affected, the existence of the rule created uncertainty. The BKPM was the main administrative body dealing with inward foreign investment, responsible for approving investments in all areas except oil and gas and some areas of financial services where special regulatory agencies existed. While the formal Negative List was seen as no more restrictive than in peer countries, BKPM had exerted pressure for the inclusion of Indonesian partners even in open industries. Apart from its regulatory role, BKPM had more recently also been tasked with attracting foreign investors to Indonesia, and with facilitating investors’ administrative contacts with other parts of government.85 Regional BKPM offices could give permission for smaller investments while the head office in Jakarta handled larger projects. Many provinces and subregional governments in Indonesia had their own foreign investment offices as well. A 2003 white paper committed the government to introducing a new investment law that would establish BKPM as a one-stop-shop for investors.86 The government announced in 2004 that the role of BKPM was to change from investment approval to investment attraction. Foreign investors had encountered diverging experiences in Indonesia. Studies by the World Bank identified policy uncertainty, corruption, and lack of confidence in the court system as key worries. 2006 data indicated that infrastructure bottlenecks were an increasing concern for investors, especially for export oriented companies in areas like electronics.87 Japanese investors ranked the country behind China, India, Vietnam, and Thailand but ahead of Malaysia and the Philippines in terms of medium-term potential as an investment location.88 According to one Western executive, 16 Indonesia: Attracting Foreign Investment 708-420 “In Suharto’s day, everybody knew the rules about payoffs and kickbacks. [The current situation] makes for uncertainty, and businesses don’t like uncertainty.”89 Investors such as Exxon Mobil and Philip Morris, which had made a record $5 billion acquisition in 2005, reported good experiences with Indonesian government agencies. However, companies such as Manulife, a Canadian insurance company, and PT Prudential Life Assurance had been declared bankrupt by Jakarta courts over business disputes. After pressure from the international business community, the government had overturned the decisions and the judges were put under investigation. Other foreign companies had been dismayed with such judgments as well as provincial meddling. Provincial objections to increasing its stake in Semen Gresik, Indonesia’s state-owned cement company, had led Mexican company CEMEX to sell its shares and leave Indonesia in 2006.90 Batam Batam had been more successful in attracting foreign investment than other parts of the country. Originally a support base for the Indonesian state oil company, the island had been designated a free trade zone in 1974 under the Batam Island Development Authority (BIDA).91 BIDA was headed by B.J. Habibie, minister for science since 1978 until he became the first president in 1998. Foreign investors were exempt from the need to have a local partner if they produced for export markets. In 1978, Batam became a ‘bonded zone,’ where imports of goods and services used for export products were exempted from import duties and no sales tax was collected. In 1989, Batam’s status was confirmed by a national law. The 1990 Growth Triangle agreement with Singapore marked the beginning of a decade of strong growth for Batam. Politicians in Jakarta had started to debate whether the exemption of domestic transactions in Batam from sales taxes was really justified. While Batam had been successful in investment, some analysts criticized that the limited linkages with