Fdi) and Agglomeration Economies Leverage Toward Invesment and Economic Growth in Special Region of Yogyakarta

UNDERGRADUATE THESIS

ANALYSIS OF GOVERNMENT STRATEGY ON ATTRACTING FOREIGN DIRECT INVESTMENT (FDI) AND AGGLOMERATION ECONOMIES LEVERAGE TOWARD INVESMENT AND ECONOMIC GROWTH IN SPECIAL REGION OF YOGYAKARTA

CASE STUDY AT SLEMAN AND KULONPROGO REGENCY 2013

Compiled and Written by:

Miptahul Janah

20100520103

INTERNATIONAL CLASS

GOVERNMENTAL SCIENCE DEPARTMENT

FACULTY OF SOSIAL AND POLITICAL SCIENCE

UNIVERSITAS MUHAMMADIYAH YOGYAKARTA

2014

CHAPTER 1

INTRODUCTION

A. PROBLEM BACKGROUND

Local governments have wide authority to manage and maintain the development in the region as released in Act No. 22 of 1999, which has replaced by Act No. 32 of 2004 about regional autonomy. It is expected that the local government will carry out the development activities according to its local potential and condition. The development of a region is a central theme in economic life of the countries in the world nowadays, including Indonesia. One of the factors causing the low-rate of Indonesian economic development is the scarcity of capital. So that, in gaining the capital, Indonesia has to arrange the effective strategies to attract the investors concerning the capital in Indonesia. As a country with a high population growth, Indonesia becomes one of preferred country in South-East Asia as the massive market of the investment. With a large internal market, a growing middle class, a consumptive lifestyle, abundant natural resources and a strategic location within Southeast Asia, Indonesia has natural appeal to foreign investors. In addition, the supporting factors such competitive and productive labour force, and market-oriented economic policy, amongst other factors, that attract Foreign Direct Investment (FDI) flows to Indonesia. Foreign Direct Investment (FDI) has been widely recognized as an essential key to accelerate economic growth as well as contributing to both national and regional government in providing public goods and services. Many scholars argue that the flows of FDI to the region may help the host region to break out the threat of underdevelopment. The presence of FDI may favour the region in many important points that refers to accelerate the economic growth. These point such acquisition of new technology, employment creation, human capital development, contribution to

1 international trade integration, enhancing domestic investment, and increasing tax revenue (Jenkins and Thomas, 2002; World Bank, 2000). In this recent century, when the global market is opened, the regional government has responsibility to sustain their development and to catch up as much as possible the opportunities to accelerate the regional economic growth. Globalisation and decentralization(regional autonomy) are not only offering new opportunities for regional development but at the same time it also testing and challenging the regional governments to adapt and maintain their competitive tone. Globalisation is demanding the regional government to be responsive toward the extended markets, the rapid technological change and the greater exchange of knowledge. Moreover, the presence of Act No. 32 of 2004 about regional autonomy is requiring the regional government to be hundred times more pro-active in organizing and developing their human capital and natural resources. Nowadays, the provinces of Indonesia are competing to attract Foreign Direct Investment (FDI) to support the development in the region in many prestigious sectors (primary, secondary and tertiary sectors). Each Province has its own potential that might not owned by other Province. For instance, Riau province with its richness of natural resources, Jakarta Province as the capital city with its strategic position and Special Region of Yogyakarta with its culture richness and so on. In this context, the nature and extent of regional mechanism in attracting foreign direct investment varies among regions regarding to the economic situation, social and institutional conditions, the natural resources potential, and ultimately the affordability of the region. The investment climate in Yogyakarta was growing up significantly in this year (2013). It is proven by many investors especially Foreign Direct Investments were looking forward to concerning the investment to this region. According to World Bank Report and International Financial Corporation (2012), Yogyakarta assumed as the most welcome cities on accepting foreign direct investment comparing to other cities in Indonesia. The characteristics of the people that were likely to work hard, the regional minimum wage, and the profitable potentials in some prestigious sectors such as tourism, industrial, culture, infrastructure, education, and health were believed as the factors that influence the investors would rather to concerning the investment in

Yogyakarta. Those all signing that Yogyakarta has opportunities to attract more foreign direct investment with its competitive advantages. In the opening ceremony of the 18th APEC Automotive Dialogue in Yogyakarta 2012, the Vice Governor of Yogyakarta Special Region, Sri PakuAlam IX emphasized that Yogyakarta is one of 70 cities in the world that is most responsive in giving service to the foreign investors (AntaraNews.com/Jogja, 2013). Many universities are located in the administrative area of the Special Region of Yogyakarta. It makes the Special Region of Yogyakarta become a “melting-pot” of Indonesia where the people with different culture come together and live in harmony. Yogyakarta is also known as a famous tourist destination with its magnetic power in tourism sector. The uniqueness of the culture and the existences of some cultural heritage site (temple, Sultan Palace etc.) differentiate this city with other region. In addition, the development planning project of new International Airport in Kulonprogo Regency that projected to start in the late of the year 2014 and targeted to finish in 2016 will makes the Special Region of Yogyakarta has such greater opportunity to attract more investors to come. Unfortunately, the Investment Coordinating Board of the Special Region of Yogyakarta (BKPM DIY) as the unit of the governance that responsible on the investment flows to Yogyakarta is not taking very seriously to differentiate the strategy both to attract foreign direct investment and the domestic investment. A staff of BKPM DIY emphasized that there are no special strategies to attract foreign direct investment in DIY (interview with the head of program division of BKPM DIY, 02 December 2013) The head of operational unit of the Investment Coordinating Board DIY (BKPM DIY), Andung Prihadi Santoso, noticed that the direction of investment policy of Yogyakarta in 2012 is focused in three main pillars, which is education, culture and tourism. He argued that these three pillars would make Yogyakarta in-line with Bali as tourist destination (Tribunjogja.com, 2012). The development core such education, business and industrial potential are so much influence the economic growth and prosperity of a region. This argument according to Russwurm in Yunus (2000), stated that the core points those influence the rapidness of development growth beyond farming sector, here are: (1) Capital city, (2) Shopping centre, (3)

Industrial area, (4) the offices centre/institutions, (5) community housing centre, (6) apartment centre, (7) education centre, (8) a recreational open space area/ tourism. However, particularly, the region with those some points will be more developed. The vision of Long-term development planning of the Special Region of Yogyakarta (RPJP DIY) noticed that the Special Region of Yogyakarta formed to be the centre of Education, culture and well-known tourism destinations in South-East Asia in the developed, independence and welfare community in 2025. This vision continuously introduced and promoted through tagline“ Jogja Never Ending Asia”. Definitely, its hoped that the Special Region of Yogyakarta will attract more tourist to come and explore “Never Ending Asia”. In this context, to support the realization of the long-term development objectives, Yogyakarta need adequate infrastructure like transportation facilities (road, airport, etc.), health facilities (hospitals, insurance, etc.), industrial sectors (trade, goods/services), Accommodations (Hotels, restaurant, etc.) and so on. The regional income from taxes, retribution and other source of income will not sufficient to manage and maintain the development pattern in Yogyakarta. Regarding to this, it is very common to other provinces in Indonesia, particularly, to makes interesting strategies to attract investors to support regional development. Furthermore, the conducive investment climate like rule of law, political stability and legal security, pro-investment policy, and the adequate infrastructure development, were the main factors to attract the investors.

The investment realization and growth of PMA/PMDN in DIY in the 2008 up to semester 1/2012, are as presented in the table below:

Table 1.1 Investment Realizations and Growth of PMA/PMDN DIY, 2008- 2012

No Year PMDN PMA (Rp) PMDN+PM Growth Growt . (Rp) A (Rp) (Rp) h (%) 1. 2008 1.806.426. 2.415.461.7 4.221.888.20 142.187. 3,49 455.845 44.857 0.702 960.933

2. 2009 1.882.514. 2.508.131.1 4.390.645.70 168.757. 3,99 536.845 63.857 0.702 500.000 3. 2010 1.884.923. 2.696.046.9 4.580.972.82 190.327. 4,33 869.797 57.447 7.244 126.542 4. 2011 2.313.141. 4.110.436.3 6.423.578.02 1.842.60 40,22 695.784 24.224 0.008 5.192.76 4 5. 2012 2,805,944, 4,250,121,5 7,056,066,14 632,488, 9,85 605,930 35,829 1,759 121,751

Source: Regional Investment and Cooperation Board of DIY (BKPM DIY) 2013

The investment in the Special Region of Yogyakarta (DIY) had shown a significant growth in this recent 5 years as seen on the table above. The highest growth is occurring in 2011.During this year there were many companies broaden the investment in the previous year and revitalization of companies that affected investment growth. On the other side, the recovery condition after Merapi eruption also gave positive impacts to investment growth.

The secondary and tertiary sectors presumably are the most contributing sectors to the investment growth in DIY. They were hotels, restaurants, manufacture industry, trading, and transportation service. In 2012, the PMDN investment growth was more significant in the hotels and convection industry. While the PMA has shown growth in hotels, restaurants, manufacture industry, trading, and transportation service (BKPM DIY, 2013).

From the zoning aspect, the investment realization of DIY in 2012 still centralized in Sleman Regency and Yogyakarta City. The amount of 91,68% of the total investment realization of DIY in the 2012 were located in Sleman and Yogyakarta city while Gunung Kidul and Kulonprogo Regency is only hold 2,4% of the total.

Table 1.2 Investment Realization based on Regency/City in DIY

No. Regency/city The investment Realization up to 2012

PMDN (Domestic Direct PMA (Foreign Direct Investment) Investment)

1. Yogyakarta 1,303,134,160,910 1,648,551,898,790 City 2. Sleman 1,242,033,289,418 2,276,146,234,364 3. Bantul 191,257,086,711 226,005,372,675 4. Kulonprogo 34,017,508,942 3,078,450,000 5. GunungKidul 35,502,559,948 96,339,580,000 Total 2,805,944,605,929 4,250,121,535,829 Source: Regional Investment and Cooperation Board of DIY (BKPM DIY), 2013

The effort of promoting potential investment has been done through involvement in the investment exhibitions both at regional and national level. At the regional level such as potential investment events, Trade and Tourism Investment (TTI) Expo, One on One meeting, business forum/business gathering with the potential investors and relevant stakeholders. There was also promotion of investment through information management such as official website of BKPM DIY named “Jogja Invest”. Furthermore, the effort to increase the investment climate also has been done through formation of Centralized Licencing service board so called as “GeraiP2T”. It is operated for arrangement of service license to the investors companies. It also arranged in the regional investment planning (RUPMD) and managed in the local regulation draft (RAPERDA) about incentives and easiness service to the investors companies in DIY.

Local Integrated Licenses Service Agency of DIY has been giving awards by Indonesia Investment Coordinating Board (BKPM RI) among of the 130 PTSP in the provincial, regency and city level in Indonesia in 2010. The award was One star. In 2011, DIY got Two Stars Award. At the event of Promotion Regional Potential Exhibition PRJ (Jakarta week) 2012, DIY was winning an award as Brand Manage Champion 2012 in government stand category.

Other policy was Single Window Policy in investment. DIY established Regional Representative Office (KAPERDA) DIY in Jakarta. One of the activities that has been done and will be continuously run is companies gathering. Those events were the strategy to keep-in-touch intensively with the

6 companies and stakeholders so that they would keep and even broaden their investment in DIY (BKPM DIY, 2013).

One of the crucial problems, identified by the BKPM DIY is the equilibrium of investment realization among regencies. Regionally, the investment in DIY was still concentrated in Sleman Regency and Yogyakarta City with amount of 90% of the PMDN and PMA realization. Meanwhile, other three regencies are only hold 11% for PMDN and less than 10% for PMA (BKPM DIY,2012). This problem brought impact of economic disintegration among regency. Theoretically, the investment agglomeration is very possible to happen. There are some points that causing agglomeration, such as infrastructure, human resources and other factors that influence the production efficiency. Based on RPJMD, it is that investment realization growing significantly in DIY on the period of 2013-2017 especially in Kulonprogo and GunungKidul Regency.

The dynamic of economic activity in DIY are concentrated in Sleman Regency and Yogyakarta City. The agglomeration economies in both regions were growing faster. It is reflected from the economic growth of both regions. The economic growth of Sleman and Yogyakarta City were growing more than the average of economic growth in DIY. The domination of Sleman Regency toward economic activity in DIY started since the 2000-2007 periods. PDRB of DIY in 2007 was reached RP. 18,31 trillion and amount of 30,3% of a whole was contributed by Sleman Regency.

Yogyakarta has many challenges and opportunities to become “attraction point” of Foreign Direct Investment (FDI). This region needs to initiate such effective strategy to compete with other provinces in Java Island and Indonesia in general. National Government in RPJM 2004-2009 reported the problems that particularly occur about FDI in region were:

1. The strict competitiveness of strategies on attracting FDI among region through new innovation and uniqueness that owned by each region. 2. The lack of law certainty, caused by uncertainty of regulations and planning of investment. 3. The low incentive of investment

4. Low quality of human resources and lacking of infrastructure. 5. There is no clear regulation on technology exchange of Foreign Direct Investment. 6. High cost of economy, because of corruption cases, security, and power manipulation. 7. Un-optimal incentives and facility services to the investors.

Many local governments was still engaged with the paradigm of lean on the national allocation funds (DAU) and the pragmatic activity oriented on the income from Local Genuine Income (PAD). The concept of local development that concern on involving the investment and (or Foreign Direct Investment) as the success key to create what so called as “multiplier effect”. It helps a region to cut the chain of poverty and the ineffective in some regency, including in DIY.

Meanwhile, there is some regency in Indonesia taking into consideration the investment role of their development project, such as the Sragen and Purbalingga Regencies. The limitation of natural resources in both regencies was not being an obstacle in developing and minimalizing their potentials. The transparency, easiness and effectiveness in giving the public service (especially the investment service licence) are the main initiative to create the prosperity to the citizens.

Furthermore, the agglomeration economies and investment flows of each region in DIY were causing the inequality of economic growth. The local economic development strategy should taking into account the spatial dimension. The cluster approach in local business development has become a trend and considered in many countries (Kuncoro,2002; Porter, 1998). As the implications, local governments need to formulate the sectorial approach base in certain location. In addition, Kulonprogo and GunungKidul were classified as rural area. The importance of this research is drawn from the fact that investment in Sleman Regency growing faster rather than investment in Kulonprogo Regency.

B. RESEARCH QUESTION Foreign Direct Investment (FDI) assumed as the important matter in accelerating the economic growth. Ironically, the realization of PMDN and PMA in DIY if compared to other provinces in Java Island categorized very low (BKPM RI Report 2012, 2013). Moreover, the economic growth in DIY is also unequal among regencies. The agglomeration of investment makes the imbalances of economic growth and human resources development. As the result, some regencies have been developed and some others left behind. According to investment report, it can be seen that the Sleman Regency is the most developed while Kulonprogo Regency is the most left behind.

Based on the problem background above, this research will explore on:

1. How do the strategy on attracting FDI and its leverage toward Economic Growth of Sleman and Kulonprogo Regency in 2013? 2. How do the Agglomeration Economies and its leverage toward Investment (or FDI) and Economic Growth of Sleman and Kulonprogo Regency in 2013?

C. PURPOSE AND BENEFITS OF THE RESEARCH 1. Purpose of the Research The purposes of this research are: 1.1 To analyse the strategy on attracting FDI and its leverage toward economic growth of Sleman and Kulonprogo Regency. 1.2 To analyse the agglomeration economies and its leverage toward Investment in Sleman and Kulonprogo Regency. 1.3 To analyse the agglomeration economies and its leverage toward economic growth of Sleman and Kulonprogo Regency.

2. Benefits of the Research This research expected to brings benefits as the basic research to understand the nature fundamentals of the social phenomenon. The results and findings of this research are hoped to be generalized into the decision making process and as the measurement to analyse the problems in the investment sector. Based on the purposes and objectives of the research, the benefits expected from this research are:

a. Theoretical Benefits In relation to development concept, this research expected to be a base for further governance-related researches, purposively in local government level analysis. It is hoped to be a base to develop the strategic management knowledge especially in the relation of local governance and investment as general and foreign direct investment.

b. Practical Benefits This research is expected to bring some benefits including for local government which can utilise the results to make an appropriate policy for FDI. Society as a whole also becomes the benefited party by using the result to assess and to watch whether local government‟s policies and performance are appropriate to deliver net benefit to the region.

D. THEORETICAL FRAMEWORK

1. Strategy on Attracting FDI 1.1 The concept of strategy According to Chandler (Rangkuti, 2000, p3), strategy is the tool to reach the company‟s objectives in relation to the long-term goals, indirect program, and resources allocation.

Moreover, the strategy is the united plans, broad and integrated. It is connecting the government/company‟s strategies with the environment threats to ensure that the main objective of the government/company could be reached through appropriate implementation by the organization (Glueck and Jauch, p.9, 1989).

In addition, Argyris, Mintzberg, Steiner and Miner (Rangkuti, 2000, p4) defined strategy as the simultaneous and adaptive responses toward the opportunities and external threat as well as internal strength and weakness that might influence the organization. As general, the strategy can be defined as the incremental and simultaneous action. The velocity of new market innovation and the changes of consumer pattern need the core competencies by the companies/governments to maintain its capacity and competencies to afford their organization sustainability.

According to Porter (in Rangkuti, 2000) there are three strategies to a company/ government to gain the competitive advantages as follow: a. Leadership Cost, the government/company can initiate the cost competitiveness. It can be done through offering the lower cost to the costumer for the same product or services with same quality compares to the competitors. The lower cost initiates by utilizing the economic scale, production efficiency, technology usage and so on. b. Differentiation, the company can create the perception toward certain value to its costumer. c. Focus, the focus strategy applied to gain the competitive advantages through targeted market segmentation.

1.2 Concept and Definition of Investment and (or FDI)

Investment is always believed as a driver for acceleration economic growth in a region. In private sector‟s view, investment becomes tool for achieving fast growth of its business. On the other hand, public sector assumes that investment assist government in providing public services and development which cannot sufficiently be financed by government budgets. Buckley et al (2007) stated that an inflation rate is negatively associated with Foreign Direct Investment. Many researchers have proven that economic growth positively associated with it. Benhabib and Spiegel (2000) also found that financial development positively influences rates of investment.

Seyoum and Manyak (2009) were the first one who tried to simultaneously identify the role of private and public transparency on Foreign Direct Investments. With sample of 58 developing countries, they concluded that both private and public sector transparency have a significant and positive effect on inward FDI flows to developing countries. Moreover, private sector transparency has a greater influence on the flow. Despite of their results which indicated more influence from private sector side, some other studies found significant findings on public sector transparency on direct investment.

Empirically, Drabek and Payne (2002) summarised that a nation which increase its transparency in policies and institutions will result in significant increasing in Foreign Direct Investment flows. They also outlined why transparency was important for direct investment especially originating from foreign sources including: (i) additional cost incurred due to non-transparency, (ii) facilitating cross-border mergers and acquisitions, (iii) protection of property rights, (iv) positively

12 influence business attitudes, and (v) monitoring by outside organisation.

Previous studies have shown that most of researches were done for country-level analysis. Limited studies were found which touching the impact of governance to Foreign Direct Investment in local-level analysis. Current trend which decentralisation has been high on the policy agenda, consideration toward broad effect also needed. Kessing et al (2006) argued that the local government are closer to their constituency, hence, potential competition and benchmarking between regions becomes feasible. They also concluded that decentralisation has horizontal and vertical dimension. Horizontal dimension caused by competition between regional governments which result improving investment condition. It also reduced possibilities for local governments to appropriate parts of investment‟s return through taxation. On the other hand, vertical dimension is caused by the inevitable multiplicity of government levels that are created in the process of decentralisation.

1.3 Strategy on attracting FDI in Public sector

John Dunning Eclectic FDI Theory stated in the determinant of Foreign Direct Investment and foreign cooperation‟s activities. It covers the O, L, & I. OLI stands in the intersection of macroeconomic theory of international trade (L) and micro economic of the firm (O and I). This paradigm called OLI Paradigm. There is three variables including:

1. Ownership-specific (O) There are variables of Ownership advantage including tangible assets (natural main power, and capital endowment) and also intangible assets

(technology and information, managerial, marketing and entrepreneurial skill and organizational systems). 2. Location-specific (L) The variables of location specific (country or regional specific) refers to market structure; government legislation and policies; and the political; legal and culture environment which have been undertaken by FDI. 3. Internalization (I) The internalization variable refers to inherent flexibility of the company, product capacity and market by the way of its own internal subsidiaries.

These five factors was developed from the Electic FDI Theory (OLI Paradigm) and going to be analysed in the relation to the government of DIY‟s strategy on attracting and inviting FDI to the region.

1. Political and Regulation

Asiedu and Brempong (2000) claimed that any countries with more open policies especially in terms of trade and investment would attract a large number of foreign investment flows. In addition, Tahir, R., &Larimo, J (2004) found the main factors that can attract FDI in the country is not taxes but it is a good infrastructure, economic growth and political system, market size and labour cost. Asiedu, E (2006) said that political instability has a negative influence on increasing of inward FDI.

