Indonesia’s Investment Promotion in a Brief: A Case Study of Japanese FDI in Indonesia Cahyo Purnomo Diskusi PPI 14 Juli 2007 TBIC Tsukuba

Definition and limitation Investment promotion: certain marketing activities through which governments try to attract foreign investors. Activities: advertising, direct mailing, investment seminars, investment missions and so on. Investment climate: defined as the policy, institutional, and behavioral environment both present and expected that influence the returns and risks associated with investment. Three factors that can be included: macro fundamentals (macroeconomic stability, economic openness, social and political stability), governance and institutions (transparency, efficiency in regulation etc) and well-functioning financial sector, labor market and a skilled labor force) and infrastructure

Background Intense competition among developed and developing countries Rapid growth of IPAs in 1990s – –In 2001: 164 IPAs around the world (UNCTAD) – –1990s: 30 new IPAs were founded Indonesia’s investment climate has deteriorated since financial crisis mid 1997 – –Ethnic clash and sectarian violence – –Bomb blast in Jakarta and Bali – –Social and political instability

What to do? Indonesia’s Investment Year – –To restore investors’ trust/confidence – –To better its image as a favorable investment destination Presidential Instruction No. 3/2006 – –Custom and excise law – –Taxation law – –Labor and investment law New investment law was legalized end of March 2007

Matrix of FDI performance and potential High FDI PotentialFront-runners Brunei Darussalam, Canada, China, France, Malaysia, Poland, Singapore, Spain, United Kingdom, Vietnam Below potential Australia, Egypt, Italy, Japan, Philippines, Republic of Korea, South Africa, Thailand, United States Low FDI PotentialAbove potential Albania, Bolivia, Jamaica, Tunisia, Uganda, United Republic of Tanzania Under-performers Algeria, Bangladesh, Ghana, India, Indonesia, Pakistan, Romania, Uzbekistán, Venezuela High FDI PotentialFront-runners Australia, Canada, China, France, Indonesia, Malaysia, Portugal, Singapore, Spain, Thailand, United Kingdom Below potential Austria, Brunei Darussalam, Germany, Italy, Japan, Poland, Republic of Korea, South Africa Low FDI PotentialAbove potential Argentina, Bolivia, Egypt, Philippines, Tunisia, Vietnam, Zambia Under-performers Bangladesh, Ghana, India, Kenya, Pakistan, Sudan, Uganda, United Republic of Tanzania

FDI to ASEAN 5 (US$ million)

Japan’s Cumulative FDI to ASEAN 5 in mio US$ ( )

Top Ten Approved Investing Countries No.CountriesValue (US$ 000) PercentageNumber of Projects Percentage 1.Japan 39,420, %1, % 2.United Kingdom 35,192, %1, % 3.Singapore 28,469, %2, % 4.Hongkong (China) 20,900, % % 5.Taiwan 13,476, %1, % 6.Malaysia 12,544, %1, % 7.South Korea 12,140, %2, % 8.United States of America 11,787, % % 9.Germany 9,521, % % 10.Australia 9,517, % % Others 119,831, %5, % TOTAL 312,802, %18, %

Top 10 Countries of Japanese FDI Recipient, No.CountriesValue (million US$) PercentageNumber of Projects* Percentage 1.USA 334,96037%30,55231% 2.United Kingdom 97,47211%3,7314% 3.Netherlands 63,3727%5,8346% 4.Cayman Islands 38,0734%8091% 5.China 31,4873%5,7686% 6.Indonesia 28,1243%3,2143% 7.Hong Kong 21,3662%5,0315% 8.Singapore 18,7452%3,4753% 9.Thailand 18,0692%4,0304% 10.France 17,8412%1,8402% Others 246,04727%35,27435% TOTAL 915,556100%99,558100%

Divestment and relocations by Japanese electronics firms, Country of divestmentRelocation toProducts and firm involvedNumber of cases (total) Malaysia(9) Product line closure64M D-ram (NEC), Cathode-ray tube and VTR (Hitachi) 3 Product line relocationChinaCamera (Minolta), Medium and low end Airco (Matsushita) 2 ThailandWashing machine China(5) Product line closureCRT TV (JVC)2 Product line relocationJapanCamcorders (Sony)1 Indonesia(2) Affiliate relocationMalaysiaCD stereo, other audio product (Sony) 1 Product line relocationMalaysiaCD stereo, other audio product (Sony) 1

Relocation of Japanese electronics sector, Country ofCountry of relocation DivestmentJapanMalaysiaThailandIndonesiaChinaVietnam Singapore23 South Korea11 Taiwan11 Malaysia14 Thailand3 Philippines2 Indonesia2 China1 Total

Conclusion Focus on image building activity Focus on image building activity –Investment mission from Indonesia-Japan and vice versa –General investment seminar –Participating in investment exhibition Led by top official Led by top official Don’t forget the existing investors Don’t forget the existing investors As counterpart/partner As counterpart/partner Follow up Follow up