1. Private Sector Perceptions of Challenges and Opportunities by Japanese Infrastructure Users (Draft Interim Report) For Bali Workshop (June 27 to 29, 2004) June 28, 2004 Hiroo Yamagata, Nomura Research Institute, Ltd.

2. Background of the Study “Infrastructure is important for development and attracting investment”----- But How? Why? Which Infrastructure? What do the actual industry users’ need? The study aims to clarify… –The priority of the infrastructure conditions –The issues for of infrastructure (in terms of both hardware and software) and the needs These will be studied from the actual view point of the Japanese firms there.

3. Japanese Firms have significant presence in Asian FDI Japan had the largest share of FDI in East Asian Countries. It is one of the Dominant Players. Their preference and views will have huge relevance to the infrastructure condition.

4. No Apparent Overall Pattern in Location All industries seem to be evenly located within Asia For most countries, there seems to be not much difference in the distribution of industries

5. Industry strategy: Two-Core Structure within East Asia ASEAN core for the ASEAN market, and other international production hub China core aims for the China market, with some US export (This may change with the advent of FTA) Japan High grade parts (Engine related etc.) China Based on interviews With major Japanese manufacturers ASEAN To USA To Australia To Europe To USA

6. Automotive industry:Division of Labor within ASEAN Automotive industry has strategic investment patterns (less so for other industries) The pattern seems largely due to tax incentives. Infrastructure is asked to accommodate this pattern

7. Direct Investment: The decisive factors Labor Cost/Availability Market Client (parent firm) Incentive (tax benefits) Legal conditions Infrastructure? Infrastructure is usually not THE decisive factor (although it may work indirectly through other factors). It may play an important role in the final comparison of candidate site. It may not dictate strategic decisions directly.

8. Infrastructure Needs (sample): Automotive Production

9. Infrastructure Needs (sample): Automotive Design

10. Caveats Room for self investment –Electronics firms need water, but not water works! (they dig their own well) Role of Industrial Park Developers –Much of the industrial infrastructure is provided by the Industrial parks, especially ICT and water (very often, power)  Need to consider what industrial parks cannot produce (transportation?)

11. Overview of Infrastructure Needs Binding Constraints Manageable Constraints Hardware Port Road (Power) (Airport) (Power)/Gas Water/Sewage Rail, (Airport) Software Port (customs) Congestion Investment policy Need for public investment Can be dealt with private investment (self investment/industrial estate)

12. Infrastructure of Indonesia

13. Case Study: Question Items Factors for Deciding the location (including non-infrastructure factors) The overall importance of various infrastructure and their effect on the operation The current condition of various infrastructure

14. Case Study: Country and Industry