Indonesia Must Heed the Golden Rule for Attracting Investors

Jakarta Globe, James Van Zorge, March 24, 2010

In comparison to other emerging economies, Indonesia should qualify as a prime investment destination for multinational corporations. Inflation rates are low and the currency is stable. Tax and wage policies are reasonable and competitive. Public debt is not excessive. The domestic market for most consumer products is huge and growing. There is political stability.

Yet, there is also a gnawing feeling that something is not right. Indonesia should be attracting more foreign direct investment. Gita Wirjawan, the head of the Investment Coordinating Board, has been trying to promote Indonesia as a place to do business. He is attempting to open up more sectors to foreign investors with the hope that additional opportunities will translate into more dollars flowing into the economy.

To a certain extent, Gita’s thinking is right. Business thrives on opportunity. And when the right opportunity presents itself, you can be sure that business will follow.

The problem is, not everybody in the Indonesian government shares Gita’s attitude. Many politicians say they want more investment but they fail to act accordingly. They don’t always admit it, but in their heart-of-hearts they view foreign investment as a necessary evil to be accepted grudgingly if at all. They think if a foreign company invests in the country it means one less opportunity for a local businessman. In their minds, if a multinational corporation has a profitable business in Indonesia, then something is wrong and it should be punished somehow.

Unfortunately, a double standard is being applied here. Indonesian politicians complain that the wages being paid by multinational corporations to local employees are too low yet they say nothing when domestic companies pay the same or even lower salaries to their own workers. They become rabid environmentalists when talking about foreign natural resource companies but fall silent when locals pollute or cut down huge swathes of precious rain forest.

Multinationals are constantly being lectured by Indonesian politicians that they must exercise corporate social responsibility — which means putting some of their profits back into a local community for much-needed public services such as education and health care. A noble undertaking, indeed, and many foreign executives are keen to have their companies make meaningful social contributions. One could only wish that more local conglomerates would be expected to do the same.

Treating local companies with kid gloves and bludgeoning multinationals with a hammer is, of course, nothing new in developing countries. As a matter of fact, it used to be a lot worse. In the 20th century, during the post-colonial era, it was not unusual to have leaders of newly-independent countries berating and punishing foreign investors for their capitalist ways. State-run economies and protectionist policies were fashionable. With memories of colonial masters still strong, expropriation as an act of delayed revenge was a convenient — and popular — policy weapon.

Today’s leaders of developing countries are not completely convinced about the professed benefits of globalization but they are more likely to seek market-friendly policies than before, if for no other reason than the fear that their economies will be punished for doing otherwise. They might offer some polite applause for Venezuela’s Hugo Chavez or even the generals of Burma for their chuztpah and machismo in facing down the West. But they also know that testosterone-charged behavior doesn’t help to pay the bills.

Still, old habits die hard. Some of the world’s largest emerging economies — Russia, China and India — often make the news for their shoddy treatment of investors. Indonesia is no exception. President Yudhoyono claims that his country is open for business but he should not forget that foreign investors have an elephant’s memory. Every time a multinational gets a raw deal and is treated badly by the government, boardrooms take notice.

If Indonesia’s leaders are serious about beating the competition, attracting more foreign direct investment and reaping the rewards of higher growth rates, then they have to realize that just whispering sweet nothings into the ears of executives will not win the day. When asking a company to risk its hard-earned capital, government officials should remember that actions speak louder than words.

What actions, then, might win over investors? There are many, but perhaps the best way to proceed is to follow the golden rule and “do unto others as you would have them do unto you.”

How would the Indonesian government react, for example, if one of its state-owned enterprises had invested a billion dollars in the US only to wake up one day and find out that a powerful senator had forced himself upon the company to become a shareholder?

As another example, how would an Indonesian executive feel if his company set up shop in a foreign country and suddenly faced demands by government officials to pay millions of dollars in return for an operating license that was normally given out for free to others?

Indonesians know how they would feel and react to such rude and unethical behavior. They should therefore find it easy to apply this golden rule when dealing with foreign investors in their own country.

Fortunately, there are people like Gita inside the government who can pass the word around that multinational corporations are not much different from their Indonesian counterparts: they just want to be treated fairly.

James Van Zorge is a manager of Van Zorge, Heffernan & Associates, a business consultancy based in Jakarta. He can be reached at jamesvanzorge@yahoo.com.

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