Industrial and Foreign Investtnent Policy in Indonesia Since 1967

Southeast Asian Studies, Vol. 25. No.3. December 1987

Industrial and Foreign Investtnent Policy in Indonesia since 1967

THEE Kian Wie*

[Sadli 1972: 203]. One ofthe outcomes of Introduction this more pragmatic approach to econo mic problems was the promulgation of a Indonesia's foreign investment policy new Foreign Investment Law in early since 1967 has changed directions several 1967 which provided various favourable times in response to fluctuations in econo incentives and guarantees to foreign in mic fortunes of the country and political vestors. pressure. The advent of the New Order The Foreign Investment Law of 1967 government in 1966 marked a sharp introduced a relatively brief period of an reversal in the approach to the economic 'open-door policy' with regard to foreign problems facing the country. Whereas the investment which lasted until early 1974. previous government under President Urban riots in January 1974 directed Sukarno adopted an increasingly hostile against the perceived 'over-presence' of attitude towards foreign investment re Japanese investment in Indonesia (the so suIting in the takeover of several foreign called 'Malari affair') led to a more enterprises during the early 1960s, the restrictive policy towards foreign invest New Order government put a much ment. This more restrictive foreign in higher priority on solving the serious vestment policy, however, turned out to economic problems of the country. While be in line with a general increase in the new government relied on foreign aid regulatory policies and government inter from the Western countries (including vention in the economy which became Japan) and multilateral aid agencies to more evident after the mid-1970s. provide the necessary funds for balance of The sharp deterioration in Indonesia's payments support and the rehabilitation balance of payments in 1982 and the of the obsolete infrastructure, it realised protracted slowdown of the Indonesian that the development of the country's economy as a result of the international vast natural resources and the embryonic recession and the attendant weakening of manufacturing sector would have to the world oil market forced the govern depend on foreign direct investment ment to introduce a series of policy reforms, including a reversal of its in * Economic and Development Studies Centre, Indonesian Institute of Sciences (PEP-LIPI), creasingly restrictive foreign investment Jakarta, Indonesia policy. In May 1986 the Indonesian

- 83- 383 government introduced a set of policy decades ago. With a favourable turn measures (the 'Pakem' or 6 May package) around In economIc conditions, the to increase the international competi abiding and widespread national aspi tiveness of Indonesia's non-oil and gas ration of 'becoming master in one's own exports and improve Indonesia's invest house' would undoubtedly reassert itself ment climate by relaxing several restric once again. This would imply a return to tive measures to control foreign invest a more restrictive policy with regard to ment which had been in effect since the foreign investment. late 1970s. In the following pages we will have a Unlike the fundamental turnaround in closer look at the shifts in foreign In foreign investment policy in 1967, how vestment policy since 1967. Since the ever, shifts in foreign investment policy largest amount of foreign investment in after 1967 did not reflect a fundamental the non-oil and gas sectors has taken policy change, but rather a pragmatic place in the manufacturing sector, we will response to political pressures (1974) or also see to what extent industrial develop adverse economic conditions (1982). ment in Indonesia over the past two While recent policy measures and decaded has influenced foreign invest government efforts to promote more ment policy. To this end we will first foreign investment mark a partial return discuss Indonesia's industrial policy since to the 'open-door policy' of the late sixties the late 1960s. and early seventies, it seems unlikely that the Indonesian government (or any Industrial Policy since 1967 Indonesian government for that matter) would ever be prepared to pursue a com a. Official policy pletely liberal policy towards foreign I t is not easy to glean from official investment. To pursue such a course documents the actual thrust of industrial would mean a naive disregard of the policy in Indonesia. In fact, the actual potent force of economic nationalism pattern of industrial development since which no Indonesian government could the late sixties has not always been in afford to do. In hindsight, the 'open accordance with stated policies. More door policy' of 1967-1973 seems to have over, stated policies have sometimes also been an 'aberration' from a basic attitude been rather vague, thus giving rise to which can only be attributed to the different interpretations, for instance in desperate situation of the Indonesian regard to the ordering ofpriorities. economy after the fall of the Old Order The general direction of Indonesia's government. Though present economic long-term industrial policy is outlined in conditions are quite serious, the Indo the General Guidelines of State Policy nesian economy in the late 1980s is un (GBHN), which are set every five years doubtedly much stronger than it was two by the People's Consultative Assembly

