The Multinational Corporations Impact on Indonesia - Case Study Example

The Multinational Corporations Impact on Indonesia (a). Trends of the nature and extend of inward FDI in Indonesia. One way to understand about the operation of multinational corporations (MNCs) and the impact of their operations in developing or low cost countries is by first discussing about funding mechanisms provided by donor countries to the developing or low cost countries. Private savings in foreign countries consist of four elements; they are foreign direct investment, portfolio investment, commercial lending, and foreign aid. Foreign direct investment, said Gillis, Perkins, Roemer & Snodgrass (1996, 393), is made by nonresidents, typically but not always by multinational corporations, in enterprises located in host countries.” It is called direct because funding provided by donor governments is invested partially or full in these countries under direct control of these enterprises. “Portfolio investment is the purchase of host country bonds or stocks by foreigners without managerial control” (Ibid). Historically, portfolio investment was a common practice in the nineteenth and early twentieth centuries and was abandoned after World War II. This mechanism was relived in mid 1970s as rich country investors were becoming interested in stock markets, especially in Asia and Latin America. This practice has been growing since and is gaining popularity in both poor and rich countries. Commercial bank lending is another mechanism used by industrial country governments and private enterprises to as a supplement means to the portfolio investment in these countries. Commercial bank lending was an important mechanism applied during 1980s. By 1990s, they even played “a more important role … accounted for 70 percent of private resource flows, but then dried up as the debt crisis eroded international banks’ confidence and profits” (Ibid, 394). Wealthy country governments guarantee commercial bank to give “export credits to importing countries as a way of promoting sales by permitting delayed payment for imports, often at commercial interest rates (Ibid). The last element is foreign aid. It was created post World War II rooted in the Marshall Plan (Gillis, Perkins, Roemer, & Snodgrass, 1998). The objectives of the early foreign aid programs were to aid newly established countries which had development plans to receive aid in the form of technical assistance programs, in which the rich countries “supplied foreign experts in fields from economic planning to engineering to construction” (Ibid). The motive behind America foreign aid program or the Marshall Plan was to constraint communism bloc countries which was led by Russia from gaining access to economic resources needed by American industries in developing or third world countries. The strengths of the foreign aid program was driven by the spirit of nationalism and altruistic motives, which drew greater political support from international political audience. This program is widely supported by the United States, the United Kingdom, France, who make greater contribution to the aid fund, and the Dutch contribute to support their former colonies, which is Indonesia. The fund is programmed through two mechanisms, which are bilateral and multilateral funding and channeled as direct investment from government to government. As more countries join in the program, multilateral scheme becomes more important especially through the World Bank. Over time, aid and development program policy has changed. From aid through technical assistance, aid is divided into four elements but all are intended to promote development. First, the capital fund must be used for project development. Second technical assistants are valuable to influence development. They represent 30% of the total fund any country could ever had. They train and influence “local professionals and new development institutions” (Ibid, 401). Third is conditional aid through bilateral scheme. Conditional aid indicates that recipients to use donor assistance according to the policy of the donors. However, some conditions tied to assistance do not promote development (Ibid). From government to government, conditional aid fund is channeled to the third party such as political friends and military allies. Aid fund is directed to not the recipient countries’ needs, in this case Indonesia), but mostly to the market actors who would pursue the donors’ political agenda in Indonesia. This aid is called conditional because it comes with the policy of economic reforms such as “currency devaluation, market liberalization, market liberalization, changes in tax systems, adoption of new wage and income policies, adjustments in food and other agricultural prices” (Ibid) etc. Too often, in its application, the fund delivered by multilateral enterprises is not to promote the interest of the host country rather the interest of the multinational corporation itself. The fourth mechanism used for channeling foreign aid is to influence development by diffusing. It is the most powerful tool, said Gillis et al (1998). It is channeled through cultural exchange or education program. However, the international aid, either directly or indirectly, is provided with the condition to “supports a large group of expert staff, university scholars, professionals, consultants, aid administrators, and others, from both the industrial and developing countries,” (p402) to popularize and influence policy makers in developing countries. By 1980s through 1990s, Indonesia’s seek for foreign aid continuously increasing, the conditionality foreign aid, and commercial lending mechanisms became more important than a direct investment where funding was channeled from government to government through technical assistance. The system of channeling foreign aid is also changed. Multinational enterprises and transnational corporations becomes the alternative means to channel foreign aid. Their activities in Indonesia grow significantly. Indonesia has gone through significant change in their economic portfolios. It goes for bonanza development and rapid expansion, as FDI becomes a fashion to promote private innovation and economic growth in the country. In general, the multinational enterprises are big corporations. However, the privatization of foreign policy has created new trends in the emergence of small size multinational enterprises in the form of both for profit and nonprofit organizations. (b) Costs and benefits of FDI for Indonesia Do they really give benefits to this country? On one hand, they bring great benefits to the countries through job creation. They can transfer technology, skills, and know how (Gillis et al, 1998; Hood, 1979; Dunning, 1993). However, their existence within the country is based