THE IMPACT OF FOREIGN DIRECT INVESTMENT ON INDONESIA'S MANUFACTURING SECTOR

Abstract

Though FDI accounted for a quarter of manufacturing production in Indonesia in the late 1990s, its contribution was rather moderate in total capital formation, generating net export revenues, creating manufacturing employment, developing supplier and support industries, transferring technology and generating tax revenues. FDI had a negative impact on the balance of payments, and contributed to the persistent deficit in manufacturing goods due to its larger propensity to import production inputs from abroad. This does not mean that FDI should be restricted. Implications for maximizing the positive contribution that FDI can make to development, while minimizing its negative effects, include the provision of world-class infrastructure, education and skills; focused investment promotion; public-private partnerships to build local manufacturing capabilities; technology-based collaboration between foreign and domestic firms; lowering bureaucratic hurdles; monitoring mergers and acquisitions; instituting effective competition policies; avoiding an incentive race between regions; adopting minimum environmental and labour standards; and restoring stability and security in the country.