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 researcher’s 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 country’s economic development. Specifically, this section will tackle the Investment Development Path (IDP) and Stages Theory of Industrial Upgrading and Overseas Investment.
(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 country’s 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 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 firm’s 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 country’s 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?
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 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.
, 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 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 after China 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 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.
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 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 be used. Primary research will be conducted using anonymous questionnaires that will be sent to employees of the respondent organizations. The questionnaires will be used to collect quantitative 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 be highlighted. 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 research and 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 the onion 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 that the 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 the researcher 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 to obtain 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 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 an interpretative, 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 in terms 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 and organized. 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 content analysis of the collected documentary and verbal material. Afterwards, the researcher will summarize all the information, make a conclusion based on the null hypotheses posited and provide insightful recommendations on employee-employer relations in reference to employee fraud.
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 the questions were answered, the researcher will ask the respondents for any suggestions or any necessary corrections to ensure further improvement and validity of the instrument. The researcher 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 provided interview 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 extra remarks 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 to be objective and tries not to influence the interviewer’s statements. The interviewer does not share 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 the questionnaire.
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.
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:
Credit:ivythesis.typepad.com
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