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ABSTRACT

Name: Hilmia Amaliati

Study Program: International Business

5th Management

Title: Indonesian FDI in comparison with Vietnam

The focus of this paper is learned more everything that included in FDI. The purpose of this
essay is to elaborate the development of FDI Indonesia in competition with Vietnam in the
economic condition. This essay structure’s divided into three steps. The first step of this essay
focus on introduction, include the definition of FDI and economic condition. The second step
will explore the facts how Indonesia utilize the function and benefit of FDI and find the
important of FDI. The third step that the comparison of development FDI between Indonesia and
Vietnam will highlight the problem of government policy in FDI of both countries. It does all
will conclude on the discussion that explained above.

DEFINITION OF FDI

Foreign Direct Investment is that investment, which is made to serve the business interests of
the investor in a company, which is in a different nation distinct from the investor's country of
origin. A parent business enterprise and its foreign affiliate are the two sides of the FDI
relationship. Together they comprise an MNC. The parent enterprise through its foreign direct
investment effort seeks to exercise substantial control over the foreign affiliate company.
'Control' as defined by the UN, is ownership of greater than or equal to 10% of ordinary shares or
access to voting rights in an incorporated firm. For an unincorporated firm one needs to consider
an equivalent criterion.

Ownership share amounting to less than that stated above is termed as portfolio investment and
is not categorized as FDI. Based on information that I get, FDI may be classified as:
• Inward, is a typical form of what is termed as “inward investment”, that is investment of
foreign capital occurs in local resources, such as, tax breaks, relaxation of existent
regulations, loans on low rates of interest and specific grants.
• Outward, is also referred to as “direct investment abroad”. In this case it is the local
capital, which is being invested in some foreign resource. Outward FDI may also find use
in the import and export dealings with a foreign country and also FDI flourishes under
government backed insurance at risk coverage.

FDI OF INDONESIA IN COMPARISON WITH VIETNAM1

• The Important of FDI

FDI is important for Indonesia in capital formation, and according to official statistics,
the contribution of the FDI sector in Vietnam economy is significant and getting more
and more important. In 2000, the contribution of the FDI sector to GDP was about 13.2
percent. In terms of the growth rate, the FDI section has always had the highest growth
rate, increasing from 11.4 percent in 2000 to 13.20 percent in 2005, significantly higher
than the 7.7 percent and 5.0 percent in 2000 and 7.3 and 8.1 percent in 2005 for the State
sector and non-state domestic sector respectively.. This has prompted a number of studies
to examine the contribution of FDI to the economy of Vietnam empirically.

• Benefit of FDI
Indonesia
FDI produced a quarter of the output of medium and large-scale manufacturing industries
in Indonesia in the late 1990s. Nevertheless, its contribution to the economy was
moderate as indicated by the following:
• FDI contributed only 3%-6% of the total capital formation in the 1990s.
• FDI generated 35% of gross export revenues and 20% of net manufactured export
revenues (gross exports minus import of production inputs).
• Manufacturing FDI employed less than 1% of the total Indonesian workforce.

1
Pdf “Foreign_Direct_Investment.” Article accesses on 23 October 2010 from
http://Pdf.org//adobe reader//Foreign_Direct-Investment
• FDI did not provide much support to the development of supplier and support
industries.
Vietnam

• Complement domestic capital.

When an economy to grow faster, it needs a lot more capital. If domestic capital is
not enough, this economy would like to have both capitals from abroad, including
FDI.

• Acquire technology and management know-how


• Join the global production network

The investment will have the opportunity to join a global manufacturing network
favorable for promoting export.

• Increase the number of jobs and training workers

Not only regular employees, but local experts have the opportunity to work and
professional training in enterprises with foreign investment.

• Major revenue source

For many developing countries or for more local tax by enterprises with foreign
investment capital to pay the revenue budget is important.

• Impact of FDI

Indonesia

FDI had a moderate impact on the development of supplier and support industries in
Indonesia, since foreign firms bought more than half of their inputs from abroad, while
the opposite was true of domestic establishments.
• Balance of payment

FDI had a negative impact on the balance of payments, and contributed to the
persistent deficit in manufacturing goods due to its larger propensity to import
production inputs from abroad.

• Taxes

Import and export tariffs are a major source of tax revenues in a country with an
underdeveloped administrative structure to collect income taxes such as
Indonesia.

Vietnam
• FDI inflows have helped to modernize management and corporate governance in
Vietnam and to train a new young workforce.
• The FDI inflows in Vietnam have had an important impact on the Vietnamese
economy, especially in providing important financial resources that have
represented a fundamental share of total investment.
• FDI has contributed to the development of the domestic sector indirectly through
increased incomes, expenditures.
• Contribution to total investment as well as promoting domestic investment.
• Contribution to state revenue, GDP and industrial output.
CONCLUSION

There have been many studies exploring the relationship between FDI and economic growth and
the effect of economic performance o FDI inflows. Based on the explanation above we can see
the different on FDI in benefit and impact of both countries to each other. In policy implication
see that the FDI shows an important element to spurring economic growth and GDP growth is
also important to attracting FDI. On domestic economic, FDI had a moderate impact on the
development of supplier and support industries in Indonesia, since foreign firms bought more
than half of their inputs from abroad, while the opposite was true of domestic establishments. On
the other side, FDI had an adverse impact on the balance of payment. The remitted profits and
other investment income earned on accumulated FDI in Indonesia were larger than new FDI
inflows throughout the 1985-1999 periods. In the 1998-99 period in particular, in the absence of
new FDI inflow, the net outflow of foreign exchange due to FDI was particularly large, reaching
$8 billion per year. Furthermore, FDI contributed to the persistent deficit in manufacturing goods
due to its larger propensity to import production inputs from abroad.

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