Fdi Impact on the Economic Growth of Indonesia

8/8/2019 Fdi Impact on the Economic Growth of Indonesia

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FDI IMPACT ON THE ECONOMIC GROWTH OF INDONESIA

RESEARCH PROBLEM

The study will be focusing on the impact of Foreign Direct Investment to the

economic growth of Indonesia. Alternatively, a breakdown in some normally well

functioning economic system may occur, leading to unanticipated suboptimal outcomes.

However, the researchers search for theories and concepts with explanatory power

shows that whatever the role of chance or system breakdown, much of the economic

deviance is a routine by-product of the characteristics of the economic system itself.

In the past, very few studies have dealt in determining the interactions between

foreign direct investment (FDI) and the economic development of the home country.

Rather, studies have centered on the existence and dynamics of the firms involved. It is

for this purpose that this section will deal on the elaboration of theories that might

explain the interaction between FDI and the home countrys economic development.

Specifically, this section will tackle the Investment Development Path (IDP) and Stages

Theory of Industrial Upgrading and Overseas Investment.


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(1981, 1986, 1988), was credited for introducing, and eventually developing and

polishing the IDP theory. Further elaboration on the theory could be found in succeeding

works of (1996), as well as in collaborative undertakings between and (1994, 1996).

IDP theory states that the home countrys level of economic development plays a role in

the determination of the levels of inward and outward direct investment and that the

levels of investment flows of any country could vary at a steady rate as new

developments arise in the economy. Moreover, the theory stated that these

developments could be classified into five stages of expansion, which were based on

the net outward investment position of the country concerned. Net outward investment

could be defined as the outward investment less the inward direct investment ( and ,

1994; , 1996; , and , 1997). As in any endeavor in its developing stages, . described

the first stage of the theory as that which primarily operates in insufficient and

underdeveloped locational advantages, thus, they said that it is best to discourage

inward FDI at this point except perhaps for those who have the means and resources

to survive in this kind of environment. Further, described the second stage of the

development in the IDP theory as that which leads to import-substituting manufacturing

FDI. In this developmental stage, home countries begin to impose tariff and non-tariff

barriers, as part of their market protection mechanisms to safeguard developments in

their local markets and in other locational advantages. Having gone through the import-

substituting manufacturing stage would have given the local industries the capacity to

deal with higher and more complex technologies. At this third stage of development,

local firms would now be ready to engage in higher-end technologies - thus having


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greater capabilities to improve their systems for greater effectiveness and efficiency.

Finally, described the fourth and last stage of the IDP theory as that wherein there is

equilibrium in the local firms inward and outward FDI flows. It is important to point out

though, as also emphasized, that IDP theory should not be considered as an

explanation of the existence and growth of the multinational corporations. Rather, it

should be seen as a mean to determine the probability by which any country would

engage in any FDI endeavor, and also a mean to understand its relation to the host

countrys stage of economic development.

RESEARCH OBJECTIVES

The main objective of the study is to determine the impact of Foreign Direct

Investment to the economic growth of Indonesia. The researcher will only focus on the

economy of Indonesia. There is still a need for a more detailed qualitative study

regarding the economic growth of Indonesia. The researcher aims to contribute and to

focus in the multi-national corporation in Indonesia. The researcher will focus on the

following research questions:

1. What are the theoretical concepts of Foreign Direct Investments?

2. What is the current situation of the multi-national companies in Indonesia?


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3. What is the current state of Indonesian economy?

4. What is the impact of Foreign Direct Investments to the economic growth of

Indonesia?

LITERATURE REVIEW

Critics of the industrial organizational theory resulted in a new generation of

scholars writing about foreign direct investment. They changed the focus of their attention

from the act of FDI to the institution making the investment ( 1979, 1981). and (1976)

attempted to piece together the various past work on FDI approaches to construct a more

comprehensive and encompassing theory of foreign direct investment widely known as

internalization theory. According to the theory of internalization ( and 1976, 1985;

1991), the motivation for MNC to internalize across national boundaries occurred when

the benefiting and incentive through internalizing are greater than those arising within the

firm. The theory described the reason for MNCs operating abroad in terms of

organization by hierarchies (FDI) rather than market forces. It draws based upon theory

originated from the works of (1937), (1975, 1979), and later by (1991) on the

transaction cost theory to explain the existence of the MNC per se across national line

from the concept of market failure. Market failures are the main reason why an MNC use


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direct investment instead of licensing. In and s point of views, firms prefer to internalize

in order to avoid market imperfections in intermediate markets, and [in order to] minimize

their business transaction costs. Proponents of this view include (1972), (1991), and

(1976, 1985), and (1981, 1982).

