Should We Worry about China? China’s Outward FDI and Aid in Indonesia Citra Hennida Universitas Airlangga, Surabaya Keywords: foreign direct investment, dependency, foreign policy, foreign aid. Abstract: Based on data from the Investment Coordinating Board (BKPM), Chinese investment in Indonesia has increased significantly in recent years. The number of Chinese investments increased 12 percent in 2017 and shifted Japan's position as the second largest investor in Indonesia after Singapore. Indonesia's foreign debt to China also increased. Between 2010 and 2016, Indonesia's debt to China increased six times. It is the largest compared to the average increase of Indonesian debt to other countries that is only 1.3 points. This situation raises concerns that Indonesia's foreign policy will benefit China a lot. This concern is justified because there is no binding agreement beyond economic cooperation. Departing from this issue, research discusses whether the level of investment and large debt to China will affect the independence of Indonesia's foreign policy. The study was conducted in the period of 2014 to 2018 during Joko Widodo presidency. 1 INTRODUCTION Chinese investment in Indonesia is increasing. The Investment Coordinating Board (BKPM) noted that China is the second largest investor in Indonesia after Singapore. The amount of Chinese investment in Indonesia in 2017 was US$ 5.5 billion, up 12% from the previous year which amounted to US$ 4.9 billion (The Jakarta Post, January 24, 2018). For the size of ASEAN, China's investment in Indonesia is the most. Based on data from BMI Research in 2017, there are 46 projects supported by Chinain Indonesia; Figure 1: Growth Estimation of Chinese ODI 2013-2022 meanwhile 31 projects are in Laos, 30 projects are in (US$ billion) Vietnam and Malaysia, 20 projects are in Cambodia, 12 projects are in Singapore, 7 projects are in China currently has a lot of money and big Philipines, 6 projects are in Myanmar, and 5 projects markets. China is geographically close to ASEAN are in Thailand (Salikha 2018). countries. ASEAN is seen as providing many low- The flood of Chinese investment in the region is cost manufacturing industries, a market that continues almost inevitable. Data at the end of 2013 shows that to grow and is in line with Xi Jinping government's China is at number three in the world's largest goal of reviving the silk trade route which is the investor country for FDI of US$ 101 billion (Wang, channel of intercontinental infrastructure linking Qi, Zhang 2015). According to China's Ministry of Europe, Central Asia, South Asia and Southeast Asia. Commerce in 2014, Chinese companies invested US$ For ASEAN countries, China's investment is needed 116 billion in 156 countries. China's ODI growth is to strengthen fiscal savings and infrastructure between 19-22% since 2013 (Wang 2014). It is also spending. The United States and Western European projected that China's investment is growing as economies that have not fully developed due to the shown in Figure 1. global crisis in 2008 left China as a major player in global financing through AIIB (Asian Infrastructure Investment Bank) and FDI (Foreign Direct 38 Hennida, C. Should We Worry about China? China’s Outward FDI and Aid in Indonesia. DOI: 10.5220/0010272800380046 In Proceedings of Airlangga Conference on International Relations (ACIR 2018) - Politics, Economy, and Security in Changing Indo-Pacific Region, pages 38-46 ISBN: 978-989-758-493-0 Copyright c 2021 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved Should We Worry about China? China’s Outward FDI and Aid in Indonesia Investment) flows. Moreover, China through Belt receiving countries benefit from CSR (Corporate Road Initiatives introduced in 2013 by President Xi Social Responsibility) run by foreign corporations Jinping provides a lot of potential infrastructure residing in the country (Onyeiwu tt). cooperation which includes overland "Silk Road On the one hand Nunnenkamp & Spatz (2004) Economic Belt" and sea-based "Maritime Silk Road". argues that there is no empirical evidence that foreign BRI's proposals in the future also include non- investment has a direct impact on growth. Herzer et infrastructure investment, namely cultural ties and al (2006) adds that foreign investment in the short run people-to-people exchanges (Hillman 2018). does indeed contribute to economic growth but in the President Joko Widodo (Jokowi) captured this long run there is no correlation. Milanovic (2002) opportunity. President Jokowi stressed the states similar argument by saying that there is no importance of infrastructure development to relationship between foreign investments with the accelerate economic growth. China's investment in increase of people's