2. Economy and Market

The economic strength in the country is the main indicator of a wealthy country. It is demonstrated as the number of GDP growth, people‟s living and purchasing power, new technology, and economic stability. The Heckscher-Ohlin theory predicted in term of FDI flows that if there were three factors such as labour, capital and natural

14 resources, investors. A large domestic market and chances to exploit economies of scale is important for the timing of the decision of FDI (Dunning, J.H. ,2000).

3. Geographical Location

Geographical location is very important in decision making for foreign investors. Hollenstein, H (2005) stated that the improvement of infrastructure and the low level of government impediment in a host country have played an important role. It can increase FDI flows and make a foothold to investors in the country. Jovana Trikulja (2005) mentioned that the implication of the capital flow is geographically altering as the rural area and urban landscapes are modified to the new market systems. The quality of infrastructures is important and the availability of skilled workers will positively affects developing countries in attracting foreign capital (Bellack, C., Leibrecht, M., &Damijan, J.P, 2009).

4. Financial

FDI is an international capital flow that provides the parents firm and MNEs get control and linked with foreign affiliates. Ahn, Y.S., Adji, S.S. and Willett, T.D (1998) mentioned that different “high” and “Low” of inflation rate, which is not distinct, can be used as an indicator of the economic and political condition in the host country. Glaister, K.W. and Atanasova, H (1998) also said the effect of high inflation and unemployment in Bulgaria and high inflation can cause many problems in the country particularly to attract foreign investors. In addition, Qazi Muhammad Adnan Hye (2011) said that financial factor plays very important role of all investment and business at the same time it will increase formation and economic growth by introduction of new technologies such as managerial skill, idea, new production techniques, and varieties of capital goods.

5. Social and Culture

De Mooij, M. &Hofstede, G (2010) said that culture is the major cited words in international business and management studies. According to Gao, T (2005) likeness in culture plays an important role in forecasting FDI because foreign firms tend to go to the location where they have close culture proximity. Its indicated that MNEs are possible to launch their business in a country where they have similar culture. Another similar study by Galan, J.I. & Gonzalez-Benito, J. G (2001) about FDI found that societal and cultural factors helped clarify as FDI increase in the same region.

There are three initiatives that would help the local government improving their competitiveness on attracting FDI: (1) bureaucracy reformation on investments service, (2) information system of investment potentials, and (3) physical infrastructure provisions (KPPOD,2002).

1.4 The Relationship of Government Strategy on Attracting FDI and the Economic Growth

Table 1.3 Economic Growth Rate No. Economic Growth Rate (Per Category cent/ year) 1. 0-1% Stagnant 2. 2-3% Very Low 3. 4-5% Low 4. 6-7% Fit 5. >8% High Source: Tarigan, 2007

According to Todaro (2000), three main factors in economic growth, they were:

1. Capital accumulation, which include all form or types of new investment in land, physical instruments, and human resources. 2. Population growth, which in the future will resulting the labour growth,

3. Development of Technology, which is the improvement of technology which is used in attract FDI.

Setyowati et.al (2007) pointed out the factors influence investment, were:

1. Labour The availability of labour in a region will increase the investment; in contrast, the lack of it will decrease the investment. 2. Inflation Generally, inflation defined as the tendency to rising of goods prices continuously. The relation of inflation and investment in a region/state is negative. It means that the rising of inflation will decrease the interest of investor to concerning investment, oppositely, if the 1inflation decrease, the investment is increased. 3. Product Domestic Regional Brutto (PDRB) When the income rate is increase, it will affect the demand for goods and services of consumption. The increasing of a regional income will increase the demands of investment in society. In this case, the investment is the function of income, I=f (Yd). The correlation of investment and income was positive; its means if PDRB increase it will attract investor to invest in that region/state. In addition, if the PDRB decrease it will also decrease the interest of investor. 4. Interest Rate The fluctuation of the interest rate is become a consideration of investors. The correlation of interest rate with the investment is negative. If the interest rate is low, then investor might attract to invest, but if the interest rate is high, then the value of investment would decrease. The economic growth occurs caused by the activity of society and labours that used their capital to producing goods and services. They were

adopting efficient methods of production to result a high quality product or services (USAID, 2008).

Investment as an important component in the aggregate demand in economy is among one factor of the sustainability of economic growth. One of the indicators of succeed are signed by a high rate of national income per capita or stable growth rate of Product Domestic Brutto (PDB). The development process of a state is considering the production activities (goods and services) in all sectors of domestic economy.

As a result, it needs to build factories, machine and production equipment‟s. Furthermore, it is also need to prepare the employers or skilled human capital to support the development, include the facilities such as school building, library and so on. Finally, everything needs fund called investment funds (Setyowati et.al, 2007).

Factor that influences the economic growth is investment. Investment is the main machine to run the economic development that creating new job opportunities as well as labour absorber. Moreover, the skilled/educated labour would able to used technology and finally will improve the production capacity. The capacity improvement next would increase the economic growth.

The typology of FDI was developed by Jere Behrman to explain the different objectives of FDI: a. Resource seeking FDI b. Market seeking FDI c. Efficiency seeking (global sourcing FDI) d. Strategic asset/capabilities seeking FDI

Table 1.4 Factors Influencing FDI inflows to a Country

Business Climate in the Destination Country I. Policy Frameworks to the FDI

 Autonomy: socio-politics, stability  Entry and Operating Regulations  Policy standard for foreign affiliation  Market Function and market structure (competition policy)

II. Economic Factors

FDI Classification by the destination Principal determinant country and TNC motivation in the destination country

a. Resource seeking FDI  Raw material  Low-skilled labour cost  Labour skill  Technological and other assets innovation (such as brand creation embodied in individuals, firms, and clusters).  Physical infrastructures (Portland, roads, energy, and telecommunicat ion). b. Market seeking  Market size and per capita income  Market growth  Local consumer preference  Market structure c. Efficiency seeking (global sourcing  Resource and FDI) asset costs (as in A), and labour productivity  Other input costs, such as transportation and communication

 Economic costs from and to the destination country and intermediate product costs  Membership in regional cooperation (support to regional cooperation inter-firm). d. Strategic asset/capabilities seeking  Acquisition of FDI key established local firms  Acquisition of local capabilities including R&D, knowledge and human capital  Acquisition of market knowledge  Pre-empting market entrance by competitors  Pre-empting the acquisition by local firms by competitors III. Business Facilities

 Investment promotion (including image creation and investment facilities services).  Investment incentives  Unidentified costs (in relations to corruptions and administration efficiency etc.).  Social amenities (bilingual schools, quality of life etc.)  Post investment services Source: Modified from World investment Report, Trends and Determinants, 1998.

The Table above, it could be concludes that FDI is a complex cooperation. It included many aspects of country‟s life. Amongst other, there was such crucial interrelation between FDI and government or

20 policy maker in a country/region in the era of autonomy. Unlike to the international trade, license, and other portfolio of investment, the FDI needs long term commitments of the business environment in the destination countries or region.

FDI frequently involves number of assets and other resources which are necessary to be coordinated and managed across country. Hence, attracting FDI into business environment in public sector in Indonesia is not a straight forward. It needs various strategies in investment project. The different FDI (companies, sectors, etc.), the different objectives they brought, so that the different strategy or ways needed to attract them.

2. Agglomeration Economies 2.1 Concept and Definition of Agglomeration There are many definitions about agglomeration. Before it is explored further, its need to comprehend the concept. The term of agglomeration first known from Marshall Idea about agglomeration economies or in Marshall Term called localized industries. Marshall pointed out that Agglomeration economies or localized industries occur when a firm picked up the location of the production activity that runs for long-term periods. As the impact, the people could gain some advantages if following them to build a business over that location (Mc Donald, 1997:37). Furthermore, Montgomery defined the agglomeration economies as the economies of proximity that associated by segmentation of firms, labours, consumers spatially to minimalize the transportation, information and communication costs (Montgomery,1988:693).

In addition, Markusen stated that agglomeration is a location that is “not easy to change” as the impacts of external proximity that opened for every firms that located side –by-side with other firms and the service providers (Kuncoro, 2002:24). Moreover, based on some definition above, it can be concluded

that agglomeration is the concentration of economic activities and the people causing by the preference of location proximity. Some of the benefits of agglomeration were, particularly, in that location there has been groups of skilled-labour, good and low cost facilities, for instances electric power, machine shops, clean water facility, housing, supermarket and so on (Robinson Tarigan, 2004).

The benefits of the spatial concentration as the effects of scale economies named agglomerations economies (Mills and Hamilton, 1989). The concept of agglomeration economies also related to externalities of geographic proximity of any economic activities (Bradley and Gams, 1996). The agglomeration economies defined as the decreasing of production cost because of the economic activity located in certain places. Hoover classified the agglomeration economies into 3 types (Isard, 1979), which are:

1. Large scale economies The benefits collected by the firms from the enlargement of the firms production scale in a location. 2. Location economies The benefits collected by any firms in the same industry as well as the location. 3. Urbanization economies The benefits collected by any industry in same location as the consequences of enlargement the economic scale (citizens, income, output or prosperity) of that location.

Different view from O „Sullivan (1996) divided agglomeration economies into two types: (1) localization economies, and (2) urbanization economies. The formation of agglomeration signed by several points as follow:

a. The industrial competition increasingly severe and huge

b. The practice of any forms of efficiency in industrial accomplishment. c. The enhancement of industrial activity and production quality. d. Awarding of simplicity to the industries activity. e. The control simplicity and labour networks f. The equity of industries location with corrects number, usefulness and environmentally sounds.

Agglomeration can be measured through various ways. First is the proportion number of habitants in urban area over number of citizens of that province. Second is using the production agglomeration concept (Bonet in Atur J. Sigalingging, 2008). This research is using production agglomeration concept that measured by the proportion of PDRB of the regencies over the province PDRB. This measurement aimed to identify the leverage and impacts of agglomeration toward economic growth and investment.

2.2 The Relationship of Agglomeration Economies and the Investment

The investment and (or FDI) determinants in a region based on the types of FDI such as the location seeking, efficiency seeking and other motives. The formation of agglomeration needed the technology, capital and infrastructure availability. The endogenous growth theory persisted that the development of a region need the advancement of technology and capital. The centripetal or prevalence of centrifugal power in long-term periods would forming the Agglomeration (Orlando Gomes, 2007).

The agglomeration will raise the disparities of rural and urban areas. The concentration of economic activity in certain location might cause the mobility of citizen to that location. This condition also would make the rural areas were left by the habitants and will cause the economy run more slowly. The public policy makers could set the strategy to make the

equilibrium of investment distribution in rural and urban areas with rural-urban linkages action.

2.3 The Relationship of Agglomeration and the Economic Growth

The interconnection bond between industries and its supporting factors named as cumulative causation (Toyne, in Mudrajad Kuncoro 2002). Myrdal and Pred (in Mudrajad Kuncoro, 2002) argued that the positive impacts were cumulative causation called agglomeration economies. It form such as formation of new industries, increasing job opportunity, rising the work and investment attraction, increasing the skill of the citizens in the development of related industry, expansion of local services with lower cost, and the availability of public services and entertainment.

E. DEFINITION OF CONCEPT There are some definitions to support means of the terms used in this research. Those definitions were: 1. Strategy on Attracting Foreign Direct Investment (FDI) Strategy on attracting FDI is the initiatives to attract the Foreign Investment and International Cooperation which running the development project by taking incentives, taxes and other agreements with the host country/region. 2. Agglomeration Economies An agglomeration economy is the concentration of economic activities and the people spatially causing by the preference of location proximity. 3. Economic Growth Economic growth is the process of output per-capita improvement in long-term period of time.

F. OPERATIONAL DEFINITION In this study, the definition of operational used as follows: 1. Strategy on Attracting FDI 1.1 Policy frameworks to the FDI a. Autonomy: socio-politics, stability b. Entry and operating regulations c. Policy standard for foreign affiliation d. Market function and market structure (competition policy)

1.2 Economic factors a. Resource seeking FDI b. Market seeking FDI c. Efficiency seeking FDI d. Strategic asset/capabilities seeking FDI e. Social Overhead Capital

1.3 Business facilities a. Investment promotion (including image creation and investment facilities services) b. Investment incentives c. Unidentified costs (in relations to corruptions and administration efficiency, etc.) d. Social amenities (quality of life) e. Post investment services

2. Agglomeration economies leverage toward investment To analyse it leverage toward investment and (or FDI), the writer conduct a study analysis as follows: a. The proportion of PDRB from FDI realization by sectors in both regencies. b. The spatial/location of the investment and (or FDI) development in both regencies.

G. RESEARCH METHOD 1. TYPE OF THE RESEARCH This research used the qualitative research method to collect the data and information. Moreover, this research used descriptive-qualitative research method. The descriptive method is the study of explanation and systematic description of the actual facts and the relation of the phenomenon observed. This type of research method used the phenomenon and problems deeply. The problems of this research were related to strategy on attracting FDI and agglomeration leverage toward economic growth of Sleman and Kulonprogo Regency during 2013.

2. DATA COLLECTION TECHIC a. Interview

Interview is the tool of data collection through directing several oral questions to be answered orally too. The interview in this research was open ended interview. Interview expected result a more accurate and detail information related to the problem. The interview conducted in both investment offices of Sleman and Kulonprogo Regency with the relevant staffs/manager of the offices that handling the investment strategy or had well-understanding of the presence of FDI in the region. In Selman Regency, interview delivered to Mr. Sriyono (Investment Development Division) and Mr. Arjunandir (Investment Marketing Division). In Kulonprogo Regency interview conducted with Mrs. Nuryani (Cooperation and Promotion Division) and Mr. Robby Amra Y (Investment Development). Furthermore, several questions also delivered to the foreign investors/firms to

ensure any factors that influencing the investor‟s preference toward a place/region.

b. Documentation

The documentation technic is the way of collecting data by involving archives, books and information related to the problem and theory to resolve the problem. In qualitative research method, the technic used as the main tool of data collecting because the hypothesis would be answered logically and rationally through perspective, theory, regulations, whether opposed and proposed the hypothesis.

The data from government program and reports related to FDI regulation and strategy from the relevant institutions (BKPM/BPMPT/KP3M) are chosen as the main information sources. The document of the RPJMD, Strategy on attracting FDI in both regencies and the challenges and opportunity to attract FDI, the agglomeration leverage toward economic growth and the real conditions of performance of BKPM DIY, Investment board of Sleman and Kulonprogo Regency would be the most valuable document to support author on finding the outcome and answers of the hypothesis in this research.

3. DATA CLASSIFICATION In this research, the writer uses the secondary data classification. The secondary data is the data that quoted from main source and not directly collected from the main source of the study. The secondary data collected from various sources such as books, archives, journals, documents and so on.

Table 1.5 Data classification

No Data Primer Secondary Source .

1. Investment  Archives of realization BKPM/BPMP and growth in T/KP3M DIY 2. Strategy on  Journal attracting FDI 3. Agglomeratio  Book n economies in DIY

CHAPTER II

RESEARCH OBJECTS DESCRIPTION

A. SLEMAN REGENCY 1. General Condition of Sleman Regency 1.1 Geographic Condition a. The Characteristics of Sleman Regency

Image 2.1 Administrative Map of Sleman Regency

Source: Regional Statistic Board (BPS) of Sleman Regency

Geographically, Sleman Regency is located between 110°13‟03” - 110°33‟00” east longitude and 7°34‟51” - 7°47‟03” south latitude, with the height between 100-2.500 metres on the sea water surface. At the north side, Sleman Regency borders with Magelang and Boyolali Regency, Central Java Province. At the west side, it borders with Kulonprogo Regency, DIY Province and Magelang Regency, Central Java Province. The south side of Sleman Regency is borders with Yogyakarta city, Bantul Regency and Gunungkidul Regency, DIY Province. The width of Sleman Regency is 57.482 ha or 574, 82 km2 or about 18% of the total width of DIY Province that had width 3.185,80 km2. The longest distance of north-south of Sleman

Regency is 32 km, and the longest distance of east-west is 35 km. Administratively, Sleman Regency has 17 districts, 86 villages, and 1.212 sub- villages (Pedukuhan). The district with the widest area is Cangkringan (4.799 ha), and the smallest one is Berbah (2.299 ha). The area distribution of Sleman Regency can be seen in Table 2.1:

Table 2.1Administrative Area Distribution of Sleman Regency

No District Village Sub-village Width (Ha) (Pedukuhan) 1. Moyudan 4 65 2.762 2. Minggir 5 68 2.727 3. Seyegan 5 67 2.663 4. Godean 7 77 2.684 5. Gamping 5 59 2.925 6. Mlati 5 74 2.852 7. Depok 3 58 3.555 8. Berbah 4 58 2.299 9. Prambanan 6 68 4.135 10. Kalasan 4 80 3.584 11. Ngemplak 5 82 3.571 12. Ngaglik 5 87 3.852 13. Sleman 6 83 3.132 14. Tempel 8 98 3.249 15. Turi 4 54 4.309 16. Pakem 5 61 4.384 17. Cangkringan 5 73 4.799 Total 86 1.212 57.482 Source: Central Statistic Board of Sleman Regency

2. Topography, Geohydrology, Climatology, and Land Use Management of Sleman Regency a. Topography The land condition of Sleman Regency in the south side area is relative to be flat exclude in the southeast of Prambanan District and some part of Gamping District. To the north side are relative to be sloping and in the north side near Merapi slope are relative to be very steep. The height of the areas of Sleman is between 100 metres up to 2.500 metres on the sea surface (m dpl).The land height can be divided into four classifications, which are <100 metres, 100-499 metres, 500-999 metres, and >1.000

metres (m dpl). The height of <100 m dpl with width of 6.203 ha, or 10, 79% of whole area of Sleman were located in Moyudan, Minggir, Godean, Gamping, Berbah and Prambanan Districts.

b. Geohydrology The geohydrology condition in Sleman Regency is dominated of the presence of Merapi Mountain. The geologic formation differentiate to be volcanic sediment, sediment, and the break-through stones, where the volcanic sediment hold more than 90% of the whole width of the regency. In Sleman Regency there are about 100 water sources that are flowing to the main rivers such as Boyong, Kuning, Gendol and Krasak Rivers. Besides that, there are affluent that flowing to the south side and end up to the Indonesian Ocean.

c. Climatology Sleman Regency seen from the climate condition had the tropical climate with the rainy and dry seasons along the year.

Table 2.2 Climate Condition of Sleman Regency

No Climate Maximum Minimum

1. Air temperature 20,7 33,3 2. Air moistness 22,0 96,0 3. Air pressure 1.004,6 1.014 4. Wind velocity 0 43,0 5. Wind direction 60,0 300,0 6. Rain pour-down 0 316,5 7. Rain intensity/a month 0 24,0

Source: Transportation Agency (Dinas Perhubungan) of DIY

d. Land Use Management The area development potential in Sleman Regency divided into some areas as follows: a) The area for farming; wet land farming area (21.386) and dry land farming area (9.172) that is located in 17 districts. b) The area for mining; limestone in Gamping District, floating stone in Prambanan and Berbah Districts, andesite in Tempel, Pakem, Turi, Cangkringan, Godean, Seyegan, and Prambanan Districts, solid land in Tempel, Godean, Seyegan, Sleman,Gamping, Prambanan and Berbah Districts, sands and gravel almost whole districts in Sleman Regency. c) The area for industry; which covering the area about 299 hectare in Gamping, Berbah and Kalasan Districts. d) The area for residential; which covering the village area (10.733 hectare) and the city area (12.590 hectare) that located in 17 districts. e) The area for tourism; which covering the natural theme park, cultural theme park, city theme park, and agricultural theme park. f) The area for forest; the public forest area ( 4.167 hectare) in Gamping, Seyegan, Prambanan, Turi, Pakem and Cangkringan. g) The area for protection and security; which including Kompi C Infanteri 403 and KompiPanser 2 Batalyon Kavaleri 2 in Gamping district, Batalyon Infanteri 403 in Depok District, and the Adisutjipto airport and National airforce army defence Adistjipto office in Depok and Berbah District.

Based on the characteristic of the resources, the areas of Sleman Regency are divided into 4 areas as follows: 1) The Merapi slope are, start from the road that connecting Tempel City, Pakem, and Cangkringan (ring belt) to the Peak of Merapi Mountain. This area is the source of water and eco-tourism oriented on the activity of Merapi and the ecosystems surrounding.

