FOREIGN INVESTMENT AND CULTURAL CHANGE
The Case of Indonesia*
By
Rahardi Ramelan
Introduction
History has shown that contacts among human beings and contacts among societies have brought them to cultural change. The contacts started with trade (e.g. silk and spices the Western people searched in the East), war as a means of territorial expansion and of finding new territories. The largest migration took place in the 19th and 20th centuries. It has disseminated certain cultural values all over the world. Chinese migrated to almost the entire world; Indian ethnic migrated from India to Africa and the Commonwealth countries, Europeans to North America, and Spanish to South America.
Nowadays, in our modern world, contacts have been established, not only by trade, but also by tourism, and investment that has become a component of the globalization process. Interactions have been facilitated and speed up by the progress in transportation and telecommunication technology. Consequently, the media has become a crucial factor in the process of cultural change.
The phenomena of change described above also happened in the history of Indonesia. Migration and trade, which also brought new religions into the country, have laid certain layers of cultural values in the society. Indonesia has experienced the glory of Buddhist Sriwijaya kingdom in Sumatra and Hindu-Buddhist Mataram and Sailendra kingdoms in Central Java in the 8th century. A powerful Hindu Kingdom, Majapahit, in the 13th century controlled the entire archipelago. The great Islam Sultanate of Mataram, in 16th century was one of the important sultanates during that period. All three of these kingdoms still have strong cultural influences on modern Indonesia. Roman Catholic religion came for the first time with the Portuguese traders, while Protestant religion came with the Dutch. Finally, the Dutch, who colonized Indonesia for more than three and a half centuries, have left a deep influence in the intellectual life of the Indonesian people.
However, the impact of these contacts varies according to the original culture of each ethnic group. Moreover, the contacts did not have the same intensity all over the archipelago and each ethnic group reacted in different ways. Each ethnic group has its own professional characteristics, e.g. people from West Sumatra are talented traders, those of Tasikmalaya in West Java are known as "money lenders", and the Bugese from South Sulawesi are known as brave sailors. The well-known motto of "Unity in Diversity" fits perfectly the socio-cultural situation in Indonesia.
In our development toward a globalized society, with its prevalent progress in the technology of transportation, communication, and information, interactions among societies have significantly intensified in speed and in volumes. State boundaries seems be inexistant, as if we all belonged to the same region.
The question is whether everybody in this world has the same feeling? The same believe?
Globalization and the Economy
Allow me now to limit my discussion to the globalization in the domain of economy, particularly the role of foreign investment in socio-cultural change in Indonesia.
The involvement of Indonesia in international trade has taken place since a number of centuries. It started in the Hindu time, continued during the Dutch colonial period with import and export. Some data from the colonial time show that in 1937 the export of coffee covered 7 percent of the world export, rubber 38 percent, palm oil 39 percent, and tin 18 percent (Tate 1979).
Similar thing happened in foreign investments. Which started in the beginning of the 20th century. At that time, Southeast Asia was already a region that attracted foreign investment, much more attractive than Africa and Latin America. In 1914, Indonesia, with its natural resources, had already been able to absorb 16 percent (675 million of US$) of the total colonial investments, and in 1937, 52 percent (1,261 million of US$) of the total colonial investments in Southeast Asia.
Economic growth and foreign investment in Indonesia, in the early 20th century, was marked by the expansion of electric power network at the beginning of the 1900s, railway at the end of the 19th century and the beginning of the 20th century on the islands of Java and Sumatra, the establishment of the first car assembly plant by General Motors in 1927, and the opening of the British-American Tobacco cigarettes factory.
The question is, did these (foreign) investments bring about socio-cultural changes at that time?
To answer this question, I tend to agree with Professor Clifford Geertz (University of Chicago) who claimed that social and economic situation in Indonesia must be seen from two different perspectives, i.e. the society of traditional economy and the society of firm-type economy.
Traditional economy has the character of a "bazaar", marked by the specificity of "traditional market's" transactions. The concept of ?traditional market? should be understood in its broad sense, i.e. firstly, where we can find commodities and services, and secondly, where mutual agreements make the economy function, and that all activities are part of the established socio-cultural system. The ?traditional market? is usually dominated by individuals grouped according to their respective professions. There is usually no fear of competition among them. In a broader sense, traditional market economy covers post-harvest processes as well as cottage industry producing household, rice field, and agriculture equipments. It also covers services, such as transportation, repair workshops, tailors and haircuts. This was the type of economy that dominated the Indonesian society at the pre-independence time.
Firm-type economy is a more structured economy marked by the form of enterprise, such as wholesaler, retail and industry, owned mostly by Chinese ethnic group. With the reform movement, which took place from 1912 to 1920, new dynamics came into the economic life, i.e. when the Muslim merchants entered the firm-type economy (Geertz). Some traditional market traders became shop and enterprise owners. In their operation the foreign companies needed the support from local producers and traders, this group then received the spillover of the foreign investments at that time. The management system and the economic behavior of this new group followed the rules of the foreign investors. The employees and workers of these foreign companies interacted with the local traders. These interactions were accompanied by cultural contacts.
Despite those developments, the majority of the population who lived in the traditional market economy was not touched by the presence of those foreign investors. The priyayis (the aristocrats), who interacted closely with the Dutch colonial officers and administrators, and who formed the middle-class group of the country, were also untouched by the changes in the economic life.
Therefore, the next question is, ?where were the glorious culture of Sriwijaya, Majapahit and Mataram ??
I have to describe the past socio-economic life of Indonesia, because we are talking about socio-cultural changes that may have taken place from generation to generation.
After the Independence
What happened after the independence of Indonesia? After centuries of colonial domination, all Indonesia are aware that in the economic domain, the "indigenous" Indonesians (known as pribumi) needed support to balance the dominant of the companies belonging to the Dutch (particularly the trading companies) and those owned by the Chinese. The government support to the pribumis was known as the "Benteng" (stronghold) program implemented in 1950 followed by the so-called "Urgent Plan" in 1951 and 1952.