Despite its contribution to the literature on MNC, internalization theory has been

rejected and criticized by some scholars. For instance, (1981: ) attempt to explain that

multinationals do not expand beyond national borders simply because they can

internalize transactions within their hierarchies. According to , any theory of MNC must,

therefore, address two facets of foreign expansion: one is the foreign involvement which

is the multinational character, and the other is the internalization within a single company.

On the other hand, and (1993) argued that internalization theory does not provide a

satisfactory explanation of the internalization activities of firms, and this has been

supported by (1988). According to (1988), the internalization and transaction cost

theories fail to consider the accomplishment of firms but more concerned with market

failure, and the explanation of the theory is too simplistic. In addition, (1991) argues that

both theories correspond more to the theory of choices rather than a theory of MNCs.

Another important criticism is cited by (1993) concerning the function of location-specific

variables in explaining the direction of FDI in internalization theory.


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, in his written works in 1992, 1995, and 1996, put forward a second theory that

attempted to explain the correlation between foreign direct investment and economic

development. More popularly known as the stages theory, s stages theory of industrial

upgrading and overseas investment, highlighted four distinct stages that a local market

undergoes towards achieving industrialization. These stages, heavily influenced by the

outward investments that the home country engages in, include: labour-intensive light,

heavy and chemical industries, assembly-based and innovation-intensive (, 1992).

highlighted the concept of factor incongruity, or the incompatibility that appears over time

between the factor intensity of a good, and the factor endowments of an economy in

which the good is produced in the stages theory. Heavily based on observations on

various firms in East and Southern Asia, noted that this theory could serve as the basis

for explanation for the occurrence of two distinct circumstances. One, a firm losses its

competitive advantage in producing a certain product for its targeted market due to the

fact that other firms have technologically-caught up in manufacturing that product. In this

case, the technology that is being used to manufacture the product becomes

standardized (also less labor-intensive) - thus making it very difficult for the previously

prevailing manufacturer to regain its niche in the market. Moreover, this dilemma could

be aggravated when, at the same time, factor endowments of the home country gradually

changes. This incongruity between factor intensity of the good and the factor

endowments of the economy could then result to the transfer of manufacturing/production

operations to other countries, in search for a new market niche, and to achieve tolerable

factor incongruity levels. The s product cycle model further describes this kind of

scenario. The other circumstance previously mentioned by is one that also results in the


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transfer of production/manufacturing operations abroad, also called the structural

upgrading mechanism. But in this case, factor endowments of a country become more

capital abundant and labour scarce, so that a product which was compatible with the

initial factor endowments cannot be produced in a cost efficient manner anymore, said.

He added that this situation is especially observed among Asian economies developing

at high speed.

Economic Growth of Indonesia

It is the third largest populated country in Asia afterChina and India and the culture is

as diverse as it houses over 200 different ethnic groups and comprises 3 major islands -

Java, Sumatra, and Kalimantan - (Indonesian Borneo), and over 13,500 smaller and

medium islands. With a temperate climate, Indonesia boasts of very fertile land, which

makes it perfect for farming, thus, it has many self-sufficient farming communities as

well as they are capable of answering the needs of the capital cities. However, it is the

natural resources that are the significant economic player of Indonesia as it is rich in

timber, tin, gas, and precious minerals. An alarming population of over 210,000,000,

Indonesia dwarfs its more prosperous neighbors, Singapore and Malaysia. The

Chinese, though small in population actually enjoys a far greater proportion of wealth,

mainly living in urban cities running businesses of all sizes. The key cities are Jakarta,

Surabaya, and Bandung (all in Java), and Medan (Sumatra). As common in


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metropolitan cities, much of Indonesia's wealth is centralized in Jakarta, which has

become a matter of interest for resource-rich provinces such as Aceh and in

Kalimantan, where inhabitants have not experienced the rise of living standards enjoyed

by those dwelling in Jakarta.

Looking back, Japan, the US and South Korea have been Indonesia's most

strategically and important business partners, with newcomers China and Singapore. Its

key exports are in Manufacturing, Petroleum and Natural Gas, food, and raw materials.

