Table Of ContentFOREIGN INVESTMENT AND GOVERNMENT
POLICY IN THE THIRD WORLD
Also by Robert B. Dickie
CORPORATIONS AND THE COMMON GOOD (editor with
Leroy S. Rouner)
FOREIGN INVESTMENT: France, A Case-Study
Also by Thomas A. Layman
THE ECONOMICS OF EXPORT CONTROLS - WITH AN
EMPIRICAL APPLICATION TO THE BRAZILIAN COFFEE
INDUSTRY
Foreign Investment and
Government Policy in
the Third World
Forging Common Interests in Indonesia and
Beyond
Robert B. Dickie
Associate Professor of Management Policy
Boston University
Thomas A. Layman
Director, Asia and Pacific
Institute of International Finance, Washington
M
MACMILLAN
PRESS
ISBN 978-1-349-09159-1 ISBN 978-1-349-09157-7 (eBook)
DOI 10.1007/978-1-349-09157-7
© Robert B. Dickie, BA, JD, and Thomas A. Layman, BA, PhD 1988
Softcover reprint of the hardcover 1st edition 1988
All rights reserved. No reproduction, copy or transmission
of this publication may be made without written permission.
No paragraph of this publication may be reproduced, copied
or transmitted save with written permission or in accordance
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Any person who does any unauthorised act in relation to
this publication may be liable to criminal prosecution and
civil claims for damages.
First published 1988
Published by
THE MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 2XS
and London
Companies and representatives
throughout the world
Typeset by Latimer Trend & Company Ltd
Plymouth
British Library Cataloguing in Publication Data
Dickie, Robert B.
Foreign investment and government policy in
the Third World: Forging common interests
in Indonesia and beyond.
l. Investments, Foreign-Government
policy-Indonesia-History-20th
century
I. Title II. Layman, Thomas A.
332.6'7322598 HG572
ISBN 978-0-333-42928-0
To Mr & Mrs John A. Dickie
and Mrs Eliza M. Layman
Contents
List of Tables xi
List of Figures xiii
Acknowledgements xv
Preface xix
Introduction xix
Why Indonesia? xxt
Subsidiary themes xxn
1 The Historical, Political and Economic Context:
An Introduction 1
Direct foreign investment and economic development 3
Indonesia and policy problems since independence: a
brief history 6
The political climate 18
Balancing conflicting political and ideological
perspectives 20
Notes 23
2 The Development of Indonesia's Financial Sector 28
Introduction 28
Financial Structure and Economic Development-An
Overview 29
The problems of financial system development 29
Differential rates of financial deepening 31
Indonesia's Financial System in Historical Perspective 35
Pre-independence period 35
Post-independence to 1966 36
Post-1966 to present 37
The Central Bank 39
State banks 42
National private banks 50
Foreign banks 52
Development banks 54
Non-ban~ financial institutions 55
Insurance companies, leasing companies and pension
funds 62
vii
Vlll Contents
Future Issues for Financial Sector Development 65
Notes 70
3 The Extractive Sector: Indonesian Government Efforts to
Develop Oil, Mining and Forestry Industries 74
Efforts to control the oil industry 75
Concession agreements 77
Contracts of work 78
Production sharing contracts 79
Renegotiation of the oil contracts 80
Differences between work contracts and production
sharing contracts 82
Similarities between work contracts and production
sharing agreements 83
Other arrangements 84
Other important developments involving oil 85
Natural gas 87
Indigenization of the mining industry 89
First generation contract 90
Second generation contracts 92
Third generation contracts 92
Equity sharing in mineral investments 94
The forestry industry 97
General overview 97
History 98
Government objectives 99
a. Forest management and practices 99
b. Export quotas 100
c. Domestic processing 101
Equity sharing 103
Conclusion 105
Notes 107
Appendix 3.1 Pertamina's affiliates Ill
Appendix 3.2 Production sharing contracts in Indonesia 112
Appendix 3.3 Foreign mining contractors in Indonesia 118
4 Foreign Direct Investment and Local Ownership
Participation 121
Introduction 121
Contents ix
Equity sharing and joint ventures 122
Indonesia's equity sharing policy since 1967 123
Origins of the policy 123
Administrative interpretation of the policy 127
Bias in favour of public offerings 134
Constraints on policies calling for public offerings 135
Legal problems 135
a. Obligation to pay compensation 135
b. Violation of government agreements with
companies 136
c. Violation of agreements to allow foreign firms the
right to manage 137
d. Primary versus secondary offerings 138
e. Rights of existing shareholders 139
Affordability to local investors 139
Disintermediation from banks to the equity market 140
Direct and indirect costs 140
The issue of management control 141
Deterrence to new foreign investment 142
Factors that influence companies going public 143
The tax system (including tax incentives) 143
Disclosure to competition 145
Flexibility 146
Other sources of capital 147
The price of shares 151
Return on capital employed by parent 154
Expansion 156
Working control 160
Political comfort 161
Qualitative judgement 162
Conclusion 162
Notes 164
s
The Equity Market: A Study in Legal and Institutional
Infrastructural Development 167
Introduction 167
Legal, Institutional and Economic Obstacles in the Third
World 169
Sources of shares 170
The Demand for shares 173
Contents
X
The Indonesian Equity Market 179
Background 179
The decision to establish the securities market 179
Registration requirement and exemptions 180
Obstacles to creation of demand 183
Attractiveness of other investments 183
Lack of protection for outsider shareholders 184
Government initiatives to stimulate demand 187
PT Danareksa and Badan Pelaksana Pasar Modal 187
Government pilot promotional projects 192
Institutional protection of small investors 193
Evaluation of Indonesia's capital market development 196
Poor initial growth of the stock market 196
Corrective policies implemented 196
The local bond market 202
Other sources of capital 204
Conclusions and measures which could enhance the
development of Indonesia's equity market 205
Notes 209
6 Interpretations and Implications for Future Development 216
The Objective of National Economic Autonomy 216
Design and Timing of Policies for Local Autonomy 219
Considerations for Policy Implementation 222
Criteria for Success 224
Notes 232
Index 235