Various other programs were launched, among others through the cooperatives promotion campaign, but up to present the result has not been satisfactory. Financial as well as technical assistance has been also provided, but with very little result. The basic constraint to those efforts was how to institutionalized the support to these "traditional-market-type economy".
The socio-economic culture established for centuries in the "traditional market" system has not much changed. Conflicts with the new type of economy often happened. With the democratization process in the economic life of today, these conflicts have become more evident, e.g. the conflict between "traditional market" and the newly introduced "supermarkets", between modest traditional household equipment and the modern-manufactured and more efficient equipment, as well as between the traditional peasants and the modern agriculture.
During the last crisis period, the "traditional market economy" has shown its resilience. It is evident that during a crisis Indonesians are able to discover the traces of our strengths (social capital) from the traditional economic system.
We cannot deny that in this globalization era the "traditional market" economy only is not able to compete in the international market. The question that we raise now is how the resilience of the traditional market could be "integrated" into the more structured economy to face the globalize economy. I think experts and scholars in sociology and economy should be able to discover values in the Indonesian society that form the foundation of the traditional economy and transform these values to fit the modern economy.
In the structured economy, the nationalization of the Dutch and British companies in 1957 and 1959 is a phenomenon that we should take note of. Nationalization at that time was not just a change in ownership, but also in the overall management of the companies that was in the hands of the Dutch and the British managers who left the country. There was stagnation in production, because Indonesian employees were not trained to be managers. As these companies were owned by the state, the Board of Directors came from the bureaucracy. Consequently, the result was not only stagnation, but also deterioration of the companies.
Is the above situation a picture of foreign investment or colonial investment?
The impact of the more than three-and-a-half-century colonization and the socio-economic development had built a certain (strong?) opinion among some groups of Indonesian pribumis vis-?-vis the role of foreigners and Chinese in the economy. Therefore, the acceleration of the building of human resources has been always an important political decision since mid-1950s. The sending of students for further studied in Europe and the United States has been a part of the policy since those years. The look-to-the-East policy (Eastern Block during the cold war) and the implementation of a centralized planning in Indonesia had given a stronger role to the state in the economy.
However, in the structured economy governed by the state, innovation by individuals in the economic field could hardly been expected. There had been no reward for the enhancement of productivity. Productivity was always as low as in the colonial time. At the other hand the public suspicion about (colonialist and capitalistic) foreign investments still remained.
Change of attitude took place when Indonesia was saved from a crisis in 1966, thanks to the assistance of the World Bank (WB), the International Monetary Funds (IMF), and the Asian Development Bank (ADB) with, of course, requirements for Indonesia to open its economic system. But with the recent crisis and the experience with the IMF and other multilateral international financial institutions, some groups have expressed their reserved opinion about foreign investments.
Indonesia in Development
After the 1965 crisis, Indonesia?s economy was marked by ?rehabilitation and recovery? policy implemented between 1966 and 1970. Later, between 1971 and 1978 the economy was blessed with rapid growth. At that time, in 1973 and 1978, the world twice faced extraordinary oil price increase. Interestingly, with the fall of oil price at the beginning of 1980, Indonesia made several policy adjustments between 1982 and 1986, and finally, in 1987 the country entered the phase of economic liberalization marked by a high growth, which lasted until 1997 when crisis struck the Asian economy.
Indonesia took the opportunity in the above economic situation to receive foreign capital investments, and in 1967 the Parliament adopted the law on investment generating regulations presenting flexible and competitive conditions. At the same time the Indonesian Government returned the assets of foreign private companies to the owners (BAT, Unilever, etc). Consequently, foreign investments started to enter the country, particularly in the sector of consumer?s goods. With the ?oil boom? in 1973 and 1978, a number of regulations were issued to enhance national capability in industry and technology. The government was involved in investments in the transportation, electricity, and telecommunication sectors, combined with a requirement to produce goods in the country. Upstream industries were developed, e.g. aluminum smelters, oil refineries, cement and steel plants. Concurrently with the green revolution in the agricultural sector, a fertilizer plant was constructed. The government initiated the creation several engineering companies. An import substitution policy was implemented to enhance the capability of domestic industries (supported by so called ?techno-nationalists?). There was in effect difference of view on what policy to choose to support the above development between the so-called ?technologists/engineers? and the so-called ?technocrats/economists?.
When Indonesia had to make an adjustment due to the decrease of oil price and regional pressure such as Asean and Apec, and globalization pressure such as GATT/Uruguay round, the economic-liberalization policy went very fast with an ?outward looking ? approach and foreign investment flow to Indonesia has increased.
Discussing about socio-cultural change induced by foreign investment, we have first to understand how different cultures came and influenced the society in Indonesia.
First, was through the media, especially television and film, and now Internet. I will not attempt to discuss about this issue, as I have not had enough data. But my guest the influence of television is quite enormous. Television networks have reached almost all parts of Indonesia.
Second, was through products, both goods and services, which entered Indonesia through franchising agreement. Hypermarket networks such as Continental and Carefour become the main competitors of traditional market. Supermarket and convenient stores network such as Circle K, Seven Eleven, and AM-PM became the main competitors of traditional grocery stores. The positive impact is in the business culture and management. Local businesses adopted standardization and productivity of such foreign companies. Some Indonesian retail business developed the same concept to compete with foreign business chains; they even recruited foreign managers and consultants to face foreign technology (Indomart, ACI etc). This also happened in the restaurant and hotel business. Franchising with technical assistance or management contract became a custom. It includes Mac Donald, Kentucky Fried Chicken, Chillis and so forth. In hotel business, a list of big hotel chains such as Hilton, Hyatt, Kempinski, and Nikko have established their presence in almost all big cities and tourist resorts. Local companies have also applied franchising in restaurant and hotel business. A multi- and cross- cultural management has to be adopted.