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(MPR), the country's highest sovereign 4. Industries which employ more workers body. The GBHN stipulated that one of than capital; the objectives of long-term development 5. Industries which through the cumula was to achieve a 'balanced economic tive effects of their nature promote structure' in which a strong progressive regional development [Republik In manufacturing sector would be supported donesia 1969]. by a strong agricultural sector. To become Based on the above five guidelines, SIX the backbone of the Indonesian economy, specific industries were designated as the development of the manufacturing priority industries during the Repelita I sector would have to be carried out in period, namely: successive phases, covering the two dec 1. Fertilizer, cement, and chemical In- ades of the first four Five Year Develop dustries; ment Plans (1969/70-1988/89). During 2. Textile industry; the First Five-Year Development Plan 3. Paper, pulp, and printing industries; (Repelita I) priority would be given to 4. Pharmaceutical industry; the establishment of manufacturing in 5. Light and handicraft (cottage) indus dustries to support the agricultural sector, tries; while during Repelita II priority would 6. Metals, machinery, equipment, and be given to resource-processing industries infrastructure industries [Republik producing industrial raw materials. Dur Indonesia 1969]. ing Repelita III industries would be The guidelines for industrial develop established which would process the in ment during Repelita II (1974/75-1978/ dustrial raw nlaterials into manufactured 79) were almost the same as those for goods, and during Repelita IV engi Repelita 1. The main difference was that neering goods industries would be es the order in which the guidelines for tablished [Republik Indonesia 1978]. Repelita II was listed had been changed, The Repelita I (1969/70-1973/74) doc apparently reflecting a slight shift in the ument spelled out in great detail the order of priorities. Thus Repelita II listed types of industries which would be given the following industries as priority in priority, namely: dustries: 1. Industries which support the agricul 1. Industries which expand employment tural sector by making agricultural opportunities; equipment or by processing agricul 2. Industries which produce basic wage tural produce; goods, such as food, clothing, and 2. Industries which earn foreign exchange building materials for dwellings; or save foreign exchange by producing 3. Industries which earn or save foreign import-substituting products; exchange through manufactured ex 3. Industries which process more domes ports or make import-substituting tic than foreign raw materials; goods. Export-oriented industries

- 85- 385 would include resource processing in still included those industries already. dustries producing industial raw listed in the previous Repelita namely: materials, as well as industries 1. Industries producing basic needs goods producing consumer goods and at prices accessible to the population intermediate goods. In promoting at large; resource processing industries which 2. Industries producing machinery and would utilise domestic resources, de equipment and industries producing velopment would be spurred in those industrial raw materials and ancillary regions where the resources were goods (machinery and basic metal located [Republik Indonesia 1974]. industries) ; Guidelines for industrial development 3. Industries utilizing natural and energy set for Repelita III (1979/80-1983/84) resources (basic chemical industries), indicated for the first time a clear shift in effectively employing Indonesia's com favour of an autarchic approach to indus parative advantage; trial development. This shift was reflected 4. Small and cottage industries, con in the emphasis given to industries which sidered to be important for a more would process (domestic) raw materials equitable distribution of business op into manufactured goods. It was hoped portunities and the expansion of op that in this way most of the country's portunities, as well as the establish needs could be met by locally-made ment of a modern industrial society products, while the export base would [Republik Indonesia 1984]. also be widened. A novel element in the above guidelines Industrial guidelines for Repelita III of Repelita IV was the inclusion of small for the first time also emphasized the and cottage industries as one of the four equity aspects ofdevelopment in line with priority industries. This belated recogni the general need to achieve a more tion of the social and economic impor equitable distribution of the fruits of tance of these small and cottage indus development. To this end Repelita III tries, accounting for 87 percent of the put an emphasis on those industries which total work force employed in the manu would expand employment opportunities facturing sector according to the 1974/75 and produce basic needs goods at prices Industrial Census [McCawley 1979: 15], accessible to the populace. In addition, was also reflected in the emphasis laid on emphasis was put on the need for greater the need to establish a balance between popular involvement in small, medium large and medium industries on the one scale, and large-scale industries as well as hand and small industries on the other. the expansion ofeducational and training In fact, to an extent not found in the opportunities [Republik Indonesia 1979]. previous three Repelita, Repelita IV was The priority industries emphasized in greatly concerned with the need to Repelita IV (1984/85-1988/89) generally establish balances (however defined): a

