political economy on indonesia's negative investment list 2014

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The Political Economy of the Indonesias

Negative Investment List (NIL) 2014

Nurman Hidayat / G1502523BSanti H. Paramitha / G1500382E

IP 6025Comparative Political EconomyTrimester 2 AY 2015/2016


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Introduction

In the globalization era, the removal of investment barriers between states

consequences one state to invest in other states through relatively easy process without

significant problems. Aside from the economic opportunity that arises, globalization signals

higher challenge in terms of competition between states. Since FDI is believed to contribute to

economic growth, states are gearing up to create a business friendly environment with the

purpose to attract more FDI. With regard to that condition, in October 2012, Indonesia

formulated a policy package containing four initatives to boost the investment activities.1This

policy package was concentrated to address the issues which hinder the investments activities,

through: (1) the deregulation of investment licenses; (2) the acceleration of agriculture and

mining based investment programs by providing tax incentives; (3) the improvement of the

ease of doing business;2and (4) the formation of more open investment policy through the

new Negative Investment List.3

Noting that Indonesia possesses abundant natural resources, working years' surplus,

growing middle class, as well as huge potential markets, these initiatives are expected to

enhance Indonesia competitiveness in the eyes of foreign investors. In addition to that,

Indonesia has been acknowledged as the 3rd top prospective host economies by UNCTAD

World Investment Report in 2014, in which Indonesia was ranked at the 4thposition in 2013.4

This explains the big chunk of investment which contributes 32,57% of Indonesias GDP.5

However, this favorable investment opportunity seems to be challenged as the NIL

2014 released. The NIL 2014 is considered to be contradictory with the governments promise

to give more spaces for investment as mentioned in October 2012 policy package, as it presents

more restriction towards specific sectors such as agriculture and logistic distribution. In some

cases, the sectors which become limitedly opened or sealed for FDI are the sectors which

actually require more foreign investment for the reason of: (1) the lack of national capability

1 Indonesia Economic Quarterly Report December 2013, accessed in February 1st 2016, through

http://www.worldbank.org/content/dam/Worldbank/document/EAP/Indonesia/IEQ-Dec13-ENGLISH.pdf2Ease of doing business refers to the components of doing business index, such as the level of easiness for

setting up new businesses, getting electricity connection, paying taxes, etc. It is released by International Finance

Corporation World Bank Group, please find the detail throughhttp://www.doingbusiness.org/3Negative Investment List is a government instrument which regulates limitation of the sectors for investment.

Before the introduction of this policy package, the latest NIL was regulated under Presidential Regulation

number 36 of 2010, called as NIL 2010.4 UNCTAD World Investment Report 2014, accessed in February 1st 2016, through

http://unctad.org/en/PublicationsLibrary/wir2014_en.pdf5 Source Ministry of Finance Website, February 5 th 2015, http://www.kemenkeu.go.id/Berita/pdb-2014-

mencapai-rp105427-triliun
http://www.worldbank.org/content/dam/Worldbank/document/EAP/Indonesia/IEQ-Dec13-ENGLISH.pdfhttp://www.worldbank.org/content/dam/Worldbank/document/EAP/Indonesia/IEQ-Dec13-ENGLISH.pdfhttp://www.doingbusiness.org/http://www.doingbusiness.org/http://www.doingbusiness.org/http://unctad.org/en/PublicationsLibrary/wir2014_en.pdfhttp://unctad.org/en/PublicationsLibrary/wir2014_en.pdfhttp://www.kemenkeu.go.id/Berita/pdb-2014-mencapai-rp105427-triliunhttp://www.kemenkeu.go.id/Berita/pdb-2014-mencapai-rp105427-triliunhttp://www.kemenkeu.go.id/Berita/pdb-2014-mencapai-rp105427-triliunhttp://www.kemenkeu.go.id/Berita/pdb-2014-mencapai-rp105427-triliunhttp://www.kemenkeu.go.id/Berita/pdb-2014-mencapai-rp105427-triliunhttp://unctad.org/en/PublicationsLibrary/wir2014_en.pdfhttp://www.doingbusiness.org/http://www.worldbank.org/content/dam/Worldbank/document/EAP/Indonesia/IEQ-Dec13-ENGLISH.pdf


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to develop the sectors, (2) the huge national demand upon the sectors outcome, and (3) the

economic potency of creating wider employment through opening new business activity.