Indonesian managers and employees now understand the importance of business culture. Cross-cultural interactions have occurred not only in offices or factories but also in social life. Having drinks after office hours has become a custom. Spending weekends in tourist resorts or only in local hotels are part of the life style. Golf has become a prestigious sport. Those who do not play golf are considered "archaic".
The inflow of foreign businesses also has changed consumer taste. Some people may now prefer Kentucky Fried Chicken than local fried chicken Suharti. Some foreign business however also adapts their product with local taste. Mac Donald for example introduced fried chicken and rice (very tasty indeed) and Mac Rendang, while Pizza Hut has "sate" pizza. On the other hand, "traditional" businesses have adopted international management system and product presentation according international standards and requirements, thanks to their interactions with the foreign international businesses.
Third, foreign direct investments also bring other implications. In addition to knowledge, brand image and management, they also bring capital, technology and market (for those with export orientation). In the past, most of them had partners with "firm-type businesses" or those who were close to high-level officials. The development of Foreign Direct Investment in Indonesia increased in line with its flow to Asean, Asia and Apec member countries. [See Attachments]
From available data, we can emphasize, that while Indonesia has conducted liberalization, since 1970, Foreign Direct Investment (?FDI?) has only amounted to 1% of the GDP.
The question is what than the impact of FDI to Indonesian socio-culture?
I have discussed FDI's impact on domestic market and businesses. As far as FDI with global market orientation, its impact on domestic consumers and culture is minimal. As to market product orientation, the joint venture companies or the subsidiaries have adopted management system of the parent?s companies. Cross-cultural management for multinational company is not uncommon. But those FDI and multinational companies who still keep their ?national identity? have to improve their willingness to hire other nationalities. Probably, because of their limited knowledge on Indonesian human resource or the fact that Indonesian managers still have limited skills, FDI and multinational companies often, instead hiring Indonesian managers, they hire managers from India, Singapore or even European as well as American who have lived in Indonesia for a longer period.
Transfer of knowledge and skills in management will certainly occur albeit slowly in line with the increasing quality of Indonesian human resources as a result of cross-cultural interactions, as I earlier said. FDI also brought technology. The question is whether there is a transfer of technology to Indonesian companies. FDI is part of globalization; it is mean the technology should be globalizing too. That is what should be understood from the agreement in the Uruguay round under TRIMS (Trade Related Investment Measures). In every company including the subsidiaries, therefore, there should be a competence to achieve dynamic interactions between Research and Development ("R&D"), Marketing and Advanced Manufacturing, including developing backward linkages with the surrounding industries. The fact this is not happening.
In this case, I agree with current thoughts in Germany (Frieder Meyer-Krahmer Eds- Globalisation of R&D and Technology Market) that globalization of technology means globalization of R&D. The real mastering of technology only occurs if we implement R&D or if FDI conducted R&D in its subsidiaries.
Our experience has shown that FDI almost never conducted R&D in its foreign subsidiaries. Backward linkages, if any, only occurred minimum, for example in Japanese companies backward linkages only occur mostly to other Japanese companies. This lead that the FDI is not yet accepted as part of the Indonesian culture.
On the other hand, several late industrialized countries continue to make efforts to develop its industry with support of their own R&D either as state-owned enterprises ("SOE") or private enterprises, and obtain protection as part of strategic industry policy of the government. The success of strategic industry, which receives large capital assistance from the government, was often disputed. Economically, some industries indeed show a gloomy image. Some peoples argued that this was due to poor judgment in policy formulation. However, seen from management perspective, this failure was caused by the absence of management talent support and discipline (Tanri Abeng, Indonesia, Inc). Strategic industries also become an issue amongst developed countries especially the US and EU, because of the government?s insistence to protect such industries. Large civil aircraft, semi conductor and other cases are interesting to be studied.
Can WTO become a fair intermediary in this global economy? My experiences have shown that the WTO was unfair vis-?-vis the late industrialized countries, such as in the case of airplane manufacturing and export dispute between Brazil and Canada, and the Indonesian national car issue. However, in contrary no party has ever brought Boeing-Airbus case to the WTO!
In my opinion, the impact of foreign investment presence in Indonesia on the local culture is determined by contact between peoples and society either in its daily professional activities or in the overall daily life. Foreign managers/executive also came to Indonesia with their family. The presence of foreign companies has caused spillovers or leakages, which created new type of economy in Indonesia. Furthermore, education and training for a number of young Indonesians in foreign countries have created human capital pool, which needs to be further institutionalized.
Another problem that needs to be solved is the difference in salary between foreign manager/employee with Indonesian manager/employee. The difference may not be resented now because in general Indonesian managers/employees still have better salaries compared if they work in a wholly owned Indonesian company. However in future it may create frictions that will be harmful to the development of both FDI and Indonesian local businesses.
Closing
We have learned considerably from the crisis, which has not as yet ended. This may be a blessing in disguise. Besides FDI, foreign investments also came to Indonesia through capital market. The problem with this type of capital investment is its volatility; it may come and go at any time depending on the condition, which is not purely economic.
Indonesia still needs foreign capital either through FDI or through capital market. Compared to investment through capital market, FDI brings more impacts to society because of its interaction. FDI however is not a dominant factor in a cultural change. FDI impacts on behavioral change depend on the intensity of its direct interaction with the society. FDI as a company does not affect the culture of traditional economy but its spillovers and leakages are relatively wide and can become a subject of a separate research.
We need to consider how to integrate the culture of traditional economy with structured economy. We have witnessed, as I indicated before, some of these integration and adjustments phenomena in the business culture. Democratization process currently in Indonesia occurs in the same time with economic crisis. We have to regain our ?social capital? as part of our cultural strength to reduce or to eliminate distrust that is now widely spread. We have to increase the linkages or integration between the two types of economic structure/socio- culture. We need to find similarity in values and norms from each of these two economic structure/culture, so that we can create a strong social capital (Francis Fukuyama) that Indonesia once possesed. The question is how to bring it to the global society for the benefit of Indonesia.