386 - 86- THEE K.W.: Industrial and Foreign Investment Policy in Indonesia since 1967 balance between agriculture and industry, close relationships between the market and within the manufacturing sector structures of the various industries, the itself, a balance between large and market behaviour ofthe firms constituting medium industries and small industries, an industry, and their market perfor a balance between upstream and down mance. stream industries, a balance between industries for the domestic market and b. Actual polieJl export industries, and a balance between Although the guidelines for industrial capital-intensive and labour-intensive in development spelled out in the GBHN dustries [Republik Indonesia 1984: 17 and successive Repelita do provide an 18]. insight into the general direction ofindus The concern with the need to achieve trial development, it neither reflects actual various balances in industrial develop government priorities nor the policy ment suggests the importance of the measures taken in pursuit of these goals. engineers' point of view in framing Actual industrial policy over time can Indonesia's industrial policy, as these better be discerned from the various balances apparently refer to 'material directives issued by the Ministry of In balances.' In addition, this concern with dustry regulating the operation of various balances also underlay an autarchic ap industries in pursuit ofspecifically defined proach to industrial development which goals and targets, by the Ministry of was already apparent in Repelita III. Trade regarding the trade regime (par Except for a passing reference to com ticularly concerning import restrictions, parative advantage in regard to the basic such as tariff duties and quantitative chemicals industries, no economic or import restrictions), and by the Capital efficiency considerations seemed to have Investment Coordinating Board (BKPM) played a role in the guidelines for indus regarding the licencing of investment ap trial development. plications in various fields ofactivity. The absence of any evidence of any Taking this approach, one can clearly meaningful input by economists in deter observe that Indonesia's trade regime and mining Indonesia's industrial policy is industrial policies since the early 1970s also evident from the fact that while have, like so many other developing 'balances' in industrial development have countries, fostered an import-substituting been emphasized, no mention has been pattern of industrialization. Until 1970 made of the appropriate structure of the the New Order government had pursued various industries to be set up. Given this a relatively liberal trade regime without neglect, it is therefore not surprising that much reliance on tariff protection or economIC or efficiency considerations quantitative import restrictions, as pro were given so little emphasis, as industrial tection of domestic industries during this economists must have been aware of the period was not yet an issue of prime con-

- 87- 387 cern. I t was only after the hyperinflation goods (15 to 30 percent) and raw mate ofthe mid sixties had been brought under rials and capital goods (0 to 10 percent) control and the infrastructure had been [Ariff and Hill 1985: 76]. The effect of rehabilitated that the government was this structure of differential nominal finally able to turn its attention to the tariff rates has been that consumer goods problem of economic development, (specifically consumer durables) and including industrial development. other final goods having gone through 1. First Phase Import Substitution higher stages offabrication have generally The promotion of import-substituting received higher effective protection (pro industries through highly protectionist tection of value added) than intermediate policies only started in earnest since the goods. In turn, these latter goods enjoyed early 1970s with the implementation of higher effective protection than industrial Repelita 1. While several policy measures raw materials and capital goods [ibid.: were taken to protect the nascent indus 86]. In view of the initial emphasis on tries, the major forms of protection final consumer goods during the first included tariff duties and import sales phase of import substitution 1967-1975), taxes which are collected at the same time this 'made-to-measure' protection seemed as the tariff duties. The protective effect quite appropriate. of the sales tax derived from the fact that The particular structure of tariff pro its rate was often higher than the domestic tection in Indonesia (provided by import sales tax on similar products [Pangestu duties and import sales taxes) has resulted and Boediono 1986: 11]. in an 'anti-export bias,' with import Since the New Order government competing sectors enjoying effective pro assumed power in the mid sixties, three tection rates of 60 percent on the average different tariff classifications have been in 1980, but exports only 32 percent used, namely the Geneva Nomenclature [ibid.: 85]. As producers' decisions are (1965-1973), the Brussels Tariff Nomen affected by effective protection rates, it is clature (1973-1980), and the Customs therefore not surprising that businessmen Cooperation Council Nomenclature.(1980 have tended to invest in import-compet -present). Although each of these tariff ing activities rather than in export classifications used different systems of industries. commodity classification and tariff rates, Despite the fact that the structure of the structure of tariff protection provided effective tariff protection contained a by all three classifications showed a clear 'anti-export bias' in 1980, estimates 'cascading' pattern. This meant that of the trend in effective rates ofprotection consumer goods enjoyed the highest tariff over the decade of the 1970s have in protection (with rates ranging from 40 dicated that effective protection as a to 270 percent under the latest CCCN whole declined over the decade due to the classification), followed by intermediate reduction in nominal tariffs and changes

