Indonesia Case

1. Political Factors

Under 30 years dictatorship of President Suharto, Indonesian economy became poorer and internal dissent was repressed. He used "crony capitalism" to give advantages to his supporters and family. In 1997, much of the $43 billion rescue money fund given by International Monetary Fund took into Suharto and his cronies' personal gain.

Another problem is the standard salaries of government bureaucrats were very low, it made the endemically corruption more serious. Also, Indonesia's penchant for bureaucratic red tape brought about a long line of officials involved in bribes, police threw the foreign investors into jail with unreasonable pretexts.

Economic Factors

Starting with Suharto's rule, Indonesia lags behind to its Southeast Asian neighbors. Unemployment rate was high that at about 10 percent of the working population; inflation was continually increasing that hitting 14 percent in 2005 and no growth in labor productivity for years. According to above economic problems, foreign capitals were leaving Indonesia and moved their investment to other countries, the stock of foreign direct investment decreased from $24.8 billion in 2001 to $11.4 billion in 2004.

Another problem is about the poor infrastructure, public infrastructure investment has been decreasing from $16 billion in 1996 to $3 billion on 2003. As a result, it brings a serious slump in private investment which the investment in oil industry fell from $3.8 billion in 1996 to just only $187 million in 2002.

Both are related

Both political and economic factors were caused by Suharto. Under dictatorship of Suharto, corruption become more serious, insufficient legal system become a risk for do business in Indonesia and cannot protect the benefit of foreign firms, they start exiting Indonesia. Therefore, because of the bad government policy, the economic problems come out.

2. Reasons of foreign firms exiting Indonesia

I think the foreign firms have been exiting Indonesia in recent years caused by excessive red tape on business activities in Indonesia that it takes 151 days to complete the paperwork on open a business. Compare to its neighbors, it is ineffective and inefficiency, and so difficult to enter the Indonesian market.

High level of corruption becomes a cost of doing business in Indonesia. Foreign firms need to spend extra expense on bribes to cross government bureaucrats' path for being successful on doing their business. Some police throw the executives of foreign enterprises into jail by unreasonable pretexts; "bribes" can secure their release.

Also, bad economic environment include high unemployment rate and continuity inflation, make the foreign firms lose interest on do business in Indonesia.

Implications and Solution

As a result, the stock of foreign investment in Indonesia fell from $24.8 billion in 2004 to $11.4 billion in 2004 caused by foreign capital left Indonesia. The economy of Indonesia is not being stimulated and less foreign firms willing to invest in this country.

In order to reverse this trend, Indonesia should provide incentives to attract the foreign enterprises, reduce the limitation on do business in Indonesia such