AACHEN, JUNE 9, 2001
FOREIGN INVESTMENT AND CULTURAL CHANGE
The Case of Indonesia
By
Rahardi Ramelan*
Introduction
History has shown that contacts among human beings and contacts among societies have brought them to cultural change. The contacts started with trade (e.g. silk and spices the Western people searched in the East), war as a means of territorial expansion and of finding new territories. The largest migration took place in the 19th and 20th centuries. It has disseminated certain cultural values all over the world. Chinese migrated to almost the entire world; Indian ethnic migrated from India to Africa and the Commonwealth countries, Europeans to North America, and Spanish to South America.
Nowadays, in our modern world, contacts have been established, not only by trade, but also by tourism, and investment that has become a component of the globalization process. Interactions have been facilitated and speed up by the progress in transportation and telecommunication technology. Consequently, the media has become a crucial factor in the process of cultural change.
The phenomena of change described above also happened in the history of Indonesia. Migration and trade, which also brought new religions into the country, have laid certain layers of cultural values in the society. Indonesia has experienced the glory of Buddhist Sriwijaya kingdom in Sumatra and Hindu-Buddhist Mataram and Sailendra kingdoms in Central Java in the 8th century. A powerful Hindu Kingdom, Majapahit, in the 13th century controlled the entire archipelago. The great Islam Sultanate of Mataram, in 16th century was one of the important sultanates during that period. All three of these kingdoms still have strong cultural influences on modern Indonesia. Roman Catholic religion came for the first time with the Portuguese traders, while Protestant religion came with the Dutch. Finally, the Dutch, who colonized Indonesia for more than three and a half centuries, have left a deep influence in the intellectual life of the Indonesian people.
However, the impact of these contacts varies according to the original culture of each ethnic group. Moreover, the contacts did not have the same intensity all over the archipelago and each ethnic group reacted in different ways. Each ethnic group has its own professional characteristics, e.g. people from West Sumatra are talented traders, those of Tasikmalaya in West Java are known as "money lenders", and the Bugese from South Sulawesi are known as brave sailors. The well-known motto of "Unity in Diversity" fits perfectly the socio-cultural situation in Indonesia.
In our development toward a globalized society, with its prevalent progress in the technology of transportation, communication, and information, interactions among societies have significantly intensified in speed and in volumes. State boundaries seems be inexistant, as if we all belonged to the same region.
The question is whether everybody in this world has the same feeling? The same believe?
Globalization and the Economy
Allow me now to limit my discussion to the globalization in the domain of economy, particularly the role of foreign investment in socio-cultural change in Indonesia.
The involvement of Indonesia in international trade has taken place since a number of centuries. It started in the Hindu time, continued during the Dutch colonial period with import and export. Some data from the colonial time show that in 1937 the export of coffee covered 7 percent of the world export, rubber 38 percent, palm oil 39 percent, and tin 18 percent (Tate 1979).
Similar thing happened in foreign investments. Which started in the beginning of the 20th century. At that time, Southeast Asia was already a region that attracted foreign investment, much more attractive than Africa and Latin America. In 1914, Indonesia, with its natural resources, had already been able to absorb 16 percent (675 million of US$) of the total colonial investments, and in 1937, 52 percent (1,261 million of US$) of the total colonial investments in Southeast Asia.
Economic growth and foreign investment in Indonesia, in the early 20th century, was marked by the expansion of electric power network at the beginning of the 1900s, railway at the end of the 19th century and the beginning of the 20th century on the islands of Java and Sumatra, the establishment of the first car assembly plant by General Motors in 1927, and the opening of the British-American Tobacco cigarettes factory.
The question is, did these (foreign) investments bring about socio-cultural changes at that time?
To answer this question, I tend to agree with Professor Clifford Geertz (University of Chicago) who claimed that social and economic situation in Indonesia must be seen from two different perspectives, i.e. the society of traditional economy and the society of firm-type economy.
Traditional economy has the character of a "bazaar", marked by the specificity of "traditional market's" transactions. The concept of ?traditional market? should be understood in its broad sense, i.e. firstly, where we can find commodities and services, and secondly, where mutual agreements make the economy function, and that all activities are part of the established socio-cultural system. The ?traditional market? is usually dominated by individuals grouped according to their respective professions. There is usually no fear of competition among them. In a broader sense, traditional market economy covers post-harvest processes as well as cottage industry producing household, rice field, and agriculture equipments. It also covers services, such as transportation, repair workshops, tailors and haircuts. This was the type of economy that dominated the Indonesian society at the pre-independence time.
Firm-type economy is a more structured economy marked by the form of enterprise, such as wholesaler, retail and industry, owned mostly by Chinese ethnic group. With the reform movement, which took place from 1912 to 1920, new dynamics came into the economic life, i.e. when the Muslim merchants entered the firm-type economy (Geertz). Some traditional market traders became shop and enterprise owners. In their operation the foreign companies needed the support from local producers and traders, this group then received the spillover of the foreign investments at that time. The management system and the economic behavior of this new group followed the rules of the foreign investors. The employees and workers of these foreign companies interacted with the local traders. These interactions were accompanied by cultural contacts.
Despite those developments, the majority of the population who lived in the traditional market economy was not touched by the presence of those foreign investors. The priyayis (the aristocrats), who interacted closely with the Dutch colonial officers and administrators, and who formed the middle-class group of the country, were also untouched by the changes in the economic life.
Therefore, the next question is, ?where were the glorious culture of Sriwijaya, Majapahit and Mataram ??
I have to describe the past socio-economic life of Indonesia, because we are talking about socio-cultural changes that may have taken place from generation to generation.
After the Independence
What happened after the independence of Indonesia? After centuries of colonial domination, all Indonesia are aware that in the economic domain, the "indigenous" Indonesians (known as pribumi) needed support to balance the dominant of the companies belonging to the Dutch (particularly the trading companies) and those owned by the Chinese. The government support to the pribumis was known as the "Benteng" (stronghold) program implemented in 1950 followed by the so-called "Urgent Plan" in 1951 and 1952.
