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Indonesia: Foreign Inputs
Country Study > Chapter 3 > The Economy > Industry > Foreign Inputs

FOREIGN INPUTS


The predominance of joint ventures with foreign firms over entirely foreign-owned firms, which numbered around fifty, reflected increasing limitations on foreign investment during the 1970s, following a liberal policy from 1967 to 1974. One of the first legislative acts of the New Order was to pass the Foreign Investment Law of 1967, which encouraged foreign investment with tax incentives and few limitations on equity ownership and employment of foreign personnel. Popular discontent with foreign economic domination, voiced in widespread protests during the 1974 visit of the Japanese prime minister Tanaka Kakuei, contributed to greater restrictions on foreign investment. New provisions required that all foreign investment be in joint ventures with Indonesian nationals, whose equity share should reach 51 percent within ten years. Enforcement of these provisions was somewhat arbitrary, however, and the greatest deterrent to foreign investment may have been the complex and sluggish bureaucracy implementing the everchanging regulations.

In the mid-1980s, foreign investment policy was again liberalized as part of the general reform movement. Administration of foreign investment was simplified, and the Investment Coordinating Board (BKPM) was required to approve projects within six weeks of initial application. In special cases, domestic equity could be as low as 5 percent for the initial investment, and licenses were subject to renewal for up to thirty years, altering an earlier policy under which all foreign investment licenses expired in 1997. The minimum investment amount of US$1 million was also lifted for special cases.

Overall, government and private ventures with foreign partners accounted for more than 40 percent of industrial production, according to the 1986 economic census. Japan was the major foreign investor in industry from 1967 to 1988, followed by Hong Kong and South Korea. The United States was the source of less than 1 percent of foreign investment in industry. This figure excluded the major United States investments in crude oil and gas exploration and production, considered part of the mining sector.

Foreign investment was often crucial for the development of capital-intensive heavy industries. A prime example was the Asahan Aluminum Project, a government joint venture with a consortium of Japanese companies that formed Nippon Asahan Aluminum Company. The aluminum smelter plant and two hydroelectric power stations, located in Sumatera Utara Province, were completed in 1984 with a capacity to produce 225,000 tons of aluminum ingots per year. The US$2.2 billion project became the focus of controversy when unforeseen difficulties in power generation and a decline in aluminum prices forced a major financial restructuring. The government equity share was increased from 25 percent to 41 percent, and in 1989 a provisional agreement was reached to allocate 51 percent of the plant's production to Indonesia, with the remainder exported to Japan.

Singapore joined Indonesia's manufactured export drive by assisting in the development of an industrial park on the island of Batam, located in Riau Province only nineteen kilometers offshore from Singapore. The 485-hectare facility, built by a state-owned company from Singapore and two private Indonesian firms, began operations in 1991. The Indonesian government hoped to attract foreign investment to the park by permitting full foreign ownership of export-oriented industries for five years. Singapore viewed the project as part of a "growth triangle" linking Singapore, Malaysia, and Indonesia, that would permit Singaporean investors to take advantage of more ample land and cheaper labor available in the neighboring countries.

In many industries, foreign firms supplied technical assistance and arranged for domestic production under licensing agreements, without direct equity participation in the domestic firm. For example, automobile assembly plants in Indonesia produced about twenty international brand name automobiles, from Fiat to Toyota, primarily under license agreements. The automotive assembly industry grew amidst heavily protected markets. The capacity of domestic firms in 1991 to produce about 250,000 units per year of as many as eighty different types and makes of vehicles meant that it would be difficult for the industry to achieve low-cost, largescale production for export. By international standards, a firm must produce at least 100,000 units of a particular vehicle to be competitive.

Under the leadership of the minister of state for research and technology, Bacharuddin J. Habibie, the government attempted to move into aeronautics with foreign technological assistance. The Archipelago Aircraft Industry (IPTN) was established in 1976 to assemble aircraft under license from Construcción Aeronauticas of Spain, and helicopters under license from Aerospatiale of France and Messerchmitt of Germany. By 1986 IPTN had delivered 194 aircraft, almost entirely to domestic buyers. A critical review of IPTN by two foreign economists argued that the endeavor was a premature leap into advanced technology and could only hope to be profitable by mandating continued domestic purchases of its aircraft. The government justified the US$3 billion investment on broader criteria than financial profitability, including the potential stimulus to domestic suppliers of aircraft parts and the training of highly skilled workers. Among the 12,000 employees, 2,000 were university graduates, many of whom were trained abroad. However, most aircraft parts were still imported in 1986.

Data as of November 1992




Last Updated: November 1992


Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Indonesia was first published in 1993. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on Factba.se.

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