2) The east area that covering Prambanan District, half of Kalasan District, and Berbah District. This area is the ancient heritage area (temple) that become the cultural tourism central. 3) The central area as the agglomeration area of Yoyakarta City that is including Mlati, Sleman, Ngaglik, Ngemplak, Depok and Gamping Districts. These areas become the centre of education, trade and services activities. 4) The west area including Godean,Minggir, Seyegan, and Moyudan Districts are the area of wet land farming that available sufficient water and other raw material for industrial needs such as herb, bamboo, and “gerabah”.

a. Based on the traffic line across province, the Sleman Regency crossed of state road line as the economic line that connecting Sleman with the main harbour cities (Semarang, Surabaya, and Jakarta). These lines only crossing the area of Prambanan, Kalasan, Depok, Mlati, Tempel, and Gamping Districts. Additionally, the area of Depok, Mlati, and Gamping District also crossed of ring road as the main artery that makes these districts develop so fast from agriculture to be the industrial, trade and service centres. b. Based on the location and the mobility of people‟s activity, the area can be differentiate based on it functions as follows: 1) The agglomeration area (the city development in certain location) is the development of Yogyakarta City that affect the cities borders with the Yogyakarta main city such as Depok, Gamping, and some part of Ngaglik and Mlati Districts were becomes the agglomeration area of Yogyakarta City. 2) The sub-urban areas (the area of rural-urban network) these areas including Godean, Sleman, and Ngaglik Districts that is located quite far from Yogyakarta City and growing as the main destination of people‟s activity in the Districts surrounding it so that these areas become the growth central.

3) The area with special function (buffer zone) that is including Tempel, Pakem, and Prambanan Districts that become the centre of growth to the areas near it.

3. Demographic Condition of Sleman Regency Based on the habitants projection result in 2010, the number of habitants of Sleman noticed there are 1.093.110 habitants, the population growth of Sleman Regency in 2010 are increase amount of 39.579 person or 3,75% person with 1.053.531 person in 2009.

Graphic 2.1 Population Number based on Sex in Sleman Regency

Population Number based on Sex 51.5

50.5

49.5 Axis Title 49

48.5

48 2007 2008 2009 Men 50.05 50.44 51 Women 49.95 49.56 49

Source: Regional Statistic Board (BPS) of Sleman Regency 2011

The population growth of Sleman Regency per year is 0, 73%. This growth is relatively high comparing to the population growth on the previous years. This tendency caused by the function of Sleman Regency as the buffer zone of Yogyakarta city, educational object area and the residential development area. Hence, the population growth occurs mostly caused by the migration not by the high birth rate.

The number of family also increasing amount of 97.209 KK (33,07%) from 293.897 KK in 2009 to be 306.701 KK in 2011. The complete information can be seen in the Table 2.3 below:

Table 2.3Population Growth of Sleman Regency 2007-2011

No. Types of data Year 2007 2008 2009 2010 2011 1. The population 1,34 1,31 1,28 1,92 0,73 growth (%/year) 2. Number of 250.847 255.555 293.897 391.106 306.7 family (KK) 01 3. Number of 3.40 3,37 3,8 3,15 3,29 family members (person) Source: Regional Statistic Board (BPS) of Sleman Regency, 2012

Table 2.4Men Habitants based on Age 2007-2011 Age 2007 2008 2009 2010 2011 group 1 2 3 4 5 6 0-4 33,208 36,368 38,050 43,026 32,088 5-9 36,568 37,743 39,581 40,796 38,799 10-14 34,748 35,369 31,990 39,023 40,252 15-19 42,504 48,023 59,182 49,077 37,461 20-24 73,808 79,692 61,155 63,847 37,095 25-29 51,828 52,840 51,822 49,907 49,703 30-34 42,616 43,110 54,858 44,877 55,938 35-39 39,424 37,365 33,722 41,678 51,435 40-44 30,604 33,734 37,810 39,906 48,386 45-49 28,196 27,153 27,767 32,319 39,475 50-54 24,612 19,892 28,530 28,810 26,945 55-59 22,344 18,938 18,361 22,280 26,945 60+ 53,452 54,497 48,595 52,339 68,903 Total 513,912 524,724 531,423 547,885 559,302 Source: Regional Statistic Board (BPS) of Sleman Regency, 2012

Table 2.5Women Inhabitants based on Age 2007-2011 Age 2007 2008 2009 2010 2011 group 0-4 32,564 34,994 30,141 40,549 30,285 5-9 35,728 35,662 32,962 38,582 36,371 10-14 36,176 34,015 25,675 36,756 37,453 15-19 41,440 47,259 52,144 48,273 35,289 20-24 57,148 68,603 55,334 55,972 36,334 25-29 48,328 47,643 48,064 46,887 50,034 30-34 36,736 43,625 61,133 44,608 54,872 35-39 35, 868 39,111 37,013 41,774 51,699 40-44 41,300 34,332 33,040 41,199 48,432 45-49 35,252 26,485 35,450 34,858 40,390 50-54 27,216 21,895 31,876 30,390 34,389 55-59 19,236 19,365 21,926 22,249 26,944 60+ 65.800 62,506 57,386 63,128 83,575 Total 512,792 515, 495 522,144 545.225 556.067 Source: Regional Statistic Board (BPS) of Sleman Regency, 2012

4. The Economic Aspects of Sleman Regency a. The Gross Regional Domestic Product (PDRB) growth The performance of economic sectors are slowly getting well so that the economic growth are reaching 4, 84% in 2011. The economic growth during 2008-2011 in Sleman Regency can be seen on the Graphic 2.7 below:

Graphic 2.2 PDRB Growth of Sleman Regency 2008-2011 (%)

5.4 Growth

5.2 5.19 5.13 5

4.8

4.6 Growth 4.48 4.49 4.4

4.2

2008 2009 2010 2011

Source: Regional Statistic Board (BPS) of Sleman Regency, 2011

The inflation rate in Sleman Regency during 2007-2011 is fluctuating from 7, 18% in 2007 increase to 10, 16% in 2008 decrease to be 4, 03% in 2009. In 2010 it is increase to be 7,46% while in 2011 the inflation rate are getting down to be 3,19% as can be seen on the table 2.8 below:

Graphic 2.3 Inflation Average Values 2007-2011 of Sleman Regency

Inflation Average (%) 12

10 10.16

8 7.18 7.46 6 Inflation Average (%)

4 4.03 3.19 2

0 2007 2008 2009 2010 2011 Source: Regional Statistic Board (BPS) of Sleman Regency, 2011

b. Economic growth The economic growth in Sleman Regency in 2011 is amount of 4, 84%. Graphic 2.4 Development of economic growth of Sleman Regency 2009-2011

5 4.84 4.8 4.6 4.53 4.4 4.2 4.11 4

3.8

3.6 2009 2010 2011

Economic Growth 2009-2011

Source: Regional Statistic Board (BPS) of Sleman Regency, 2012

Table 2.6Economic Growth of Sleman Regency by Sectors 2009-2011 No. Sector Growth (%) 2009 2010 2011* 1. Agriculture 1,75 0,80 0,23 2. Mining _4,84 6,40 4,51 3. Processing Industry 1,93 2,08 3,44 4. Electricity, Gasses and 6,21 5,29 6,24 Water 5. Building 6,51 7,34 6,41 6. Trades, Hotel and 5,99 5,14 6,75 Restaurant 7. Transportation 5,40 6,33 6,24 8. Financial 5,47 4,33 6,14 9. Services 4,70 4,33 5,39 Source: BPS of Sleman Regency :*) = provisional figures

c. Investment

Table 2.7 Investment Potentials of Sleman Regency 2011

No Sector Commodi Location Contributio ty n of each sectors 1. Agriculture Agro Kalasan 12,74 per industry(fi (Selomartani), cent shery, Sleman agriculture (Caturharjo, ) Triharjo), Gamping (Trihanggo, nogotirto,Ngampla k(Wedomartani) Tempel(Margorejo ,Sumberejo) 2. Processing Garment, Ngemplak(Wedom 14,38 per Industry leather artani), De-pok cent gloves, (Maguwoharjo), wood and Gamping(Nogotirt rattan o, Trihanggo), furniture Mlati industry, (Sendangadi, publishing Tirtoadi) and

printing, food and beverage packaging industry and other industries. 3. Trades, Departme Tempel 22,87 per Hotel and nt stores, (Lumbungrejo, cent Restaurants export- Margorejo, import, Sumberejo), consultant Ngemplak(Wedom , property, artani), Mlati flats, (Sinduharjo),gamp hotels, ing (Nogotirto), Apartment Depok(Maguwoha s, Cafe, rjo, Nogotir-to), Resort, Sleman restaurants (caturharjo, . Triharjo),kalasan (Selomar- tani),Prambanan (Bokoharjo)

4. Services Tour, Godean 18,85 per Travel, (Sidoarum), cent

transportat Kalasan(Selomarta ion, etc. ni, Purwomartani),Pra

mbanan (Bokoharjo), Berbah

(Jogotirto), Sleman (Triharjo,Caturharj o),

Ngemplak(Wedom artani),Mlati (Sendangadi,

Tirtoadi), Ngaglik (Sinduharjo),

Gamping (Nogotirto, Trihanggo),

Depok ( Maguwoharjo), Tempel

(Margorejo, Sumberejo),

Pakem

(Hargobinangun)

Oth 31,16 per cent ers

Source: The Investment Office (KP3M) of Sleman Regency

5. General Information of Sleman Regency Investment Office (KP3M) 1. Organizational Structure Based on the local regulation No. 9/2009 about the formation and organization structure of local subsidiary of Sleman Regency, the Capital Investment, Support, and Inclusion Office (KP3M) were formed with the basic tasks, function and work procedures which noticed in the Regent of Sleman Regulation No. 42/2009 as the regional technical institution that has the main task on making and implementing the regional policy in the scope of capital investment, support and investment inclusion.

Image 2.2 Organizational Structure of KP3M

THE HEAD OF INVESTMENT OFFICE

GROUP THE HEAD OF ADMINISTRATION FUNTIONAL POSITION

THE SECTION OF THE SECTION THE SECTION OF THE SECTION OF FUNDING, OF INVESTMENT INVESTMENT COOPERATION AND INVESTMENT MARKETING DISTRIBUTION CONTROL OF THE DEVELOPMENT DISTRIBUTION OF CAPITAL

Source: Regent Regulation (Perbup) No. 42/2009

2. Personnel Resources of KP3M Sleman Table 2.8 Staff based on Sex and Educational Level No Office Sex Educational level Elements Men Women SLTP SLTA D3 D4/S1 S2 1. The head of - 1 - - - - 1 investment office 2. Administration 3 4 1 2 1 3 - sub-section 3. Section of 1 2 - - - 2 1 investment marketing 4. Section of 1 2 - 1 - 2 - investment development 5. Section of 1 3 - 2 - 1 1 investment distribution 6. Section of - 3 - - - 2 1 funding, cooperation and control of investment distribution Total 6 15 1 5 1 10 4 Source: Modified from KP3M book profile 2013

3. Vision and Mission of KP3M Sleman a. Vision The vision of Sleman Investment Office (KP3M) is “Realization of Investment Services and Strengthening the Optimal Capital for the Economic Improvement and Welfare Society”. b. Mission To achieve the vision, Sleman Investment Office arranging 2 missions that will be delivered as follows: Mission 1: Improving the manpower quality and general services of capital support and inclusion. Mission 2: Improving the management quality of capital support and inclusion.

B. KULONPROGO REGENCY 1. General Condition of Kulonprogo Regency 1.1 Geographic Condition a. The Characteristics of Kulonprogo Regency

Image 2.3 Administrative Map of Kulonprogo Regency

Source: Regional Statistic Board (BPS) of Kulonprogo Regency, 2012

Geographically, Kulonprogo Regency is located between 7° 38‟42” - 7° 59‟3” south latitude and 110° 1‟37” - 110° 16‟26” east longitude. Located in south coast of Java, Kulonprogo is the westernmost region of D.I Yogyakarta Province. Wates is the capital of Kulonprogo. The regency has an area of 586,28 square kilometres (km2), consists of 12 sub districts, 88 villages, and 930 hamlets.. The regency‟s territorial borders are:

West : Regency of Purworejo, Province of Jawa Tengah.

East : Regency of Sleman and Bantul, Province of D.I. Yogyakarta

North : Regency of Magelang, Province of Jawa Tengah

South : Indian Ocean

The widest districts are Samigaluh and Kokap, each holding 12% of the total width, while the smallest district was Wates. The table 3 is showing

44 the complete information of the width area of each districts in Kulonprogo Regency.

Table 2.9Name, width of each districts, and number of villages in Kulonprogo Regency

No. District Number Width of each the Districts of (Ha) (%) village 1. Temon 15 3.629,890 6,19 2. Water 8 3.200,239 5,46 3. Panjatan 11 4,459,230 7,61 4. Galur 7 3.291,232 5,61 5. Lendah 6 3.559,192 6,07 6. Sentolo 8 5.265,340 8,98 7. Pengasih 7 6.166,468 10,52 8. Kokap 5 7.379,950 12,59 9. Girimulyo 4 5.490,424 9,36 10. Nanggulan 6 3.960,670 6,76 11. Kalibawang 4 5.296,368 9,03 12. Samigaluh 7 6.929,308 11,82 Total 88 58.627,512 100,00 Source: Regional Statistic Board (BPS), Kulonprogo in Figures 2011

2. Topography, Geohydrology, Climatology, and Land Use Management of Kulonprogo Regency a. Topography

Based on the topographical distributions of peaks and valleys, KulonProgo landscape divided into five major groups. 17,58 % of the region are less than 7 m above sea level, 15,20 % of the region are between 8- 25 m above sea level, 22,84 % of the region are between 26-100 m above sea level, 33,0 % of the region are between 101-500 m above sea level, and 11,37 % of the region are more than 500 m above sea level. Meanwhile, based on the inclination level of area, Kulonprogo Regency categorized into four groups:

a) 40,11 % of the region have an inclination below 20,

b) 18,70 % of the region have an inclination between 30 - 150, c) 22,46 % of the region have an inclination between 160 – 400 d) 18,73 % of the region has an inclination above 400. a. Geohydrology

The geological formation of this region mostly comprises of Sentolo Formation of limestone and Alluvium Formation of old volcanic rocks. Besides, there are the formations of Diorite, Jonggrangan, Andesit, Collovium and the sedimentation of Young Merapi Volcano Formation (along Progo river banks). The physiographic condition of this region comprises of Menoreh Mountain Range, Progo Plain, Sentolo Hill range, Alluvial Plain and coastal plain (including sand dunes). The soil type consists of Latosol in the Menoreh Mountain range; Aluvial in the Aluvial Plain; Grumusol and Aluvial in the Sentolo Hill range; Regosol in the Progo Plain; and Gleisol and Regosol in the coastal plain.

The biggest river catchments areas (DAS) are Serang River catchment area and Progo river catchments area (Progo Terrace, Samigaluh, Pekik-Jamal and Sudu). In the Serang River catchment area, there are Sermo Dam and Clereng spring water, both become the main standard for drinking water and also irrigation water. The inter-regional river catchment area of Progo River located between the Special Province of Yogyakarta and Central Java is a very big surface water Source. In the lower stream (Progo River delta) there are sedimentation of volcanic material from Merapi Mountain in the form of sand on the river delta or on the river banks, while the volcanic material enter into the sea through the Aeolian and marine process and brought up

to land and become sand dunes. The water level varies from < 7 m to 25 m. The rainfall also varies. It is tend to be dry in the Sentolo Hills Range (1500 - 2000 m/year), and to be wet in Menoreh Mountain Range (3.500 – 4.000 m/year).

b. Climatology Table 2.10 Climatology of Kulonprogo Regency No. Month Rain-fall Temp (®c) Humidity (mm) (%) 1. January 335 25.3 82 2. February 330 25.6 81 3. March 190 25.3 82 4. April 140 25.6 83 5. May 150 25.3 82 6. June 20 24.8 80 7. July 78 24.3 77 8. August 1 24.5 77 9. September 85 25.3 73 10. October 45 26.1 75 11. November 430 25.8 80 12. December 340 25.6 82 Total 2144 26.3 80 Source: ATLAS Kulonprogo Regency

c. Land Use Management The area development potential in Kulonprogo Regency divided into some areas as follows: 1) Industrial Designation Zone This region is the preferred area to accommodate the activities of the maturation of industrial land and facilities to be fully carried out by industrial entrepreneurs. a) Large-scale Industry Area planned for large-scale industry designation area in the Kulonprogo covering Sentolo Industrial Area with area approximately 4,796 hectares in the District of Sentolo and Lendah. Temon Industrial Zone in the district Temon is also planned as a marine industry with an area of

approximately 500 hectares. In addition, Industry Designation Area is covering 700 hectares of land in District of Nanggulan. This area was previously a dry soil, which very low values of utilization, both in terms of productivity and tax. By Supported of the location which lies on the banks of the Progo River, then the problem of water and waste of an industrial activity is pretty much reduced. b) Small and Micro Industries Small and micro industries in Kulonprogo include: 1. Food Processing Industry Utilization of processing industry designation area covers District of Temon, Wates, Panjatan, Galur, Sentolo, Pengasih, Kokap, Girimulyo and Kalibawang. 2. Clothing and Leather Industry Utilization of clothing and leather processing industry designation area covers District of Temon, Wates, Lendah, Sentolo, Nanggulan and Kalibawang. 3. Chemical Industry and Building Materials Utilization of chemical and building materials designation area covers district of Temon, Wates, Panjatan, Sentolo, Pengasih, Kokap, Girimulyo, Nanggulan, Kalibawang and Samigaluh. 4. Metal Industry and Services Utilization of metal industry and services designation area covers District of Wates. 5. Craft Industry Utilization of the craft industry designation area covers the whole District of Kulonprogo.

2) Strategic Area of Economic Growth Strategic area in light of economic growth interest in example: metropolitan area, special economic zones, integrated economic development area, un-developed area, and also free trade zone and free port zone. a) Strategic corridor area that links Temon-Wates- Yogyakarta; b) Strategic economy area in the District of Galur, Sentolo, and Lendah; c) Sentolo Industrial Area, including: 1. Banguncipto village, Sentolo village, Sukoreno village, Salamrejo village and Tuksono village which is located in District of Sentolo; and 2. Ngentakrejo village and Gulurejo village located in the Dsitrict of Lendah. d) Agropolitan Region, include: District of Kalibawang and Temon. e) Minapolitan Region with an area of approximately 7,160 hectares, including District of Wates and Nanggulan.

C. Demographic Condition of Kulonprogo Regency

Table 2.11 Demographic Condition of Kulonprogo Regency

District Number of population Family number (KK) Growth (%) 2009 2010 2011 2009 2010 2011 201 2011 0 1. Temon 32.99 33.268 32.899 6886 6,943 7001 0.8 -1.11 4 3 2. Wates 50.18 50.597 52.717 1185 11949 1204 0.8 4.19 6 2 7 2 3. Panjatan 41.58 41.939 41.885 9224 9302 9381 0.8 -0.13 6 5 4. Galur 33.36 33.478 34.668 8378 8407 8436 0.3 3.55

1 5 5. Lendah 39.03 39.238 41.647 9887 9,937 9988 0.5 6.14 9 1 6. Sentolo 48.74 49.237 50.669 1155 11,673 1179 1.0 2.91 5 6 1 1 7. Pengasih 50.36 50.699 53.632 1221 12,299 1238 0.6 5.79 6 8 0 6

8. Kokap 42.09 42.227 39.38 8878 8,906 8934 0.3 -6.74 6 1 9. Girimulyo 29.40 29.517 27.022 6412 6,436 6460 0.3 -8.45 6 8 10 Nanggulan 35.03 35.521 31.967 7374 7,476 7580 1.3 -10.01 . 4 9 11 Samigaluh 34.17 34.343 31.538 7954 7,994 8034 0.5 -8.17 . 3 0 12 Kalibawang 31.04 31.135 35.373 7545 7,567 7589 0.2 13.61 . 5 9 Total 467.8 470.90 473.39 1081 108,89 1096 0.6 0.53 16 3 7 85 9 18 6 Source: Kuloprogo in Figures 2010-2011and Poverty Documentation of Kulonprogo Regency 2011

From the table above, seen that the population growth in Kulonprogo was still centred in 3 districts which is Pengasih District amount 11,33 %, followed by Wates District amount 11,14 %, and Sentolo District amount of 10,70 %. Pengasih, wates and sentolo District were the three districts that hold the upper position in the number of population number, each amount of 53.632 people, 52.717 people and 50.669 people. Moreover, the Girimulyo District is the district with the lower number of it citizen which is amount of 27.022 person.

Based on the 2010 population census, population of Kulonprogo Regency is increased by total of 8.184 people compared with 2008 figures. Following chart shows selected demographic indicators from population censuses from 1980 to2010:

Table 2.12 Population Censuses of Kulonprogo Regency of 1980, 1990, 2000 and 2010

Census of Number of Total Sex ratio Population population population density

Male Female Person/km2 1980 185.232 195.453 380.685 95 649

1990 182.344 189.965 372.309 96 635 2000 182.672 188.272 370.944 97 633 2010 190.694 198.175 388.869 96 663 Source: Kulonprogo Regency in Figures 2012

Female residents of Kulonprogo Regency are larger by number than their counterpart. Most people settled in the urban area, as in Wates District with 11.31 per cent of total population, Sentolo District with 11.45 %, Pengasih District with 11.62 %, while the rest districts each inhabited by less than 10 % of total population of Kulonprogo. The age group composition of the population by is almost evenly distributed in every age group. In 2010, the number of young people (0-14 years) was 89,691 (23.06%), the population of reproductive age (15-49 years) is 251,870 (64.77%) andthe elderly (65 years upwards) is 47,308 people (12.17%). The number of dependency burden of the productive age is 54, meaning that for every 100 people of productive age bearing a burden as many as 54 residents of unproductive age.