Various other programs were launched, among others through the cooperatives promotion campaign, but up to present the result has not been satisfactory. Financial as well as technical assistance has been also provided, but with very little result. The basic constraint to those efforts was how to institutionalized the support to these "traditional-market-type economy".
The socio-economic culture established for centuries in the "traditional market" system has not much changed. Conflicts with the new type of economy often happened. With the democratization process in the economic life of today, these conflicts have become more evident, e.g. the conflict between "traditional market" and the newly introduced "supermarkets", between modest traditional household equipment and the modern-manufactured and more efficient equipment, as well as between the traditional peasants and the modern agriculture.
During the last crisis period, the "traditional market economy" has shown its resilience. It is evident that during a crisis Indonesians are able to discover the traces of our strengths (social capital) from the traditional economic system.
We cannot deny that in this globalization era the "traditional market" economy only is not able to compete in the international market. The question that we raise now is how the resilience of the traditional market could be "integrated" into the more structured economy to face the globalize economy. I think experts and scholars in sociology and economy should be able to discover values in the Indonesian society that form the foundation of the traditional economy and transform these values to fit the modern economy.
In the structured economy, the nationalization of the Dutch and British companies in 1957 and 1959 is a phenomenon that we should take note of. Nationalization at that time was not just a change in ownership, but also in the overall management of the companies that was in the hands of the Dutch and the British managers who left the country. There was stagnation in production, because Indonesian employees were not trained to be managers. As these companies were owned by the state, the Board of Directors came from the bureaucracy. Consequently, the result was not only stagnation, but also deterioration of the companies.
Is the above situation a picture of foreign investment or colonial investment?
The impact of the more than three-and-a-half-century colonization and the socio-economic development had built a certain (strong?) opinion among some groups of Indonesian pribumis vis-?-vis the role of foreigners and Chinese in the economy. Therefore, the acceleration of the building of human resources has been always an important political decision since mid-1950s. The sending of students for further studied in Europe and the United States has been a part of the policy since those years. The look-to-the-East policy (Eastern Block during the cold war) and the implementation of a centralized planning in Indonesia had given a stronger role to the state in the economy.
However, in the structured economy governed by the state, innovation by individuals in the economic field could hardly been expected. There had been no reward for the enhancement of productivity. Productivity was always as low as in the colonial time. At the other hand the public suspicion about (colonialist and capitalistic) foreign investments still remained.
Change of attitude took place when Indonesia was saved from a crisis in 1966, thanks to the assistance of the World Bank (WB), the International Monetary Funds (IMF), and the Asian Development Bank (ADB) with, of course, requirements for Indonesia to open its economic system. But with the recent crisis and the experience with the IMF and other multilateral international financial institutions, some groups have expressed their reserved opinion about foreign investments.
Indonesia in Development
After the 1965 crisis, Indonesia?s economy was marked by ?rehabilitation and recovery? policy implemented between 1966 and 1970. Later, between 1971 and 1978 the economy was blessed with rapid growth. At that time, in 1973 and 1978, the world twice faced extraordinary oil price increase. Interestingly, with the fall of oil price at the beginning of 1980, Indonesia made several policy adjustments between 1982 and 1986, and finally, in 1987 the country entered the phase of economic liberalization marked by a high growth, which lasted until 1997 when crisis struck the Asian economy.
Indonesia took the opportunity in the above economic situation to receive foreign capital investments, and in 1967 the Parliament adopted the law on investment generating regulations presenting flexible and competitive conditions. At the same time the Indonesian Government returned the assets of foreign private companies to the owners (BAT, Unilever, etc). Consequently, foreign investments started to enter the country, particularly in the sector of consumer?s goods. With the ?oil boom? in 1973 and 1978, a number of regulations were issued to enhance national capability in industry and technology. The government was involved in investments in the transportation, electricity, and telecommunication sectors, combined with a requirement to produce goods in the country. Upstream industries were developed, e.g. aluminum smelters, oil refineries, cement and steel plants. Concurrently with the green revolution in the agricultural sector, a fertilizer plant was constructed. The government initiated the creation several engineering companies. An import substitution policy was implemented to enhance the capability of domestic industries (supported by so called ?techno-nationalists?). There was in effect difference of view on what policy to choose to support the above development between the so-called ?technologists/engineers? and the so-called ?technocrats/economists?.
When Indonesia had to make an adjustment due to the decrease of oil price and regional pressure such as Asean and Apec, and globalization pressure such as GATT/Uruguay round, the economic-liberalization policy went very fast with an ?outward looking ? approach and foreign investment flow to Indonesia has increased.
Discussing about socio-cultural change induced by foreign investment, we have first to understand how different cultures came and influenced the society in Indonesia.
First, was through the media, especially television and film, and now Internet. I will not attempt to discuss about this issue, as I have not had enough data. But my guest the influence of television is quite enormous. Television networks have reached almost all parts of Indonesia.
Second, was through products, both goods and services, which entered Indonesia through franchising agreement. Hypermarket networks such as Continental and Carefour become the main competitors of traditional market. Supermarket and convenient stores network such as Circle K, Seven Eleven, and AM-PM became the main competitors of traditional grocery stores. The positive impact is in the business culture and management. Local businesses adopted standardization and productivity of such foreign companies. Some Indonesian retail business developed the same concept to compete with foreign business chains; they even recruited foreign managers and consultants to face foreign technology (Indomart, ACI etc). This also happened in the restaurant and hotel business. Franchising with technical assistance or management contract became a custom. It includes Mac Donald, Kentucky Fried Chicken, Chillis and so forth. In hotel business, a list of big hotel chains such as Hilton, Hyatt, Kempinski, and Nikko have established their presence in almost all big cities and tourist resorts. Local companies have also applied franchising in restaurant and hotel business. A multi- and cross- cultural management has to be adopted.
