MNCs and the Host Country: The Indonesian Case 9789814376105

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I5EA5 Institute of Southeast Asian Studies The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The responsibility for facts and opinions expressed in this publication rests exclusively with the author, and his interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

MNCS AND THE HOST COUNTRY The Indonesian Case

by

Sumantoro

Research Notes and Discussions Paper No. 45 INSTITUTE OF SOUTHEAST ASIAN STUDIES 1984

Published by Institute of Southeast Asian Studies Heng Mul Keng Terrace Paslr Panjang Singapore 0511 All rights reserved, No part of this publication may be reproduced, stored in a retrieval system, or transmitted In any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies, © 1984 Institute of Southeast Asian Studies

ISSN 0129-8828 ISBN 9971-902-77-X

CONTENTS

Page LIST OF TABLES

v

INTRODUCTION

vii

THE INDONESIAN LOOKS AT MULTINATIONAL CORPORATIONS

1

The Multinational Corporations' Involvement in Indonesia The Development Plan and MNCs Justification Analyses 1.

11

Incentives as a Component of the Development Concept

12

Promotion of Exports and ImportSubstitution and Technological Transfer

15

3.

Joint-Venture Requirements

16

4.

Shared Ownership and Control

17

2.

II

3

INDONESIAN FOREIGN INVESTMENT LAW

19

The Scope and Purpose of Legislation

19

The Coverage of the Foreign Investment Law

22

iii

Page

III

IV

Review of the Foreign Investment Law

28

A Comprehensive Legislation

34

MEASURING SUCCESS

42

Background

42

The Investment Climate

47

The Domestic Enterprises

51

THE PURSUIT OF PARTNERS IN DEVELOPMENT

56

Development Orientation

56

The Relationship between Foreign Investors/MNCS and the Host Country

58

The Policy Trends of the Host Country

62

The Pursuit of a Partner in Development

67

The Indonesian Perspective

71

APPENDIX:

THE INDONESIAN FOREIGN INVESTMENT LAW

75

Act No. 1/1967 Re Foreign Capital Investment

75

Elucidation on Act No. 1 Year 1967 Re Foreign Capital Investment

85

Act No. 11 Year 1970 Regarding Amendment and Supplement of Act No. 1 Year 1967 Re Foreign Capital Investment

93

BIBLIOGRAPHY

97

iv

LIST OF TABLES

Page Approved Foreign Investment in Indonesia by Sectors, 1967-80

7

Approved Foreign Investment in Indonesia by Country of Origin, 1967-80

8

Employment Creation from Foreign Investment, 1967-80

9

Approved Foreign Investments in Indonesia by Regions, 1967-80

10

Approved Foreign Investment in Indonesia by Type of Investment, 1967-80

14

6

Balance of Payment:

14

7

Inflow of Foreign Exchange from Direct Investments and Outflow of Foreign Exchange through Repatriation of Profits and Withdrawal of Foreign Investment (US$ millions)

23

8

Indonesian Development Expenditure

26

9

Indonesian Investment

27

10

Number of Foreign Companies' Shares Offered to the Public, 1977-81

34

1

2 3

4 5

Indonesia, 1978/79-1980/81

v

Page 11 12

13

14

15

Trading of Stocks in the Indonesian Stock Exchange since 1977

35

Stock of Direct Investment Abroad of Developed Market Economies, by Host Country, 1967-75

61

Selected Developed Market Economies: Stock of Direct Investments Abroad and in Developing Countries, 1971-74 (US$ millions)

62

Relationship between Income and Foreign Direct Investment Stock, by Developing Country Income Group, 1975

63

Stock of Direct Investment in Selected Developing Countries and Territories, by Major Industrial Sector, Selected Years

64

vi

INTRODUCTION

Over the last two decades, the range of operations of multinational corporations has increased significantly. Their spread has been both upstream and downstream in such fields as mining, oil, plantations and the manufacturing industries, as well as in a broad range of services including trading, banking, financing, insurance, and tourism. By virtue of their i nternat ion a 1 flexibility and the technological progress they have made, the MNCs have control over technological expertise, marketing and communications techniques, and access to large amounts of capital. In fact, MNCs have taken on an increasingly important role in the world economy as a whole, and in the economy of developing countries in particular. Many developing countries which are host countries to the MNCs have simultaneously launched their own national development programmes and as a result, their relationship with MNCs has been affected. The relationship between MNCs and the host countries often depends s i gni fi cant ly on the host government 1 s abi 1 ity to negotiate effectively with MNCs. Considering the global range of the MNCs 1 interests, the deployment of their resources is in the interest of any individual host country. It is therefore of the utmost importance to host countries to strengthen their bargaining power with the MNCs. Efforts must be undertaken at national, regional and international levels to regulate and monitor the implementation of MNCS 1 activities, to ensure an equitable distribution of gains made. In the past, the benefits derived from the MNCs 1 operations fell far short of what had been expected. The main reasons were vii

mostly in the host country's inability to regulate and to monitor the MNCs on the one hand, and the failure to look for alternative policies of investment on the other. In view of the vital relationship between MNCs and host countries in both development and international relations, this firstly, Indonesia as a host book looks as the following: country to MNCs, from colonial times when we witnessed the multinational corporations' back-up of the Dutch colonial regime prior to World War I I, the absence of foreign capita 1 in f1 ow during the Japanese Occupation and the struggle for independence, the ensuing bitter feelings towards MNCs, and the nationalization of foreign companies in the 1960s, up to the present day where we see the difficulties experienced by MNCs owing to the existing bureaucratic red tape. Since MNCs can bring capital, technology, and expertise to national development, one should ask whether the relationship between MNCs and the host countries meets the anticipated returns of both, in the sense that the benefits are fairly distributed. Chapter I I reviews the capacity of the host government to monitor and regulate the multinational corporations' activities. This is dependent on the adequacy of the provision of 1aws and regulations governing MNCs. Investment laws and regulations are designed to ensure that the objectives of the investment policies are safeguarded and sectional and auxiliary provisions are introduced as and when necessary. There is therefore no single law or regulation on MNCs. The Indonesian case shows some specific phenomena, in that Consequently, the laws and regulations are relatively brief. much of the deta i 1 is 1eft to the executives and in some instances, case-by-case interpretations are necessary. Therefore, the 1ega 1 structure of and 1ega 1 prob 1ems faced by host countries need to be comprehensively reviewed so that existing deficiencies may be filled and further improvement of the administrative machinery for the regulation, supervision, and This improvement requires, control of MNCs be forthcoming. an evaluation of the success of the existing firstly, administrative machinery which is covered in Chapter III. Chapter III examines questions such as whether the MNCs contribute to the economic development of the host country and whether such contributions are compatible with the sociopolitical priorities of the host country; whether the national entrepreneurs have been able to acquire the necessary leverage to achieve optimum deve 1opment and what the government 's po 1 icy is with regard to these issues. vi i i

Since the main aim of inviting MNCs to invest in any given host country is for both to become partners in development, Chapter IV reviews the deve 1opment orientation, and the constraints and considerations of encouraging this relationship of partners in development; it concludes that there should be a process of reviewing not only the present relationship between MNCs and the host country, but a1so the 1ega 1 and admi ni strati ve machinery of the host country, its policy perspectives and any probable change in the near future.

ix

I

THE INDONESIAN lOOKS AT fiJlTINATIONAl

CORP~TIONS

The Multinational Corporations' Involvement in Indonesia The Dutch co 1on i a1 regime had cont ro 11 ed the Inaane;::· econor-:::::-1y for three and a half centuries, primanly in resw;: to t l r l e Dutch need for raw materia 1 s for the aomestic ~~a~