Embarking from that particular case, this paper intends to examine the relevant

dimensions to understand the case of NIL 2014, such as the formulation mechanism of NIL;

the political economy of NIL 2014 by observing the motives of each actor involved in the

making of NIL 2014 and constructing its interaction model; and the NIL 2014 policy

implications, to answer the following questions:

1. Why does the government of Indonesia applymore restrictive treatment to specific

sectors through the Negative Investment List (NIL) 2014, under the favorable

investment opportunity? Is there any possibility of business players interests being

granted by the government through the implementation of NIL 2014 upon certain

sectors?

2. What are the implications for Indonesias economy by applying NIL2014?

This paper assumes that NIL 2014 is not merely formulated based on the national

interest of supporting domestic economy. There are other reasons incorporated in the

consideration of deciding the sectors to be put on the list. This is rooted on the factual

mechanism that NIL is periodically adjusted based on the government preferences and dialogue

with the existing business players to regulate the sectors which are fully opened, limitedly

opened, or even sealed for the foreign investment.

Literature Review

Foreign Direct Investment (FDI) can be understood as a cross-border investments flow

made by a firm which located in one country to expand its business by opening a new factory

or purchasing an existing one in another country.6Previous researches have mentioned that

beyond the possession of natural resources, competitive factor production costs, and larger

market opportunity, the host countrys type of regime is central to explain the countrys

attractiveness and attitude towards FDI.

In terms of countrys attractiveness, the conventional wisdom says that authoritarian

regime provides more promising deals for foreign investors, due to the lack of constraints and

low pressure of labor union on political leaders. The better deals offered by authoritarian

regimes, are mostly related to the cheaper labor wages and dictators protection for the foreign

companies run their business. While authoritarian regimes provide better deals, the democratic

6Thomas Oatley, International Political Economy, (US: Pearson Education, Inc, 2012), 161.


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regime, on the other hand, offers different appealing consideration for the foreign investors to

plant their money. Democratic regime provides credibility and political stability as the pull

factors. Noting that the democratic regime consists of large veto players, its tendency to violate

its own regulation and promises will be small. Also, as mentioned by Olson, the well-

established democracy, will ensure the future of the FDI in the host country.

Research upon the countrys attitude towards FDI was conducted by Li and Resnick in

2003. Li and Resnick argue, although the democratic regime owns more likeable factors for

foreign investors, it does not necessarily suggest that democratic country will be more open to

the FDI.7Their empirical result proves that higher the level of democracy will create better

judicial systems and rule of law as well as multiple avenue for the domestic groups to deliver

their concern. These conditions sometimes may drive the government of democratic countries

to put necessary constraints to the FDI, for the consideration of protecting their domestic

market players from serious foreign competitors.

In addition to that, previous research also finds that individual preferences may also

influence the states attitude towards FDI. As mentioned on Mayda and Rodrik research, they

find that there is a positive relationship between national pride and protectionist preferences

towards FDI. It indicates that the higher the individual national pride within a state, the state

will be less likely to widely open its door for FDI. 8With quite similar view, Sornarajah states

that nationalistic sentiments would hinder the prospect of FDI, particularly when the host

country economy is in the downturn and the prosperous foreign investors are seen as

controlling the economy.9

Besides national pride, Scheve and Slaughter mention that perceived job insecurity also

induces the individual preference for FDI. It is rooted in the assumption that FDI increases the

elasticity of labor demand in the host country, which therefore results in individual perception

to relate FDI to the future of their jobs. Their findings suggest that individuals which perceive

their jobs will be more vulnerable as the FDI flows in, will demonstrate less favorable

preference towards the FDI.10 Furthermore, Pandya research in 2010, confirms that the

individual level of education and is also found to be significant in shaping the preferences. The

7 Quan Li and Adam Resnick, Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment

Inflows to Developing CountriesInternational Organization 57 No. 1 (2003), 196.8Anna Maria Mayda and Dani Rodrik, Why Are Some People (and Countries) More Protectionist Than Others?

