Foreign and Domestic Capital in Indonesian Industrialization*
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Southeast Asian Studies. Vol. 24. No.4. March 1987 Foreign and Domestic Capital in Indonesian Industrialization* THEE Kian Wie** and Kunio YOSHlHARA*** in 1966 which, unlike the previous govern I Industrial Development since the ment, was strongly committed to economic Late 19608 development, industrial development started The unsettled political conditions of the in earnest for the first time since indepen 1950s and first half of the 1960s were not dence. In the period 1966-1968 the average favorable to economic development 10 annual growth rate of the manufacturing general and industrial development 10 sector reached 6. 02 percent, and accelerated particular. With the Indonesian economy to 12.44 percent during the following three steadily deteriorating during the first half years. of the sixties, the small manufacturing We can divide industrial growth since sector was burdened with under-utilized the late 1960s into three phases: a) the capacity, as the flow of imported raw phase of 'easy' import substitution (1968 materials and parts and components slowly 1975), b) the phase of 'moving upstream' dwindled to a trickle as a result of steadily (1975-1982), and c) the phase of slowdown declining foreign exchange reserves. (1982-present) . With the advent of a new government a) The first phase (1968-1975) : 'easy' * In May 1986. we conducted a number of import substitution. During this period a interviews with Japanese businessmen in wide range of locally made consumer goods Jakarta. Although we cannot name them (including light consumer goods and con individually, we would like to record our appreciation to those who gave us their sumer durables) gradually replaced imported valuable time. We would like also to express goods. The firms which produced these our appreciation to JETRO for letting us use consumer products were set up by domestic their Indonesian collection. Also at lETRO, Mr. Sori Harahap often provided us with (i. e., national) and foreign investors who information on Indonesian businesses, for were spurred by highly protective import which we are very grateful. Lastly, we would like to thank Dr. Dorodjatun Kuntjorojakti substitution policies as well as by the of Universitas Indonesia for letting us use Foreign Investment Law of 1967 and the liberally his files on Indonesian businesses Domestic Investment Law of 1968 [Thee and industries. Without this help, this study would have been impossible. 1983 : 2J. This pattern of investment is ** Economic and Development Studies Center, quite similar to that of other Southeast LIP!, Indonesia *** s}jj{?\C::::R:, The Center for Southeast Asian Asian countries. such as the Philippines, Studies, Kyoto University Thailand, and Malaysia, which experienced 327 a surge of foreign and domestic invest rice huller industry, and the household ment to set up 'tariff factories' (behind electric appliance industry, to manufacture highly protective tariff walls). locally a specified percentage of parts and Most, if not all, of these factories merely components which until then had been undertook 'final assembling' or 'end process' imported. While in the case of certain activities. For example, completely knocked components, the assemblers were allowed down kits (CKD kits), containing a set of to make the components themselves (in inter-related parts and components, were house manufacture), other parts and com imported from abroad and assembled locally ponents had to be procured locally from into final consumer goods. The bulk of independent, unaffiliated firms, preferably these imported parts and components were from small subcontractors (out-house manu often supplied by the parent companies facture) [Thee 1984: 35]. located in the home countries. The 'deletion programs' stipulated that b) The second phase (1975-1982) : mov the number or proportion of locally made ing upstream. After 1975 the domestic parts and components have to be reached market for most basic consumer goods within a specified period of time. For gradually became saturated, signaling the instance, in the motor vehicle industry, it completion of the relatively easy phase is stipulated that commercial vehicles (i. of import substitution industrialization. e., buses and trucks) have to be 'fully Spurred by the example of the newly manufactured' by 1987/88 [Ministry of industrializing countries (NICs) and buoyed Industry 1984]. This implies that these by vastly increased oil revenues, particularly locally assembled commercial vehicles will after the second oil boom of 1978/79, eventually have to use all locally made Indonesia's policy makers opted to push parts, including engines [Thee 1984: 15]. the process of industrialization one stage To a large extent the decision to move further by moving upstream into basic upstream was influenced by the perceived industries, resource processing industries, -need "to maintain the growth momentum capital goods and intermediate goods indus of the manufacturing sector as well as to tries, and a few strategic high technology 'deepen' Indonesia's