Sex ratio of Kulonprogo in 1980 was 95, which means that there are 95 male for every 100 female. With an area of 586.27 km2, in 1980, the population density of 1980 Kulonprogo Regency was 649 persons per km2. The 1990 Population Census showed that the population of Kulonprogo Regency decreased to 372,309, with growth rate of -0.22, sex ratio of 96 and population density of 635 persons per km2. The results of the 2000‟s Population Census in Kulonprogo Regency showed that there were 370,944 persons, with the growth rate of -0.04, sex ratio of 97 and the population density of 633 persons per km2. The latest Population Census in 2010 showed that there were 388,869 persons in Kulonprogo, with the growth rate of 0.48, sex ratio of 96 and the population density of 663 persons per km2.

D. The Economic Aspects of Kulonprogo Regency a. The Gross Regional Domestic Product (GRDP/PDRB) The value of GRDP at current market prices of Kulonprogo Regency in 2011 was 3.87 trillion rupiahs. With total population of 390,207 the GRDP per capita

reached 9,910,472 rupiahs. The GRDP per capita is obtained by dividing the value of GRDP at current market prices by the population. GRDP per capita is one of the indicators to assess the welfare of the population. The comparative between the value added of each sector or sub- sector with total GRDP will result the amount of the percentage distribution. At current prices, those values are usually used to see how big a role or contribution of each sector or sub-sector in the economy of a region.

From a close observation to the composition of GRDP at current prices in 2011, the sector with the largest contribution in the formation of GRDP Kulonprogo Regency was the agriculture sector (23.68 per cent), followed by the services sector (21.10 per cent) and in the third position of the trade, hotels, and restaurants sector with a contribution of 16.97 per cent, while the smallest contribution is mining-quarrying sector with 0.82 per cent.

Table 2.13 Gross Regional Domestic Product at Current Market Prices in Kulonprogo Regency (Million Rupiahs), 2008 – 2011

No. Industrial Origin 2008 2009 2010 2011 1. Agriculture 729.521 792.463 821.569 915.596 2. Mining and 30.423 34.555 24.835 31.548 Quarrying 3. Manufacturing 458.172 496.185 550.513 553.335 Industry 4. Electricity, Gas 25.107 28.379 31.366 33.525 and Water Supply 5. Construction 173.721 189.629 209.221 239.507 6. Trade, Hotels and 493.782 538.809 587.485 656.244 Restaurants 7. Transportation 328.755 346.570 359.493 383.612 and Communication 8. Financial, Real 180.932 204.966 225.679 237.799 Estate and Business 9. Services 617.752 654.723 736.894 815.969 PDRB 3.038.165 3.286.278 3.547.055 3.867.136 PDRB/Kapita 7.872.179 8.480.876 9.121.466 9.910.472 Source: Kulonprogo Regency in Figures 2012

b. Economic growth

The economic growth rate of Kulonprogo Regency in 2011 was 4.95 per cent. Compared with the 2010 growth (3.06 per cent), the figure has risen by 1.89 point. The growth scale, mutually shared by: the agriculture sector (1.57 per cent), the services sector (1.31 per cent), the trade-hotel-restaurant (about 1.27 per cent), while the rest shared only 0.8 per cent of the economic growth. The economic policy should be directed to the sectors that give a important and strategic share in the economy.

Graphic 2.5 Economic Growth of Kulonprogo Regency 2008-2012

Source: Regional Statistic Board (BPS) of DIY 2013

Sectorial-wise, from nine sectors of GRDP in 2011, eight sectors had a positive growth, while only one sector had a negative growth, which was the manufacturing industry sector (minus 1.23 per cent). The mining and quarrying sector had the highest growth rate of 21.56 per cent. The second high growth rate was the construction sector of 9.82 per cent, followed by the services sector that grew by 7.36 per cent.

c. Investment

Table 2.14 Investment Potential by Sector

No. Sectors Commodity Location Contribution of Each Sectors 1. Farming Cow breeding and District of 56 per cent &Agricul fattening, ettawa Samigaluh and ture crossbreed Girimulyo, farming cacao and Banjarharjo, coconut and herbal kalibawang district, processing Nanggulan, industry, etc. Sentolo, Lendah, Panjatankokap district 2. Industry Cement industry, Sentolo district, 7 per cent handycraft outlet wijimulyo village, district of Nanggulan 3. Trade, Fish centre, Wates district, 37 per cent tourism Sermo dam, Glagah-congot and Suroloyo peak, district of Temon. services beach, cave Kulonprogo tourism, tourism regency, Girimulyo village, bathhouse, district, Pengasih pilgrimage tours, district

Source: Modified from Investment Office (BPMPT) of Kulonprogo Regency

E. General Information of Kulonprogo Regency Investment Office (BPMPT) 1. Organizational structure Based on the Regional Regulation of Kulonprogo Regency No. 16/2012 about the formation of organization and regional technical institutions followed by Regent of Kulonprogo Regulation No. 73/2012 about the explanation of tasks of the lowest level organization, BPMPT has functions including: a. Formulation of technical policy in investment and integrated licensing;

b. Supporting the implementation of Local government‟s program in investment and integrated licensing; c. Developing and implementing the investment and integrated licensing; d. Implementing other tasks given by the Regent of Kulonprogo in investment and integrated licensing;

THE HEAD OFFICE

SECRETARIAT

CERTAIN GROUP FUNCTIONAL POSITION SUBBAG. GENERAL SUBBAG. PLANNING AND STAFF AND FINANCE

BID. INVESTMENT BID. SERVICES AND BID. DATA SUPERVISION COMPLAINT AND INFORMATION

SUBBID. SUBBID. LICENCING SUBBID.

COOPERATION AND SUPERVISION PROMOTION

SUBBID. SUBBID. SURVEI SUBBID. DATA AND FACILITATION AND INFORMATION DEVELOPMENT

SUBBID. COMPLAINT AND ADVOCATION

Source: Perda Kulonprogo No.16/2012

Personnel Resource of BPMPT Kulonprogo

Table 2.15 Personnel Resources based on Sex and Educational Level

No Office Sex Educational Level . Elements Men Wom SLTP SLTA D3/AKTA S1 S2 en 1. The head 1 - - - - - 1 office 2. Secretary 1 - - - - - 1 3. Subbag. 1 3 1 2 - 1 - General and staff 4. Subbag. 1 3 - 2 - 2 - Planning and finance 5. Kabid. 1 - - - - 2 - investme nt 6. Subbid. 2 1 - 1 - 1 1 Cooperati on and promotio n 7. Subbid. 1 2 - 1 - 1 1 Facilitati on and developm ent 8. Kabid. 1 - - - - - 1 Services and

complain t 9. Subbid. 5 ------survei 10. Subbid. 1 2 - 1 - 2 - Complain t and Advocati on 11. Subbid. 5 3 - - - - - Licensing 12. Kabid. 1 - - - - - 1 Supervisi on, data and informati on 13. Subbid. 3 - - 2 - - 1 supervisi on 14. Subbid. 2 - - 1 - 1 - Data and informati on Total 26 14 Source: Investment Office (BPMPT) of Kulonprogo

2. Vision and Mission of BPMPT Kulonprogo a. Vision The vision of BPMPT Kulonprogo is “Realization of investment that has competitiveness, sustainability and eco-friendly based on the local resources and the service prima”

b. Mission The missions would be achieved by the BPMPT Kulonprogo including: 1. Improvement of data and information about investment; 2. Improvement the quality of manpower and infrastructure of investment; 3. Improvement the investment climate and investment attractiveness; 4. Improvement of cooperation, promotion and investment attraction; 5. Improvement the service quality and investment facilities; 6. Improvement of direction and control of the investment.

F. GENERAL DESCRIPTION OF INVESTMENT AND AGGLOMERATION ECONOMIES IN DIY 1. Foreign Direct Investment (FDI) Realization by Regency/City in DIY 2011 Table 2.16 Investment Realization by Regency in DIY 2011 No. Regency/city Investment Realization (%) 1. Sleman 53,43 2. Yogyakarta 39,63 3. Kulonprogo 0,07 4. Bantul 4,60 5. Gunungkidul 2,27

Source: Regional Statistic Board (BPS) of DIY 2013

2. Distribution of FDI Realization by Sectors 2011 Table 2.17 FDI Realization Portion by Sector No. Sectors Portion of realization (%) 1. Primary 0,18 2. Secondary 16,12 3. Tertiary 83 Source: Regional Statistic Board (BPS) of DIY 2013

The sectors that hold the biggest portions respectively are trade and reparation; hotels and restaurant; and transportation, warehouse and communication. Each holding 31, 28 per cent; 25, 25 per cent; and 16,44 per cent. As well as domestic investors, the foreign investor was also interested to invest on the tourism bases sectors.

3. Investment Strategy of DIY In order to develop the investment and attract the investors, the government of the Special Region of Yogyakarta under BKPM DIY (investment coordinating board of DIY) was settled three main strategies so called: attraction, durability and competitiveness. The components of those strategies are as follows: a. Attraction Power a) The enhancement of the marketing capacity for the staffs. b) The inter-sectors coordination periodically in arranging the investment opportunities. c) Business meeting with the prospective investors. d) Promotion through contacting the contact person by printed or electronic media, web and exhibition. b. Durability Power a) Coordination of handling and escorting the licensing process and procedures. b) Inter-sector coordination in order to create the conducive investment climate. c) Arrange the policy to give guarantee and security for the local and international/foreign investors. For instance, the limitation of operational period of foreign investment, local-partnerships and involvement of the locals. d) Handling the local-private partnership, especially for the big and strategic investments.

59 c. Competitiveness Power a) Coordination related to the needs of investors such as infrastructures. b) Land banking, it is needed to control the land prices. c) Held an exhibition to invite the potential buyers. d) Offers such unique and innovative commodity such as creative- industry and so on.

4. The Policy Direction of Spatial Plans in DIY (RTRW) a. The National Referrals of Spatial Plans The national urban system on DIY as noticed in the sheet of PP No. 26 year 2008 as the table 2.18 as follows; Table 2.18 National Urban System on DIY Province PKN PKW D.I Yogyakarta Yogyakarta (I/C/3) Bantul(I/D/1), (II/C/1) Sleman (II/C/1) Source: The Sheet of PP No. 28 year 2008 about RTRWN

The key region contained on the Special Region of Yogyakarta as listed on the sheet of PP No. 28 year 2008 about RTRWN are as follows; Table 2.19 Key Region of DIY Key region Seed sectors Yogyakarta and surrounding area - Tourism - Agriculture - Industry - Fishery Source: The Sheet of PP No. 28 year 2008 about RTRWN

The key region is including some part of Sleman, Bantul, Kulonprogo, Gunungkidul Regency and Yogyakarta City. The seed sectors of that key region were tourism, agriculture, industry and

60 fishery. Beside the key regions it is also mentioned the national strategic area in DIY Province. It was the National Merapi Mountain Park (Central java and DIY).

b. The Spatial Plans Referrals (RTRW) 1. The strategic areas of the economic growth in the Special Region of Yogyakarta.

The national strategic area is including the urban areas of Yogyakarta. The provincial strategic area including; a) The urban area of Yogyakarta; b) The corridor area connecting Yogyakarta, Piyungan, Wonosari, Rongkop, and Sandeng; c) The corridor area connecting Temon, Wates, Yogyakarta and Prambanan; d) The corridor area of Sewon, Kasihan, Sedayu, Srandakan, Imogiri and Piyungan in Bantul Regency; e) The corridor area of Godean and Pakem in Sleman Regency; f) The area for industry, Sentolo, in Kulonprogo Regency; g) The corridor area connecting Tempel and Parangtritis.

2. The strategic socio-cultural preservation area in DIY are including: a) The national strategic area of Prambanan and Ratu Boko temple tourism park in Sleman Regency; b) The provincial strategic area including: Kraton Yogyakarta, old city if Kotagede, Imogiri

Graveyard, PuroPakualaman, Malioboro and the temples in Sleman and Bantul Regencies.

3. The protected area and cultivation on DIY are include: a) The national strategic area covering the Merapi Mountain National Park, which have 1.743,250 ha width in the District of Turi, Cankringan and Pakem in Sleman Regency. b) The provincial strategic area including: (1) the karst eco geo-tourism in Gunungkidul Regency; (2) The Parangtritis and desert in Bantul Regency; c) The WediOmbo beach area in Gungkidul Regency.

4. The strategic area of utilization of natural resources and/or high-tech in DIY covering: a) The south-beaches (Pantai Selatan) area for wind and sea wave power plants in KulongProgo, Bantul and Gunungkidul Regencies; b) The high-tech area in GunungMerapi areas in Sleman Regency.

5. The coastal development and management of marine products in DIY covering: a) The Depok, Samas, Kuwaru and Pandansimo beaches in Bantul Regency; b) The Trisik, Karangwuni,Glagah and Congot beaches in KulonProgo Regency;

62 c) The Sadeng, Sundak, Baron, Ngerenehan and Gesing beaches in Gunungkidul.

CHAPTER III

ANALYSIS AND DATA INTERPRETATION

The fast growing of urban area and urban sprawl in Special Region of Yogyakarta (DIY) is demanding effective strategy of development. The sustainable development of economy, social, culture and environment must meet its equilibrium. The equilibrium in development means that all the aspects are developing in line with the local land use planning (RTRW). As the urban sprawl in DIY, Sleman Regency has growing faster compares to other regencies/city. It can be seen from the contribution of the Gross Regional Domestic Product (PDRB) of Sleman Regency toward the provincial PDRB were highest among others with value of 30,64%. Related to its function as the urban sprawl of DIY, the economic growth and fast growing of development of Sleman Regency actually never be separated from the support of Investment in many sectors. In contrary, Kulonprogo Regency that was located not so far from the Yogyakarta city has the lowest contribution of PDRB toward the formation of provincial PDRB at current prices in 2011.

Table 3.1 Contribution of PDRB of Regency/City toward the Formation of Provincial PDRB at Current Prices in 2011

No. Regencies/City PDRB (Million Contribution rupiah) (%) 1. Kulonprogo 3.867.136 7,85 2. Bantul 10.097.345 20,49 3. Gunungkidul 7.250.682 14,71 4. Sleman 15.097.600 30,64 5. Yogyakarta 12.962.435 26,31 Total 49.275.198 100,00 Source: Regional Statistic Board (BPS) DIY, 2013

From the table 3.1 above, it can be seen that Sleman and Kulonprogo hold the highest and lowest contribution toward the PDRB formations in DIY. It may presumably as one of the indicators of economic growth of Sleman that superior to the Kulonprogo Regency.

Graphic 3.1 Percentage of the Width each Regencies of DIY

Kulonprogo Bantul Gunungkidul Sleman Yogyakarta City

18% 18%

16%

47%

Source: Regional Statistic Board (BPS) of DIY 2013

Sleman and Kulonprogo Regency have almost same portion of the total width of DIY. Each is holding 574, 82 km² and 586,27km² from the total width of DIY 3.185,80 Km2. It means that both regencies have the same possibility to attract the investor. However, need some advantage values that able to influence the investor to invest in the regency.

Government of Kulonprogo Regency presumed that Kulonprogo Regency has distinct advantages compared to other regencies in the Special Region of Yogyakarta. Kulonprogo has the strategic location on the south java economical traffic as well as its attractive topography. In addition, as an accessible open economical region, Kulonprogo Regency will become a competitive region if developed in processing industry, trading and services sectors. Furthermore, the future prospect of Kulonprogo will have some crucial supporting facilities such as Fishery Harbour (in progress), and an International Airport (pre-feasibility study is available).

On the other side, Sleman Regency is also presumed itself has strategic position thanks being on the regional economic route. It has availability sufficient physical infrastructures. More detail, on its investment promotion book, Sleman Regency assumed that the reasons of the regency focus on investment because it has numerous comparative advantages. The advantages are including; trained and skilled manpower (hosting about 40 high educational institutions), friendly community as the central sprit of Sleman society.

Sri Purnomo on the regent remarks in the investment promotion book on “How would we have visitors without inviting and being friendly to them?”. Apart from that, the existence of some easy-to-reach international icons in the region such as the Prambanan Hindu Temple, Yogyakarta Palace and Borobudur Buddhist Temple as well as other supports facilities. It‟s also including Adisutjipto International Airport and a star-rated hotel of international standard also has made Sleman an attractive investment destination.

1. Analysis of Strategy on Attracting Investment and (or FDI) in Sleman and Kulonprogo Regency

Sleman Regency is paying much attention on how the investment could improve the region‟s economy and the people‟s life quality. Those make the regency taking into account how to create an attractive and friendly investment strategy through well-structured investment promotion. On the other hand, Kulonprogo Regency is realizing its inferiority and initiates to create a brand image “Kulonprogo The Jewel of Java” as the way to promote the regency to the world. It hopes can bring Kulonprogo “Go International”. Hence, the image was created as a manifestation of the commitment of Region Economic Development, which integrates potencies of Trading, Tourism, Education and Cultural sectors.

A. Policy Frameworks to the FDI 1. Autonomy: Socio-politics and Stability

The Special Region of Yogyakarta is a province that has good political stability and security among other provinces in Indonesia. It is a natural appeal of a monarchical region because the leader of the province was not being selected through electoral system. It makes the political tendencies in the province are relatively small. Related to investment, the socio-politics and stability of a region are quite affecting the determinants of the investors, including the foreign investors. The business world is requiring such conducive investment climate as well as the support of the socio-political stability. Good relation between government, private and society is a crucial thing that needsmaintained in a region.

At the end of 2013, the FDI Companies in Kulonprogo noted there were 3 business units. They are PT. Sung Chang Indonesia, PT. Jogja Magasa Iron (JMI), and PT. Epotech Indonesia. The investor was from South Korea and Australia. Total value of investment received by Kulonprogo Regency in 2013 from those three companies is amount of IDR 227,761,150,000. Furthermore, Domestic Investment (PMDN) there is 7 business units with the investment value amount of IDR 983,363,175,249. Meanwhile, till the end of 2013, the investment of Sleman Regency noticed there were 44 business units of FDI (PMA) with the investment value amount of US$206.788.265,40 and absorb about 7.292 man powers (peoples).

For domestic investments (PMDN) there were 40 business units with the investment value amount of IDR1.868.199.326.172 and afford to absorb 9.782 man powers. The non-PMA/PMDN investment there are 33.341 business units with the investment value amount of IDR3.787.620.723.615 and afford to absorb about 266.489 man powers (peoples).

Sleman Regency with the huge number of FDI companies is more likely stable compares to Kulonprogo Regency in maintaining the relation between government, private, and society. It presumably that Sleman Regency has autonomy on creating „Clean and Good Governance‟ system of investment governance. The head of KP3M Sleman, Retno Susiati stated as follows:

“…In order to create „clean and good governance‟, the KP3M Sleman is conducting a high performance of investment governance which managing services effectively, transparently and professionally”.

Sleman Regency is succeeded to attract investors to come through the heterogeneous and open society. It can be seen from the investment realization that increasing simultaneously year to year. The Investment Office of Sleman Regency works hard to keep the good relationship between the office (government), investors and society. They keep relation with the investors by regularly held business gathering and monitoring. The program and the policy were successful in creating stability and conducive investment climate in the regency. Shown from that, there are almost none of the foreign companies that having problems and conflict whether with government and even with society.

On the other hand, Kulonprogo Regency stability related to the foreign investment was not as good as Sleman Regency. It is assumes because there are several conflicts between government, private and society occurs. The number of business unit concerning the capital in the regency is barely so small. Two among three of them were in problem. For instance, since 2006 until 2011, PT. JMI (Jogja Magasa Iron) have problem with society of four districts, such as Temon, Wates, Panjatan and Galur. The people were complaining about the existences of the project because they cultivate the land and desert along the south coast of Kulonprogo since about two decades ago. They were rejected the project

68 because they assumed that the project might disturb their existences, source of income and life in that area.

In addition, PT. Sung Chang Indonesia, in 2011 was had a huge conflict with the labours of the company. The General Manager of the company, Cho Han Hyun was accused a law abuse toward the labours. As the result, the labours formed such movement of demonstration push the government to reform the investment policy. The labour movement was demanding the government of Kulonprogo to evaluate the investment objectives. They suggested that the government should not have to “sell” the low wage labour to attract foreign investors because they think that action was disadvantages for the regency as well as the labours.

From some points above, it can be said that Sleman Regency‟s investment cycle was relatively stable and well- managed rather than Kulonprogo Regency. It is proven by the adjustment of some investors that almost every of them feeling satisfied with the investment governance and professionalism of Sleman Regency.

Furthermore, Kulonprogo Regency might assumes has not been succeeded in creating comfortable and profitable investment for all stakeholders. It might presumably cause by the lacking of socialization to the society about the investment projects and lacking of knowledge briefing to the investors about the law and regulations as well as the rights and obligations of the foreign company in Indonesia.