the local economy and the fact that wage levels for Batam employees were only marginally higher than the Indonesian average.92 In the early 2000s, foreign investors became reluctant to invest when the legal status of Batam was put into question. Batam’s share of Indonesian non-oil and gas exports dropped from 14% in 2001 to 8% by 2005.93 However, Batam received a boost in 2003 when it was included in the area covered by the U.S.Singapore Free Trade Agreement.94 In 2006, President Yudhoyono and Singaporean Prime Minister Lee Hsien Loong signed a new framework agreement for cooperation in the Batam region. Singapore would provide its know-how in order to attract more foreign investment to the area.95 Batam’s new ‘Integrated Investment Services Center’ (IISC) had become a one-stop agency for investment approvals and, according to BKPM, had reduced approval times by a third.96 Limits on the level of foreign ownership had been removed and other government permits, for example work permits for foreign employees, were easy to obtain. Foreign investors could choose among a number of industrial parks offering modern real estate, housing, and physical infrastructure. Foreign developers from Singapore, Taiwan, and the Netherlands, were among the industrial park owners. New Legislation In late 2006, the government prepared a new program for special economic zones. Initially, each of the large Indonesian islands was to get one or two zones, but the program evolved towards establishing zones in regions with sufficient infrastructure and an established presence of investors that could achieve faster results. The intention was to provide investors with streamlined investment procedures through dedicated one-stop agencies rather than financial incentives. Zones would only 17 708-420 Indonesia: Attracting Foreign Investment be created where local governments backed them and were willing to delegate decision rights to the new agencies. After the draft law on economic zones had been stuck in the parliament for some time, the government was considering whether to launch the program as a presidential decree. A new investment law was approved in March 2007.97 It had been under discussion for more than three years. The new law gave policy makers the discretion to offer further financial incentives to foreign investors on a case-by-case basis: higher rates of depreciation, carry forward of losses, and lower income tax rates on dividends paid to foreigners.98 There were ongoing discussions about whether to focus these incentives on specific industries. Trade Minister Mari Pangestu announced that the law would reduce the time to establish a new business to 30 days, in line with neighbors in the region and significantly below the 155 required in 2006.99 This would raise Indonesia to rank 120 in the World Bank’s Doing Business assessment, up from its current 136.100 BKPM would focus on investment attraction and providing services, while the regional governments and one-stop agencies would be responsible for investment approvals. The law would also simplify temporary residence permits for foreign investors and extend the length of usage rights under land titles. It would also open the way for a simplification of the Negative List. 18 Indonesia: Attracting Foreign Investment Exhibit 1 708-420 Indonesia and its Neighborhood Source: Courtesy of the University of Texas Libraries, The University of Texas at Austin, Perry-Castenada Library Map Collection, http://www.lib.utexas.edu/maps/cia06/ indonesia_sm_2006.gif, accessed December 1, 2006. Exhibit 2 Long-term trends in prosperity growth, selected Asian countries GDP per capita (PPP) growth, CAGR 1950–1965 1965–1980 1980–1990 1990–1997 1997–1999 1999–2004 1950–2004 GDP per capita, US-$, (PPP), 2004 Indonesia 1.1% 4.3% 3.0% 5.8% -7.8% 3.0% 3.4% 3,684 China 3.2% 2.8% 5.7% 7.0% 2.0% 9.0% 5.6% 4,785 Thailand 3.2% 4.6% 6.1% 5.4% -4.3% 4.2% 5.2% 7,549 Malaysia 1.0% 4.8% 3.4% 6.8% -2.9% 3.1% 4.0% 8,937 India 1.5% 1.3% 3.4% 3.6% 4.5% 4.2% 3.0% 2,257 Source: Compiled from Groningen Development and Growth Center, The Conference Board (2006). 