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Fredrik Sjöholm on FDI in Indonesia

Fredrik Sjöholm recently delivered the Sadli Lecture in Jakarta. He was introduced by the Minister of Trade Mari Pangestu and spoke for a large audience of policy makers and politicians.

Fredrik Sjöholm noted that foreign direct investment (FDI) has been important in the growth and global integration of developing economies. Both Northeast and Southeast Asia, especially the latter, have been part of this development, with increasing inflows of FDI and greater foreign participation in local economies. However, Indonesia has been an outlier within the region. Inflows of FDI have been lower to Indonesia than to other countries, especially in manufacturing, and they have been lower than could be expected from Indonesia’s size, population and other country characteristics.

Fredrik Sjöholm continued and noted that the inflows of FDI that have occurred have benefited Indonesia, and he used the East Asian experience to identify measures that are likely to increase these flows.

In particular, he argued that Indonesia’s long history of skepticism towards foreign multinational firms have resulted in various restrictions on their activities. In addition, the level of education and the state of infrastructure is worse than in neighboring countries. These factors are together with ill functioning institutions resulting in low inflows of FDI. Policy attempts to address these shortcomings would according to Fredrik Sjöholm have large positive effects on the Indonesian economy.

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