2. Entry and Operating Regulations

The effectiveness of free-trade regions in the regional- global level, and the anticipation of the ASEAN Community in 2015, requires the regencies or local government to do reorientation on the investment aspect. The governments are required to improve its quality and capability as the proportional

public server. It is aimed to meet the demands of the global development and enhance the competitiveness among regencies on attracting foreign investors that has very big deal with the succeeded of the development of a region. In addition, the clear information about investment potentials, investment procedures and transparency of investment incentive and license procedures were also plays important roles in this case. The figure below compares the licensing procedures and guidance provided by Sleman Regency with Kulonprogo Regency.

Image 3.1 Investment Licensing Procedures of Sleman Regency

Source: Investment Office (KP3M) of Sleman Regency in Investment Promotion Booklet, 2013

Image 3.2 Investment Licensing Procedure of Kulonprogo Regency

Rejection Letter

Service Administration

Applicant Front Office

(Information, Form)

Field Survey

Research Documents

License Launching Cashier Cost Calculation

Source: Investment and Integrated Licensing Office (BPMPT) of Kulonprogo 2013

Comparing Figure 3.1 and 3.2, it can be seen that Sleman has more clear information about procedures of the investment for both domestic and particularly the Foreign Direct Investment (FDI). It seen on the image 3.2, Sleman Regency give the information of what license must be done by FDI in Investment Coordinating Board (BKPM RI) in national level and which steps are the authority of regional investment office and must be done in regional level. On the other hand, Kulonprogo in not present the licensing guidance for the FDI as well as the types of investment licensing. The regency is only provides the licensing direction in general.

The investment license for FDI or foreign companies is the right of National Investment Coordinating Board. Hence, the FDI have to complete the entire documents and investment license on the National level as the first step. It might seem very simple but it can affect the determination of the FDI. Well-reserved information should give the easiness to the investor and as the strong point of attraction. According to Law of the Republic of Indonesia Number 25 of 2007 about Investment, the investments must be a part of the conductions of national economy and be positioned in an effort to increase the national economic growth. The law order the business sector to create job opportunities, to improve sustainable economic development, to improve the capacity and capability

71 of national technology, to foster people‟s economic development, as well as to realize public welfare, in a competitive economic system.

3. Policy Standard for Foreign Affiliation

One of the strategies on attracting FDI is ensuring the basic requirements and regulations to the foreign affiliation. The local government must clearly present the mechanism required to the foreign affiliation before signing the project contracts for long- term period of time. This is important to avoid monopolistic action and exploitation of the resources that probably did by the foreign affiliation in the future.

According to Sriyono, the head of Investment development of Investment Office (KP3M) Sleman Regency, on the interview on February, 17th2014, stated that the requirements or conditions for the foreign investor before investing in Sleman Regency. The company at minimum investing amount of $ 100.000 or 5 % of the investment value of the company. He added, for the business field such as hotels and restaurant the license period is 20 years at minimum and 30 years at maximum and it can be extended in the National Investment Board (BKPM RI).

Carry the role as water conservator for DIY, hence, Sleman set the limit of land usage for the investment and only the ones those have eco-friendly business allowed investing in certain areas of water conservation in the Regency. It is in order to keep the water availability as well as the environments. Other policy standard for foreign investment regulated in the regency is about the land ownership. The government regulation of Sleman Regency is didn‟t allow FDI Companies to own the land. Both small-medium and large scale of business were only allowed to rent the land with determined maximum rental period.

Furthermore, Sleman Regency is also pay attention toward resident permit for foreign labours. The foreign labours have to

72 renew the license permit annually. The latest policy for the foreign workers is about retribution of the license renewal employ the foreign workers in Sleman Regency. The changes of Local Government Regulation of Sleman No. 8 of 2012 noticed the new policy for the foreign workers. According to Rohman Aus Sukamta, The vice chairman of Local Representatives Body (DPRD) Sleman Regency, stated that every foreigners workers that works in Sleman Regency obligated to pay tax amount of $100 per month or about 1,2 million rupiahs. (Jogja.tribunnews.com/2013).

On the other hand, in the interview on February, 12th 2014, Ir. Robby Amra Y, the head of Investment division of BPMPT Kulonprogo, stated as follows:

“We (Kulonprogo) set same requirements for either domestic or foreign investment, which investing in Kulonprogo. The different is only in the licensing permits. Foreign investment must collect the legal license from national government and only domestic investment which can be done the license in BPMPT Kulonprogo. Furthermore, we didn‟t set special strategy or regulation for the foreign investment; we do the same as we did to the domestic investment”.

Based on findings about the policy standard for the foreign affiliation both in Sleman and Kulonprogo Regency, it is assumes that Kulonprogo is less concern toward the foreign affiliation. It may probably because the number of foreign affiliation in Kulonprogo barely small. But in the future, Kulonprogo Regency has to consider those matters, not only to attract the investors but also to keep the existences and sustainability of the natural resources in the regency. If there is no certain regulation or strict action for foreign affiliation, it may threat the regency itself. The abuse of law and exploitations could be the biggest threat that needs to anticipate as early as possible.

The policy standard for foreign affiliation in DIY was noticed in some regulations. According to the Special Region of Yogyakarta Governor Regulation No. 11 of 2008 about Sub- District Property Usage System, explained the Rental Mechanism, Cooperation and Build Transfer Operation and Build Operation Transfer, were regulated as follows: a) Rental Mechanism Rental period is 20 years at the maximum and can be extended. Rental tariff is decided through a sub-district head regulation and comes with a written permit from the governor. It is issued based on respective regent recommendation. In addition, the agreement clauses must include: (1) concerning parties according to the agreement; (2) rental object; (3) rental period; (4) rights and obligation of involve parties; (5) dispute settlement mechanism; (6) force majeure; (7) agreement implementation evaluation. b) Cooperation Cooperation regarding the use of a sub-district property has to have the approval from the respective sub-district head to apply for the regent‟s license. This is done to optimize the effectiveness and efficiency of the sub-district property and increase the sub- district income. Furthermore, the requirements were: (1) lack of fund in the sub-district budget; (2) decision on the partnership is made through a deliberation representatives body (BPD); (3)decided by the sub-district head, with the approval from the respective BPD; (4) the cooperation period is three years at the maximum and can be extended; (5) the agreement must include clauses like the ones required for the rental mechanism. c) Build Transfer Operation and Build Operation Transfer It is if the sub-district administration is in need buildings and facilities to run the administration and to serve the public. If there is not enough fund in the sub-district budget for providing the

74 needed buildings and facilities. The related parties must obtain a written license from the governor after receiving a recommendation from the regent and is stipulated in a sub-district by law. The usage period is 20 years at the maximum and can be extended after being evaluated by a team established by the sub- district head then the evaluation result is presented to the sub- district administration to consider. The agreement clauses must include: (1) related parties; (2) agreement object; (3) period of time; (4) reasonable profit sharing; (5) rights and obligations of involved parties; (6) dispute settlement mechanism; (7) force majeure; (8) agreement implementation evaluation.

4. Market Function and Market Structure (Competition Policy)

In order to accelerate the economic growth and improving the quality of life of the people, Sleman Regency implements marketing place that focuses on the potential of ETI-Education, Tourism and Investment. This is a competitive position and strong differentiation for Sleman compared to other regions. On the other hand, Kulonprogo Regency set the brand image “Kulonprogo The Jewel of Java”. It is aimed to „brain storming‟ the business world and warn that the Kulonprogo is the best and profitable place for investment.

Both regencies have different market structure. In Sleman Regency, the number of skilled and trained manpower is greater than Kulonprogo. The presence and increased number of new comer students from outside the Province of DIY makes the market function and market structure of Sleman Regency as the main destination for education. It is hardly attract the investors particularly in the secondary and tertiary sectors.

Furthermore, Sleman Regency is also become main destination of tourism in DIY with hosted several world-class

75 tourism objects such as Prambanan Hindu Temple and Borobudur Buddha Temple. It is make Sleman Regency has very big opportunities on attract the foreign investors. The technology usage is also developed in line with the urban mobility that more busy in the agglomeration areas in Sleman Regency, while in Kulonprogo the technology usage is relatively low. At present, the market structure of Kulonprogo still dominated by the agricultural sectors and other primary sectors. By different market structure and function, the Investment Promotion Agency of both regencies also presented different seed investment potentials based on their main market structure and function.

Table 3.2Investment Opportunities and the Market Segment in Sleman and Kulonprogo Regency

No Investme Mark Investme Market . nt et nt Segment Opportu Segme Opportun nities of nt ities of Sleman Kulonpro Regency go Regency 1. Develop Touris Developm Industry ment of m, ent of Maguwo Educat Tanjung harjo ion Adikarto Stadium Fishery Port 2. Develop Touris The Trading, ment of m Developm Tourism Candi ent of Gebang Internatio and nal Embung Airport Tambakb oyo 3. Develop Touris Pig Iron Mining, ment of m Industry Mount Merapi Museum Region 4. Develop Touris The Trading, ment of m development Transpo

Tourist of South rtation Objects Java Road Route 5. Student‟s Educat The Industry Dormitor ion development y of Sentolo Industrial Area

6. Motorbik Tradin Tourism Tourism e g Objects Assembli ng Industry 7. Compute Tradin Cacao, Industry r g, Herbal, and Assembli Industr Coconut ng y Processing Industry Industry Source: Processed from KP3M Sleman and BPMPT Kulonprogo Investment Promotion Book 2013

From the table above, seen that the market segment of both Sleman and Kulonprogo Regency were particularly different. The Sleman Regency is set the strategy on investment development mainly for the tertiary and secondary sectors while Kulonprogo Regency set the strategy of investment development is more likely in primary and secondary sectors rather than tertiary sector. Both Sleman and Kulonprogo Regency were considering their strong points and understanding the market structure and function in the regency.

The followings are descriptions and supporting business projections of Sleman three potentials:

a) Education

Sleman as the education centre in DIY has very strong intellectual atmosphere. There are 7 state universities and 40 private universities which grow up with thousands of student from five continents to study various disciplines within 3 levels of strata

(S1-S3). As a barometer of education in Indonesia, Sleman has a complete and modern facilities and infrastructure. Education system with the concept of link and match is suitable for the needs of society and labour market.

Future projections: In general. Universities in Sleman orientate in intellectual skill formation and communication skills to produce human resources that have the professional ethos required in the era of global business. Therefore, Sleman Regency provides campus construction zones and facilities that can be support teaching and learning process; facilities such as student housing, indoor/outdoor sport facilities, infrastructure network and utilities. Information technology system is also designed to build campus networking with its stakeholders. Supporting Business Education Projections: The growing of business support commodity in Sleman as a cluster of education industry with the student market is Exclusive boarding, laundry, photocopy, press/offset, printing services,Distro clothing, computer rent, public internet and gadget store. b) Tourism

Sleman tourism‟s excellence is a blend of its strong natural character, culture and archaeological history. Mount Merapi as one of the most active volcanoes in the world becomes a power of tourism attraction in Sleman Regency. As the hub of the religious- cultural heritage, relics of Islamic Culture in Sultanate palace, Yogyakarta; Christianity Culture in Sendangsono, Kulonprogo; Culture of Buddhism in Borobudur Temple, Magelang as the largest Buddhist temple in the world- and in the Hinduism Culture at Prambanan Temple, Sleman, the largest Hindu temple in Indonesia, it makes Sleman a cultural melting pot for the major religions in Asia.

The ecotourism: In Sleman Regency is cantered on the presence of Mount Merapi (3.000 m). Merapi area is

always inspiring to the creation of many variations of the tourism business. Exploration of a variety of tourist businesses in this growing area of Merapi, lava tours, golf courses, tourism villages, tourism parks, nature restaurant, villa, etc.

According to Sriyono, the head of investment development division of the KP3M Sleman, on the interview on February 17th 2014, stated that one of among others of the competitive advantages of Sleman Regency was its fertile soil and natural beauty and freshness. At present, there are about 38 tourism villages has been developed. For instances, various fun family activity, such as outbound, paddy planting, and many more options for the unforgettable tourism experience in Sleman Regency.

In addition, mount Merapi also has magical value in terms of philosophy and beliefs in Javanese culture, which mentions the existence of an imaginary straight line from the Indian Ocean towards mount Merapi passes the Palace of Yogyakarta. The imaginary line of Yogyakarta is interpreted as a line toward the perfection of life.

Cultural Tourism: Sleman is rich in art and culture. There are more than 15 communities and 10 traditional art ceremonies that continue to thrive in the community. Islamic and Hindu acculturation into Javanese culture has become a high-value of creativity. Creativity of arts and culture is a potential to form a design that creates a new and better life, progressing and prospering. Art and culture in Sleman Regency are rich with numerous and various dancers, painters, artists, artisans and cultural art performances. Creative industries are constantly evolving rapidly, through music, crafts, fashion and performing arts. Ramayana role-dance is one of the leading legends held in

the Court of Prambanan, the world famous Hindu temple as the background.

Antiquity History Tourism: The establishment of temples in Sleman regency utilized the rocks and stones from eruption of Mount Merapi. Among them are the temples of Prambanan, Mendut, Ratu Boko, Kalasan, Sambisari, Banyunibo, Barong, and Sewu Temple. Prambanan Temple as the Biggest Hindu temple in Indonesia, built in the IX century by Sanjaya Dynasty is the embodiment of cultural values and high technology. This 47 metre-high temple is decorated by the reliefs of Ramayana Legend, which can directly pass the values of life in today‟s generation.

Supporting Business Projections: The growing of business support commodities in Sleman Regency as a major tourist destination in Indonesia, with a market of domestic and foreign tourists are hotel, cottage, home stay, restaurant, eating house, specific foods, tour&travel, new tourist destinations, crafts and souvenirs, malls and shopping centres, nightclubs, karaoke, salon spa, MICE, land transports (taxis and rental cars).

Graphic 3.2 Number of Tourist on Temples, Natural, and Museum Object in Sleman Regency 2012

Foreign Tourist Domestic Tourist

1,233,794

591,557 481,253 180,555 5,034 12,034

Temples Natural Museum

Source: Regional Statistic Board (BPS) of Sleman Regency, in Sleman in Figures, 2013

From the Graphic 3.2, it can be seen that three main tourism objects of Sleman Regency invited many tourists to come either domestic or foreign tourists. The Temples seems to be the most visited object in Sleman compares to natural and museum objects. c) Investment

Supported by its comprehensive infrastructures and its competitive advantages, Sleman Regency has grown to be one of the best investment territories in Indonesia. The advantages in education and tourism offer various businesses to grow in the area, ranging from manufacturing industries, trading, and service-based industries, to lots of creative industries. The trading activities in 2011 indicate a realization export of more than US$ 50 million to U.S, Japan, and South Korea. In addition, Manufacturing and Creative Industries has rapidly grown in the recent decade. This is related to its advantages in education and tourism.

The investment prospects of Sleman Regency are now directed to several integrated investment development. This is to make sure all parties easily choose the best offer. Mostly the areas are in the Agglomeration Sphere of Yogyakarta (APY) which is a golden area for business. The following are among the investment potentials to offer:

a) Development of Maguwoharjo Stadium: Developed to be the biggest in Yogyakarta Special Region, Maguwoharjo Stadium has the capacity of accommodating 30,000 spectators. The stadium has been well designed to be developed into an integrated sport, commercial, and entertainment spot. Among other facilities currently was being developed in the site

such as sport hall, food-court, exhibition hall, park, and waterpark. b) Development of Candi Gebang and Embung Tambakboyo: The main objective for developing Embung Tambakboyo is for the water conservation in Sleman urban areas. The region can be developed into waterpark recreational sites as well as other business including plain water fishery. The Gebang Temple, on the other hand, is prehistoric temple site measuring 5.25 meters by 5.25 meter by 7.75 meters. The temple has a good prospect to be developed into a promising archaeological historical tourist object. c) Development of Mount Merapi Museum Region: Developed by using the concept of edu-tourism based on the volcanic activity of Mount Merapi. The Region is projected to synergize education, information, attraction, and innovation into the concept of techno- park. d) Development of Tourist Objects: The local government focuses to enhance the tourism in the Merapi slopes. The areas of Tlogo Putri, Kali Adem and the vicinities there have promising potentials for specific-interest area. In addition, the rural areas like Desa Sumberarum are very good for religious tourism, Water Park and Out-bond arenas. e) Student‟s Dormitory: As a cluster of education industry, the urban areas of Sleman open for an establishment of an integrated zone with a complete and modern facilities uniting dormitories, sport centres, guest house, culinary corners, groceries, and internet cafes. f) Motorbike Assembling Industry: As the biggest regency in the province with 47 universities, Sleman Regency has the open market for the motorbikes. The regency is on the top rank of sales in the province. It is reaches

255.431 units/year of the total 639.696 units in the province. g) Computer Assembling Industry: Computer Assembling Industry is the industry that prospectively developed in Sleman Regency as „the cluster of educations industry‟ in Indonesia. Nowadays, the Special Region of Yogyakarta has launched as “The Cyber Province”.

On the other hand, Kulonprogo Regency is also pay attention on business projections agenda in the regency. Based on Government Regulation (PP) No. 24 of 2009 about industrial zone and Ministry Regulation (Permen) No. 35 of 2010 about the provision of industrial zones, has arranged the policy standard of the designation industrial zone of the economic, industry and investment centre in Sentolo Industrial Zone. This area was projected as the integrated industrial zone in DIY. Furthermore, to support the development of Industrial Zone and the economic activities in Kulonprogo, the regency was developed the supporting infrastructure. The followings are the infrastructures and resources in Kulonprogo:

a) Transportation: main terrain transportation facilities in Kulonprogo Regency is road with length 1,112,373 km which divided into; national road 28.57 km, provincial road 159.9 km, and regency road 923.903 km. other facility is railway train path as part of south java railway route. There two stations in Kulonprogo, Wates and Sentolo. The railway in Kulonprogo already improved into double track line. The national policy to establish South Java Road Project which connects among coastal area of south Java will boost up the growth and development of transportation network, traffic and economic development in Kulonprogo. b) Electricity: Electricity powers in Kulonprogo Regency available in up to 36 Mega Watt meanwhile the demand

approximately 20 Mega Watt, so there are 16 Mega Watt of electricity power reserved in Kulonprogo Regency. c) Water Resources (Surface Water): Kulonprogo Regency has three watersheds: (1) Progo watersheds have 8,894 Ha of catchment area; (2) Serang watersheds have 3,635.79 Ha of catchment area; (3) Bogowonto River as the boundary of the Kulonprogo Regency with Purworejo Regency of Central Java Province. Groundwater: Groundwater availability in Kulonprogo Regency approximately 1, 787, 788, 274, 96 m3, while the amount of exploitable water is 170, 565, 874, 96 m3. The reserve groundwater consists of: (1) reserve from statistic groundwater: 1,617,222,400 m3; (2) reserve from dynamic groundwater: 18,615,368,36 m3; (3) from infiltration 1,787,788,274,96 m3. Tap Water: Production Capacity of Local Tap Water Company is 6,259,896 m3.