Indonesian managers and employees now understand the importance of business culture. Cross-cultural interactions have occurred not only in offices or factories but also in social life. Having drinks after office hours has become a custom. Spending weekends in tourist resorts or only in local hotels are part of the life style. Golf has become a prestigious sport. Those who do not play golf are considered "archaic".
The inflow of foreign businesses also has changed consumer taste. Some people may now prefer Kentucky Fried Chicken than local fried chicken Suharti. Some foreign business however also adapts their product with local taste. Mac Donald for example introduced fried chicken and rice (very tasty indeed) and Mac Rendang, while Pizza Hut has "sate" pizza. On the other hand, "traditional" businesses have adopted international management system and product presentation according international standards and requirements, thanks to their interactions with the foreign international businesses.
Third, foreign direct investments also bring other implications. In addition to knowledge, brand image and management, they also bring capital, technology and market (for those with export orientation). In the past, most of them had partners with "firm-type businesses" or those who were close to high-level officials. The development of Foreign Direct Investment in Indonesia increased in line with its flow to Asean, Asia and Apec member countries. [See Attachments]
From available data, we can emphasize, that while Indonesia has conducted liberalization, since 1970, Foreign Direct Investment (?FDI?) has only amounted to 1% of the GDP.
The question is what than the impact of FDI to Indonesian socio-culture?
I have discussed FDI's impact on domestic market and businesses. As far as FDI with global market orientation, its impact on domestic consumers and culture is minimal. As to market product orientation, the joint venture companies or the subsidiaries have adopted management system of the parent?s companies. Cross-cultural management for multinational company is not uncommon. But those FDI and multinational companies who still keep their ?national identity? have to improve their willingness to hire other nationalities. Probably, because of their limited knowledge on Indonesian human resource or the fact that Indonesian managers still have limited skills, FDI and multinational companies often, instead hiring Indonesian managers, they hire managers from India, Singapore or even European as well as American who have lived in Indonesia for a longer period.
Transfer of knowledge and skills in management will certainly occur albeit slowly in line with the increasing quality of Indonesian human resources as a result of cross-cultural interactions, as I earlier said. FDI also brought technology. The question is whether there is a transfer of technology to Indonesian companies. FDI is part of globalization; it is mean the technology should be globalizing too. That is what should be understood from the agreement in the Uruguay round under TRIMS (Trade Related Investment Measures). In every company including the subsidiaries, therefore, there should be a competence to achieve dynamic interactions between Research and Development ("R&D"), Marketing and Advanced Manufacturing, including developing backward linkages with the surrounding industries. The fact this is not happening.
In this case, I agree with current thoughts in Germany (Frieder Meyer-Krahmer Eds- Globalisation of R&D and Technology Market) that globalization of technology means globalization of R&D. The real mastering of technology only occurs if we implement R&D or if FDI conducted R&D in its subsidiaries.
Our experience has shown that FDI almost never conducted R&D in its foreign subsidiaries. Backward linkages, if any, only occurred minimum, for example in Japanese companies backward linkages only occur mostly to other Japanese companies. This lead that the FDI is not yet accepted as part of the Indonesian culture.
On the other hand, several late industrialized countries continue to make efforts to develop its industry with support of their own R&D either as state-owned enterprises ("SOE") or private enterprises, and obtain protection as part of strategic industry policy of the government. The success of strategic industry, which receives large capital assistance from the government, was often disputed. Economically, some industries indeed show a gloomy image. Some peoples argued that this was due to poor judgment in policy formulation. However, seen from management perspective, this failure was caused by the absence of management talent support and discipline (Tanri Abeng, Indonesia, Inc). Strategic industries also become an issue amongst developed countries especially the US and EU, because of the government?s insistence to protect such industries. Large civil aircraft, semi conductor and other cases are interesting to be studied.
Can WTO become a fair intermediary in this global economy? My experiences have shown that the WTO was unfair vis-?-vis the late industrialized countries, such as in the case of airplane manufacturing and export dispute between Brazil and Canada, and the Indonesian national car issue. However, in contrary no party has ever brought Boeing-Airbus case to the WTO!
In my opinion, the impact of foreign investment presence in Indonesia on the local culture is determined by contact between peoples and society either in its daily professional activities or in the overall daily life. Foreign managers/executive also came to Indonesia with their family. The presence of foreign companies has caused spillovers or leakages, which created new type of economy in Indonesia. Furthermore, education and training for a number of young Indonesians in foreign countries have created human capital pool, which needs to be further institutionalized.
Another problem that needs to be solved is the difference in salary between foreign manager/employee with Indonesian manager/employee. The difference may not be resented now because in general Indonesian managers/employees still have better salaries compared if they work in a wholly owned Indonesian company. However in future it may create frictions that will be harmful to the development of both FDI and Indonesian local businesses.
Closing
We have learned considerably from the crisis, which has not as yet ended. This may be a blessing in disguise. Besides FDI, foreign investments also came to Indonesia through capital market. The problem with this type of capital investment is its volatility; it may come and go at any time depending on the condition, which is not purely economic.
Indonesia still needs foreign capital either through FDI or through capital market. Compared to investment through capital market, FDI brings more impacts to society because of its interaction. FDI however is not a dominant factor in a cultural change. FDI impacts on behavioral change depend on the intensity of its direct interaction with the society. FDI as a company does not affect the culture of traditional economy but its spillovers and leakages are relatively wide and can become a subject of a separate research.
We need to consider how to integrate the culture of traditional economy with structured economy. We have witnessed, as I indicated before, some of these integration and adjustments phenomena in the business culture. Democratization process currently in Indonesia occurs in the same time with economic crisis. We have to regain our ?social capital? as part of our cultural strength to reduce or to eliminate distrust that is now widely spread. We have to increase the linkages or integration between the two types of economic structure/socio- culture. We need to find similarity in values and norms from each of these two economic structure/culture, so that we can create a strong social capital (Francis Fukuyama) that Indonesia once possesed. The question is how to bring it to the global society for the benefit of Indonesia.
