Foreign investment and industrialization in Indonesia

THERE are several reasons for a book-length examination of foreign invest ment and industrialization in Indonesia. First, the role of foreign involve ment in its manufacturing sector is something of a puzzle. It is clear to any observer that the foreign presence' is ubiquitous in the modern sector, and yet all available statistical information points to comparatively modest foreign investment inflows and foreign ownership. A second reason is that Indonesian manufacturing experienced extraordinarily rapid growth in the fifteen years after 1967. To better understand this historically unprece dented growth episode, it is important to examine the role of contributing factors, of which foreign investment has undoubtedly been one.

There is, third, the fact that foreign investment in Indonesia has been a contentious issue. When critics of the current regime-both local and foreign-list their grievances, the government's alleged 'open-door' policy towards foreign investment is generally prominent. Finally, the book is in part a response to the challenge that the subject is not worthy of examin ation because the research and statistical data base is so weak. When I commenced work on the book, it was surprising how much had been written on foreign investment in Indonesia, even if much of the material was not easily accessible. Moreover, the range and quality of Indonesian economic statistics have improved enormously in the last decade, such that they are now among the best in South-East Asia.

The purpose of this book is to analyse and integrate this material in the framework of the theory of direct foreign investment, and in the context of general economic developments in Indonesia since 1965. It is not my inten tion to promote a particular set of arguments for or against foreign invest ment in that country. Indeed, throughout the study I maintain that a more important consideration is the broader macro and industrial policy environ ment. I believe Indonesia could have secured a much higher proportion of the benefits of foreign investment over the last two decades if these general policies had been more conducive to the emergence of an efficient and internationally competitive manufacturing sector. In this sense, to conduct a debate concerning the benefits and costs of foreign investment, without reference to this general policy environment, is a somewhat sterile exercise.