6 - Indonesia's Outward Foreign Direct Investment

Summary

INTRODUCTION

Inward-looking policies brought Indonesia close to bankruptcy towards the end of Sukarno's government in the mid-1960s. In contrast, his successor, President Suharto, started to develop a new development strategy by pursuing an outward-looking policy with more liberal trade and foreign investment regime (Thee 2012). The Foreign Investment Law was enacted in 1967 and the Domestic Investment Law was issued in the following year. The “open door” policy succeeded in attracting new foreign investment flows in the oil sector, other mining projects and the mining sector (Hill 1988, p. 81).

As seen from Figure 6.1, inward foreign direct investment (IFDI) flow increased gradually from about US$145 million in 1970 to about US$1.3 billion in 1975. Then between 1976 and 1989, the average IFDI flow was about US$349 million. IFDI flow gradually increased after 1989 and it reached a peak at US$6.2 billion in 1996, then it declined to US$4.7 billion in 1997 (before the economic crisis in 1997–98). On the other hand, the movement of outward foreign direct investment (OFDI) flow was not as quick as IFDI. However, in 1994, the ODFI flow was higher than IFDI. Even, for seven consecutive years (1998 to 2004), the flow of ODFI was higher than IFDI. In 2014, the flow of ODFI was about US$7.1 billion. The ODFI flow has increased more than double compared to its level in 2005. This indicates that IFDI and ODFI flows have increased in the same direction. By 2014, the IFDI stock in Indonesia was about US$253.1 billion, while the OFDI was about US$24 billion (UNCTAD 2015). This indicates that the share of OFDI stocks to inward FDI stock was about 9.5 per cent.

Today, Indonesia lags in the promotion of OFDI. According to the Central Intelligence Agency (CIA), in term of OFDI stock, Indonesia was ranked 48 out of 93 countries. In the ASEAN region, Indonesia lags behind Singapore (rank 18), Malaysia (rank 27), and Thailand (rank 34).1 As seen from Figure 6.2, in 2012, there were no Indonesian firms in the list of top-100 non-financial Transnational Corporations (TNCs) from developing and transition economies. In the list, about 50 per cent of the top nonfinancial TNCs came from China and Singapore. Thus, Indonesia's companies lack in internationalization record compared to other developing countries.