European Economic Review49 No. 6 (2005), 1416.9

M. Sornarajah, The International Law on Foreign investment, (UK: Cambridge University Press, 2004), 78-79.10Kenneth F. Scheve and Matthew J. Slaughter, Labor Market Competition and Individual Preferences over

Immigration Policy Review of Economics and Statistics83 No. 1 (2001), 141-142.


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support for FDI inflows within a state will decrease in a condition where the educational

background is low, and increase as the educational background is high.11

Aside from the regime effects and individual preferences, Goodman, Spar, and Yoffie

explain another factor contributes to the countrys attitude towards FDI, which is the relations

of FDI to imports. Their results show that in the situation when FDI is considered as import

complementary, there will be a split in the domestic industry, with the domestic business player

of the host country will request for more protectionist measure from the government for FDI.12

On the other hand, when the FDI is taken as substitute to import, the demand of domestic

business players of host country for protection declines, as the protection benefits are becoming

irrelevant.13

However, apart from the sole reliance on the power of the government, the growing

economic conditions in developing countries support the birth of local companies and

entrepreneurs to play in the domestic markets. Given the considerable number of the local

business players, it then becomes imperative to note the role of business players in shaping the

governments decision. In regard to that, slightly different from the existing approach which

considers the regime type, individual preferences, and FDI relations to import as the influential

factors to the states attractiveness and attitude towards FDI, this paper seeks to examine the

case of the Negative Investment List (NIL) year of 2014 in Indonesia. The research will be

developed by scrutinizing the interaction between business players and government in making

restrictive policies towards FDI. This still dovetails with the previous research findings, which

shows that more democratic country will provide more spaces for the domestic groups to

vocalize their concern to the government, in which, when the domestic group pressure and

lobby are strong, the governments are urged to accommodate their requests.

Discussions

Negative Investment List

Formulation Mechanism

All of direct investment activities in Indonesia are regulated under the Law Number 25

of 2007 on Investment. According to this law, all business fields in Indonesia are open for

11Sonal S. Pandya, Labor Market and the Demand for Foreign Direct Investment International Organization 64

No. 3(2010), 406.12

John B. Goodman, Debora Spar, and David B. Yoffie, Foreign Direct Investment and the Demand of theProtection in the US, International Organization 50 No. 4 (1996), 569.13Ibid., 587


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investment, unless those which are stated as close or open with a certain condition14on the NIL

or have been regulated by other law. Noting that NIL is an instrument of investment restriction

that is codified in the form of Presidential Regulation, thus the agenda setting in NIL is more

flexible compared to the restriction which is regulated through legislation, because it only

involves the executive element as the policy makers. However, any setting on investment

restriction through NIL has its own level of complexity since each drafting process attracts a

lot of attention from business and political circles.

NIL is evaluated periodically. Those adjustments are done by taking into account the

economic development and national interest. The adjustment process of NIL is coordinated by

the Investment Coordinating Board (BKPM) to involve the related Ministries and the business

players representative. The related ministries and business players may submit their proposal

accompanied by supporting reasons during the evaluation process of NIL. The proposals

subsequently are discussed bilaterally with BKPM and multilaterally in a coordination meeting

with the Coordinating Ministry for Economic Affairs. This suggests that the evaluation of the

previous NIL and the formulation of the new NIL, involve not only the governments branches

but also the business players as the major actors in NIL policy-making.