The followings are the strategic projects and investment opportunities of Kulonprogo Regency: a) Tanjung Adikarto Fishery Port It is located in Karangwuni Village, Wates District. Reserved area for development of infrastructure is 83 Ha. The location has good access and easy-to-reach, connected with cities in the south of Java by the regional transport routes. Tanjung Adikarto Fishery Port located 2 kilometres from national road of south Java and South National Development Plan of South Java Road and 40 km from Adisudjipto International Airport. The availability of electricity, land, and fresh water supply is from groundwater and future plan from pipe network of PDAM water from Sermo dam along 10 kilometres. Designed for ship landing up to 150 GT with parking space is about 6 Ha and possibility to extent up to 15 Ha. By the end of 2013, it is planned

84 to be used for boat landing up to 30 GT. Until now had completed the construction of infrastructure such as roads in the harbour area, fisherman settlement and office buildings overall construction of the port has completed 75 per cent and expected to be fully operating in 2014. The investment opportunities of the integrated development of marine industries such as fish processing & scanning, surimi, fish bone meal, frozen fish, smoked fish, shipping industry and fishing equipment, gas station, cold storage and ice factory, water supply, etc. Table 3.3Marine Potentials of Kulonprogo Regency No. Potential Fish Sustainable Save Yield Resources Yield (80%) (Ton/year) ton/year 1. DIY Province 6.995 5.595 South Beach 2. South Java 364.200 291.360 3. Indonesian 905.340 725.280 Ocean Source: The Centre of Marine Technology (PUSTEK) UGM Yogyakarta, 2005 b) International Airport The construction of Kulonprogo Airport is included in the PPP Book 2010-2014. It is indicates that there will be an opportunity for the private and foreign investors who are interested in managing the airport under the Technical Unit (UPT) of the Directorate General of Civil Aviation. The international airport will be called Nyi Ageng Serang, after a heroine from Kulonprogo. The master plan for Kulonprogo Airport located around 30 km west of Yogyakarta City. It has a runway of 3,600 meters long. The runway is very adequate for large international aircrafts. From the east to the west side of the runway, two perimeters with a length of 900 meters each will added. Thus, the overall total of the runway will be 4,400 meters. The runway will be constructed first followed by the perimeter and lighting. The 478 hectare airport will be equipped with 7 taxiways that have 4 interconnecting taxiways. The facilities provided cover aprons,

85 terminal building, commercial building, technical building, Air Traffic Control (ATC) to support flight operations, as well as a parking facility for visitors. The airport will be capable of serving 30 million passengers annually. c) Pig Iron Stream that caries pig iron mineral is spread in three major spot of big rivers that flows all year long. In the west side of Bogowonto River, middle part of Serang River, and east side of Progo River. The south sea is an area of pig iron mineral deposit, as the work of wind the iron mineral accumulated in the coastal area. The distance from the source is about 12-14 km, a good process from the bed rock to be disintegrated to pig iron mineral. Grain sand contains 0,71-64,85 per cent of pig iron with Fe2O3 content (56,09-59,20 %), FeO (14,04-14,93 %) and TiO2 (6,34- 6,7%). Amount of pig iron deposit in South coast of Kulonprogo Regency is in an area of 22 km x 2 km starts from the estuary of Progo River to the estuary of Serang River. Estimated number of pig iron deposit is 605.000.000 tons with content of Fe up to 10,8%. Highest deposit proportion lies in 6 - 8 meters depth with total deposit amounted 273.000.000 tons with Fe content reaching to 14,2 per cent. Possible production potency is approximately 1.000.000 tons/year for 30 years mining activities. That level of production will fulfil more than 50 per cent national of steel demand. For the iron sand mining activities, there is already mining concession between the Government of Indonesia and PT. Jogja Magasa Iron, signed on 4 November 2008.Investment opportunities for iron sand mining are pig iron processing plant into semi-finished goods and finished goods. The area of 2,000 Ha around the iron sand mining will be developed into a National Steel Industrial Zone (Sentolo, Lendah, and Galur District) that is initiated by the Ministry of Industry.

d) The development of South Java Road Route The south Java road route of DIY is part of the southern route of Java which already becomes the national agenda. The road of Kulonprogo Regency with 29,704 kilometres length and 4 – 6 m width will be increased to 14 m width mainly using the existing road. By the mid of 2015, there are 1+7+1 m connected road planned. Longer term in 2025, the road already becomes the main route. 1. Policy Framework Analysis of FDI A. Sleman Regency

FDI

Less Conflict Hidden

Incentives Accommodated License for FDI

Specified Policy Standard for FDI

HDI above average of DIY KP3M

Investor

 Tourism

 Industry  RS  Service and  MS 87 Commerce  ES  Agriculture  SA/CS

B. Kulonprogo Regency

FDI

Conflict Incentives

Unspecified

License for FDI

Uncompleted Policy Standard

HDI below average of DIY BPMPT

Investor

Industry RS

Agricultu ES re SA/CS

B. Economic Factors

Normatively, local investment is considered as one of the important power in accelerating economic growth and development of a region. After the implantation of local autonomy, local government such being more concern toward the investment flows, the acceleration of economy and development were only possible if it‟s supported by the significant investment flows. That strong perception has push up the local government to build a good investment climate. Moreover, the local government also have to consider what aspects that may influence foreign direct investment determination.

Jere Behrman was developed the typology to explain the different objectives of FDI:

a. Resource Seeking FDI This type of FDI particularly looking for the availability of raw material, low-skilled labour cost, labour skill, and other asset innovation, physical infrastructure, etc. b. Market seeking FDI Market seeking FDI generally considering the market size and market growth of a region by analysis the income per capita or the economic growth whether a region has a good market structure or not that prospective for the development of their business. c. Efficiency Seeking FDI This type of FDI mainly looking for the labour productivity and other input costs that might help minimizing the expenditure of the companies toward the labour cost, transportation and communication costs.

d. Strategic Asset/Capabilities seeking FDI This type of FDI was particularly looking for a region that has established local firms, a developed human capital with knowledge about markets, competitors and R&D matters.

Table 3.4Typology of FDI in Sleman and Kulonprogo Regency based on the Type of Company No. Sleman Regency FDI Companies R M E SA/C S S S S Tourism Sector 1. PT. Mustika Princess    Hotel 2. PT. Adichandra Graha    Wisata 3. PT. Taman Sakura    Martani 4. East Parc Hotel    5. PT. Azimuth   Adventure Travel Ltd 6. PT. Haruna Wisata   Indonesia 7. PT. Paradise Bali Indah  

8. PT. Queen Spa 

Industry Sector 1. PT. Sport Glove   Indonesia 2. PT. Eagle Glove Indonesia  

3. PT. Kiho Bali Korin   4. PT. Lezax Nesia Jaya  

5. PT. Nexus Fashion and   Sports 6. PT. Java Glove   Perdana 7. PT. BMB Eskport   8. PT. Indo Merapi   9. PT. Bothwell   Indonesia 10. PT. Perdana Citra   Amahi 11. PT. Niaga Merapi   12. PT. Java Connection   13. PT. Talaido Interior   14. PT. Teak Works   15. PT. Almi Furniture   Perdana 16. PT. GE Linghtening   17. PT. Japanese Ina Basic   Service And Commerce Sector 1. PT. Putra Mataram   Sejahtera 2. PT. Tozy Sentosa   3. PT. Lotte Mart   4. PT. Lion Superindo   5. PT. Japan Indonesia   Basic 6. PT. Gameloft    Indonesia 7. PT. Agrisoft System   

Indonesia 8. PT. Bayu Aji Cook   Ateliers 9. PT. Meta   Communication 10. PT. Jibril and Jill   Consult 11. PT. Japan Indonesia   Economy Centre 12. PT. Honpo   Agriculture Sector 1. PT. Bamboo Nusa   Verde 2. PT. Takii Indonesia   No. Kulonprogo Regency FDI Companies R M E SA/CS S S S Industry Sector 1. PT. Sung Chang   Indonesia 2. PT. Epotech Indonesia   Mining Sector/Agriculture 1. PT. Jogja Magasa Iron  (JMI) Source: Processed from KP3M Sleman and BPMPT Kulonprogo, Investment Promotion Book 2013 Note: RS = Resource Seeking MS = Market Seeking ES = Efficiency Seeking SA/CS = Strategic Asset/ Capability Seeking

From Table 3.4 above, it can be seen that between Sleman and Kulonprogo Regency were able to attract or naturally pull up the FDI

Companies with different objectives. Almost all types of FDI were investing in Sleman Regency. Meanwhile, it can be concluded that mainly the FDI companies, which investing in Kulonprogo Regency were the Resource Seeking FDI. For instance, PT. Jogja Magasa Iron (JMI), the company that process and produce pig iron explored in the south coast of Kulonprogo. Presumably it is impossible for them to invest in Sleman Regency or other regencies/city because the source of raw materials for their business not available but in Kulonprogo. In addition, PT. Sung Chang Indonesia as one of the biggest company in South East Asia that producing wig and hair extension from South Korea, explained that their determinants for investing in Kulonprogo because of low-labour cost and the most feasible location for their business. The company‟s raw materials are only 20 per cent from Indonesia while other 80 per cent imported from South Korea and Japan. Furthermore, PT. Epotech Indonesia engaged in the chemical industry that produces Chemical Additives, Silicon, etc., persisted that the Kulonprogo is the most feasible location for their business. It is impossible for their business to be located in Yogyakarta City, as example, because it‟s an urban Area that didn‟t match to their chemical waste. Moreover, the water catchment area like Sleman Regency is also will be damaged by the chemical waste although both Yogyakarta and Sleman Regency have good infrastructures. At the result, it can be assumed that the FDI companies in Kulonprogo Regency were not the type of Market and capabilities seeking FDI.

Sleman Regency presumably has greater chance to attract FDI. Some of regional economist assumes that a region where there are such development concentrations would be more attractive for the economic, business and trading actors. Sleman Regency has good infrastructures, skilled and educated manpower, tourism attraction such some international level of tourism destination that sounds positive to attract FDI to invest in the region. Until 2013, noted there are 44 FDI companies concerning its capital in Sleman. From the table above, it seen that mainly FDI companies in Sleman Regency was in the industrial sector, it is followed

93 by the service and commerce sector and tourism sector while the agricultural sector there are only two companies. In related to the determinants of FDI companies toward Sleman Regency, it has been conducted a study on the factors influencing FDI inflows to a region. According Marc Peters origin from Belgium, the President Director of PT. Bambu Nusa Verde that was operated in the sector of industry especially bio-technology of forestry specialization in Bamboo tissue culture production, stated that the company investing in Sleman Regency because raw materials for their business are available in Sleman Regency, he added that the fertile soil and fresh air of Sleman Regency as one of the factors the company determinant toward Sleman rather than other regency. In addition, the physical infrastructure of Sleman regency is also an important point of the company determination. By support of easy- to-reach and market structure, Sleman Regency was most promising compares to other Regency. Moreover, Takayoshi Iseki, the General Manager of PT. Lezax Nesia Jaya, stated as follows:

“I like doing business in Sleman Regency because the manpower here is more competitive than other city although there has also been an increase in the regional minimum wage. From the access and transportation point of view, we also find it more pleasing here in Sleman than other regency. Professional staffs have been very helpful in the bureaucracy and licensing process”.

Supporting the statement above, Gabriele Waegerle, the President Director of PT. Jibril and Jill Consult, said as follows:

“My seven year experience has shown that developing a business in Sleman is very pleasing. Apart from its strategic location, it is also very easy to get quality and cooperative manpower in the regency. The community, similarly, is very open to foreigners that we really feel comfortable to invest in Sleman Regency”

From the statements above, it may assume that one FDI companies in Sleman might have several factors that influencing their preference toward Sleman rather than other regencies/city. One FDI company may have not only one reasons/determination. The companies may seek the resource, efficiency, market and capabilities at the same time. Kim Min Joon, the President Director of PT. Eagle Glove Indonesia, added as follows:

“I am happy doing business in Sleman because so far the tripartite relationship between the regency administration, the employers and the employees is relatively good. I also like doing business in Sleman Regency because it has abundant ready to use manpower. With regard to the business development in term of licensing services, as far as the company sees it, is also better compared to that of the surrounding regions. Developing a business in Sleman is still attractive to do. Yet, with regard to the regency‟s being a water catchment area, we need to be careful in deciding a sound investment in the region especially in relation with the limited land available and the prices of the land”.

Based on the sample above, it can be concluded that the FDI companies in Sleman Regency generally were the market, efficiency and capabilities seeking FDI. By sectors, which industrial ,and service and commerce are dominated, it may assumes that the FDI companies were seeking for a well market structure by considering Sleman Regency role as the urban sprawl and population and economies agglomerations center in DIY. The agglomeration economies theory explained the role of urbanization economies and localization economies are influencing the urbanization providence because the people and investors were more likely and prefer the urban area that offers the cost efficiency, accessibility, and the urban infrastructures. The localization providence is rising because of the geographical proximity toward the raw materials

95 source, labor, and knowledge spillover that promising the spatial benefits (Kuncoro, M, 2012).

1. Analysis of FDI objectives in Sleman Regency by Sector 1.1 Tourism Sector Based on the Table 3.4 above, FDI in Tourism Sector of Sleman Regency is dominated by Market Seeking FDI (MS). This is influence by the number of visitor or tourist that used hotel and other tourism facilities in Sleman Regency increased (see Appendix). Tourist either domestic or foreign is the massive market of the FDI Company in tourism sector such as hotels, trading, and restaurants. 1.2 Industry Sector FDI in Industry Sector in Slemna Regency is dominated by Resource Seeking FDI (RS). it is because this sectors mainly looking for the availability of raw materials, low-skilled labour cost, etc. majority of the FDI Company in this sector needed high number of employee as well as skilled-low cost labour. 1.3 Service and Commerce Sector Majority of the FDI Company in this sector is the Market Seeking (MS) and Capability Seeking (CS) FDI. The commerce sector like trading needed the effective market to grow. Thus, Sleman Regency presumably the better place for their business because that region has established local forms, develops human capital and also massive market. 1.4 Agriculture Sector FDI Company in Agriculture Sector such as PT. Bamboo Nusa Verde and PT. Takii Indonesia decided to be located in Sleman Regency because the fertile soil and fresh air needed for plantations seeds. It is shows that the objective of the FDI Companies is Resource Seeking (RS).

2. Analysis of FDI objectives in Kulonprogo Regency by Sector

1.1 Industry Sector PT. Sung Chang Indonesia (SCI) and PT. Epotech Indonesia are the FDI Company that needed high number of employees. Thus, main objective of the company assumed as Resource Seeking FDI where the low cost labour available without compromising the infrastructure availability or market structure of the region.

1.2 Agriculture Sector PT. Jogja Magasa Iron (JMI) is the only FDI Company in Kulonprogo Regency in the agriculture sector. By analyzing its sector on the mining, it is assumed that the main objective of the company is Resource Seeking (RS). it is because the raw materials (pig iron) they needed for the business is only available in that location (east cost of Kulonprogo).

e. Social Overhead Capital The concept of Social Overhead Capital represents various conditions required in actual production such as facilities for road, harbor, land, building, communication, means of transportation, etc., and yet at the same time it means in some cases key-industries such as steel and electric power, not to speak of human resources, scientific invention, services activities, etc. No. Social Overhead Capital and Investment Facilities Sleman Regency Kulonprogo Regency 1. Road Access to the Roas access of 29,704 Sea port of +/- 110 km length and 4-6 m km to the Port of width. By the mid of Tanjung Mas 2015, there are 1+7+1 Semarang m connected road

planned. 2. Rusunawa Modern Fishery Development (flats Harbour “Tanjung for rent) Adikarto” 3. Students Dormitory Electric Power in up to 36 Mega Watt of the need 20 Mega Watt. Source: Modified from KP3M Sleman and BPMPT Kulonprogo, 2013 From the table above, Sleman and Kulonprogo Regency provided Social Overhead Capital such as roads, harbour, land, building, etc. It is necessary to fulfil the required facilities in order to accelerate the economic mobility in the region.

C. Business Facilities 1. Investment Promotion

In the framework of marketing place, paradigm shift to entrepreneurial-competitive government makes the Government of Sleman Regency constructs ability to always innovate, have the operational capabilities and global network. For that reason, many efforts made to create the concept of investment innovation that has a market value to meet the expectations of both business and social communities. Sleman investment image creation is “Sleman: Education, Tourism, and Investment”.

The brand image is created because the importance‟s of those three things in the economic life of Sleman Regency. In the investment performance, Sleman Regency innovate to change the orientation from the local orientation to global orientation demands bureaucratic reorganization based on the principles of efficiency and competence in order to create the best service for the community. The main step is to change the “mind set” as a

pro-business, globally-oriented, and professional public service providers. With the system synergy, high technology and qualified human resources, Government of Sleman Regency has created a conducive investment climate for the implementation of professional and more visionary investment governance.

As well as Sleman Regency Government, the government of Kulonprogo Regency always tries to create situation and condition that is conducive for business growth and development. It is expected to be able to encourage investment growth that gives positive effect for local economy development and improvement people welfare. In addition, Robby Amra Y, the head of division of investment of BPMPT Kulonprogo, in the interview on February 17th 2014, stated that the cheap manpower and the presence of special industrial zone of Sentolo are the competitive advantages owned by the regency.

Kulonprogo The Jewel of Java as the brand image of Kulonprogo Regency to Go International is the commitment of Region Economic Development, that integrates potencies of Trading, Tourism, Education and Culture sectors. The integrated potencies are hoped be an important icon for promoting Kulonprogo Regency to the world.

Table 3.5Investment Promotion of Sleman and Kulonprogo Regency

No Investmen Sleman Regency Invest Kulonprogo t ment Regency Promotion Image Strong Promot Imag Strong Object Point ion e Point Object 1. Tourism Ease of Located Trading Strate Located Travel between gic on the Jakarta Locati and on south Bali. java econom

ical traffic 2. Tourism Highly- 10 Tourism Attrac Has and valued monum tive highlan education archaeol ents Topo ogical graph d and sites y coastal area 3. Tourism Harmon Lots of Trade As an Compet ies of art access itive in native perform ible cultures ances open sectors and and econo of modern tradition mical touch al region processi ceremo ng nies. industry , trading, and services 4. Tourism As a Various Tourism Will Develop major premiu hoste ment of tourist m d destinati accomm sacral new on odation facilit airport ies and fishery harbour 5. Tourism Authe Beauti Trade Provi Sentolo nticity ful ncial Industri nature, Desig unique nation al Area society Indust and rial culture Area 6. Tourism Merapi Source Tourism Beaut Unique as an of y ness of Econo inspira Panor my tion, ama nature Potenti knowl al edge, and natural resour ces

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7. Education The 7 state Gover A Political best univer nance Demo Stability cluster sities, cracy of and 40 with educati private no on univer violen sities ce region 8. Govern Good Excelle Tourism As Safety, ance Gover nt and MICE stability nance education Destinat , and Syste Services ion security m and of social Facilitie life s 9. Education As a Advan Trade Regio IDR techno ce nal 1.069.0 logy- Techn Mini based ology mum 00 region Wage (Second Lowest RMW) 10. Tourism Sleman 24 Trade Produ 58% Lives hours a ctive producti 24 day of age Hours a lives Popul ve age day (a ation of the sleeples s city) total populati on 11. Tourism Easy Abunda Tourism Abun So access nce dance many world- Natur brands al natural options Resou resource rces s (Gold, Iron sand, andesite sheets)

12. Tourism The Lots of - - - best amazing place of taste-

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business adventu res 13. Tourism Modern Eco- - - - business friendly of internati onal level 14. Tourism Best Merapi - - - sensatio as the n of most natural active and volcano sports 15. Tourism Friendly A Locals Javanes e – Culture Centre 16. Trade Export Shares Product 30% of with the Beat world Quality market Source: Modified from BPMPT Kulonprogo Investment Promotion Book and KP3M Sleman Investment Promotion Book 2013

From the Table 3.5 above seen that Sleman and Kulonprogo Regency have different “products” , which promoted as the investment potentials. Sleman Regency has been one step beyond the Kulonprogo Regency in the development and popularity. The Sleman Regency has several globally known sites and product so that investors, particularly the foreign investors and the people in general probably knowing Sleman more than Kulonprogo Regency. This condition makes Sleman Regency not need too hardly promoting and ensuring people knowing them. For instances, the Prambanan and Borobudur Sites as the well-known tourism sites in Indonesia even in the world makes the regency quite easy to be noticed as the location of where the sites take place.

In opposite, Kulonprogo Regency presumably needs extra efforts to promote the region because the regency hasn‟t even one famous site like Sleman Regency. The government of Kulonprogo realizing the weakness of the regency, hence, the regency initiate to create an image “Kulonprogo The Jewel of Java”. The image created in order to makes the

102 peoples and investors paying attention to the regency. Through the image, the regency hopes that in the near future the investment and the economic growth in Kulonprogo would increase and the society‟s quality of life would increase as well.

2. Investment Incentives

Based on Government Regulation No. 45 of 2008 about the guidance for the provision of investment incentives and investment facilities in the region, provision of investment incentives is a kind of support from the local government to the investors in order to accelerate the investment growth in the region. Based on the regulation, the incentives provision could be in the form as follows:

a. Reduction, relief, or local tax exemptions; b. Reduction, relief, or local retribution exemptions; c. Funding stimulant; and/or d. Provision capital.

While the investment facilities could be in the forms as follows:

a. Provision of data and investment potentials information; b. Provision of supporting infrastructures; c. Provision of space and location; d. Administration of technical support; e. Acceleration of permitting provision.

The efforts to increase the investment through provision of investment incentives and/or investment facilities provision for the investor are relatively still low and even contra-productive. This condition characterized by many of local government regulations related to local tax and retribution and others kind of collection that burdensome the business actors including the investors. It is,

103 hence, causing the competitiveness among regions and national in the investment decreased.

Sleman and Kulonprogo Regency are the regency of DIY that has different kind of investment incentives and facilities provision offers to the investors. Sleman Regency didn‟t specify the regulations about investment incentives in the region. Sleman Regency is only offers “Easy Investing” as the compelling advantages in providing investment in the regency. Meanwhile, Kulonprogo Regency is specifically noticed the needs related to investment incentive and facilities provision on the Local Government of Kulonprogo Regulations No. 21 of 2012 about advocating, incentives and investment provisions.

Kulonprogo explained several criteria and types of incentives and investment facilities provision refers to Government Regulation No. 45 of 2008 as mentioned above, while Sleman Regency is only stated that the regency warranty that the regulations of trade, industries, mining, and tourism in Sleman Regency is accommodative to the investors. The Sleman Regency is not concerning to what kind of incentives that offered like regulated in the Government Regulation No. 45 0f 2008 about the guidance for the provision of investment incentives and investment.

From this finding, it is assume that Kulonprogo might be better than Sleman Regency in the strategy on attracting the investors/FDI toward a clear investment incentives and facilities provisions regulation.

3. Unidentified costs

The efficiency is an important aspect in business field. The business actors would prefer the place or location thatmight be able to minimize the costs and expenditure of the company. The place where there are the crucial

104 supporting infrastructures, such as transportation and telecommunication facilities is more preferable rather than an under-developed place. On the other words, the urban area is preferable than the rural or semi-rural area for the business as well as investment. FDI companies are mainly the private organizations/company, so that the main objective of FDI inparticular is profit-oriented.

