02 Jun 2021
The government needs to enhance capability of small and medium enterprises through entrepreneurial development and incubation programs in order to fully maximize and grow their businesses, a senior official has said.
Kasan Muhri, head of Trade Analysis and Development Agency at the Trade Ministry, said if local companies can maximize know-how and technological skills by linking with the transnational companies (TNCs), they can build their own capacities based on these incentives and even expand their businesses by using the TNC’s networks.
“The government needs also to strengthen the regulatory working environment to expand employment, upgrade technology and contribute to global value chains,” Kasan added.
Aside from that, the government also needs to develop science, technology and innovation infrastructure to enable companies to build more efficient business practices, he emphasized.
Kasan raised those points during a webinar organized by ASEAN-Japan Center (AJC) on May 27, 2021, in response to AJC’s paper titled “Non-Equity Modes of Trade in ASEAN: Promoting new forms of trade between Japan and ASEAN: Paper 3 Indonesia”.
According to the paper, non-equity modes (NEMs) of trade in Indonesia is foreseen to potentially play a role in expanding opportunities to participate in global value chains and are critical for inclusive economic development especially during the COVID-19 pandemic.
In general, Kasan added, host country governments prefer equity modes (EMs) to NEMs, because EMs give higher level of commitment and bigger impact of the foreign presence to the performance of local economy.
He added non-equity modes are essentially contractual modes, such as leasing, licensing, franchising and management-service contracts.
A smaller degree of ownership means lower commitment on the investment. It shows strategic policy to mitigate business risk in host country. The higher the business risks faced by foreign investor the lower the level of commitment an investor has, he added.
Data shows, Indonesia is the seventh largest economy in the world, and one-third of the country’s economy is contributed by investments.
Contract-based business or NEMs in Indonesia exists in natural rubber industries in the form of contract farming, in footwear industry through outsourcing and subcontracting, in fast-food and convenience stores through franchising, and in international hotel chains through management contracts or licensing agreements.
The enforcement of Law No. 11/2020 on Jobs Creation aims to ease the main obstacles to investing in Indonesia, and benefits also NEMs by attracting investors to Indonesia with the expected ease of doing business in the country.
NEMs present opportunities that are not found in foreign direct investment (FDI). For example, it is an attractive choice for international brand owners and TNCs considering their flexibility to enter the Indonesian market through contractual agreements with local companies.
To meet TNCs’ standards, local companies are expected to be equipped with management and technological skills and capacity. However, as transnational corporations can easily terminate contracts, a long-term deal is not guaranteed particularly when the quality of goods and services does not meet the TNC’s standards.
While FDI may have a better advantage than NEMs in terms of bringing in capital, NEMs expand the operational methods to have local Indonesian firms engaged in international networks of production.