AACHEN, JUNE 9, 2001
FOREIGN INVESTMENT AND CULTURAL CHANGE
The Case of Indonesia
By
Rahardi Ramelan*
Introduction
History has shown that contacts among human beings and contacts among societies have brought them to cultural change. The contacts started with trade (e.g. silk and spices the Western people searched in the East), war as a means of territorial expansion and of finding new territories. The largest migration took place in the 19th and 20th centuries. It has disseminated certain cultural values all over the world. Chinese migrated to almost the entire world; Indian ethnic migrated from India to Africa and the Commonwealth countries, Europeans to North America, and Spanish to South America.
Nowadays, in our modern world, contacts have been established, not only by trade, but also by tourism, and investment that has become a component of the globalization process. Interactions have been facilitated and speed up by the progress in transportation and telecommunication technology. Consequently, the media has become a crucial factor in the process of cultural change.
The phenomena of change described above also happened in the history of Indonesia. Migration and trade, which also brought new religions into the country, have laid certain layers of cultural values in the society. Indonesia has experienced the glory of Buddhist Sriwijaya kingdom in Sumatra and Hindu-Buddhist Mataram and Sailendra kingdoms in Central Java in the 8th century. A powerful Hindu Kingdom, Majapahit, in the 13th century controlled the entire archipelago. The great Islam Sultanate of Mataram, in 16th century was one of the important sultanates during that period. All three of these kingdoms still have strong cultural influences on modern Indonesia. Roman Catholic religion came for the first time with the Portuguese traders, while Protestant religion came with the Dutch. Finally, the Dutch, who colonized Indonesia for more than three and a half centuries, have left a deep influence in the intellectual life of the Indonesian people.
However, the impact of these contacts varies according to the original culture of each ethnic group. Moreover, the contacts did not have the same intensity all over the archipelago and each ethnic group reacted in different ways. Each ethnic group has its own professional characteristics, e.g. people from West Sumatra are talented traders, those of Tasikmalaya in West Java are known as "money lenders", and the Bugese from South Sulawesi are known as brave sailors. The well-known motto of "Unity in Diversity" fits perfectly the socio-cultural situation in Indonesia.
In our development toward a globalized society, with its prevalent progress in the technology of transportation, communication, and information, interactions among societies have significantly intensified in speed and in volumes. State boundaries seems be inexistant, as if we all belonged to the same region.
The question is whether everybody in this world has the same feeling? The same believe?
Globalization and the Economy
Allow me now to limit my discussion to the globalization in the domain of economy, particularly the role of foreign investment in socio-cultural change in Indonesia.
The involvement of Indonesia in international trade has taken place since a number of centuries. It started in the Hindu time, continued during the Dutch colonial period with import and export. Some data from the colonial time show that in 1937 the export of coffee covered 7 percent of the world export, rubber 38 percent, palm oil 39 percent, and tin 18 percent (Tate 1979).
Similar thing happened in foreign investments. Which started in the beginning of the 20th century. At that time, Southeast Asia was already a region that attracted foreign investment, much more attractive than Africa and Latin America. In 1914, Indonesia, with its natural resources, had already been able to absorb 16 percent (675 million of US$) of the total colonial investments, and in 1937, 52 percent (1,261 million of US$) of the total colonial investments in Southeast Asia.
Economic growth and foreign investment in Indonesia, in the early 20th century, was marked by the expansion of electric power network at the beginning of the 1900s, railway at the end of the 19th century and the beginning of the 20th century on the islands of Java and Sumatra, the establishment of the first car assembly plant by General Motors in 1927, and the opening of the British-American Tobacco cigarettes factory.
The question is, did these (foreign) investments bring about socio-cultural changes at that time?
To answer this question, I tend to agree with Professor Clifford Geertz (University of Chicago) who claimed that social and economic situation in Indonesia must be seen from two different perspectives, i.e. the society of traditional economy and the society of firm-type economy.
Traditional economy has the character of a "bazaar", marked by the specificity of "traditional market's" transactions. The concept of ?traditional market? should be understood in its broad sense, i.e. firstly, where we can find commodities and services, and secondly, where mutual agreements make the economy function, and that all activities are part of the established socio-cultural system. The ?traditional market? is usually dominated by individuals grouped according to their respective professions. There is usually no fear of competition among them. In a broader sense, traditional market economy covers post-harvest processes as well as cottage industry producing household, rice field, and agriculture equipments. It also covers services, such as transportation, repair workshops, tailors and haircuts. This was the type of economy that dominated the Indonesian society at the pre-independence time.
Firm-type economy is a more structured economy marked by the form of enterprise, such as wholesaler, retail and industry, owned mostly by Chinese ethnic group. With the reform movement, which took place from 1912 to 1920, new dynamics came into the economic life, i.e. when the Muslim merchants entered the firm-type economy (Geertz). Some traditional market traders became shop and enterprise owners. In their operation the foreign companies needed the support from local producers and traders, this group then received the spillover of the foreign investments at that time. The management system and the economic behavior of this new group followed the rules of the foreign investors. The employees and workers of these foreign companies interacted with the local traders. These interactions were accompanied by cultural contacts.
Despite those developments, the majority of the population who lived in the traditional market economy was not touched by the presence of those foreign investors. The priyayis (the aristocrats), who interacted closely with the Dutch colonial officers and administrators, and who formed the middle-class group of the country, were also untouched by the changes in the economic life.
Therefore, the next question is, ?where were the glorious culture of Sriwijaya, Majapahit and Mataram ??
I have to describe the past socio-economic life of Indonesia, because we are talking about socio-cultural changes that may have taken place from generation to generation.
After the Independence
What happened after the independence of Indonesia? After centuries of colonial domination, all Indonesia are aware that in the economic domain, the "indigenous" Indonesians (known as pribumi) needed support to balance the dominant of the companies belonging to the Dutch (particularly the trading companies) and those owned by the Chinese. The government support to the pribumis was known as the "Benteng" (stronghold) program implemented in 1950 followed by the so-called "Urgent Plan" in 1951 and 1952.