Indonesia suffered tremendously in the economic crisis in 1997. However, it was

serious in overcoming such blow and rise above the challenges. As a step to economic

recovery, industrial and manufacturing investment is on the verge of a substantive

increase even consumer spending has improved from admittedly very depressing

levels. Indonesia is not different from other Southeast Asian countries, as the conduct

of business is primarily based on personal and close contacts and the practice of bribing

government officials or under the table transactions are considered as acceptable and

part of the system necessary for the survival not only of the family but of the economy

as well.

On the other hand, since the ouster of Suharto, the conduct of business has

become more complex and intricate. Patronage, though still dominates Indonesian

transactions involving middle to upper social strata and forging relationships with

influencers in order to make a market entry is imperative, this is the prevailing situation

both for local and foreigners alike.


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In the construction industry, workers face head-on the issue of sub-contracting

which companies unabashedly use in order to earn more money. By this arrangement,

workers are forced to work, regardless of their nominal compensation without ample

protection from law that is why, when complication arises, such as when the workers

were not given their salaries, they cannot go after the entity they were working for

because it was the sub-contacting agent that hired them. More often than not, sub-

contracting agents have no substantial and necessary capital to finance the

undertaking. There are only 91% or 63,000 small building contractors that do the real

work, while medium contractors companies are about 8% and big contractors are less

than 1%.

Financial analysts attributed the region's continued downturn at present due to its

oversight to smartly use of time since the Asian financial crisis improved in 2000 by the

strengthening of local economies; this was done by relying less on exports. However,

the metropolitan demand for the region's chief exports like steel, textiles and electronic

components remains weak and hardly help the economy. As a result, which was

undeniable the richest in the region, is going through its worst recession in more than 30

years. However, Indonesia remains enclosed in a recessionary environment. Moreover,

in Indonesia, the political instability and chaotic civil society threatened and kept much-

needed investors away.

During the economic crisis, critics and financial analyst are alike; unison in

claiming that the dilemma was actually the effect of unabashed and reckless attitude

towards globalization, with the unmistakable result to years of chronic economic


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recession, worsening the already aggravated poverty which furthered the social

violence. Nevertheless, Southeast Asian governments were adamant to renounce the

concept of free trade and open markets, as they still view it as their remaining hope to

resume economic well-being for the region they are dealing with.

METHODOLOGY

A greater understanding of the relationship of staff dissatisfaction and staff misconduct is a

fundamental thrust of this study. For this study, primary research and secondary research will beused. Primary research will be conducted using anonymous questionnaires that will be sent to

employees of the respondent organizations. The questionnaires will be used to collectquantitative data and the interviews will be used to provide qualitative insights into the data

collected.

The data will be analyzed and compiled for the correlation of the hypothesis. The data will then

be presented by means of graphical representations and illustration and the difference would behighlighted. Research requires an organized data gathering in order to pinpoint the research

philosophies and theories that will be included in the research, the methodology of the researchand the instruments of data interpretation. In this study, the Research Process Onion will be

utilized so that the findings of the study can be thoroughly established. The inner part of theonion describes the methodology portion whereas the outer part discusses the strategies that can

be utilized in interpreting the results of the findings.

The descriptive research method uses observation and surveys. In this method, it is possible thatthe study would be cheap and quick. It could also suggest unanticipated hypotheses. Nonetheless,

it would be very hard to rule out alternative explanations and especially infer causations. Thus,this study will use the descriptive approach. This descriptive type of research will utilize

observations in the study. To illustrate the descriptive type of research, (1994) will guide theresearcher when he stated: Descriptive method of research is to gather information about the

present existing condition. The purpose of employing this method is to describe the nature of a

situation, as it exists at the time of the study and to explore the cause/s of particular phenomena.The researcher opted to use this kind of research considering the desire of the researcher toobtain first hand data from the respondents so as to formulate rational and sound conclusions and

recommendations for the study.

The research described in this document is partly based on quantitative research

methods. This permits a flexible and iterative approach. During data gathering, the


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choice and design of methods are constantly modified, based on on-going analysis.

This allows investigation of important new issues and questions as they arise, and

allows the investigators to drop unproductive areas of research from the original

research plan.

This study also employs qualitative research method, since this research intends

to find and build theories that would explain the relationship of one variable with another

variable through qualitative elements in research. These qualitative elements does not

have standard measures, rather they are behavior, attitudes, opinions, and beliefs.