19 708-420 Exhibit 3 Indonesia: Attracting Foreign Investment Basic economic indicators, selected Asian countries, 2004 Indonesia Malaysia Philippines Thailand China India Vietnam Population Population (in millions) 218 25 82 64 1,300 1,100 82 1.3% 1.9% 1.8% 0.9% 0.6% 1.4% 1.0% 102 16.5 50.5 20.4 512 308 21.3 254,298 118,318 90,100 161,688 1,931,714 694,703 45,210 GNI per capita, PPP (current U.S. $) 3,480 9,720 4,990 7,930 5,890 3,150 2,730 Agriculture, value added (in % of GDP) 15.6% 9.5% 15.2% 10.1% 13.1% 19.6% 21.8% Industry, value added (in % of GDP) 44.3% 50.4% 31.9% 43.5% 46.2% 27.3% 40.1% Services, value added (in % of GDP) 41.2% 40.1% 52.9% 46.4% 40.7% 53.2% 38.2% Gross capital formation (% of GDP) 23.1% 22.6% 17.1% 27.1% 38.7% 30.1% 35.6% Goods exports (BoP, current U.S.$ in millions)** 72,167 126,642 38,728 94,979 593,393 59,388 26,503 Goods imports (BoP, current U.S.$ in millions)** 50,615 99,149 45,109 84,193 534,410 60,208 28,759 Population growth (annual 2003–2004) Urban population (in millions) Economy GDP at market prices (current U.S.$ in millions) Health and Education Life expectancy at birth (years) 67 73 71 71 71 63 70 Infant mortality rate (per 1,000 live births) 29.6 10.2 26.0 18.2 26.0 61.6 17.4 Health expenditure, public (% of GDP)* 1.1% 2.2% 1.4% 2.0% 2.2% 1.2% 1.5% Public education spending (2003, % of GDP) 0.9% 8.0% 3.2% 4.2% -- 3.3% -- Personal computers (per 1,000 people) 13.9 196.8 45.1 58.3 40.9 12.1 12.7 Cell phone subscribers ( per 1,000 people) 137.9 587 403.5 429.9 258.3 43.8 60.4 Telephone mainlines (1997, per 1,000 people) 45.9 178.6 42.1 106.7 241.1 40.7 70.3 Inflation (GDP deflator annual %) 6.2% 6.2% 6.0% 3.1% 69.1% 4.2% 7.9% Tax revenues (% of GDP) 12.5% NA 12.4% 15.9% NA 10.2% NA Present value of debt (% of GNI) 60.9% 52.7% 73.1% 35.2% 14.50% 18.4% 39.1% Information Technology Finance External debt (current U.S.$ in millions) 140,649 52,145 60,550 51,307 248,934 122,723 17,825 Stock market capitalization (% of GDP) 28.8% 160.6% 32.1% 71.4% 33.1% 55.8% -- Source: Compiled from World Development Indicators, 2006. 20 Indonesia: Attracting Foreign Investment Exhibit 4 708-420 Investment as Percentage of GDP from 1995 to 2005, Selected Asian countries 80% 70% 60% Malaysia Vietnam 50% Thailand 40% China Philippines 30% India Indonesia 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Compiled from Economist Intelligence Unit, 2006. Exhibit 5 FDI Position in 2005, selected Asian countries Source: Compiled from World Investment Report, 2006. 21 708-420 Indonesia: Attracting Foreign Investment Exhibit 6a Foreign Direct Investment Inflows as % of Fixed Capital Formation over Time, selected Asian countries 50% 40% 30% Malaysia Vietnam China India Philippines Thailand Indonesia 20% 10% 0% -10% -20% 1970 1975 1980 1985 CAON Indonesia 11-28-06 CK.ppt 1990 20 1995 2000 2005 Copyright © 2006 Professor Michael E. Porter Source: Compiled from World Investment Report, 2006. Note: The 2005 data for Indonesia is affected by one major transaction that accounted for 90% of inflows that year. 22 Indonesia: Attracting Foreign Investment Exhibit 6b 708-420 Foreign Direct Investment Inflows in Millions US-Dollars, selected Asian countries Source: Compiled from World Investment Report, 2006. Note: The 2005 data for Indonesia is affected by one major transaction that accounted for 90% of inflows that year. 23 708-420 Exhibit 7 Indonesia: Attracting Foreign Investment Indonesian exports by