Grounding to the assumption that the business players are basically profit maximizers

while the government and politicians are survival maximizers, this paper views that the above

mentioned mechanism, opens the opportunity for lobbying process between the business

players and government in every formulation of NIL. A particular business players may ask

for protection to maximize their profits. To successfully get protection, they create a

collectively powerful lobbying power to the government by using the business association. In

the name of business association, they actively lobby the government for their collective

interests. In accordance with this realm, this paper explores the motivation of each actor above

on the latest investment restriction policy-making codified in NIL 2014 as replacement of NIL

2010.

Negative Investment List (NIL) 2014

NIL 2014 was enacted on 23 April 2014, on the same month with the general elections

and only three months to the presidential election on July 2014. Its formulation process had

14Fully open means all business player are allowed to conduct a business in those area, close means none of

private sector are allowed, while open with condition means that those business sectors are allowed but subject

to certain requirement, such as only open for small-medium enterprise, only open for domestic investment, orcould be open for foreign investment with certain ceiling equity.


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been started from the end of 2012 and was originally scheduled for completion at the end of

2013. At first, according to the government, the new NIL aimed to encourage more investment

activities by introducing a more liberal policy measures. The Government was also reaffirmed

to further loosen the restrictions for foreign investment by opening up a greater investment

opportunities in infrastructure through Public-Private Partnership (PPP) schemes. In addition,

the government also said that it would be a more open investment policy in a number of sectors

such as pharmaceutical industry, transportation, and specialty hospitals.

Later, this announcement got a lot of negative responses in the media.15Towards these

initiatives, many parties accused the government for failing to protect the national interest. A

similar sentiment was expressed by domestic business players that calling for a number of

protection from competition with foreign investors. Upon this situation, the government tried

to soften the debate stating that the discussions were still unfinished and turned to express its

commitment to balance the national interest.16It took a quite long time for the NIL to be fully

released in April 2014, showing that there was a tough negotiation between government and

the business players to accommodate those kind of national interest.

In NIL 2014, there are several business field provisions that change from NIL 2010 as

presented in Tabel 1. Some sectors are more relaxed and some other are more restrictive

towards foreign investment. NIL 2014 relaxes the limitations on foreign ownership in sectors

such as in infrastructures including electricity generation, transmission and power distribution,

port facilities, pharmaceutical industry, and transportation. On the other side, NIL 2014 also

introduces new restrictions in business retail, trade services including distribution,

warehousing and cold storage, onshore oil production services, as well as horticulture sectors.

In comparison, many perceive that NIL 2014 is becoming more protectionist towards FDI

rather than NIL 2010.17

15Erlangga Djumena, Asing Semakin Mendominasi Ekonomi Indonesia, KOMPAS, November 7th2013,

http://bisniskeuangan.kompas.com/read/2013/11/07/0756260/Asing.Semakin.Mendominasi.Ekonomi.Indone

sia16Ibid.17

Michael Taylor and Randy Faby, Foreign Investor Unhappy With Some Indonesias New Investment Rules,Reuters, May 14th 2014, http://www.reuters.com/article/indonesia-economy-investment-

idUSL3N0NV3L920140514
http://bisniskeuangan.kompas.com/read/2013/11/07/0756260/Asing.Semakin.Mendominasi.Ekonomi.Indonesiahttp://bisniskeuangan.kompas.com/read/2013/11/07/0756260/Asing.Semakin.Mendominasi.Ekonomi.Indonesiahttp://bisniskeuangan.kompas.com/read/2013/11/07/0756260/Asing.Semakin.Mendominasi.Ekonomi.Indonesiahttp://www.reuters.com/article/indonesia-economy-investment-idUSL3N0NV3L920140514http://www.reuters.com/article/indonesia-economy-investment-idUSL3N0NV3L920140514http://www.reuters.com/article/indonesia-economy-investment-idUSL3N0NV3L920140514http://www.reuters.com/article/indonesia-economy-investment-idUSL3N0NV3L920140514http://www.reuters.com/article/indonesia-economy-investment-idUSL3N0NV3L920140514http://bisniskeuangan.kompas.com/read/2013/11/07/0756260/Asing.Semakin.Mendominasi.Ekonomi.Indonesiahttp://bisniskeuangan.kompas.com/read/2013/11/07/0756260/Asing.Semakin.Mendominasi.Ekonomi.Indonesia


