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Indonesia 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
(see
Petroleum, Liquefied Natural Gas, and Coal
, this ch.).
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
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