Foreign direct investment and growth in East Asia: lessons for Indonesia

Abstract

Foreign direct investment (FDI) has been important in the growth and global integration of developing economies. Both Northeast and Southeast Asia, especially the latter, have been part of this development, with increasing inflows of FDI and greater foreign participation in local economies. However, Indonesia has been an outlier within the region. Inflows of FDI have been lower to Indonesia than to other countries, especially in manufacturing, and they have been lower than could be expected from Indonesia's size, population and other country characteristics. We show that the inflows that have occurred have benefited Indonesia, and use the East Asian experience to identify measures that are likely to increase these flows. A relatively poor business environment, inefficient government institutions, low levels of education and poor infrastructure all seem to be important explanations for the low inflows of FDI to Indonesia.

What can Indonesia learn from China's industrial energy saving programs?

“…R&D spending as a share of GDP was even lower in 2005 than it was in the 1990s (only 0.05% of GDP); meanwhile US majority-owned manufacturing affiliates operating in Indonesia were spending only 0.06% of employee compensation, or $80 per employee, on R&D in 2004 (Lipsey and Sjöholm 2011). 20 The comparable figures for US firms operating in China were 14.9% of employee compensation and $1,492 per employee.…”

“…China's actual trade share is nearly 45% higher than expected, while Indonesia's is only 9% higher than expected. 6 Lipsey and Sjöholm (2011) argue that the stock of inward foreign direct investment (FDI) in Indonesia is much lower (only 59%) than might be expected for a country with its characteristics, while China's stock of inward FDI is roughly what can be expected. 7 Price controls, non-tariff barriers (NTBs) and import licensing and quotas have virtually disappeared from China (Branstetter and Lardy 2008), while NTBs and price controls have become more common in Indonesia (Basri and Hill 2008).…”

“…9 See the discussion of technological catch-up policies in China below. Lipsey and Sjöholm (2011) argue that Indonesia has weak technological capabilities, while Hill (1995) argues that Indonesia does not have a technology policy. 10 I say 'appears' simply because there are no reliable estimates of CO 2 emissions from cement in Indonesia.…”

“…Second, the CO 2 intensity of cement is falling in China but appears 10 to be rising in Indonesia 4 The CO 2 intensity of GDP includes CO 2 emissions from land cover change, while the CO 2 intensity of industry and of cement does not. 5 Following Lipsey and Sjöholm (2011), I regressed country trade shares in 2005 on country land area and population, and compared predicted values with actual values. China's actual trade share is nearly 45% higher than expected, while Indonesia's is only 9% higher than expected.…”

Foreign Direct Investment in Indonesia: Fifty Years of Discourse

“…Lipsey and Sjöholm argued that American firms chose to locate their labour-intensive production in Indonesia only when alternatives were not available elsewhere. They concluded that environmental conditions such as infrastructure, education, and corruption become all-important as soon as investors can pick a host country at will (Lipsey and Sjöholm 2011). It was the responsibility of Indonesian policymakers to provide better conditions.…”