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Table 1Investment Policy Changes from NIL 2010 to NIL 201418

Political Economy of NIL 2014

To understand the dynamics of political economy in the process of formation

investment policy in Indonesia, this paper identifies at least two major actors involved in NIL

formation, namely government and business players. From the government side, it consists of

the president and the ministries of the related sectors, where the president and all the ministers

stand as politicians. Therefore, it is essential to analyze what kind of political incentives the

government possess by imposing NIL. Two polar groups are identified within the business

18Compiled from the Presidential Regulation No. 36 of 2010 and Presidential Regulation No. 39 of 2014.


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players. The first group is domestic business players that generally demands for protection

while the second group is foreign business players that prefer investment liberalization to

protection. In the following section, this paper will explain those actors profile and their

motivations in NIL policy-making, then finally draw the interaction model among those.

Actor 1: Business Players

First, we start to identify the profiles and motivations of business players that involve

in policy formation of NIL. At the stage of collecting inputs, the government opens a wide

opportunity for the business players, whether they are domestic or foreign players and whether

as an individual firm or through a business association, to provide input for the evaluation of

previous NIL and produce the new version of NIL. The foreign groups are more likely to

support liberalization in contrary with the domestic groups which generally demand for more

protective policies.

However, on the next stage of NIL policy discussion, the government engage Apindo

(The Employers' Association of Indonesia) as the only party to represent business players.19

The Apindos membersconsist of both domestic and multinational companies in Indonesia, in

which its MNC members are concentrated in the manufacturing sector. Noting that the board

of Apindo is dominated by domestic business players, its policy preferences on the formation

of NIL tends to bring along the nationalistic concern.

During the development of NIL, Apindo expresses its support for the government's

plans to liberalize investment in infrastructure, electricity, and manufacturing industry.

However, Apindo also demands the government to maintain the protection in retail trade20and

impose new restriction on logistic distribution sectors, including distribution, warehousing, and

cold storage.21According to Apindo chairman, Sofjan Wanandi, such protection is necessary

to provide business opportunities for domestic entrepreneurs. He argues that domestic

employers have been unable to compete with foreign investors in manufacturing due to lack of

capital and technology, hence the retail and distribution sector need to be protected so not all

sectors can be controlled by foreigners.

19Apindo is the largest business association in Indonesia that covers all business sectors running in Indonesia.20At that time, the government responded this request by keeping the closed investment status for the retail

trade business and further providing more details in regard to what kind of retail trade business being listed as

closed (which had not been mentioned in the prior NIL 2010).21Linda Yusman, Retail, Distribution should be Put on Negative List: Apindo, The Jakarta Post, May 11th2013,

accessed throughhttp://www.thejakartapost.com/news/2013/05/11/retail-distribution-should-be-put-negative-list-

apindo.html
http://www.thejakartapost.com/news/2013/05/11/retail-distribution-should-be-put-negative-list-apindo.htmlhttp://www.thejakartapost.com/news/2013/05/11/retail-distribution-should-be-put-negative-list-apindo.htmlhttp://www.thejakartapost.com/news/2013/05/11/retail-distribution-should-be-put-negative-list-apindo.htmlhttp://www.thejakartapost.com/news/2013/05/11/retail-distribution-should-be-put-negative-list-apindo.htmlhttp://www.thejakartapost.com/news/2013/05/11/retail-distribution-should-be-put-negative-list-apindo.html


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From those explanations, this paper assumes that Apindo would likely to demand for

protection with certain ceiling foreign equities limitation rather than full restriction to FDI. In

this case, foreign investors would be required to set up a joint venture company with domestic

players, showing that the presence of foreign investors must bring benefits for local

entrepreneurs, became partners and not competitors.22The second preference would be full

protection from foreign investment in retail trade and distribution sectors. While the last

preference would be to let government in maintaining a liberal policy in those sectors. In order

to maximize its probability for success in this lobbying, business players may offer any kind

of political support to the incumbent (government) to win the upcoming elections, given that

2014 general election and the presidential election were coming soon.