Various other programs were launched, among others through the cooperatives promotion campaign, but up to present the result has not been satisfactory. Financial as well as technical assistance has been also provided, but with very little result. The basic constraint to those efforts was how to institutionalized the support to these "traditional-market-type economy".
The socio-economic culture established for centuries in the "traditional market" system has not much changed. Conflicts with the new type of economy often happened. With the democratization process in the economic life of today, these conflicts have become more evident, e.g. the conflict between "traditional market" and the newly introduced "supermarkets", between modest traditional household equipment and the modern-manufactured and more efficient equipment, as well as between the traditional peasants and the modern agriculture.
During the last crisis period, the "traditional market economy" has shown its resilience. It is evident that during a crisis Indonesians are able to discover the traces of our strengths (social capital) from the traditional economic system.
We cannot deny that in this globalization era the "traditional market" economy only is not able to compete in the international market. The question that we raise now is how the resilience of the traditional market could be "integrated" into the more structured economy to face the globalize economy. I think experts and scholars in sociology and economy should be able to discover values in the Indonesian society that form the foundation of the traditional economy and transform these values to fit the modern economy.
In the structured economy, the nationalization of the Dutch and British companies in 1957 and 1959 is a phenomenon that we should take note of. Nationalization at that time was not just a change in ownership, but also in the overall management of the companies that was in the hands of the Dutch and the British managers who left the country. There was stagnation in production, because Indonesian employees were not trained to be managers. As these companies were owned by the state, the Board of Directors came from the bureaucracy. Consequently, the result was not only stagnation, but also deterioration of the companies.
Is the above situation a picture of foreign investment or colonial investment?
The impact of the more than three-and-a-half-century colonization and the socio-economic development had built a certain (strong?) opinion among some groups of Indonesian pribumis vis-?-vis the role of foreigners and Chinese in the economy. Therefore, the acceleration of the building of human resources has been always an important political decision since mid-1950s. The sending of students for further studied in Europe and the United States has been a part of the policy since those years. The look-to-the-East policy (Eastern Block during the cold war) and the implementation of a centralized planning in Indonesia had given a stronger role to the state in the economy.
However, in the structured economy governed by the state, innovation by individuals in the economic field could hardly been expected. There had been no reward for the enhancement of productivity. Productivity was always as low as in the colonial time. At the other hand the public suspicion about (colonialist and capitalistic) foreign investments still remained.
Change of attitude took place when Indonesia was saved from a crisis in 1966, thanks to the assistance of the World Bank (WB), the International Monetary Funds (IMF), and the Asian Development Bank (ADB) with, of course, requirements for Indonesia to open its economic system. But with the recent crisis and the experience with the IMF and other multilateral international financial institutions, some groups have expressed their reserved opinion about foreign investments.
Indonesia in Development
After the 1965 crisis, Indonesia?s economy was marked by ?rehabilitation and recovery? policy implemented between 1966 and 1970. Later, between 1971 and 1978 the economy was blessed with rapid growth. At that time, in 1973 and 1978, the world twice faced extraordinary oil price increase. Interestingly, with the fall of oil price at the beginning of 1980, Indonesia made several policy adjustments between 1982 and 1986, and finally, in 1987 the country entered the phase of economic liberalization marked by a high growth, which lasted until 1997 when crisis struck the Asian economy.
Indonesia took the opportunity in the above economic situation to receive foreign capital investments, and in 1967 the Parliament adopted the law on investment generating regulations presenting flexible and competitive conditions. At the same time the Indonesian Government returned the assets of foreign private companies to the owners (BAT, Unilever, etc). Consequently, foreign investments started to enter the country, particularly in the sector of consumer?s goods. With the ?oil boom? in 1973 and 1978, a number of regulations were issued to enhance national capability in industry and technology. The government was involved in investments in the transportation, electricity, and telecommunication sectors, combined with a requirement to produce goods in the country. Upstream industries were developed, e.g. aluminum smelters, oil refineries, cement and steel plants. Concurrently with the green revolution in the agricultural sector, a fertilizer plant was constructed. The government initiated the creation several engineering companies. An import substitution policy was implemented to enhance the capability of domestic industries (supported by so called ?techno-nationalists?). There was in effect difference of view on what policy to choose to support the above development between the so-called ?technologists/engineers? and the so-called ?technocrats/economists?.
When Indonesia had to make an adjustment due to the decrease of oil price and regional pressure such as Asean and Apec, and globalization pressure such as GATT/Uruguay round, the economic-liberalization policy went very fast with an ?outward looking ? approach and foreign investment flow to Indonesia has increased.
Discussing about socio-cultural change induced by foreign investment, we have first to understand how different cultures came and influenced the society in Indonesia.
First, was through the media, especially television and film, and now Internet. I will not attempt to discuss about this issue, as I have not had enough data. But my guest the influence of television is quite enormous. Television networks have reached almost all parts of Indonesia.
Second, was through products, both goods and services, which entered Indonesia through franchising agreement. Hypermarket networks such as Continental and Carefour become the main competitors of traditional market. Supermarket and convenient stores network such as Circle K, Seven Eleven, and AM-PM became the main competitors of traditional grocery stores. The positive impact is in the business culture and management. Local businesses adopted standardization and productivity of such foreign companies. Some Indonesian retail business developed the same concept to compete with foreign business chains; they even recruited foreign managers and consultants to face foreign technology (Indomart, ACI etc). This also happened in the restaurant and hotel business. Franchising with technical assistance or management contract became a custom. It includes Mac Donald, Kentucky Fried Chicken, Chillis and so forth. In hotel business, a list of big hotel chains such as Hilton, Hyatt, Kempinski, and Nikko have established their presence in almost all big cities and tourist resorts. Local companies have also applied franchising in restaurant and hotel business. A multi- and cross- cultural management has to be adopted.
Indonesian managers and employees now understand the importance of business culture. Cross-cultural interactions have occurred not only in offices or factories but also in social life. Having drinks after office hours has become a custom. Spending weeken