simply on market competition and cost saving operations. As they take domestic withstand, they import capital-intensive production techniques for export production. Then they compete with local producers who produce at lower cost, which forces them to eventually produce and supply goods at cheaper costs (Ibid; Sousa). Competition forces low cost operation and these enterprises have no choice to employ more labor intensive. Over time, this practice benefits multinational enterprises in terms of finance and Indonesia would benefit from the transfer of knowledge, technology, and skills. Nevertheless, as multinationals are competing with domestic producers, the objectives for knowledge, technology, and skills transfer are diminishing. Even though adaptation and cost-saving innovations become the theme of the multinational movement in this country so that they will become less dependent in foreign aid, the politics of privatization and marketization bring about different scenario. Policies on paper are good but multinational enterprises are slowly deviate from foreign aid mission. They claim that Indonesians are low in capacity. They do not have sufficient technical and educated people. Media broadcasted the shortage of technically sounded and begin to rectify this shortage. At the same time, they put pressure on host government to concentrate on the local people to improve knowledge and that their investment in the country a sunk cost. Through political pressure, they argue that Indonesia governments could keep their existence in the countries by guaranteeing them with greater return. Unfortunately, the emphasis is on knowledge improvement is concentrated on Islamic education. Multinational corporations’ investment is intended to transfer management capabilities with proper access to technology. With proper access to technology and better management, it is guaranteed that Indonesia government would be better off. Through multinational enterprises, local producers are given access to the world markets. In return, they should be given preferential treatment such as long-term contract for standardized products, guaranteed marketing advantages, and free taxes. By the time Indonesia has reached the level of dependency, multinational enterprises are deviating from foreign aid mission and objectives. They begin to dictate the country’s policy and implementation. Bribery of the government officials is their common practice. Foreign aid in the form of grants are eliminated and replaced by conditional aid, commercial lending, or conditional grants become more popular and are administered through multilateral scheme’. The impact of multinational enterprises activities begins to show the sign of disaster. Not only in political and economic issues but also in the most important case, which are human right abuse and social conflict. They take away the peace on these lands and replace it with abusiveness and conflicts among local population and competing government officials. Islamic education bred religious conflict. In regions where mining is the main activities of multinational enterprises, cases of human rights abuse escalated. For example, the cases of human rights abuse and religious riots in South Sulawesi, East Timor, and West Papua. © Policy implication From accounting point of view and focusing solely on cost, outsourcing may benefit a company that wants to cut cost and increase profit. No wonder firms of all sizes from western countries are flocking the low cost countries seeking to save cost and reaping the benefit of the strength of their dollar in these countries and the absence of any regulations in health care, justice and human rights, and most importantly, the environment. Soft loan is the most attractive scheme to most developing countries because the interest rate is very low. It is usually started with 1% but it is fluctuated according to the market rate. Unfortunately, as people become more focus, they fail to see beyond the sphere of each policy presented to them. Host government may only see such a low interest rate and envision the future benefit they would receive. However, with the loans are managed and controlled directly by the multinational corporations, they prioritize their interests at the cost of local society. Consequently, they go on with their borrowing binge in 1990s to pursue a bonanza development. At the same time, they claim that they are in shortage of technical staff and that would require them to bring in technical staff from overseas. Companies begin to bring in their technical staff in their home countries to replace the locals but keep the labors and pay them very cheap return. Outsourcing jobs become a trend among multinational corporations. Their success is glorified and glamorized by the media. It becomes like a contagious disease and contracts every industry. At the same time, claiming on the shortage of technical staff, multinationals began to outsource their employees from their home countries to the developing countries. Efficiency, the term used to downgrade government provisions and services also has become one of the fashion words among companies to conduct business with and focusing on least resources. Unfortunately, in most outsourcing scenario, it only last for a short season. Companies may evolve themselves into transnational or multinational corporations but in the long run, the cost of outsourcing is more than what has been glorified. “Multinationals are Mushrooms” is the title of Raymond Vernon as he discussed about multinationals companies in foreign countries – from their patterns of operation to lines of policy, the antitrust issue, the pressures for political ends and economic ends, to tax issue, and to their unfinished business (King, 1990). History reveals that companies that outsource overseas often go bankrupt within five years of their operation. Even though they are transnational or multinational, despite of their failure in operating overseas, they continuously operating even under solvency abroad because their finance is guaranteed by their government at the expense of the home countries. Public private companies become their mechanism to stay afloat in the market of the developing countries. Three years after the deregulation of banking industry, Indonesia went bankrupt. Since 1975, the country has accumulated $45 billion US in debt resulted mostly in foreign direct investment. The bail out package provided by the World Bank and the IMF did not help the country much because 75% of the fund received was used to salvage the foreign banks and corporations that went under during the crisis in the country. One percent of the remaining amount was used for safety nets and infrastructure redevelopment due to the religious war, certain percentage was used to bribe government