Actor 2: Governments

To examine the motivation of the government, this paper employs electoral cycles

(office-seeking policy makers) model to test whether the government has an office-seeking

motivation in NIL policy making. This paper is engrained on the assumption that politicians,

including incumbent governments are basically survival maximizers. Voters will be an

important consideration for them to decide what policies will be taken. Government tends to

target specific policies that can satisfy the median voter (Downs 1975).23 In Indonesia, the

median voters are dominated by workers or lower and middle classes. This class will tend to

favor pro-employment policies rather than low inflation. As in general, people easily forget the

old policy outcomes, voters have a tendency to assess the government performance through the

latest policy outcomes. On this premise, the government has a political incentive to pursue

specific measures that can spur growth and combat unemployment mainly on the time leading

up to elections. (Nordhaus 1975).24The purpose is none other to lure voters at the next election.

In relation to those premises, NIL formulation that began in late 2012 (1.5 years ahead

of elections) initially aims to reverse the economic downturn by opening up to attract more

FDI in attempt to reduce unemployment and boost economic growth. Nevertheless, in

November 2013, apparently that liberal policy was reaping a lot of negative responses in the

media. Many put the commitment of the government of securing national interest into question.

22Satria Sambijantoro, Door Widens for Foreign Investors, The Jakarta Post, November 7th2013, accessed

throughhttp://www.thejakartapost.com/news/2013/11/07/door-widens-foreign-investors.html 23Antony Downs, An Economic Theory of Political Action in DemocracyJournal of Political Economy, Vol. 65,

No 2 (April 1957), 135-150.24William D. Nordhaus, The Political Business Cycle The Review of Economic Studies, Vol. 42, No. 2 (Apr.,

1975), 169-190.
http://www.thejakartapost.com/news/2013/11/07/door-widens-foreign-investors.htmlhttp://www.thejakartapost.com/news/2013/11/07/door-widens-foreign-investors.htmlhttp://www.thejakartapost.com/news/2013/11/07/door-widens-foreign-investors.htmlhttp://www.thejakartapost.com/news/2013/11/07/door-widens-foreign-investors.html


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This momentum is also captured by the domestic business players to reinforce their

lobbying power in asking for investment protection through NIL. The rising of nationalist and

protectionist sentiment in closer to the elections, makes the government to delay the enactment

of NIL and continue to negotiate in balancing the national (domestic players) interest. Due to

the tight time to the election, an investment policy would likely to become ineffective

instrument to stimulate investment, employment, and growth in a short time.

Pragmatically, signalling pro nationalist by accommodating a little protectionist policy,

may give more political incentives for the incumbent government to reap political support in a

short time. First, to lure voters. Second, to open up the possibility of cooperation with business

players in an effort to win the election. From the situation, the government tends to

accommodate protectionist policy as demanded by domestic business players. This policy can

become a popular policy with a fashionable jargon of for the sake of national interest.

Interaction Model between Government and Business Players Representative (Apindo)

This section explains the interaction model in NIL policy-making between the

Government and Apindo as the representative from business players. The model is constructed

based on the profile and the possible incentives for both players as been descripted in the

previous section. By considering its possible incentives, this paper predicts the order of each

players preferences from the highest to the lowest as follows. Apindo prefers a moderate

protection with certain ceiling limitation for foreign equities; over full protection; over no

protection. Apindo gets its most preferred outcome, suppose payoff of 3, if it demands for

ceiling limitation and the government complies. Apindo locks its next best outcome, payoff of

2, if it seeks a full protection and the government agrees. Lastly, Apindo acquires the lowest

outcome, payoff of 0, if it does not pursue any protection or if the government rejects its

demands.