income. There are other Indonesia is mostly in mining, infrastructure and indicators that need to be developed. These indicators tourism. On the occasion of meeting with Chinese are trading volume (De Mello, 1999); domestic President Xi Jinping May 14, 2017, Jokowi invited market, competition level and human capital the Chinese Government to cooperate on three mega (Balasubramanyan et al, 1996); government projects. The three-mega projects are located in North regulations, the development of other economic Sumatra, namely the construction of the Kuala sectors and industry readiness in the country (Agosin Tanjung Port facility and the Medan-Sibolga toll & Mayer, 2000). road; in North Sulawesi, namely the construction of The magnitude of Chinese foreign investment and road infrastructure, railways, ports and airports in aid has led to consequences such as the increasing Bitung-Manado-Gorontalo; in North Kalimantan, number of Indonesia's foreign debt to China which namely energy investment and construction of a 7200 rose by 6 times between 2010 and 2016. It is the megawatt power plant. On the same occasion, the greatest increase in comparison with the average Government of Indonesia and the Government of increase in debt to other countries outside China is China also signed several documents, namely 2017- only 1.3 times. Second, Chinese contractors and sub 2021 Indonesia-China Comprehensive Strategic contractors seek and obtain raw materials and Partnership, China Economic and Technical equipment from suppliers in China and do not use Cooperation, and Jakarta-Bandung rapid train project local suppliers. Third, about half of the Chinese (setkab.go.id). experts working in Indonesia are employed in the Based on BKPM records during 2004-2015 there construction sector (Kong & van de Eng 2018). are about 2500 direct investment projects from China Additionally, the dominance of investment and debt and 1100 projects from Hongkong. This amount is are feared will affect the independence of Indonesian even greater considering that Chinese companies are foreign policy. also channeling their investments through Singapore. Departing from the above background, this study In addition Belt and Road Initiative (BRI) will also aims to find a correlation whether the dominance of spread to sectors outside of mining such as property investment from China affect the independence of and e-commerce. The involvement of Chinese foreign policy of Indonesia against China. This study companies in Indonesia are through two mechanisms: was limited to Jokowi presidency. During his FDI mechanisms and mechanisms of the BRI. A large presidency in 2014, Chinese investment in Indonesia number of companies are involved because they take and Indonesia’s debt to Chian increased rapidly. The part in the Belt and Road Initiative. study found that Indonesian foreign policy tends to be The magnitude of FDI can boost the economy pragmatic and utilizes its position as a middle power (Korbin 2005; Morisset & Pirnia 2001). FDI offers that leads to great power of the region. With this several advantages: (1) technology transfer and position Jokowi is more hedging in the face of China. capability; (2) opening employment opportunities for Indonesia's hedging attitude is influenced by the communities in receiving countries; (3) encouraging domestic political situation. Jokowi’s political the privatization and commercialization of SOEs; (4) opponents mostly play the issues of China and FDI is deemed able to maintain the exchange rate Chinese Indonesians by utilizing the still high because the incoming FDI equals the entry money for stereotypes over China and Chinese Indonesians in the country; (5) generating sustainable economic public and domestic elites. activity; (6) creating cooperation with local businesses, for example through joint-ventures; (7) infrastructure development in recipient countries; (8) 39 ACIR 2018 - Airlangga Conference on International Relations 2 METHOD Table 1: Chinese FDI Realisation in Indonesia 2010-2017 (US$ million) This study focuses on the relationship between foreign investment and foreign policy. This type of research uses descriptive research type as an attempt to explain and interpret a particular phenomenon, problem or behavior. In this study the authors aim to explain how the dominance of foreign investment affect the independence of foreign policy of the recipient country to the donor country. FDI in question is FDI from China. The foreign policy in question is the foreign policy of Indonesia during Jokowi's reign of China, both bilaterally and multilaterally. Data are presented in the form of primary data and secondary data. Primary data were obtained from institutional reports, institutional Before Jokowi’s administration,