388 - 88- THEE K. W.: Industrial and Foreign Investment Policy in Indonesia since 1967

In import sales taxes. However, these Table I Distribution of Ad Valorem Import tariff reductions affected the export Tariff Rates, March 1985 sector more than the import-competing Tariff Rates Product Categories sectors, so that by 1980 the import Percentage Number Percentage competing sectors were still enjoying the 0- 5 1,408 32.0 highest levels of nominal and effective 10-20 1,413 32.1 rates· of protection [Pangestu and 30-40 1,209 27.4 Boediono 1986: 27-28J. 50-60 357 8.1 100 and over 19 0.4 2. Second Phase Import Substitution The persistence of an 'anti-export bias' Total 4,406 100.0 in 1980 thus reflected a continued adher Source: Buku Tarif 1985, as quoted by R.B. Suhartono [1985: 17]. ence to an import-substituting pattern of industrialization after the first or 'easy' were enjoying relatively low tariff pro phase of import substitution had been tection with ad valorem rates of up to 20 completed by 1975. Instead of shifting to percent. Ifone includes product categories an export-promoting pattern of industri with tariff protection of up to 40 percent, alization, however, policy-makers, buoyed the percentage of product categories by vastly increased government revenues covered rises to more than 91 percent. due to the two oil booms of the 1970s, The most recent tariff reforms included chose to push the process of industriali not only substantial nominal tariff re zation into the second phase of import ductions involving more than 60 percent substitution by promoting upstream in of the product categories, but also a dustries, including basic industries, inter substantial reduction in the dispersion of mediate goods industries, and engineering the nominal tariff rates from a range of 0 goods industries. However, in order to up to 225 percent to a range of 0 to 60 promote this process of the second phase percent. In addition, the tariff structure of import-substituting industrialization, was also greatly simplified as the number the government began to rely more and of tariff rates were reduced from 25 to 11 more on non-tariff barriers (NTBs) and [Suhartono 1985: 16-19J. This reduction measures, such as increased local-content in the spread and number of tariff rates programs, rather than on tariffprotection. can be considered as a significant step In fact, the reliance on tariff protection towards a greater uniformity of the pro continued to decline, as demonstrated by duction incentives affecting the various a major decline in the range and level of industries. nominal tariff rates introduced by the While tariff protection In Indonesia government in March 1985 (Table 1). has slowly declined over the past few The above table shows that as a result years, non-tariff protection, primarily in of the most recent tariff reductions, more the form of quantitative import restric than 64 percent of the product categories tions, has proliferated in support of Indo-

- 89- 389 nesia's industrial strategy ofextending the hance the capacity for self-sustained process ofimport substitution to upstream industrial growth and contribute towards industries. greater national resilience" [Soehoed The views on how Indonesian industrial 1981: 9-10]. development should further proceed, once The above quotations have been pre the phase of 'easy' import substitution for sented to indicate the considerations several industries was completed by the which were put forward by Indonesia's mid 1970s, has been most clearly artic policymakers by the late 1970s to lay ulated by A.R. Soehoed, former Minister down the guidelines for the path of of Industry during the Repelita III Indonesia's industrial development. While period, who argued that progress in one can argue about the validity of the import-substituting industrialization dur economic rationale of these views, these ing the decade of Repelita I and II had views were and are still held by the resulted "in the widening, rather than in present top decision-makers determining the deepening, of the industrial structure. industrial policy, including Hartarto, the As the scope for further widening the present Minister of Industry. In fact, in a structure of industry through import recent speech Hartarto put forward six substitution along the past pattern was guidelines for industrial development getting more limited (by the end of during Repelita IV, the first one of which Repelita II), a stage had been reached involved the need "to deepen and sta where the further development of manu bilize the industrial structure and es facturing industry would necessitate the tablish linkages with the other economic deepening of the industrial structure" sectors," while the second one (also in [Soehoed 1981 : 6-7]. Soehoed also argued line with Soehoed's view) emphasized the that with the completion of the 'easy' need to develop engineering goods in phase of import substitution, the future dustries, particularly those producing growth ofthe manufacturing sector needed machinery and electronic equipment to be ensured by taking a two-pronged [Hartarto 1985: 18-19]. approach. This approach required that The above views on 'deepening' the "first, the optimum use of existing and industrial structure through the genera newly-established capacities be facili tion of various backward and forward tated, and second, rational industrial linkages reflect what in Indonesia has development be guided in such a way, been called a structuralist approach to that the growth of manufacturing in industrialization [CSIS 1982: XVII dustries would be more and more inter XXIX]. This structuralist approach ap linked and mutually reinforcing, ver parently aims at a high degree of au tically and horizontally, and industries tarchy, as reflected by the argument that would become more deeply-rooted to the by creating maximum backward and Indonesian economy, and thereby en- forward linkages, the "deepening of the