cluster, 2005 Coal and Briquettes (9.5%, +2.4%) 3.00% Change In Indonesia’s Overall World Export Share: -0.01% Indonesia’s world export market share, 2005 Footwear 2.50% Fishing and Fishing Products Furniture Building Fixtures and Equipment Forest Products (1.9%, -3.3%) 2.00% Apparel Oil and Gas Products Textiles Agricultural Products 1.50% Plastics Tobacco Communications Services Entertainment and Reproduction Equipment Metal Mining and Manufacturing 1.00% Indonesia’s Average World Export Share: 0.88% 0.50% Construction Services Business Services Hospitality and Tourism Prefabricated Enclosures and Structures Jewelry, Precious Metals and Collectibles 0.00% -2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% Change in Indonesia’s world export market share, 1997 – 2005 Exports of $5 billion = CAON Indonesia 11-28-06 CK.ppt 7 Copyright © 2006 Professor Michael E. Porter Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 24 Indonesia: Attracting Foreign Investment Exhibit 8 708-420 Quality of the national business environment, selected Asian countries, 2006 Indonesia Malaysia Philippines Thailand China India Vietnam Factor (Input) Conditions Railroad infrastructure development 22 17 79 24 31 38 58 Quality of math and science education 12 19 74 27 63 20 88 Quality of public schools 43 15 67 33 50 61 70 117 31 89 19 82 2 63 3 20 78 38 57 20 95 107 Quality of electricity supply Port infrastructure quality Overall infrastructure quality 19 58 63 23 67 3 Ease of access to loans 98 30 49 36 96 4 48 Financial market sophistication 73 41 82 40 90 94 49 Telephone/fax infrastructure quality 28 23 83 63 72 59 108 Air transport infrastructure quality 76 71 63 35 90 53 82 Efficiency of legal framework 36 19 43 44 70 91 108 Presence of demanding regulatory standards 70 10 49 61 78 107 57 Stringency of environmental regulations 97 31 85 38 95 27 97 Buyer sophistication 49 11 82 47 62 13 85 50 Demand Conditions Context for Strategy and Rivalry Intensity of local competition 29 9 84 36 36 26 Efficacy of corporate boards 98 32 66 82 117 10 61 Cooperation in labor-employer relations 83 16 99 35 99 2 99 Effectiveness of antitrust policy 42 18 56 30 67 31 88 Business costs of corruption 87 27 56 59 81 20 88 Intellectual property protection 75 12 40 38 75 4 87 81 13 87 36 69 22 74 4 14 79 46 45 28 81 Supporting and Related Industries Local supplier quality Local supplier quantity Source: Compiled from Business Competitiveness Index data, in: Global Competitiveness Report 2006-07. Exhibit 9 World Bank “Doing Business” rankings, 2006, Selected Asian countries Indonesia Malaysia Philippines Thailand China India Vietnam Overall rank 135 25 126 18 93 134 104 Starting a Business 161 71 108 28 128 88 97 Dealing with Licenses 131 137 113 3 153 155 25 Employing Workers 140 38 108 46 78 112 104 Registering Property 120 66 98 18 21 110 34 Getting Credit 83 3 101 33 101 65 83 Protecting Investors 60 4 151 33 83 33 170 Paying Taxes 133 49 106 57 168 158 120 Trading Across Borders 60 46 63 103 38 139 75 Enforcing Contracts 145 81 59 44 63 173 94 Closing a Business 136 51 147 38 75 133 116 Source: Compiled from World Bank Doing Business Report, 2006. 25 708-420 Indonesia: Attracting Foreign Investment Top 25 Indonesian Goods Export Industries by Export Value, 2005 Exhibit 10 Industry Cluster Export Value (in $1,000) World Export Share Point Change in Share 1997 - 2005 Natural gas Oil and Gas Products $8,603,835 7.58% -2.18% Crude petroleum oils Oil and Gas Products $8,145,844 1.43% -1.60% Fixed vegetable fats and oils, other Agricultural Products $4,762,103 36.26% 11.06% Coal, not agglomerated Coal and Briquettes $4,354,121 9.70% 2.31% Copper ores and concentrates Metal Mining and Manufacturing $3,310,967 21.22% -4.77% Natural rubber, balata and similar natural gums