Furthermore, as we define the qualitative research it is multi-method in focus, involving aninterpretative, naturalistic approach to its subject matter. This means that qualitative researchers

study things in their natural settings, attempting to make sense of, or interpret phenomena interms of the meanings people bring to them. Accordingly, qualitative researchers deploy a wide

range of interconnected methods, hoping always to get a better fix on the subject matter at hand.

The primary source of data will come from the researcher-made questionnaire

and interview questions. The primary data frequently gives the detailed definitions of

terms and statistical units used in the study. These are usually broken down into finer

classifications.

The secondary sources of data will come from published articles from social science journals,theses and related studies on personnel administration, particularly in the field of compensation.

Acquiring secondary data are more convenient to use because they are already condensed andorganized. Moreover, analysis and interpretation are done more easily.

For this research design, the researcher will gather data, collate published studies from different

local and foreign universities and articles from social science journals and make a contentanalysis of the collected documentary and verbal material. Afterwards, the researcher willsummarize all the information, make a conclusion based on the null hypotheses posited and

provide insightful recommendations on employee-employer relations in reference to employeefraud.


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The researcher shall use a combination of cluster and random sampling. First, a

self-administered questionnaire shall be formulated, containing 18 to 20 questions and

to be filled out by the employees with information regarding their employers. Another set

of questionnaires will be prepared for the interview with the employers themselves

gearing towards their perception of their relationship with their employees. Ideally, the

respondents will grade each statement in the survey-questionnaire using a Likert scale,

with a five-response scale wherein respondents will be given five response choices.

The equivalent weights for the answers will be:

Range Interpretation

4.50 5.00 Strongly Agree

3.50 4.00 Agree

2.50 3.49 Uncertain

1.50 2.49 Disagree

0.00 1.49 Strongly Disagree

For validation purposes, the researcher will initially submit a sample of the set of survey

questionnaires and after approval; the survey will be conducted to five respondents. After thequestions were answered, the researcher will ask the respondents for any suggestions or any

necessary corrections to ensure further improvement and validity of the instrument. Theresearcher will again examine the content of the interview questions to find out the reliability of

the instrument. The researchers will exclude irrelevant questions and will change words that

would be deemed difficult by the respondents, to much simpler terms.

The researcher will exclude the five respondents who will be initially used for the validation of

the instrument. The researcher will also tally, score and tabulate all the responses in the providedinterview questions. Moreover, the interview shall be using a structured interview. It shall consist

of a list of specific questions and the interviewer does not deviate from the list or inject any extraremarks into the interview process. The interviewer may encourage the interviewee to clarify

vague statements or to further elaborate on brief comments. Otherwise, the interviewer attempts


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to be objective and tries not to influence the interviewer's statements. The interviewer does notshare his/her own beliefs and opinions. The structured interview is mostly a "question and

answer" session.

When the entire survey questionnaires have been collected, the researcher will

use statistics to analyze all the data.

The statistical formulae to be used in the survey questionnaire will be the following:

1. Percentage to determine the magnitude of the responses to thequestionnaire.

n

% = -------- x 100 ; n number of responses

N N total number of respondents

2. Weighted Mean

f1x1 + f2x2 + f3x3 + f4x4 + f5x5

x= --------------------------------------------- ;

xt

where: f weight given to each response

x number of responses

xt total number of responses

The researcher will be assisted by the SPSS in coming up with the statistical analysis for this

study.


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Work Plan

August 18-30 2006- Thesis Proposal

September 2006- Collection of Primary Data

October December 2006- Collection of Secondary Data

December 2006- Collation and Data Analysis

January 2007- Chapter 1-3

February 2007- Chapter 4-5

March 2007- Presentation of the Study

POSSIBLE FINDINGS

This study adapts a comparative approach in analyzing and examining the impact of

FDI to the economic growth of Indonesia. It seeks to understand the mechanism that

allows the selected firms to strengthen their strategies in order to compete globally. In

order words, this thesis proposed that the developing country multinationals strategy in

competing with their competitors is not solely dependent on the technology

accumulation process, as suggested by the conventional literature on developing

country multinationals, but is also dependant on the variety of resources and other

advantages enabling their growth at home and on the international level.

REFERENCES:


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Documents

Fdi Impact on the Economic Growth of Indonesia