390 - 90- THEE K. W.: Industrial and Foreign Investment Policy in Indonesia since 1967 industrial structure could be achieved," times even banned, the entry of potential and thus 'lessen Indonesia's external new entrants into an industry. The drive dependence and vulnerability by making to develop new upstream industries, the industrial sector more deeply rooted which would process raw materials into to the Indonesian economy' [Soehoed intermediate and semi-finished products, 1981: 8-9]. One could perhaps describe and new downstream industries, which the above view in a more simple way as would process primary commodities, was the reflection of a wish to fill up the also being promoted by the provision of various niches in Indonesia's input-output various investment incentives to various table as much as possible. In a more priority projects, the most important of critical vein, the structuralist approach which involved direct government par has also been described as "an inward ticipation [Soehoed 1981: 14]. looking, import-substituting approach to 3. Partial Shift to Export Promotion industrialization that pays little, if any However, the sharp deterioration In attention, to efficiency considerations." Indonesia's balance of payments in 1982 Hence, this approach does not appear "to as a result of the severe international make any comparisons of production recession and the attendant weakening of costs with border prices as applied to the international oil market required the various industries with different pro government to take several drastic adjust duction functions and economies of scale" ment measures, including a deferral of [Gray 1982: 41]. several major industrial projects which While the latter VIew may be a little were to be undertaken by the government unfair to the structuralist approach, the itself, including an olefin, an alumina, drive to promote upstream industries in and an aromatics project [Awanohara the late 1970s was buttressed by an array 1983 : 51]. The protracted economic of various policy measures, the most slowdown since 1982, however, has not important of which included the pro only required the government to defer tection of the nascent upstream industries, several ambitious public sector projects primarily through import restrictions and but, in the face of a steady decline in import bans, local content regulations foreign exchange earnings from oil ex (deletion programs) and, since late 1982, ports, to reassess the economic merits of through the strict regulation of imports continuing to pursue an inward-looking, through licensed importers. In addition, import-substituting path of industriali- the nascent upstream industries (basic zation. This reassessment appeared to be and intermediate goods industries) were particularly relevant, as one of the major also protected by a cumbersome industrial arguments in support of the decision to licensing system, administered by the promote upstream industries, namely the Capital Investment Coordinating Board perceived need to 'maintain the growth (BKPM), which strictly regulated, some- momentum of the manufacturing sector'