Plastics $2,583,963 28.11% 0.72% Petroleum Oils Oil and Gas Products $1,903,797 0.59% -0.68% Video recording or reproducing apparatus Entertainment and Reproduction Equipment $1,251,637 3.11% -2.61% Plywood, solely of wood Building Fixtures and Equipment $1,193,503 15.11% -26.98% Input or output units Information Technology $1,161,549 1.75% 1.40% Paper and paperboard, uncoated Forest Products $1,049,910 5.30% 3.36% Crustaceans, mollusks, and aquatic invertebrates Fishing and Fishing Products $983,520 5.37% -1.52% Nickel mattes, sinters and other intermediate nickel products Metal Mining and Manufacturing $925,452 25.39% 9.88% Tin Metal Mining and Manufacturing $918,686 30.46% 12.84% Chemical wood pulp, soda, bleached Forest Products $886,026 5.41% 1.46% Fabrics of man-made fibers Textiles $831,999 3.04% -0.07% Other wooden furniture Furniture $804,027 4.71% 2.24% Other sports shoes with leather uppers Footwear $765,826 16.67% -6.85% Yarn of staple fibers, strip and other synthetic textile materials Textiles $718,274 12.40% 6.13% Builders’ joinery and carpentry of wood Furniture $717,256 6.49% -2.11% Copper, copper anodes and alloys Metal Mining and Manufacturing $676,312 2.47% 2.39% Cocoa Agricultural Products $653,510 7.60% -0.20% Rubber tires, tubes Motor Driven Products $650,052 1.57% 0.61% Parts for automatic data processing machines Information Technology $641,605 0.45% -0.26% Printed circuits Information Technology $607,666 2.85% 2.79% Source: Institute for Strategy and Competitiveness (2006). 26 Indonesia: Attracting Foreign Investment Exhibit 11 Foreign Direct Investment incentives, 2006, selected Asian countries Financial incentives Indonesia • Some sectors: 30% reduction in net income, carry forward losses for 10 years, accelerated depreciation • Import duty exemptions of 100% for main equipment and supplies, raw materials not locally available (for up to 2 years) Malaysia 708-420 • Incentives for export orientation, and valueadded, local participation, and skills transfer; Carry forward losses indefinitely Ownership restrictions • 8 sectors closed to foreigners, including: broadcast media, forestry, warehousing wholesaling, market research, noxious chemicals • FDI in infrastructure requires 55%:45% JVs with foreigners in the minority • Maximum 30% foreign equity in banks, telecom, law; additional limits in services • Pioneer status limits tax rate to 10% for 5 years; reinvestment allowances for 60% of capital spending; accelerated capital allowances • Pioneer status, special investment capital allowances, concessional government loans Thailand • Carry forward losses for 5 years; other tax benefits depend on investment location, nature of activity (e.g. R&D), and degree of exports’ 200 industries eligible for 8 years’ import and other tax exemptions • Tax incentives for regional headquarters Philippines • Income tax holidays, tax credits; exemptions from local taxes; 6 year tax exemption for pioneer status industries • Tax credit on imported raw materials and components used in exports; credits for duties on raw materials • Foreign ownership constrained in 32 areas in 3 categories, including cultural and security sphere prohibitions, industries in which foreigners can hold a maximum 40% stake with govt approval; businesses in which Thai companies cannot compete with foreign firms. • Foreign ownership barred in mass media, retail trade, licensed professions, rice and maize farming; Minority foreign interests only allowed in advertising, public utilities, land ownership, exploration and extraction of natural resources, investment houses. • Eleven priority investment areas with 6 year income tax holidays. China • Preferential 15% tax rate for foreign investors in state-approved zones, additional local benefits; Exporters