Pros & Cons of FDIs

Central Bank estimates that Rp165 trillion (US$ 16.5 billion) of Foreign Direct Investments (FDI) needed to achieve a 5.7% GDP growth. Bank of Indonesia and the government believe that FDI is the key to recover Indonesia’s economy. That is the reason President and Vice President bothered to visit Middle East and China last month in order to attract investors to direct more investment into Indonesia. . In the meantime, the investment legislation and revision of manpower law are entering completion progress to shore up the efforts to bolster FDIs. Unfortunately, though, these endeavors have not gone smoothly as expected since April witnessed massive rallies across Indonesia rejecting the drafted revision. The goal to reinforce the economy through FDIs is somehow still a long way ahead. How effective FDIs would be in supporting the country’s growth has not actually been statistically verified.

In spite of that, obvious benefits emerge as soon as FDIs are coming in. They create more employment and invigorate regions (Young et al., 1994; Neven and Siotis, 1993). When investors agglomerate in a specific area, they bring forth development of the area both social and physical infrastructures (Peck, 1996; Morgan, 1997). In addition to this, national balance of payment would be improved thanks to the capital inflow of the FDIs and an increase in export value from the FDIs’ output (Dunning, 1988).

Nevertheless, multinational corporations (MNCs) do not always benefit the host countries (Leahy and Montagna, 2000). They do help but are not radically transforming the economy. Raisins in a cake are seen as an analogy of the FDIs’ role in a whole economy. People can feel the raisins but they are not the major taste of the cake (Buxman, 1992). Another thing to note is that MNCs could also have an adverse effect on domestic firms because their supplying goods or services into the market will definitely reduce demand to local firms’ products as a result of competition. It is therefore difficult for domestic companies to reach potential scales of economies (Aitken and Harrison, 1999).

FDIs also have great impact on labor-related issues. Greater openness to MNCs means job losses in uncompetitive industries (Lee, 1996). On the upside, MNCs would spread technology advance to local industries which lead to a rise in skilled workers’ demand and eventually their wages. In other words, the discrepancy between educated and uneducated labors’ wages is getting wider (Drieffield and Taylor, 2000) while on the low-skilled level, the race to enter labor markets would be more competitive (Lee, 1996). Lee continues that the problem is more severe in countries where wage discrepancy and poverty rate are already high. However, when the number of skilled workers grows strongly, their salaries will come down in the long run (Drieffield and Taylor, 2000).

This country’s unequal distribution of income and around 50% of population having less than $2 per day indicate that government has to be more vigilant to foreign investments’ impact. Macro economy must be alert to transition cost the MNCs may bear. Thus, to maximize the effectiveness of FDIs in boosting GDP, government should provide a safety net for adversely affected groups of people from this globalization tendency. Furthermore, supports to local producers such as infrastructures’ building and quick access to credits are also necessary (Lee, 1996). Only then, the government’s efforts to enhance the citizens’ wellbeing through FDIs would not be wasted in vain. (PK)