- 91 391 (in addition to the need to 'deepen' the deal with the adverse effects of the steady industrial structure) [CSIS 1982: XX], weakening ofthe world oil market, such as appeared increasingly implausible in the the deferral of several large public sector face of the continued sluggishness of the projects, the introduction of tax and manufacturing sector. financial reforms, the implementation ofa As a consequence of the protracted flexible exchange rate policy to avoid an slowdown in economic and industrial overvaluation of the exchange rate, and growth and the severe pressures on the the simplification of investment proce balance of payments, the government has dures and port procedures to reduce over put the promotion of the growth of non regulation and increase efficiency in oil (and natural gas) exports, particularly customs and port operations, severe manufactured exports, as a top priority. criticism is still being directed at the To achieve this goal, however, a sub highly protectionist trade regime which stantial improvement in the technical has contributed to the establishment of efficiency of Indonesia's largely inefficient many inefficient industries. industries is imperative to achieve the To promote the emergence of an inter required level of international com nationally competitive manufacturing sec petitiveness. tor, critics of current industrial and com Despite a rapid rise In manufactured mercial policy have therefore advocated a exports since oil export earnings started shift from the current import-substitution declining in 1982 (from US$850 million regimes to a more export-oriented set of in 1982/83 to US$4.4 billion in 1986),D policies. The arguments of these critics the prospects for a steady and rapid in are primarily based on the fact that the crease in manufactured exports, which current trade regime has produced an are to form the bulk of non-oil exports, 'anti-export bias' that provides stronger do not seem too promising at present. incentives to produce for the domestic While rising protectionist barriers in the market rather than for export markets. industrial countries and increasing com In fact, instead of reducing this 'anti petition from other developing countries export bias,' the government has since do pose a real threat to Indonesia's hopes late 1982 increased this 'anti-export bias' to become a significant exporter ofmanu by introducing a series of quantitative factured exports, the general lack of restrictions on the imports of several international competitiveness of its own intermediate inputs needed by the manu manufacturing sector is at present the facturing industries. While there was an biggest obstacle to the realization of these initial rationale to these quantitative hopes. restrictions in late 1982, namely to reduce While the Indonesian government since the looming big current account deficit 1983 has taken a series of sensible steps to to more manageable proportions, their 1) See, Business News. Jakarta. April29, 1987. effects have been aggravated by the fact

392 - 92- THEE K. W.: Industrial and Foreign Investment Policy in Indonesia since 1967 that the limited imports of several inter switch from an import-substituting to an mediate inputs could only be conducted export-promoting policy of industrial through licensed importers, the number development along the lines of the East of which for each product category was Asian NICs became very difficult [Lal limited to only two or three companies 1985: 27-28]. (sometimes only one), most but not all of Indonesia faces a predicament similar them state-owned trading companies. in India. Although not yet as advanced or Bearing in mind Little's observation as pervasive as India in extending import that the major lesson of the successful substitution to basic and intermediate experience of the four East Asian NICs goods industries, a total shift from import (newly-industrializing countries) in ex substituting to outward-oriented, export panding their manufactured exports ra promoting policies in Indonesia is rather pidly lay in their labour-intensive, export difficult in view of the fact that quite a oriented policies which provided almost few upstream industries (basic and inter free trade conditions for exporters [Little mediate goods industries) have already 1981], it thus appears that until the policy been set up since the late 1970s. Under reforms of 6 May 1986 (the Pakem or 6 these circumstances the provISIOn of May package), it was the very absence almost free trade conditions for exporters of these almost free trade conditions for is very difficult to implement, as such a exporters that had been an important policy measure would run counter to the factor in accounting for Indonesia's lack interests of the infant upstream industries. lustre performance in expanding manu To make matters worse, the proliferation factured exports. of import monopolies, duopolies, and It should be pointed, however, that oligopolies since late 1982 with large and Taiwan and Korea in the early 1960s lucrative 'rent-seeking' opportunities has were able to introduce the required policy added to the already existing 'anti-export reforms to shift from an import-substitut bias,' which thus far has proved to be ing to an export-oriented pattern of very difficult to reduce, let alone elimi industrialization, because at that time nate. they had not yet gone beyond the first Since May 1986 the Indonesian govern phase in import substitution (import ment has tried to reduce the 'anti-export substitution of finished consumer goods). bias' of its trade regime by providing India, on the other hand, had by adopting almost free trade conditions to manu Mahalonobis' heavy industry strategy, facturing companies which export at least proceeded way beyond first-phase (pri 85 percent of their output. In addition, a mary) import substitution to establish duty drawback system applies to those also basic and intermediate goods indus companies which export less than 85 tries on a wide scale regardless of their percent of their output. These companies economic costs. As a result, for India a have also been allowed to import those