Different with Sleman Regency that is selling skilled and educated manpower, Kulonprogo is “selling” cheap/low wage manpower. Those are the competitive advantages that might attract investors with various objectives.

Table 3.6List of Regional Minimum Wage of Regency/City of DIY 2013-2014

No. Regency/City 2013 2014

1. Yogyakarta IDR 1.065.247 IDR City 1.173 .300 2. Sleman IDR 1.026.181 IDR 1.127 .000 3. Bantul IDR 993.484 IDR 1.125 .500 4. Kulonprogo IDR 954.339 IDR 1.069 .000 5. Gunungkidul IDR 947.114 IDR 988.5 00 Source: Harianjogja.com/14 November 2013

From the Table 3.6 above, it can be seen that Kulonprogo has the lowest regional minimum wage after Gunungkidul Regency, while the Sleman Regency was took the second highest position after Yogyakarta City. The labour costs may be one of the unidentified costs that was

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important to be considered in order to attract both domestic and FDI. Realizing they has strong point that may attract FDI, especially the efficiency seeking FDI, Kulonprogo Regency was setting out its image as the regency that has a low-wage labour costs. Compares to Sleman, Kulonprogo Regency presumably has not many competitive advantages like Sleman Regency. According to Ir. Robby Amra Y, the head of investment division of BPMPT Kulonprogo stated as follows:

“Kulonprogo may not have a good infrastructure and technology as well as Yogyakarta City and Sleman Regency today, but in the near future Kulonprogo has very big opportunities because this regency would hosted by an International Airport and also modern Fishery Harbour. On the other side, the investor may probably prefer to invest in Kulonprogo because of it “cheap human resources”. Nowadays, Kulonprogo Regency has the lowest regional minimum wage after Gunungkidul Regency; it may attract the strategic asset or capabilities seeking FDI and or domestic investors to come and investing in Kulonprogo”.

Different with Kulonprogo Regency, Sleman Regency is setting out another image that was presumably effective and compatible. The following is the initiatives of Sleman Regency in order to attract FDI related to efficiency and unidentified costs that becomes one of the most important considerations of the investors, especially foreign investor in doing and developing business:

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1. Accessibility 1.1 The presence of Adisicipto International Airport with a total of 40 flight (domestic) and 4 (overseas) in a day. 1.2 Road access to the sea port of +/- 110 km to the Port of Tanjung Mas Semarang. 1.3 Transport and infrastructure of roads and trains are very adequate. 1.4 Train departure from the Tugu and Lempuyangan Station were 31 times a day.

2. Complete and modern investment supporting facilities and infrastructure Adequate facilities and infrastructure is ranging from transportation, electricity, water, post and telecommunications, banking, Cargo and International standard Medical Facilities. 3. Fertile and Clean Sleman is located at an altitude of 100-3000m above sea level, which certainly has fertile soil as well as water resources and clean air. According to Arjunandir, the head of investment marketing section of KP3M Sleman, stated that Sleman has very good soil and air condition for agriculture and eco-tourism. He added that Sleman has developing about 38 eco-tourism villages. The FDI investing in the utilization of the fertile soil and fresh air of Sleman were PT. Bambu Nusa Verde from Belgium and PT. TAKII Indonesia from Japan.

4. Excellent Human Resources a) As a cluster of educational industry, there are 47 universities and colleges, and partly fit into the world ranks as well as Asia‟s best universities.

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b) Numerous vocational schools, educational institutions and training centres and professional certification institutes under education system with link and match concept corresponding to labour market needs and global business. c) Qualified workforce, promote an open culture, peace-loving and cooperative (business like). d) Human development index (HDI) in 2012: 78,20 (the top rank among cities/regencies in Indonesia).

4. Social Amenities (Quality of Life)

Social amenities of a regioncan be measured through Human Development Index (HDI). The HDI is the average of the result of aspects such as Life Expectancy Rate, Literacy Rate, and Consumption per capita, etc. The HDI is the reflection or manifestation of social amenities rate of a region. Between Sleman and Kulonprogo Regency, from the table below, can be seen which one of the regency that has good Human Development Index as basis of the quality of life measurement.

Table 3.7Human Development Index (IPM) based on Regency/City in DIY 2007- 2011

No Regency/City IPM (HDI) 2007 2008 2009 2010 2011 1. Kulonprogo 72,76 73,26 73,77 74,49 75,04 2. Bantul 72,78 73,38 73,75 74,53 75,05 3. Gunungkidul 69,68 70,00 70,18 70,45 70,84 4. Sleman 76.7 77,24 77,7 78,2 78,79 5. Yogyakarta 78,14 78,95 79,29 79,52 79,89 City D.I Yogyakarta 74,15 74,88 75,23 75,77 76,32

Source: Regional Statistic Board (BPS) of DIY, 2013

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From the table 3.7 above, itcan be seen that the Human Development Index of Sleman Regency each year was above of the Provincial HDI. It is amount of 78, 79 in 2011 while the average of HDI in DIY is 76, 32 in the same year. The human resources development quality of Sleman Regency was relatively succeed. In 2010, the Human Development Index (IPM) of Sleman Regency is amount of 78, 20. In national level, Sleman Regency took the 15 ranks among 483 regencies/cities in Indonesia. In addition, Kulonprogo Regency took the bottom two positions with Gunungkidul Regency. It was still on below of the average HDI of DIY. Kulonprogo Regency as the prospected region in the near future has opened the social consciousness of the people by now on. Kulonprogo Regency has the added value such as the domination of the productive age population as the important factor to keep increase the social amenities and life quality of the people. It has 58 per cent population in the productive age for the ranged of 20 – 59 year old of age.

Graphic 3.3Number of Poverty and Poverty Line based on Regency/City in DIY Province (2008-2010)

Yogyakarta City

Sleman

Bantul 2010

2009 Gunungkidul 2008

Kulonprogo

DIY Province

0 5 10 15 20 25 30

Source: Regional Statistic Board (BPS) of DIY 2013

The Graphic 3.3above shows that the highest poverty rate was there on Kulonprogo Regency. It is amount of 26,85 per cent in 2008,

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24,65per cent in 2009 and 23,15 per cent in 2010. While the lowest rate of poverty was in Yogyakarta City and Sleman Regency in the second lowest position. The poverty rate percentage in Sleman Regency is 12, 34 per cent in 2008, 11, 45 per cent in 2009, and only 10, 7 per cent in 2010. Its indicated that Sleman Regency is more prosperous compares to Kulonprogo Regency. It may probably because of the Sleman Regency‟s roles as the urban sprawl of Yogyakarta City in DIY.

5. Post Investment Services

Sleman Regency has its own strategy to makes FDI feeling comfortable investing in Sleman. Cooperative services were given inthe matter of administration services, controlling and relationship with FDI. As well as Sleman Regency, Kulonprogo Regency also continuously enhances its investment strategy. The regency is trying to create conducive investment climate toward serving good information system through internet bases information system.

Table 3.8Post Investment Services Types of Sleman and Kulonprogo Regency

No. Post Investment KP3M Sleman BPMPT Services Regency Kulonprogo Regency 1. Investment Investment Investment Information website, e-mail website, SPIPISE Service coordination system, 2. Investment Business Feasibility Study, Development gathering, Investment Service Investment Exhibition Exhibition, Investment Mission 3. FDI Specification Resident Permit, Not specified. Services Tax Regulation, Land Usage and Ownership System Source: Processed from KP3M Sleman and BPMPT Kulonprogo, 2013

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From the table 3.8, it can be seen the different service types delivered by the KP3M Sleman and BPMPT Kulonprogo. Both have different form of institution, which the Investment Office of Sleman Regency were separated with the licensing office while Kulonprogo Investment Office has been integrated with license office. In addition, BPMPT Kulonprogo has been allowed by the Central Investment Coordinating Board (BKPM) use the Electronically Investment License Service (SPIPISE). The SPIPISE system was not allowed in Sleman because the office structure was still separated from the Licensing Service Office (KPP Sleman). The Sleman and Kulonprogo Regency were setting out the strategy on how to increase the interests of business actors through Investment Exhibition Events. Sleman Regency is also regularly held the business gathering with current Investors and also with the prospective investors.

Ir. Robby Amra Y, the Head of Investment Division of BPMPT Kulonprogo, stated:

“……..BPMPT Kulonprogo is always renewing the investment potentials and information on the website and in the booklet and investment promotion book.”

He added that the BPMPT Kulonprogo wasn‟t differentiating the post investment services between domestic and foreign investor. It is caused by there are only 3 FDI companies investing in Kulonprogo.

According to Gabriele Waegerle, the Consulting Service Investor of PT. Jibril and Jill Consult, the foreign companies that investing in Sleman since 2005 stated as follows:

“The regency administration is very cooperative, helpful, friendly and quick in processing business licences according to prevailing regulations”.

In addition, Arjunandir, Head of Investment Marketing of KP3M Sleman, stated that the KP3M Sleman formed such team to do the controlling regularly to each company, especially the foreign companies.

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The KP3M Sleman also intimately conducting two-way communication either directly or indirectly by e-mail or other communication services. Furthermore, KP3M Sleman also held such business forum and investor gathering annually in order to create conducive investment climate in the region. Hence, it is hoped that the investment in Sleman Regency will be increased and the investors stay feeling happy to invest in Sleman and even broaden its businesses.

In order to enhance the investment service, KP3M Sleman held exhibition of investment in the regency, province, and international. This year, the Investment Office of Sleman (KP3M) will send the investment mission to Singapore on May cooperated with General Consulate of Republic Indonesia (KJRI) in Singapore. On June, KP3M Sleman will be in South Korea in order to hold an investment promotion (Sriyono, The Head of Investment Development of KP3M Sleman, on interview in 17 February 2014).A crucial critical issue about the regulation of the government of Sleman Regency that complained by most of FDI investors was the land ownership. According to Kim Min Joon, the President Director of PT. Eagle Glove Indonesia stated as follows:

“It is indeed a dilemma with the administration‟s offering land lease as alternative while on the other hand employers want to buy the land instead as a company‟s asset that can be used as collateral to seek for additional working capital. This needs to be evaluated. Such a policy can only be applied on small and medium sized businesses”.

Other problem of the FDI was the resident permit regulation for the foreign worker. As the Gabriele Waegerle suggested that one thing that needs to be improved is the immigration documents for foreigners so as to make it is possible for the foreigners not to extend the documents annually. In addition, Kim Min Joon also suggested that regarding to policy on foreign employees, there is a need to synchronize between regulations residence permit for investors and for foreign employees because there are still many differences in them. He hoped that in the

112 future the investment policies of DIY as well as Sleman Regency are benefiting the business world.

2. Agglomeration Economies leverage toward Investment A. The proportion of PDRB from FDI by sectors in Sleman and Kulonprogo Regency

Gross Regional Domestic Product (GRDP/PDRB) defined as total of gross value added of goods and services in the certain period of a region. GRDP of Sleman Regency on the base of current price in 2012 was 16.696 billion rupiahs while the value of GRDP at current market prices of Kulonprogo Regency about 4.196 billion rupiahs in the same year. Meanwhile, the GRDP of Sleman Regency on the base of constant price of the year 2000 in 2012 was 7.069 billion rupiahs and the GRDP of Kulonprogo Regency on the base of constant prices of the year 2000 in 2012 was 1.963 billion rupiahs, its increased 93.69 billion rupiahs compared the previous year.

If the size of PDRB based on prevailing prices was made by Regency/City compares to the size of PDRB of DIY Province, hence, considered the contribution of each regency/city toward the formation of provincial economy. From the size of contribution showed which regency/city that most contributed on the formation of Provincial PDRB of DIY.

Table 3.9Contribution of PDRB of Regency/City on the Formation of Provincial PDRB based on the Prevailing Prices 2011

No Regency/City PDRB (Million Contrib rupiahs) ution (%) 1. Kulonprogo 3.867.136 7,85 2. Bantul 10.097.345 20,49 3. Gunungkidul 7.250.682 14,71 4. Sleman 15.097.600 30,64 5. Yogyakarta 12.962.435 26,31 Total 49.275.198 100,00 Source: Regional Statistic Board of DIY Province 2012

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From the table 3.9 it seen that in 2011, Sleman Regency occupy the highest position of the formation of Provincial PDRB of DIY with contribution of 30, 64 per cent. As the capital city of DIY, Yogyakarta City was give amount of 26, 31 per cent of contribution. In addition, Bantul Regency as the buffer zone of the city contributed amount of 20,49 per cent while another two regencies barely give a small contribution, which is Gunungkidul Regency contribute amount of 14,71 per cent and Kulonprogo Regency with the smallest contribution of 7,85 per cent.

The Sleman Regency is the area that has the fast growing among other regencies/city in the province of DIY. Sleman Regency has the competitive advantages in the infrastructures completeness and it geographical location. The advantages of natural resources such as the fertile soil, the rock and sands excavation and the historical heritages as a tourist attraction can be used as development capital. Furthermore, Sleman Regency also known as the centre of education facilities range from the primary education up to universities level. For instance, the existence of Gadjah Mada University, State University of Yogyakarta, and other private universitieS support the economic movements in the sectors of Trade, Hotels, Provision of Food and Drinks, Constructions and another related sector.

Other potential of Sleman Regency is the existences of the large and medium industries. The processing industry that has export orientation in Sleman Regency such as textile industry, confection, golf gloves, light, furniture, and other products. While the micro or small industries produces roof, brick, woven bamboo, bread, eel chips and many more products producing in the industrial processing.

Table 3.10 Contribution of PDRB based on Business Field of Sleman and Kulonprogo Regency 2009-2011

No Business Contribution (%) Field Sleman Regency Kulonprogo Regency 2009 2010 2011 2009 2010 2011 1. Agriculture/ 13,6 13,02 12,7 25,1 23,8 24,5 Excavation 1 4 6 6

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2. Processing 14,1 14,16 14,3 15,1 15,5 14,3 Industry 8 9 0 2 1 3. Trade, 22,8 22,76 22,8 16,4 16,5 16,9 Hotels and 2 7 0 6 7 Restaurant 4. Services 18,5 18,80 18.8 19,9 20,7 21,1 0 5 2 7 0 5. Others 30,8 31,27 31,1 23.4 23,2 23.1 8 6 2 7 3

Source: Regional Statistic Board (BPS) of Sleman and Kulonprogo Regency,2013

From the table 3.10 above, concluded that the most leading sector/ business field of Kulonprogo Regency was Agricultural sector. It is contributed the highest portion of the PDRB formation of Kulonprogo Regency, even though it was decreased in 2012. It also can be seen that the sector of Trading, Hotels & Restaurant and Services was increasing year by year; it could be the impact of the agglomeration economies of Yogyakarta was reached some strategic area in Kulonprogo. It is presumably increase in the next coming years in accordance with the mega project of new International Airport and Fishery Harbour that built in that regency.

The agricultural sector has an important role in the national economy, likewise for regional economic development of Kulonpogo. The role of the agriculture sector among others as a source of basic commodities, clothing, and housing, providing employment for most of the population and giving contribution to regional and national income. The agricultural sector consists of 6 subsectors, which is food crops, horticulture, plantation, animal husbandry, fishery, and forestry. Food crops include paddy (rice fields and fields) and crops. Maize, cassava, sweet potatoes, peanuts, soybeans and green beans are categorized as crops. Horticultural crops include fruits, vegetables, herbs, and decorating plants.

Production of paddy in 2012 reached 135,238 tons or has increased 1.60 per cent compared with 2011 which reached 133,100 tons. Among total production of paddy, 132,982 tons produced from wetland paddy, and 2,256 tons from dry field paddy. Meanwhile, the productivity of

115 wetland paddy is about 69.52 kW/ha and dry field paddy about 31.91 kW/ha.

Production of crops in Kulonprogo Regency was dominated by cassava by 47,445 tons, maize by 31,233 tons, soybeans by 5,091 tons, and peanuts by 1,087 tons. While other crops were have a relatively small production such as sweet potatoes and green bean, with production about 313 tons and 98 tons. In general, the production of crops of Kulonprogo Regency in 2012 was increased compared to 2011, except for sweet potatoes commodity which decreased by 19.74 per cent. Production of soybeans increased 177.44 per cent, peanuts increased 36.90 per cent, green beans increased 19.51 per cent, and cassava increased 2.54 per cent and production of maize increased 4.03 per cent.

On the other hand, Sleman Regency that have role as the urban sprawl of DIY, has been dominated by the urban main sectors/business field such Trading, Hotels and Restaurant that fluctuating year by year. The dominant sector that able to give impacts on the entire economic growth called as the leading sector. With observe the changes of contribution of each sectors per year, hence, could be discovered which sectors that increasingly dominated and which sectors that increasingly weak in that regional economic cycle.

In recent years, the economic growth of Sleman Regency was dominated by four sectors. Those four sectors successively were Trading, Hotels and Restaurants sector; Services sectors; Processing Industry and Agricultural sector. About 69 per cent of the added-value of economic activity in Sleman Regency was the role or added value from those four sectors. Another five sectors were contributed about 31 per cent of the total added value created in Sleman Regency.

The sector of Trade, Hotels and Restaurants is the sectors that contributed the highest portion on the formation of the added value in Sleman Regency. In 2011 this sector are able to contribute about 22, 87 per cent toward the total PDRB of Sleman Regency. In 2012, the export realization was USD 44,968,623.39 and the volume was 4,779,343.84

116 kilogram. Synthetic gloves, Clothes and Leather gloves have dominant contribution to the value of export in Sleman Regency. Those contributed 86.88 per cent of the total value of export in 2012.

According to the destination country, the United State of America is the most important destination which has highest contribution to the value of export (39.10%) and is followed by some other countries that are Japan (27.23%), and South Korea (7.98%). In addition, the number of hotel/inn in Sleman Regency in 2012 decrease than 2011, that is 395 hotels. It is followed by the number of room and the number of bed that is 9.239 beds. Moreover, the number of room is more than the year before, which are 6.314 rooms (Regional Statistic Board (BPS) of Sleman Regency, 2013).

Table 3.11Growth of Tourism Objects Visits in Sleman Regency 2010- 2012

Tourists 2010 2011 2012

Foreign 285.424 262.351 341.578 Domestic 2.941.552 3.015.387 3.076.676

Total 3.226.976 3.277.728 3.418.254 Source: Modified from Investment Office (KP3M) of Sleman Regency

The number of foreign tourist can be categorized into 4 categories which are based on the continent. The highest number of foreign tourist is from Asia continent that was 7,200 tourists which is dominated by visitors from Malaysia and Singapore. The number of visitors from Europe was 5.541 which are dominated by visitors from Denmark and France. Moreover, there were 1,427 tourists from America continent and 1,255 visitors from Australia and its neighbour countries. The second highest sector was the services sector with amount of 18, 85 per cent, followed by the industrial sector with amount of 14, 39 per cent and agricultural sector with amount of 12, 74 per cent. The growth level of those four sectors would be most affecting the economic growth in Sleman Regency as a whole. The higher these sectors grow, the sooner the economy of Sleman

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Regency develops, and vice versa. However, the domination of these four sectors didn‟t mean that another economic sector hasn‟t role in the economic cycle of Sleman Regency.

The investment growth in DIY is mainly from the tertiary sector, especially in the sectors of hotels and trade. The FDI (PMA) companies as well as the previous year, was gives the significant growth on the sector of hotels, services, restaurant, processing industry, trade, and transportation. The details of the FDI companies those realized it investment (Active) in DIY in 2012 is amount of 111 Companies which is 42 of the companies was operated in Sleman Regency and only 3 companies were concerning its investment in Kulonprogo Regency. In 2013, Sleman Regency has 44 FDI companies while Kulonprogo still with 3 companies as the previous year.

Table 3.12 Number of FDI Company by Sector in Sleman and Kulonprogo Regency 2013

No. Regency Number of FDI Companies by Sector

Primer Secondary Tertiary 1. Sleman 2 21 21 Regency 2. Kulonprogo 1 2 -

Source: Investment Office (KP3M) of Sleman Regency and Investment and Integrated Licensing Office (BPMPT) of Kulonprogo Regency

From the table above, it can be seen the differences of the FDI in Sleman and Kulonprogo Regency. Sleman Regency is dominated by the secondary and tertiary sectors. Both sectors have 21 FDI companies while the primary sector is only able to have 2 FDI companies till the end of 2013. In addition, Kulonprogo Regency is only has 3 FDI companies as a whole, each were in primary and secondary sectors while the tertiary sectors is still none.

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Table 3.13 Investment Realization of PMA/PMDN per Regency/City from 2009-2012

No Regency/City Investment Realization of PMA/PMDN Per Regency/City (Million Rupiahs) 2009 2010 2011 2012 1. Bantul 220,461 244,151 378,282 417,262 2. Sleman 1,964,0 2,055,66 3,415,26 3,518,17 30 9 9 9 3. Gunungkidul 88,815 107,179 38,419 131,843 4. Kulonprogo 32,185 36,934 127,358 37,096 5. Yogyakarta 2,085,1 2,137,04 2,464,25 2,951,68 City 55 0 2 6 Total 4,390,6 4,580,97 6,423,58 7,056,06 46 3 0 6 Source: Cooperation and Investment Board (BKPM) of DIY, 2013

Table 3.14 Contribution of PMA (FDI) by Sector in DIY 2011 (%)

No. Sectors FDI 1. Agriculture, Forestry, and Fishery 1.33 2. Industry 17.64 3. Construction 0.00 4. Hotels 22.46 5. Transportation 0.12 6. Housing and Office Affairs 0.00 7. Other services 58.46 Total 100.00 Source: Cooperation and Investment Board (BKPM) of DIY, 2013

Based on RPJMD, the investment growth is expected to occur significantly in DIY performance on period of 2013-2017, especially in Kulonprogo, Gunungkidul and Bantul, which is still lags behind of Sleman and Yogyakarta City.