The government favors investment liberalization over all other alternatives; slightly

dislikes foreign investment limitation with a certain maximum amount of shares; and detests

full restriction on foreign investment, but also wants to meet its constituents expectation to

balance the national interest. Accordingly, the government prefers no investment restrictions

if none protection is demanded. It yields the best outcome for government, suppose payoff of

3. In turn, if Apindo demands for protection policy, the government prefers granting a mild

protection with a particular foreign equity limitation (payoff of 2) over rejecting its

constituents voices (payoff of 1), but prefers to repudiate a constituent (payoff of 1) rather


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than grants a full investment protection (payoff of 0). The possible payoff and interaction

model between the Government and Apindo are illustrated in Figure 1.

Figure 1Interaction between Government and Apindo during the Formulation of NIL 201425

Based on these preferences and game settings, the Apindos best strategy is to lobby

government for imposing ceiling limitation on foreign equities. If Apindo is doing so, the

government would likely allow its demand and Apindo will attain its best possible payoff (3).

In contrast, if Apindo asks for full protection or does not lobby at all, it will not receive any

protection and will be left with the lowest payoff of 0. This lobbying game will meet its

equilibrium condition when Apindo asks for ceiling limitation and government yields its

lobbying efforts.

Policy Implications

The aforementioned section has elaborated the circumstance which influences why NIL

2014 is formulated the way it is. Morevover, this section will further explain how the NIL 2014

25

Adapted from Frieden, Jeffrey A. Actor and Preferences in International Relations in Strategic Choice inInternational Relations ed. David A. Lake and Robert Powell. New Jersey: Princeton University Press, 1999, 43.

Government

(G)

Government

(G)

Apindo

(A)

Lobby for

full protection

Lobby forceiling limitation

Do not lobby

for protection

Reject

Reject

Accept

Accept

(2,0)

(0,3)

(0,1)

(0,1)

(3,2)

Government and Apindo:

Strategic Interaction over Investment Policy


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affects the Indonesian economy. The implications of the execution of NIL 2014 can be divided

into two aspects, which are (1) the implications towards the domestic business players and (2)

implications towards the future of investment activities in Indonesia.

First, this paper argues that in some sectors, the regulation of NIL 2014 is too focused

on accommodating the demand of the specific business players in the name of the national

interest without really paying attention to the national capability and demand. It later results to

the imbalance of the national supply and demand.

As mentioned on the previous section, the restriction on retail trade creates incentive

for the domestic business players while disadvantage the foreign investor because of the entry

barrier. In addition, in the case of restriction on the logistic distribution, the World Bank Report

in 2013 states that Indonesias logistic cost reached to 24% of Indonesia GDP, higher than

other countries in the region.26This high cost and long logistic distribution process are mainly

caused by the high demands which are not met by the limited number and the poor capacities

of logistic distribution providers in Indonesia, which actually can be altered by opening the

sectors for the foreign companies to operate.

However, what the government decided through NIL 2014 is paradoxical. Instead of

opening the sectors for the foreign companies, it decides to limit the sectors for the reason of

protecting the national interest. This decision champions the domestic players which run their

business in the logistic distribution since it is a strategic sector which demand will be relatively

stable or even higher. Oppositely, it generates difficulty for the other domestic business players

which business requires logistic distribution to market their commodities, as evident on the

hiking logistic distribution cost to become 26,4% of Indonesias GDPin 2015.27

Secondly, the introduction of the more protective NIL in 2014 triggers the perception

towards the Indonesias investment climate to go south, as shown on the UNCTAD World

Investment Report 2015. While the prior report suggests Indonesia will be number 3 among

the worlds top prospective host economies, Indonesia falls down to rank 14 in the period of

26World Bank Website, High Logistics Costs Impede Higher Economic Growth For Indonesia, Says Joint Report,

September 6th2016, accessed through

http://www.worldbank.org/en/news/press-release/2013/09/06/high-logistics-costs-impede-higher-

economic-growth-for-indonesia27

Reiy Schreiben, Tingginya Biaya Logistik Dan Solusi Untuk Menekan Biaya Logistik Di Indonesia,