qualify for a 50% income tax cut • Foreign ownership divided into prohibited, restricted, allowed, and encouraged categories. • 2 year tax holiday for increased investment, 50% income tax reduction for 3 more years; 10 year tax reductions possible for foreign investments in underdeveloped areas • 100% foreign ownership allowed in most industries; capped at 49% in basic telecom, rail freight, publications, aviation (though no single foreign entity can own more than 25%); no 100% owned employment agencies allowed. • Bank of China offers fixed asset loans, working capital loans, and accounts receivable financing. India • 10 year tax holiday for FDI in infrastructure, scientific R&D firms, and a 5 year tax holiday for cold chain operations, telecom and ISPs • R&D is fully tax deductible; accelerated depreciation available for energy-saving, environment-protection, and pollution control. • Permission required for investments in aviation, courier services, defense, public sector oil refining, tea, some telecom and airports. • Real estate, plantations, and retail trade are all closed to foreign ownership. Source: Based on Economist Intelligence Unit, CountryCommerce, various countries, 2006, available from www.eiu.com. 27 708-420 Indonesia: Attracting Foreign Investment Endnotes 1 Interview with Minister Pangestu in FDI Magazine, 3 October 2005. 2 Thomson Gale data, available at www.nationsencyclopedia.com/Asia-and-Oceania/Indonesia-LOCATION -SIZE-AND-EXTENT.html, accessed January 3, 2007. 3 Thomson Gale data, available from http://www.nationsencyclopedia.com/Asia-and-Oceania/IndonesiaETHNIC-GROUPS.html, accessed January 3, 2007. 4 Australia’s willingness to send peacekeepers to East Timor had particularly angered parts of the Indonesian leadership 5 The Economic History of Indonesia, http://eh.net/encyclopedia/article/touwen.indonesia, accessed March 12, 2007. 6 Thee Kian Wie, Policies for Private Sector Development in Indonesia, ADB Institute Discusssion Paper No. 46, March 2006. 7 ‘Unitary’ relates to the country being a single entity, divided only for administrative purposes, not a federation of regions with different identities. 8 Thee Kian Wie, ibid. 9 Jonathan Temple, Growing into Trouble, In: Dani Rodrik (ed.), In Search of Prosperity, Princeton University Press, 2003. 10 Higgins quoted in Haryo Aswicahyono/Tubagus Feridhanusetyawan, The Evolution and Upgrading of Indonesia’s Industry, CSIS Working Paper WPE 073, January 2004. 11 Asia Development Bank, Appendix 1: Country Context, p. 66. 12 The term is somewhat misleading as most of the “Berkeley Mafia” weren’t graduates of Berkeley. The name came largely from the fact that two leaders did go to Berkeley on scholarships financed by the Ford Foundation. 13 J. Temple, ibid. 14 Haryo Aswicahyono/Tubagus Feridhanusetyawan, The Evolution and Upgrading of Indonesia’s Industry, CSIS Working Paper WPE 073, January 2004., p. 12 15 Ibid., p.13. 16 Thee Kian Wie, Policies for Private Sector Development in Indonesia, ADB Institute Discusssion Paper No. 46, March 2006. 17 Jonathan Temple, Growing into Trouble, In: Dani Rodrik (ed.), In Search of Prosperity, Princeton University Press, 2003. 18 The government intentionally used three parallel programs to induce competition between them that would limit corruption – companies could opt for the program with the least amount of hidden payments. Interview with Louis Wells, former advisor to the Indonesian government. 19 Haryo Aswicahyono/Tubagus Feridhanusetyawan, The Evolution and Upgrading of Indonesia’s Industry, CSIS Working Paper WPE 073, January 2004, p. 13. 20 Haryo Aswicahyono/Tubagus Feridhanusetyawan, The Evolution and Upgrading of Indonesia’s Industry, CSIS Working Paper WPE 073, January 2004. 