officials to further the interest of the market groups, and the remaining disappear in the process. “In terms of the manufacturing jobs,” said Vernon, “multinational enterprises have become a major factor … employed 3.9 million persons outside the United States.” Unfortunately, in many cases, the benefit provided by these enterprises are paid by the lives of the locals and their ignorant government. The patterns of operation of the multinational enterprises are “contracting, or shifting their productive facilities around the globe… looking for environment with favorable cost structure… look for the most attractive package of subsidies and tax exemptions being offered by competing governments” (Vernon in King, 1990, 224 - 225). Using their political ability, they ensure that host government would prioritize their interest, often approved through bribery, and influence them for performance requirements if they require international funding either loans or grants. According to Vernon, this performance requirement represents a “virulent form of beggar-thy-neighbor tactics among competing governments” (Ibid, 226). Many government officials of the foreign countries tend to fall into this trap because of either their ignorance toward foreign policies of the advanced countries or the bribes. Many have failed to realize that for each loans taken intended for projects delivered, managed, and controlled by multinational corporations, certain percent of the fund has been used to bribe government officials so that they will create policy to favor their activities in the countries. Though developing countries governments are depending on this fund, over time, their dreams shattered. Finance minister of Zambia claimed, in twenty years, they have impoverish the people of Zambia. They take more than what they give. Similarly, in twenty years, they have impoverished Indonesia and caused the people to be starving. Deepak Lal declared, the policy to improve the economic welfare of the society has been ill-advised. Gordon Brown, declared, “We must step up our efforts to work together to advance social justice on a global scale, to the benefit of all. And we must do this with more international co-operation not less. Founded on the belief that not only do we have obligations to each other beyond our front doors and garden gates, responsibilities beyond the city wall and duties beyond our national borders but that, working together – governments, business, NGOs, faith groups - this generation, with its energy, technology and global reach, does indeed have it in its power - if it so chooses - to finally free the world from poverty, disease, illiteracy and want.” Nevertheless, hhistory reveals that in countries where multinational corporations set their kingdom, which is backed by their government, they “apply economic pressure … for political ends, with results that have sometimes been politically disastrous… other aims in applying economic sanctions, including efforts to enforce its concept of human rights,” (Ibid, 229), which often ends up in social conflicts such as experienced by the people in Southern Rhodesian, South African, Nigeria, Zambia, the Philippines, or Indonesia. The irony they bring to the host country is another competing values and paradox. On one side, they nurture and promote democracy and market liberalism; but on the other side, they instill fear and conflict to promote human rights action in order to obtain control as described by Alexis Tocqueville in his Democracy in America. Their presence in foreign countries always “evoke bitter political reaction,” said Vernon (King, 1990, 230). In many instances, their presence in foreign countries is through direct investment or the most phenomenons way is through mergers and acquisition, and through recent government privatization policy of foreign policy through bilateral and multilateral arrangements. The irony of having foreign ownership is that when the companies go bankrupt, it is not the company’s headquarters or their home government who is responsible for their losses but the host countries to pick up their loss. For example, Indonesia went bankrupt due to its dependent on foreign aid accumulated through foreign direct investment. The irony of foreign direct investment is that not only thousands workers tend to be left without employment but also that multinational corporations exploit local labors. Over time, they come with their own employees with the capacity but keep the labor to the local. The transfer of knowledge and skills according to donors’ foreign policy is absence. Indonesia is repeating its own history. After its bankruptcy government takes over foreign enterprises but all end up in bankruptcy as well. Though many people today are working by emphasizing their preferences on “common sense,” one must understand that theory informs good practice (Tompkins, 2005). Foreign policy under the term of transferring the capacity from those who know how to employees never produce result. Consequently, when the companies are leaving the countries due to political and economic disadvantages, none of these countries is able to survive because both the governments and the employees are becoming intellectually dependent. Then we are being asked, what benefits do multinational corporations give to the low cost countries? It is a mixed answer. Some people consider that without multinational corporations their countries would not be as they are today. The reality is they represent wolves in sheep clothing. They mobile from one country to another not only to seek better and favorable tax treatment but also to avoid their obligations to the country. For example, 80% of foreign aid is transferred back to the donors’ country in terms of stocks or bonds investments. Jeremy Rifkin, the author of American Dreams, said that Americans like to talk about their success. When they make mistakes, instead of fixing the mistakes, they move to another place and start new adventure with the same mistakes. So does the case of multinational enterprises and their political activities in foreign countries, especially in Indonesia. They bleed the country at the expense of the Indonesians. The cost of foreign aid dependence or being dependent on multinational enterprises always have negative impact on the country. In mining industry, their activities cause damage to the environment and ecosystem. Their industrial waste has negative impact on the environment. Jakarta is facing environmental threat (corrosive, abrasive, etc.) left by the legacy of multinational enterprises. Similarly, natural disaster becomes routine in this country. References Brown, Gordon, Chancellor of the Exchequer. International development/ International poverty reduction. 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