FDI In Indonesia

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CHAPTER 3
ANALYSIS OF FDI IN INDONESIA
3.1 Trend of FDI in Indonesia
As mentioned in the previous chapter, Indonesia is among the Top 20 countries that receives the most Foreign Direct Investment (FDI) inflows. This condition is reflected on Figure 3.1. FDI in Indonesia was fluctuating but showing a significant increase from 1995 to 2014. However, during 1998 to 2002 and in 2003 the value of FDI inflows was negative. According to Francis (2013) negative FDI inflows means that the value of investment is less than the value of divestment. Crisis that happened during the stated period is responsible for this trend. According to Indonesia Investment (n.d.) during the late 1990s, Indonesian economy is greatly affected by Asian financial crisis that
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In 2003 the figure of FDI in Indonesia was once again negative as a result of economic slowdown. The economic slowdown was also the cause of the decline of FDI in 2006. From 2008 to 2009, the figure of FDI declined sharply as a result of the subprime crisis or global financial crisis. The slowdown of United States economy decreased the world’s economic activity. As a result of this crisis, many of foreign investor withdraws their fund and investment from Indonesia Alena…show more content…
Firstly, FDI increase government source of income through taxation. Indonesian government gives tax exemption or tax relief for foreign investor to attract investment and therefore could not gain the amount of tax revenue that it supposed to get. Even so, the increase of the number of foreign investor because of these incentives increases the amount of Indonesian government income and in the long run when these incentives are lifted, Indonesian government can gain more from FDI.
Secondly, FDI is believed to produce positive externalities in the form of technology transfer for the host country. A study by Liu (2002) proves that FDI produces positive externalities in the form of technology transfer. The study suggested that the rate of productivity growth in the component industry could rise by as much as 0.5% if there is a 1% increase in the average level of FDI in manufacturing industry.
Thirdly, foreign company benefits the citizen of the host country by giving them job opportunity ranging from management level to factory worker. Moreover, the presence of this company may increase competition in the market. The competition is beneficial for customers because it provides them with a better quality product at a competitive price.
While FDI brings many advantages for the host country and foreign company, both parties should also consider several disadvantages of
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