21 22 28 Asia Development Bank, BELOW?, Appendix 1: Country Context, p. 69. Dewi Fortuna Anwar, Indonesia in ASEAN, Institute for South East Asian Studies, 1994, p. 316/317. Indonesia: Attracting Foreign Investment 23 708-420 The World Bank, Making the New Indonesia Work for the Poor, Jakarta, 2006. 24 Asia Development Bank, Operations Evaluation Department, “Country Assistance Program Evaluation for Indonesia,” CAP: INO 2005-16, December 2005, p.iv. 25 US-ASEAN Business Council, http://www.us-asean.org/afta.asp , accessed April 12, 2007. 26 IMF, Indonesia: Selected Issues, 2006. 27 Sebastian Mallaby, The World’s Banker, Penguin Books. 28 Asia Development Bank, Appendix 1: Country Context, p. 69. 29 For a description of the political developments in the first six year’s after the end of the Suharto regime see J.F. Conceicao, Indonesia’s Six years of Living Dangerously, Horizon Books, Singapore: 2005. 30 IMF, Indonesia: Selected Issues, July 2004. 31 World Bank, Indonesia Country Assistance Strategy, 2006, p. 10. 32 Sebastian Mallaby, The World’s Banker, Penguin Books. 33 IMF, Indonesia: Selected Issues, 2006. 34 IMF, Indonesia: Selected Issues, July 2004. 35 R. Rohdewohld, A New Framework for Local Governance, GTZ Discussion Paper, 1999, available from www.gtzsfdm.or.id, cited in Asian Development Bank, Appendix 1: Country Context, p. 67. 36 World Bank, Indonesia Public Expenditure Review 2007. 37 See J.F. Conceicao, 2006. 38 IMF, Indonesia: Selected Issues, November 2005. 39 EIU, Country Profile Indonesia, 2006. 40 Thomson Gale data, available from http://www.nationsencyclopedia.com/Asia-and-Oceania/IndonesiaGOVERNMENT.html, accessed January 3, 2007. 41 Suzanne Miller, “Indonesia Disappoints,” fDi Magazine, Financial Times Business, Ltd., www.fdimagazine.com/news/printpage/php/aid/421/Indonesia_disappoints.html, accessed December 22, 2006. 42 World Bank, Indonesia: Economic and Social Update, 2006. 43 Asian Development Bank, Appendix 1: Country Context, p. 68. 44 International Monetary Fund, Asia and Pacific Department, Indonesia: Report for the Post-Program Monitoring Discussions, IMF Country Report 05/128, January 14, 2005, p. 3. 45 Asia Development Bank B, Initial Assessment of the Earthquake and the Tsunami in Southeast Asia, Manila, 2005. 46 World Bank, Indonesia: Economic and Social Update, 2006. 47 Asian Development Bank, Appendix 1: Country Context, p. 70. 48 The World Bank, Making the New Indonesia Work for the Poor, Jakarta, 2006. 49 IMF, Indonesia: Selected Issues, November 2005. 50 IMF, Indonesia: Selected Issues, 2004. 29 708-420 Indonesia: Attracting Foreign Investment 51 IMF, Indonesia: Selected Issues, November 2005. 52 Transparency International, 2006 Corruptions Perceptions Index. 53 Kaufmann, Kraay, Mastruzzi, Worldwide Governance Indicators 1996-2005, World Bank . 54 Business Competitiveness Index, in: Global Competitiveness Report 2006. 55 World Bank, Doing Business data base www.doingbusiness.org, accessed February 14, 2007. 56 Asian Development Bank, Improving the Investment Climate in Indonesia, 2005. 57 The World Bank, Making the New Indonesia Work for the Poor, Jakarta, 2006. 58 World Bank, Revitalizing the Rural Economy: An assessment of the investment climate faced by non-farm enterprises at the District level, July 2006. 59 Montty Girianna, A way forward for RI electricity industry, Jakarta Post, July 31, 2006. 60 IMF, Indonesia: Selected Issues, November 2005; World Bank, Unlocking Indonesia's Domestic Financial Resources, 2006 61 IMF, Indonesia: Selected Issues, 2004. 62 Ibid. 63 Asian Development Bank, Asian Development Outlook 2006, p. 199. 64 Annual Report on Competition Policy Developments in Indonesia, OECD, 2005. 65 IMF, Indonesia: Selected Issues, November 2005. 66 See http://news.bbc.co.uk/2/hi/asia-pacific/4798501.stm and Jakarta Drifts, Newsweek, February 19, 2007. 