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NEWS UPDATES Asean Affairs         24  June 2011

FDI in Indonesia lags

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Foreign direct investment (FDI) has shown little growth as a percentage of gross domestic product since 2008 and “continues to underperform that in regional peers,” a leading bank says.

DBS Bank research noted that latest figures showed FDI totals 2.3 percent of GDP, only moderately higher than the 2 percent rate prior to the worst of the global financial crisis.

“Consensus opinion is that Indonesia needs greater foreign direct investment to address the economy’s bottlenecks, strengthen its growth potential and boost employment,” DBS’s research division said in a report dated June 14 but circulated on Thursday.

“Among the neighboring economies with more successful FDI experiences, Vietnam sees FDI amounting to as high as 9 percent of GDP during the recent three years. In China, although the FDI [to] GDP ratio has fallen in recent years due to labor shortages and higher wages, the ratio currently remains significant at 3 percent.”

But the report notes that in absolute terms, investment in Indonesia has grown, suggesting the problem lies in keeping pace with the economy, which last year clocked a 6.1 percent expansion.

DBS research said data from government authorities showed encouraging FDI inflows. Bank Indonesia figures measuring new FDI showed it rose to more than $4 billion in both the last quarter of 2010 and the first quarter 2011.That compared with an average of $3 billion in the first three quarters of 2010 and a previous peak of $3.4 billion in the third quarter of 2008.

The increase in FDI inflows is “spread across industries ranging from mining and manufacturing to services sectors such as wholesale and retail trade, and transport and communication,” the report said.

DBS said there were strong push factors (conditions abroad) and pull factors (domestic conditions) fueling optimism.

“The push factors on FDI are undoubtedly positive: the expansion in the global business cycle, the weak outlook for the G-3 [the US, Japan and the euro zone], and China’s waning competitiveness owing to higher wage costs,” DBS said. “Regarding pull factors, growth is strong, labor costs are low and economic stability is improving.”


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