Decentralization, Foreign Direct Investment and Development in Indonesia

As the role of Foreign Direct Investment (FDI) in development becomes increasingly significant, the concern of many policy makers is not only to attract FDI but also to ensure that the society and future generations gain broad benefits from the FDI. Hence, the United Nations Conference for Trade and Development (UNCTAD) developed the Investment Policy Framework for Sustainable Development (IPFSD) as guidance for countries to achieve sustainable development from FDI. Using the IPFSD, this paper examines the investment policies of Indonesia under centralized and various decentralization periods and describes the relationships among government levels in implementing the policies which guide FDI. From the examination, we found that the investment policies in Indonesia have been directed to achieve sustainable development gradually. Furthermore, the intergovernmental relationships that have changed due to the decentralization process have become crucial to the effectiveness of investment policies for the society. During the centralized period, the performance of inward FDI was good, but citizen input and participation in the policy process was weak. In the first wave of decentralization, local governments gained significant powers from the central government to guide FDI. However, the great devolution of power to local governments without clear mechanisms of intergovernmental relations and accountability led to a deterioration of the investment climate and made the policies less effective. Finally, during the second wave of decentralization, the central government has taken responsibility in the FDI management process but still provides more room for local governments to participate in the development process. Hence, cooperation between national and local government is more enhanced during this period to guide FDI.