67 PriceWaterhouseCoopers, mineIndonesia 2006, February 2007. 68 “Jakarta’s tough tin export regime begins,” Financial Times, February 24–25, 2007. 69 See Harvard student team analysis in 2002 by Ijeoma Akunyili, Bertha Angulo, Oupa Mokuena, and Salvador Stadhagen. 70 Haryo Aswicahyono, Competitiveness and Efficiency of the Wood Products Industry in Indonesia, CSIS Working Paper WPE 075, February 2004. 71 Martin Perry, Business Clusters in the South: A Critical Appraisal from Indonesian Evidence, Singapore Journal of Tropical Geography, Vol. 26 (2), 2005, pp. 227-243. 72 IMF, Indonesia: Selected Issues, 2006, p. 32. 73 Stephen Royle, Industrialization in Indonesia: The Example of Batam Island, Singapore Journal of Tropical Geography, Vol. 18 (1), 1997, pp. 89-98. 74 Stepen Thompson, Southeast Asia: The Role of FDI Policies in Development, OECD, 1999/I. 75 Osamu Watanabe, JETRO, Economic Integration in East Asia and Investment in Japan, May 27, 2005. See also The problem with Made in China, China Supply Chain Council, January 15, 2007, http://www.supplychain.cn/en/art/?1438, accessed March 23, 2007. 76 Quoted in Thee Kian Wie, Policies for Private Sector Development in Indonesia, ADB Institute Discusssion Paper No. 46, March 2006. 77 2002. 30 FDI Magazine, Sony pulls out of Indonesia as a result of frustration with governance issues, December 2, Indonesia: Attracting Foreign Investment 78 708-420 Tom Wright, Indonesian Labor Rules Take Toll on Investment, Wall Street Journal, December 6, 2006. 79 BKPM Indonesia Investment Coordinating Board), http://www.bkpm.go.id/bkpm/file_fact/Tabel-10.xls, accessed March 20, 2007. 80 Louis T. Wells/Nancy J. Allen, Tax Holidays to Attract Foreign Direct Investment: Lessons from Two Experiments, FIAS Occasional Papers 15, World Bank, 2001. 81 Ibid. 82 Stephen Thompson, Southeast Asia: The Role of FDI policies in Development, OECD, 1999, p. 22. 83 FDI Magazine, “Out of nowhere,” October 3, 2005. 84 Jannes Hutagalung, Indonesia’s Efforts to Enhance Transparency for Improving the Investment Climate, OECD Global Forum on International Investment, Johannesburg: 2003. 85 Interview with Mr. Lufti, head of BKPM, in FDI Magazine, August 1, 2005. 86 CGI Brief: Beyond Macroeconomic Stability, Jakarta, December 2003. 87 Indonesia: Economic and Social Update, World Bank, April 2007. 88 Japanese Bank for International Cooperation, Survey Report on Overseas Business Operations by Japanese Manufacturing Companies, 2006. 89 Quoted in Newsweek, February 19, 2007. 90 Cemex retreats from Indonesia with sale of stake, Financial Times, July 24, 2006. 91 Stephen Royle, Industrialization in Indonesia: The Example of Batam Island, Singapore Journal of Tropical Geography, Vol. 18 (1), 1997, pp. 89-98. 92 Ibid., p. 96. 93 Embassy of the United States in Jakarta, Indonesia, Economic Reform Update January 2007, Batam Special Economic Zone. 94 FDI Magazine, “Out of nowhere,” October 3, 2005. 95 The Coordinating Minister for Economic Affairs, Press Release: Indonesia and Singapore Signed Framework Agreement on Economic Coordination in the Islands of Batam, Bintan, and Karimun, June 25, 2006. 96 Embassy of the United States in Jakarta, Indonesia, Economic Reform Update January 2007, Investment Incentives and Streamlined Procedures. 97 Trade and Investment News, The Coordinating Ministry for Economic Affairs, Republic of Indonesia, Jakarta: April 2, 2007. 98 Embassy of the United States in Jakarta, Indonesia, Economic Reform Update January 2007, Investment Incentives and Streamlined Procedures. 99 100 A Red Carpet for Investors, Globe Asia, March 2007. Indonesia: Investment Law Passed At Last, DBS Group Research, Singapore: March 30, 2007. 31
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