- 93- 393 intermediate inputs which are subject to in Indonesia has been of the type oriented import controls, if domestic suppliers are towards the domestic market. This ori unable to provide these inputs at com entation is understandable, as protection petitive prices. will raise profits in the protected domestic Further reforms In the trade regime industry, but will reduce profits of those were introduced on 25 October 1986 and foreign firms the exports of which are 16 January 1987 to remove some of the being excluded or restricted by protection. quantitative import restrictions, and to These foreign firms will then resort to replace these non-tariff barriers (NTBs) "defensive investment" in the protecting by an easier-to-administer tariff pro country to maintain their market in this tection. While these policy reforms do country and thereby restore their profits constitute an important step towards [Corden 1978: 331-332]. reducing the 'anti-export bias,' several Although no comprehensive data are observers have pointed out that these available about the market orientation of policy reforms still cover only a relatively all the foreign firms operating in Indo small number of items, with many im nesia's manufacturing sector, survey find portant items still being regulated under ings of Japanese-affiliated companies do the 'approved importers systems' (Tata seem to confirm that the overwhelming Niaga Impor) [Pangestu 1987]. However, majority of these investments are indeed in view of the rather limited scope of the "defensive investments," largely oriented policy reforms thus far, it still remains to towards the protected domestic market. be seen whether these three policy reforms For instance, a survey, conducted by the can in hindsight be considered important Japanese Ministry of Trade and Industry steps toward the elimination of the 'anti (MITI) in 1974, disclosed that Japanese export bias' in Indonesia's trade regime affiliated companies in Indonesia sold or only promising steps in an aborted only 16 percent of their output in the shift from an import-substituting to an export market. While some of the ex export-promoting policy. ported goods were labour-intensive pro ducts, most of the manufactured exports

Foreign Investment Policy since 1967 of these companies were actually proces sed primary resources [Yoshihara 1978: The thrust in Indonesia's industrial 48-49]. A more recent survey by Kino policy has been closely mirrored in its shita revealed that of the 113 Japanese investment policy, including its policy affiliated manufacturing companies in towards foreign investment. As a result Indonesia, not less than 105 were import of the import-substituting policy of in substitution oriented, while only 3 were dustrialization, it is not surprising that, export-oriented, and the remaining 5 aside from resource-oriented foreign in were both import-substitution and export vestment, the bulk of foreign investment oriented [Kinoshita 1985: 21]. As Japan

394 - 94- THEE K.W.: Industrial and Foreign Investment Policy in Indonesia since 1967 is the largest investor in Indonesia's man process Indonesia's abundant natural ufacturing sector, the domestic market resources and agricultural products orientation of these Japanese-affiliated [Soehartoyo 1982: 192-193]. companies is an important indicator of the market orientation of foreign b. Less Restrictive Policy affiliated companies in Indonesia. With the move towards a more export oriented trade and industrial policy since a. More Restrictive Policy the mid 1980s, foreign investment policy As the first phase of import-substituting has shifted to attract more export-oriented industrialization came to a close by the foreign investment. As Indonesia has late 1970s, and the Indonesian govern over the past decade become less at ment began to promote import substi tractive to foreign investment as a result tution in the upstream industries, foreign of the increasingly restrictive conditions investment policy with regard to the introduced since January 1974, several downstream, consumer goods industries steps have been taken to simplify and became increasingly restrictive. This is reduce the regulatory framework of evident from the rising number of fields foreign investment which had been in of activity which were closed to foreign effect since the mid-1970s. An important investment, particularly in those fields step in that direction was the policy where domestic (i.e. national) investors package of 6 May 1986 which contained were considered capable enough to take several provisions to attract more foreign over the dominant role hitherto played investment, particularly for export by foreign investors. As a result, by the oriented activities, including the opening early 1980s the prevailing view among up of several sectors which hitherto had many foreign investors in Indonesia was been closed to foreign investment. that 'the party is over,' at least for the Although foreign businessmen have majority who were engaged in the pro welcomed the latest policy measures with duction of consumer goods [Astbury regard to foreign investment, their actual 1982: 18]. Instead of more foreign in response has thus far been lukewarm. vestment in the downstream, consumer Aside from some restrictive conditions goods industries, the government intended which still bother foreign investors, for to steer more foreign (as well as private instance with regard to the dilution domestic) investment in to the upstream requirement of foreign equity participa industries, such as basic metals industries, tion to 49 percent or less within a period which would form the basis for further of 10 years after the start of commercial industrialization during Repelita IV. In production, it appears that a substantial addition, more foreign (and domestic) increase in foreign investment will only investment was to be promoted in those be forthcoming with further improve downstream operations which would ments in the investment climate and a

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