Title: The role of foreign direct investment in Indonesia|s industrial technology development

Authors: Kian Wie Thee

Addresses: Centre for Economic and Development Studies, Indonesian Institute, of Sciences (PEP-LIPI), Widya Graha, 5th Floor, Jalan Gatot Subroto, 10, Jakarta 12190, Indonesia

Abstract: Despite the large inflows of FDI into Indonesia|s manufacturing sector during the past three decades, Indonesia has in general not been very successful in taking full advantage of the presence of FDI projects to promote the development of its indigenous industrial technological capabilities, at least compared to its East Asian neighbours. This lack of success has been attributed to the high facilitation payments required to realise an FDI project and the relatively high costs of infrastructure services and leasing land, the lack of transparency and cumbersome licensing procedures and, at least until the important foreign investment deregulation package of June 1994, the requirement for foreign investors to divest their equity ownership to a minority position of maximum 49% within a specified period of time. In order to obtain greater technological benefits from FDI in the near future, the new Indonesian government will henceforth, aside from pursuing sound macroeconomic policies and pro-competition policies to ensure a competitive business environment, have to pursue a consistent and transparent foreign investment policy to attract the FDI it needs for Indonesia|s economic recovery and for sustaining its economic growth and export-oriented industrialisation. To achieve this, the Indonesian government needs to continue dismantling its still cumbersome regulatory framework in order to reduce the still high facilitation costs associated with setting up a new FDI project. In addition, the Indonesian government will have to put a high priority on developing and upgrading the country|s human resources in order to raise their capacity to absorb, assimilate, modify, and improve the imported technologies, whether transferred through FDI or purchased through technical licensing agreements with transnational corporations (TNCs).

Keywords: foreign direct investment; technology transfer; development of local technological capabilities.

DOI: 10.1504/IJTM.2001.002979

International Journal of Technology Management, 2001 Vol.22 No.5/6, pp.583-598

Available online: 09 Jul 2003

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