Regionally, the investment seems was still concentrated in Sleman Regency and Yogyakarta City with the portion reaching about 90 per cent of both PMA and PMDN. Other three regencies were only holding 11 per cent for PMDN and less than 10 per cent for PMA (FDI). This condition is certainly impacting the economic gap between regions. In the Agglomeration theory, this condition is very possible to happen. There are several factors that causing Agglomeration, such as the Infrastructure Carrying Capacity, Human Resources Quality, and other factors that may

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influence the production efficiency. PMDN and PMA (FDI) were dominated by three main sectors of Industry, Hotels and services. In 2011, these three sectors have its share of FDI almost 98 per cent.

B. The spatial/location of the investment and (or FDI) development in Sleman and Kulonprogo regencies The FDI number based on sectors and spatial in Sleman and Kulonprogo Regency is presented on the Table 3.15 and Table 3.16 as follows:

Table 3.15 List of FDI Company based on Sectors and Spatial in Sleman Regency 2013

No. District Company Sector Status

1. Berbah Lezax Nesia Jaya, pt. Industry FDI (PMA) 2. Depok Plaza Ambarukmo (Putra Services FDI Mataram Mitra Sejahtera, (PMA) pt. 3. Depok Sheraton Mustika Tourism FDI Yogyakarta Hotel & Spa (PMA) (Mustika Princess Hotel, pt.) 4. Depok Jogjakarta Plaza Hotel Tourism FDI (Adichandra Graha Wisata, (PMA) pt.) 5. Depok Paradise Bali Indah, pt. Tourism FDI (PMA) 6. Depok Lotte Shopping Indonesia, Trade FDI pt. (PMA) 7. Depok Jibril and Jill Consult, pt. Services FDI (PMA) 8. Depok Queen Spa, pt. Services FDI (PMA)

9. Depok PT. Azimuth Adventure Tourism FDI Travel Ltd. (PMA) 10. Depok Pravianty Vantasia, pt. Industry FDI (PMA) 11. Depok PT. Lion Superindo Trade FDI (PMA)

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12. Depok Bayuaji Cook Ateliers, pt. Services FDI (PMA) 13. Depok Meta Communications, pt. Services FDI (PMA)

14. Depok Agrisoft System Indonesia, Services FDI pt. (PMA) 15. Depok Gameloft Indonesia, pt. Services FDI (PMA) 16. Depok Tozi Sentosa, pt. Trade FDI (PMA) 17. Gamping Talaido Interior, pt. Industry FDI (PMA) 18. Gamping Sinar Kencana Makmur Industry FDI Jaya, pt. (PMA) 19. Gamping Niaga Merapi, pt. Industry FDI (PMA) 20. Gamping TIrta Investama, pt. Trade FDI (PMA)

21. Gamping Teak Works, pt. Industry FDI (PMA) 22. Kalasan Home Spirit, pt. Industry FDI (PMA) 23. Kalasan Java Gloves Perdana, pt. Industry FDI (PMA) 24. Kalasan Eagle Glove Indonesia, pt Industry FDI (PMA) 25. Kalasan Poeri Devata Resort & Tourism FDI Hotel (Taman Sakura (PMA) Martani, pt.) 26. Kalasan Kiho Bali Korin,pt. Industry FDI ([MA) 27. Kalasan Japanese Ina Basic, pt. Industry FDI (PMA) 28. Kalasan Japan Indonesia Basic Services FDI (PMA) 29. Mlati Borneo Melintang Buana Industry FDI Eksport, pt. (PMA) 30. Ngaglik Craftex International, pt. Trade FDI (PMA) 31. Ngaglik Almi Furniture Perdana, pt. Industry FDI (PMA) 32. Ngaglik Bothwell Indonesia, pt. Industry FDI (PMA) 33. Ngaglik Japan Indonesia Economy Trade FDI Centre, pt. (PMA) 34. Ngaglik Haruna Wisata Indonesia, Tourism FDI pt. (PMA)

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35. Pakem Takii Indonesia, pt. Agriculture FDI (PMA) 36. Pakem Bamboo Nusa Verde, pt. Agriculture FDI (PMA) 37. Prambanan Indo Merapi, pt. Industry FDI (PMA) 38. Sleman GE Lightening Indonesia, Industry FDI pt. (PMA) 39. Sleman Java Connection, pt. Services FDI

(PMA) 40. Sleman Sport Glove Indonesia, pt. Industry FDI (PMA) 41. Turi Padma Citra Amahi, pt. Industry FDI (PMA)

Source: Investment Office (KP3M) of Sleman Regency.

Table 3.16List of FDI Company based on Sector in Kulonprogo Regency 2013

No. District Company Sector Status 1. Wates Sung Chang Processing FDI Indonesia, pt. Industry (PMA) 2. Wates Epotech Chemical FDI Indonesia, pt. Industry (PMA) 3. Galur Jogja Magasa Mining FDI Iron, pt. (JMI) (PMA)

Source: The Investment and Integrated Licensing Office (BPMPT) of Kulonprogo Regency 2013

From the table 3.15 and 3.16 above, it can be seen that the FDI of Sleman Regency was mainly located in Depok, Kalasan and Gamping District. Those three areas were the agglomeration area of DIY; hence, it may assume that the agglomeration economies as well as the population growth have the significant influence toward the investment. Following is the statement of the Arjunandir, the Head of Investment Marketing of KP3M Sleman:

“The FDI Companies in Sleman Regency mainly located in the industrial area such as Depok, Kalasan, Berbah, Kalasan,

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Mlati and Gamping. Those are the area where the domination of industrial and economic activity takes place. In addition, the areas that dominated by the industrial activity is Minggir, Moyudan and Sayegan, while the area of water conservation is Cangkringan, Pakem and Turi”.

In Sleman Regency, FDI was dominated by the sectors of trade, industry, services and tourism. It is because of regency as the centre of development, where the skilled manpower, modern life style live in line with adequate infrastructures. While in Kulonprogo, two of the FDI companies were located in Wates District, which in the sectors of industry while the one other was located in south coast of Kulonprogo in the sector of mining.

More than half of the total habitants of DIY were live in urban area; it is about 60 per cent of the people as a whole. DIY is the most densely province in Indonesia after DKI Jakarta. An average of the density of DIY in 2010 is amount of 1.084 people/km2 with the highest density in Yogyakarta City (11.941 people/km2) and the lowest in Gunungkidul (454 people/km2). The agglomeration of population of DIY are tend to be in Yogyakarta City and Sleman Regency (See Table 3.15).

Table 3.17Population Number by Regency/City in DIY Province year 2000-2010

No Regency/City 2000 2010 Growth Total % Total % Rate 2010 (%) 1. Kulonprogo 370.965 11,8 388.755 11,2 0,47 8 6 2. Bantul 781.059 25,0 910.572 26,3 1,55 2 7 3. Gunungkidul 670.544 21,4 674.408 19,5 0,06 8 3 4. Sleman 901.735 28,8 1.090.5 31,5 1,92 9 67 5. Yogyakarta 397.398 12,7 388.088 11,2 -0,22 City 3 4 DIY Province 3.121.7 100 3.452.3 100 1,2 01 90 Source: Regional Statistic Board (BPS) of DIY in Kuncoro, M, 2010

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In Sleman, there is high activity in population to a growing number of immigrants, increase birth rate, and the number of couples of childbearing age. In turn, this indicates the growing phenomenon of the Yogyakarta City, especially extended Yogyakarta urban region, namely the Yogyakarta City plus districts in Sleman and Bantul Regency that directly neighbouring to Yogyakarta City. With the population growth 1, 92 per cent in 2010, Sleman Regency has the highest population growth in DIY Province, followed by Bantul, Kulonprogo, and Gunungkidul Regency.

Image 3.3 Urban Agglomeration Area of DIY

Source: The Investment Office (KP3M) of Sleman Regency, 2012

From the Image 3.3 above, it seen that the agglomeration in DIY placed in several areas of Sleman Regency as the urban sprawl of Yogyakarta City (Extended Yogyakarta Urban Region). The districts of Mlati, Depok, Godean, Berbah, Kalasan and Gamping were the areas of urban agglomeration in DIY Province. Some areas of Bantul Regency such as Sewon, Kasihan and Banguntapan were also included as the

124 extended Yogyakarta urban region (Kuncoro et al. (2008); Kuncoro (2009)).

Table 3.18 Number of Population of Sleman Regency by Sex and District, 2012

No. District Allocation Male Female Total 1. Moyudan 10.176 9.014 19.190 2. Minggir 11.159 7.964 19.123 3. Seyegan 16.000 13.745 29.745 4. Godean 20.530 15.592 36.122 5. Gamping 28.736 24.669 53.405 6. Mlati 27.811 20.991 48.802 7. Depok 30.541 23.605 54.146 8. Berbah 11.009 10.315 21.324 9. Prambanan 13.025 13.509 26.534 10. Kalasan 21.765 16.793 38.558 11. Ngemplak 13.915 12.480 26.395 12. Ngaglik 22.772 19.410 42.182 13. Sleman 17.296 14.775 32.071 14. Tempel 13.973 11.993 25.966 15. Turi 10.545 8.848 19.393 16. Pakem 8.998 7.673 16.671 17. Cangkringan 6.875 4.775 11.650 Total 285.126 236.151 484.621

Source: The Regional Statistic Board (BPS) of Sleman Regency, Sleman Regency in Figures 2013

It can be seen in details, the contributor of the highest number of population in Sleman Regency were Depok, Gamping, Mlati, and Ngaglik Districts that located in the south side of Sleman. These districts are the area that developed in order to support the agglomeration development of Yogyakarta City. These four districts was faced the high growth in the number of population and economic activity as the impacts of the added number by students and immigrants/outsiders.

As the results, it is concluded that those areas are the urban growth or urban areas in Sleman Regency. Considering the composition of the population of Sleman Regency, it may assumed that the area of southern Sleman that including Gamping, Mlati, Ngaglik, Depok, plus the Godean

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Districts and Sleman City was actually as the basis of urban growth that formed a pattern of agglomeration with Yogyakarta City. Furthermore, Godean, Sleman, and Ngaglik have developed to the direction of economic activities of the people in the districts of its surrounding areas.

The dynamic of economic activity in DIY was forming the concentration of economic activity in the area of Yogyakarta City and Sleman Regency. The agglomeration economies in both areas seems having faster growing as reflected on the economic growth that was so high even more than the average of economic growth of DIY.

Table 3.19 Number of Population of Kulonprogo Regency by Sex and District, Result of 2010 Population Census

No. District Allocation Male Female Total 1. Temon 11.993 12.478 24.471 2. Wates 21.571 22.424 43.995 3. Panjatan 16.281 17.116 33.397 4. Galur 14.408 14.712 29.120 5. Lendah 18.113 18.334 36.447 6. Sentolo 22.054 22.471 44.525 7. Pengasih 21.961 23.214 45.175 8. Kokap 15.346 15.778 31.124 9. Girimulyo 10.694 11.199 21.893 10. Nanggulan 13.197 14.042 27.239 11. Kalibawang 12.948 13.854 26.802 12. Samigaluh 12.128 12.553 24.681 Total 190.694 198.175 388.869 Source: Regional Statistic Board (BPS) of Kulonprogo, Kulonprogo in Figures 2013

From Table 3.19 above, it can be seen that the districts that contribute highest portion of population number in Kulonprogo Regency were Pengasih, Sentolo, Wates, and Lendah Districts. Based on the spatial planning of Kulonprogo Regency, there has been settled the strategic area in light of economic growth interest in example: metropolitan areas, special economic zones, integrated economic development area, un- developed area, and also free trade zone and free port zone. The strategic area in Kulonprogo Regency were: (a) strategic corridor area that links

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Temon-Wates-Yogyakarta; (b) strategic economy area in the district of Galur, Sentolo, and Lendah; (c) Sentolo industrial Area; (d) Agropolitan region, include: District of Kalibawang and Temon; (e) Minapolitan region, include: District o Wates and Nanggulan.

The identification of urban area also can be refers to the spatial concentration of each districts from the Medium-Large Industry (IBM) that there are in Sleman Regency. With used the cluster identification method that has been developed in latest industrial literature (Kuncoro, 2002), it can be seen the IBM concentration was mainly located in Southern Sleman Area where is the agglomeration area of Yogyakarta City. The existence of road, especially ring road and main road linked Yogyakarta City and Magelang, was contributed as the factor that have role on formation of agglomeration pattern along those roads.

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CHAPTER IV

CONCLUSION

From the previous chapters, indicates that both local governments of Sleman and Kulonprogo Regency are less concern toward the treatment for the Foreign Direct Investment (FDI). There are seems no specific consideration, policy and strategy on how attracting treating and maintaining the FDI in the region.

1. Policy Frameworks to the FDI a. Both Sleman and Kulonprogo Regency have different autonomy of form of its investment institutions. Sleman Regency‟s Investment office called KP3M is fully deal with all investment matters (Investment, Capital Strengthening and Inclusion) while the Kulonprogo Regency‟s Investment office based on Regulation No. 25/2007 about Investment, Government Regulation No.27/2009 about One-Stop Service (PTSP) in investment field and the regulation of the head of Investment Coordinating Board (BKPM) No. 16/2012 about the Ways of Implementation and Reporting PTSP in Investment field, is mixed with the Integrated Licensing Office. b. From the entry and operating regulations, the KP3M Sleman presents a clear licensing procedure for both domestic and foreign investors. It is in order to conduct a conducive investment climate to accelerate the economic growth of the region. On the other hand, Kulonprogo Regency is not presenting clear procedures and licensing direction especially for the foreign investors. The regency is only displaying the license procedures of investment in general. c. According to the Special Region of Yogyakarta Governor Regulation No. 11 of 2008 about Sub-District Property Usage System, explained the Rental Mechanism, Cooperation and Build Transfer Operation and Build Operation Transfer, were arranged

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by the law. The Sleman Regency is displaying this explanation and information about the regulation as well as the policy standard for FDI while Kulonprogo Regency is not considering this Policy and even didn‟t serving well information about the policy standard for the FDI. d. Both Sleman and Kulonprogo Regency were serving the information about its investment potentials clearly. Sleman Regency is presumably more concern to the information system of their potentials and other crucial needed information related to the Investment. The regency is not only serving up-to-date information through official website of investment office, but also through the investment promotion book, leaflets, and investment profile. On the other side, Kulonprogo Regency is only serving the information through official website and investment promotion book. If seen from the complete information served in the website as well as the investment promotion book, it may assumes that Kulonprogo is less informing its up-to-date and crucial information like the Sleman Investment Office did. e. Sleman Regency is selling skilled-educated manpower, physical infrastructures, easy-to-reach, and its heterogeneous and friendly society as well as strength as the urban sprawl of DIY as the competitive advantages of the regency. Meanwhile,Kulonprogo Regency is offering low-cost labour, near future mega projects development (International Airport and Modern Fishery Harbour) and its role as one of the location of special industrial zone in DIY as regulated on the Government Regulation (PP) No. 24 of 2009 about industrial zone and Ministry Regulation (Permen) No. 35 of 2010 about the provision of industrial zones, has arranged the policy standard of the designation industrial zone of the economic, industry and investment centre in Sentolo Industrial Zone.

2. Economic Factors a. From the previous chapter, concluded that generally the FDI Companies in Sleman Regency is seeking for market, efficiency

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and capabilities rather than resources, it is because Sleman Regency has less natural resources as well as reduced availability of land and land usage limitation because of its function as the water catchment area of DIY. On the other hand, Kulonprogo Regency is mainly attracted the investors that seeking for the resources and efficiency. It is because the regency has rich natural resources especially for agriculture and mining industry. The market seeking FDI is barely investing in Kulonprogo because the regency‟s Human Development Index (HDI) was below the average of Provincial Human Development Index.

3. Business Faculties a. Both Sleman and Kulonprogo Regency are concern toward the importance of image creation or branding to attract FDI. Sleman Regency create an investment brand “Sleman-ETI (Education, Tourism, and Investment)” while Kulonprogo Regency create a brand image as “Kulonprogo The Jewel of java”. b. Regulations of Trades, Industries, Mining and Tourism in Sleman Regency are accommodative to investor as well as the Development Planning Policies with the good direction and orientation of economic policy. Kulonprogo regency also gives the easy investing offers through incentives to the investors. It is noticed in the Local Regulation No. 21/2012 about advocating, incentives, and investment easiness. c. The Sleman Regency presents its strong points compares to other regencies/city in DIY, such as easy-to-reach, skilled and educated manpower, physical infrastructures and other profitable advantages potentials. Kulonporogo Regency is realizing its inferiority toward Sleman Regency and offering prospective profitable investment for the near future related to the mega project of International Airport. d. In the matters of quality of life between Sleman and Kulonprogo Regency, Sleman Regency is have a lower rate of poverty compares to Kulonprogo that becomes the regency that has a

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highest poverty rate. It is 23,15 per cent in 2010 while Sleman Regency is only 7 per cent in the same year. e. Both Sleman and Kulonprogo Regency is didn‟t give the effective policy about the residents permit for the FDI employees. It is suggested by some investors to create a more effective policy about the residents permit. f. Sleman Regency has conducting broaden Investment linkage and networks. It is proven in the previous chapter, that the KP3M Sleman has regularly conducting investment promotion and cooperation up to international level. Kulonprogo Regency is seems less concern on that matters.

4. Agglomeration economies leverage toward investment a. The leading sector in the formation of PDRB in Sleman Regency is the tertiary sector, which is Trade, Hotels and Restaurant subsectors. While the leading sector in the formation of PDRB in Kulonprogo Regency is the primary sector, which is Agriculture sub-sector. b. The FDI realization of Sleman Regency is higher compares to Kulonprogo Regency. c. Based on the spatial/location of the FDI, FDI in Sleman Regency is mainly located in Depok, Kalasan and Gamping Districts. Those all districts were include as the agglomeration area of DIY. The FDI in Kulonprogo Regency is mainly located in Wates District.

A. Recommendation Considering several problems founded in the previous chapter, here is some recommendations listed: a. Both Regency is still need to reform its investment policy and regulations in order to conductconducive investment climate and attract more foreign investors by arranged such friendly- investment policy especially for the FDI. b. Recommendation for Sleman but more specifically for Kulonprogo Regency to take into account the importance of licensing

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procedure and information toward FDI. Good investment governance becomes one of attraction points for the many potential FDI. c. Normatively and operationally, both domestic and foreign investment have different characteristics, so that it need to be noted that in delivering service must be there are some differentiation or so to say the “specialization” services to the FDI. It is aimed to influence the determination of FDI toward the regency. Every aspects of this life, include human beings, are pleasing to be specialized and so do FDI. d. To make Sleman and Kulonprogo Regency attracted to the FDI, both need to rising up its uniqueness or extraordinary potentials that have a high investment value to the FDI and improving the capacity of the supporting infrastructures, manpower, security and services. e. Sleman Regency has spread broad linkage and network of cooperation up to international level, it needs to be increased. While Kulonprogo need to starts do the same in order to strengthens its image branding “Kulonprogo The Jewel of Java” as the regency‟s gun to go international. f. Both regency are needs to improve all the economic, social, cultural and capabilities and wrap all these points into a complete packaging, hence, the better the packaging, the higher the FDI concerning. As the results, not only certain types of FDI attracted, but all the types of FDI invited. g. Promotion or marketing is one of important matters in economic science. Suggestion for both Sleman and especially Kulonprogo to serving as complete as possible the information that needed by the prospective investors. For Kulonprogo, it no need just explain how much the investment potencies you have, but more important to present other information related to the investment. Such as investment realization, competitive advantages, and other points to ensure the Investors doubtless about the regency‟s capability.

132 h. Sleman Regency is suggested to improve the Investment Officers capacity on giving the right and appropriate services to the investors. i. Sleman Regency based on the complaint of some investors and foreign workers about residents‟ permits need to create a more sound friendly policy to the investors and foreign workers in Sleman. j. Kulonprogo is suggested to develop the tertiary sectors as the main attraction source of investor‟s determinant in another urban area like Yogyakarta City and Sleman Regency. k. Kulonprogo Regency need to enhance the ability of the Investment Officers in order to faces a more competitive tone of Investment in the region in the near future. l. Kulonprogo need to conduct conducive investment climate and a sound friendly policy so that all stakeholders (Government, Private, and Society) are satisfied. m. Kulonprogo Regency need to repair the relation between Private (Investors) and the Society, hence, there will not be repeated the same mistakes and misunderstanding.

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