IndonesianLogistic Association (Asosiasi Logistik Indonesia) Website, accessed on February 5th 2016 through

http://www.ali.web.id/detail_article.php?id=69
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2015 to 2017.28Although it is later reported that Indonesias FDI inflow grow about 20%,29its

FDI is now more concentrated to specific sectors, which leave the other potential sectors being

uncultivated. This insinuates that the more restrictive measure on NIL 2014 reduces the

opportunity of the new business players entrance to Indonesia from various business

background. Finally, the fact that Indonesia owns quite stable democratic regime, abundant

natural resources, and huge labor advantage will be a waste, as they are no longer attractive for

the FDI. Without further improvement on the existing NIL 2014, it is expected to jeopardize

the Indonesias investment activities future.

Conclusion

Starting with questioning the government of Indonesias more restrictive measure

towards FDI through the implementation of NIL 2014, this paper finally discovers several

findings to explain why the NIL 2014 is contradictory with the initial agenda of the government

to spur the investment activities and growth in Indonesia.

First, this paper finds that there is a compromised interests between the government and

the business players during the formulation of NIL 2014. Related with the argument of Li and

Resnick in the earlier section, the democracy allows the dialogue between the government and

the business players within a country. In the case of Indonesia, the business players under the

Apindo request for the government to set necessary barricade to the sectors which in fact need

more foreign investment to develop, noting the limited availability of domestic capital and the

lack of domestic business players capacity of doing so. Considering that the period of new

election is approaching, the government with its office-seeking motive then accommodates the

Apindo request in exchange of the political support.

Second, the negative response from the society and media upon the first initiative of

the government to open more rooms for FDI, showing that national sentiment plays important

role in shaping the economic policy outcome in Indonesia. This is particularly consistent with

the research of Mayda and Rodrick, as well as Sornarajah, about the positive relation between

nationalistic sentiments and protectionist measure towards FDI.

Third, the case of NIL 2014 in the logistic distribution sector, also suggests that when

government accommodate the interests of small groups of the business players, it will conceive

28 UNCTAD World Investment Report 2015, accessed in February 6 th 2016, through

http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf29

Galih Gumelar, Naik 20%, Investasi Asing di Indonesia Tertinggi di ASEAN, CNN Indonesia, June 25th

2016,accessed through http://www.cnnindonesia.com/ekonomi/20150625010145-92-62208/naik-20-investasi-

asing-di-indonesia-tertinggi-di-asean/
http://unctad.org/en/PublicationsLibrary/wir2015_en.pdfhttp://unctad.org/en/PublicationsLibrary/wir2015_en.pdfhttp://www.cnnindonesia.com/ekonomi/20150625010145-92-62208/naik-20-investasi-asing-di-indonesia-tertinggi-di-asean/http://www.cnnindonesia.com/ekonomi/20150625010145-92-62208/naik-20-investasi-asing-di-indonesia-tertinggi-di-asean/http://www.cnnindonesia.com/ekonomi/20150625010145-92-62208/naik-20-investasi-asing-di-indonesia-tertinggi-di-asean/http://www.cnnindonesia.com/ekonomi/20150625010145-92-62208/naik-20-investasi-asing-di-indonesia-tertinggi-di-asean/http://www.cnnindonesia.com/ekonomi/20150625010145-92-62208/naik-20-investasi-asing-di-indonesia-tertinggi-di-asean/http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf


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an imbalance supply and demand which gains those who are being protected while burdens

the more broader society. Besides, the restrictive measure without proper cost and benefit

consideration will hinder the economic growth and ditch the the sectors which should pose

greater benefits for the whole economy if they are optimally developed.

At the end, this paper concludes that specific interest groups, media pressure, national

perception towards FDI, and political concideration are the important factors which may lead

the government towards the protectionist policy in Indonesia. In which, the implications of the

protectionist policy in the name of national interest somehow does not nationally bring optimal

benefits to the whole society, since it is proven to conversely compensate only specific groups

within society with whom the government compromise its interests.

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