industrial structure industries (notably the aircraft assembly through the generation of as many back industry). ward and forward linkages as possible In pushing this 'backward integration,' with a view to strengthen the manufactur the Indonesian government, through man ing sector and to transform the pattern of datory 'local content' programs (in Indo Indonesia's foreign trade so as to decrease nesia referred to as 'deletion programs'), the share of manufactured imports as well required assembler firms, particularly in as increase the share of manufactured the automotive industry (specifically com exports" [CSIS 1982: xx]. These strong mercial vehicles), the diesel engine indus views of the major decision-makers of try, the electric generator industry, the industrial policy were reflected in the 828 THEE K. W. and K. YOSHIHARA: Foreign arid Domestic Capital in Indonesian Industrialization extension of protection against imported cement) rose respectively from 1.4 to 7.0 intermediate and capital goods. percent, 0.8 to 4.3 percent, 3.8 to 7.1 Stimulated by rising domestic demand percent, 1. 3 to 4.8 percent, and 2.5 to for a wide range of intermediate and 5.9 percent. The iron and steel industry capital goods as well as by the strongly emerged during this period, producing protectionist policies of the Indonesian 3.1 percent of total MVA in 1980 (com government, industrial development dur pared to 0 percent in 1971) [ibid.: 36 ing the latter half of the 1970s led to a 37]. substantial change in the structure of the The structural change which has taken manufacturing sector. While the tradi place in Indonesia's manufacturing sector tional, relatively labor-intensive, light con is also reflected in the striking changes sumer goods industries, such as food which have taken place in the composition products, beverages, and tobacco, began of imports. While the share of imported to grow less rapidly during the latter half consumer products amounted to 22. 1 of the 1970s more capital- and technology percent (US $ 180. 7 million, cif) of total intensive industries producing a wide range imports (excluding the imports of oil and of intermediate and capital goods (includ gas) in 1969/70, this share had declined to ing consumer durables) came to the fore 5. 6 percent (US $ 603. 5 million) by 1984/ [Roepstorff 1985 : 35J. 85. On the other hand, during the same According to a UNIDO study conducted period the share of imported intermediate by Roepstorff, the share of consumer goods goods increased slightly from 48. 8 percent (excluding consumer durables) in total (US $ 399. 7 million) to 53. 1 percent (US $ manufacturing value added (MVA) dropped 5, 749. 8 million), while the share of im steeply from 80.8 percent in 1971 to 47.6 ported capital goods rose from 29. 1 percent percent in 1980. On the other hand, dur (US $ 238. 7 million) to 41. 3 percent (US $ ing the same period the share of inter 4,477.8 million) [Republic of Indonesia mediate goods rose from 13. 1 to 35. 5 1986 : 209-212]. percent, while the share of capital goods c) The third phase (1982-present) : (including consumer durables) rose from slowdown since 1982. Since 1982 Indo 6. 1 to 16. 9 percent. The study also reveals nesia's economic growth in general and that the share of the more traditional, industrial growth in particular have slowed labor-intensive food products, beverages, down considerably as a result of the and tobacco dropped by almost one half weakening of the world oil market. As during the decade, from 63. 8 to 31. 7 a result, considerable concern has arisen percent. However, the shares of inter about the gross inefficiency of the manu mediate industries, namely wood products facturing sector and its general inability (excluding furniture), industrial chemicals, to achieve international competitiveness, other chemicals, rubber products, and which would be necessary if the manu other nonmetallic minerals (particularly facturing sector were to replace the oil 829 sector as the engine of Indonesia's economic Below we will discuss primarily these three growth and as the major source of foreign categories of companies, and treat them exchange earnings. as the agents of industrialization, even The Fourth Five Year Development though the actual agents are the people Plan (Repleta IV) for the period 1984/85 and organizations behind them. 1988/89 had actually targetted manufactur In some ASEAN countries, there is no ing growth at 9. 5 percent. However, in interest in the first category, since the view of the protracted sluggishness of state is not directly involved in industrial industrial growth, widespread concern has ization. But in Indonesia, since the Sukarno emerged, particularly after a spate of lay period, the state has been an active par 0ffs by a number of manufacturing firms. ticipant and dominates certain sectors. Critics of current industrial policy have So, in order not to attribute the rise of therefore suggested that the government Indonesian capital completely to private abandon, or at least postpone, the highly Indonesian capital, we decided to separate capital- and technology-intensive industries state from private capital.