Interview: Prijono Sugiarto

What role can foreign direct investment (FDI) play in maintaining Indonesia’s growth momentum?

PRIJONO SUGIARTO: FDI’s role in supporting growth will become even more significant as Indonesia has seen its exports weakened by the global slowdown, and will have to rely more on domestic consumption and investment. FDI brings substantial benefits to Indonesia’s economic development in four main ways. First, FDI contributes to the formation of supporting industries by triggering demand for capital goods, intermediary goods, raw materials and services, which will primarily be fulfilled domestically. This assists the development of local supporting industries that will become better capitalised and more bankable. These industries will need additional funding to expand their businesses, which will be provided by the local banking sector, contributing to growth in the banking industry and the overall economy.

FDI also creates employment opportunities. Construction operations will require a large amount of human resources, which will increase incomes locally. This additional income will be spent on food, clothing and other necessities, increasing purchasing power in the community, allowing people to buy more and boosting overall economic performance. So this will have a multiplier effect in Indonesia.

Finally, FDI reinforces the formation of strong human capital by upgrading skill levels; improving discipline; and increasing knowledge capacity and open-mindedness. This leads to a more educated workforce, which makes for a more attractive climate for foreign investors.

How can investors’ concerns over changing regulations and legal uncertainty be addressed?

PRIJONO: There should be a holistic approach from the government in policy development, so that regulations take into account the private sector, local communities and all related government institutions. A clear structure should also be in place regarding who has the responsibility and the authority to issue policies and regulations, and to monitor their implementation.

The government should prepare adequate resources to implement policies and regulations and conduct proper monitoring, and it should be able to exercise its power and to take any measures necessary to enforce the law. For example, in following up the newly issued Land Bill, the National Land Board will need to recruit and train numerous new employees to be distributed throughout all the regions to speed up the land acquisition process for infrastructure development. There should also be legal enforcement if the deadline of a court decision elapses. The overall communication strategy for foreign investors should be handled through a single door, to avoid misinterpretation of regulations.

Why do you think there is such a lack of truly international Indonesian brands at present?

PRIJONO: Most strong industries in Indonesia have been growing their revenues through international partner brands, and have not established their own Indonesian brand. Additionally, many research and development (R&D) activities are conducted in partnership with the home country and leave Indonesian firms with the manufacturing, distribution and marketing operations. As a result, Indonesian companies lack the experience and competency in innovation to develop their own products and brands. This is an area in which the government should focus on increasing education. Indonesia is still far behind countries like India, China or Malaysia in terms of the number of engineers, PhD graduates and professors who conduct research and studies. The government, alongside large Indonesian corporations, should allocate additional funding to schools and universities to strengthen R&D. There is a lack of incentives from the government to support firms that have developed truly Indonesian products, and the cost of R&D to companies is huge. To be a truly international brand means the product is exported and well known in the international market. Most Indonesian firms are satisfied with products that sell well locally but do not necessarily meet global standards.