How does terrorism affect the inflow of FDI in Indonesia

Kruunenberg, Robertjan Christian (2007) How does terrorism affect the inflow of FDI in Indonesia. Bachelor thesis, Petra Christian University.

Abstract

Indonesia is the 4th biggest country in the world with more than 220 million inhabitants. Over 200 million are Muslim, making it the biggest Muslim inhabited country in the world. It is also one of the most diverse countries with hundreds of different ethnic groups. Since Indonesia?s independence in 1949, Indonesia has been ruled from the most densely inhabited island Java, which is the political and economical heart of Indonesia. Ever since its independence Indonesia has been trying to overcome many internal hurdles like widespread corruption, political disturbance, a poor investment climate, human rights issues, inadequate infrastructure, a weak banking sector, unequal resource distribution among regions, problems with implementing compulsory education, abuse of the military, Muslim extremist who are gaining influence and above all that, natural disasters and terrorist attacks. A big Muslim country with Muslim extremist organization and an extreme diversity in cultures and ethnic groups with on top of that an instable internal situation make Indonesia fertile ground for terrorist organizations. Results of this are the Bali bombings in 2002 and 2005, and the Marriot and Australian Embassy bombings of 2003 and 2004, killing hundreds of people and having very negative economical affects. Foreign direct investment is investment of foreign assets into domestic structures, equipment and organizations. It does not include foreign investment into the stock markets. The Indonesian government and the private domestic markets do not have the resources to adequately stimulate the economy and therefore FDI is crucial for Indonesia to make use of their full economic potential. Indonesia?s investment climate is not very appealing to investor?s Even though the current president Yudhoyono is doing better then his predecessors, investors are still hesitant in investing in Indonesia, mainly due to a weak and instable internal situation. The investment climate has been changing dramatically over the last 2 decades. Until the Asian financial crisis, Indonesia?s economy was growing steadily. The growth figures were however hiding internal economic weaknesses. These weaknesses saw the daylight during the Asian financial crisis and resulted in a very negative impact on the investment climate during the years after the crisis. It took until 2004 for the FDI inflows to pick up again. Since 2004, Indonesia has been seeing GDP growth figures of more than 5% annually and things seem to be turning around. The reasons for the FDI inflows to be so low in Indonesia are difficult to link to terrorism. What we can say is that terrorism has 4 main economic affect: 1. The capital stock (human and physical) of a country is reduced as a result of terrorist attacks. 2. The terrorist threat induces higher levels of uncertainty. 3. Terrorism promotes increases in counter-terrorism expenditures, drawing resources from productive sectors for use in security. 4. Terrorism is known to affect negatively specific industries such as tourism The decision making process of foreign investors depends on a number of factors: I. Conventional wisdom; 2. Prior experience; 3. Perception and tolerance of economic and political risk; 4. Long-term objective Perception and tolerance of economic and political risk is a major factor in Indonesia, especially after the Bali bombings. These terrorist attacks have put a magnifying glass on top of the Indonesian internal weaknesses and showed investors the instability of the country. The money spend on terrorism is enormous and all this money could have been invested in the countries economy. Since this has not been done, Indonesia is facing bigger problems and has fewer resources to reach their long-term objectives. The slow recovery after the Asian financial crisis has proven us that Indonesia is very slow in overcoming crisis situations. This is very important information for potentia

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