Research Purpose

Globalization has led international firms to engage in increasing foreign direct investment (FDI) in an overseas country. Once a firm decides to conduct FDI, it will take a long-term commitment to the investment country and a significant amount of outflow investment. Before the international firms decide to do FDI, the firms have to do research for market entry method and strategy to minimize the risk and threats. Based partially on their enterprise criteria and thought process, this study will focus on the following:

1. Identify the motives of Taiwanese enterprises in conducting FDI Indonesia.

2. Determine the reasons for choosing Indonesia as the location choice of FDI.

3. Evaluate the reasons for choosing entry mode and ownership structure of FDI in Indonesia.

4. Examine the partner selection criteria of the Taiwan enterprise for seeking local partner.

Chapter 2 Literature Reviews

The world’s economy keeps evolving, forcing firms to compete with limited markets and added pressure, resulting in firms looking to gain competitive advantages to surpass their competitors (Porter, 1990). Most traditional firms have the same goal to maximize profit. Some local firms try to become the champion of the domestic market but when that enters the saturated phase, the firms need to look for potential new customers to increase the firm’s revenue (Barney

& Hesterly, 2015). International business is one method to achieve this goal, through which firms increase the sale and provision of their products and services. At the same time, this process can also raise new lifestyles and ideas to consumers in new markets (Hill, 2009). Now international business is very familiar with the world economy.

The most common international business transactions are international trade and international investment. While international trade exchanges products and services with money with a foreign country, international investment transfers assets or acquisition of assets to and from another country. International trade is considered to be lower-risk method than international investment which requires companies to set up capital, technology, managerial talent, and manufacturing infrastructure in another country. In order to do these tasks successfully, firms need to develop international strategic management, which refers to comprehensive and ongoing management planning process aimed at formulating and implementing a strategy that enables a firm to compete effectively internationally (Griffin & Pustay, 2013). There are many factors that the firms should consider to make sure that customers in their target market are willing to buy and

able to buy the products. This study will focus on the strategy involved in international investment rather than an international trade.

According to the earliest findings of the theory of direct investment by Hymer (1960), the investors seek control over the enterprise to ensure the safety of their investment. The control over by investors is defined as direct investment of the investors could control over directly to their investment. When firms engage in the foreign direct investment, they retain direct responsibility and rights to manage their foreign investment. Also relevant are subsidiary companies registered across borders, in which situation the headquarters retain the control of their capital.

The Organization for Economic Cooperation and Development (OECD) describes FDI as having the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise, and a significant degree of influence on the management of the enterprise. The controlling ownership of the firm’s equity is worth at least 10% of the firms’ total value (Aregbeshola et al, 2011).

Over the past 30 years, FDI keeps growing in both developed and developing countries. FDI inflow recovered in 2015 by rising 38% to $1.762 billion which motivated by slowing growth in emerging market. While FDI outflow has been increasing by 33% from previous year, many multinational companies from developed country invested abroad with a total $1.1 trillion in 2015.

According to the World Investment Report 2016, FDI flows declined in 2016 due to the fragility of the global economy and resulting corporate reconfiguration. However, global FDI flows are likely to resume growth and surpass $1.8 trillion in 2018.

Firms who consider doing FDI should determine whether to employ equity or non-equity modes. The distinction between those two defines whether the firms are classified multinational enterprises (MNEs) or non-MNEs. Non-equity modes are used for smaller commitments to foreign markets, including exports and licensing. On the other hand, firms that involved in equity modes are regarded as MNEs. Equity mode tends to reflect larger commitments to overseas markets including wholly owned subsidiaries or joint ventures (Peng & Meyer 2011). In general, FDI is defined as investment through equity modes.

Firms have different motives for FDI and specifically for collaborative ventures. A study from Makino et al (2002) investigated the motives behind Newly Industrialized Economies (NIE) for location choice of FDI. They used the sample of 328 Taiwanese firms to represent NIEs in this study, and each firm had specific motives and sufficient capabilities. While the motives for FDI refers to the reasons to encourage the firm to invest aboard, the capabilities refer to the necessary resources and skills for investing abroad. There are two perspectives of FDI in developing the hypothesis: asset-exploitation and asset-seeking. Asset-exploitation refers to when firms seek for proprietary assets of a foreign country which could transfer overseas, while asset-seeking firms desire to acquire an intangible asset (i.e., technology, management, and marketing) of the foreign country. Since NIE mostly engage in FDI in upstream countries or downstream countries, the location choice defined into Developed Country (DC) and Less Developed Country (LDC). The motives of FDI in developed countries and less developing countries include asset-seeking, resource/labor-seeking, and market seeking. Because from an asset-exploitation perspective, a firm seeks specific “advantages” of the foreign country to engage in FDI, both market seeking and labor seeking is considered to be asset-exploitation.

The study examined the impact of location choice between DCs and LDCs based upon the motives and capabilities. From the several literature reviews of this study, the hypotheses simplify into three: When the motive of the FDI is asset seeking, the newly industrialized economies (NIEs) are equally likely in DCs due to their desire to acquire advanced technology, management, and marketing expertise. While in resource/labor-seeking motive, the NIEs are more likely to invest in LDCs because of the specific natural resources and lower cost of labor. In the market-seeking motive, the NIEs are more likely to invest in DCs amongst markets of equal population because of higher consumption ability in the DCs; obviously if the population of LDCs are significantly higher, they are seen as a more attractive market.

The result of the study showed that the firms from NIEs tend to invest in DCs when they had strategic asset-seeking and market-seeking motivations and in LDCs when they had resource/labor-seeking motivation. For asset-seeking firms, the study suggested that technology-based advantages and prior strategic asset-seeking experiences strengthened the probability of their FDI in DCs. However, for resource/labor-seeking firms, the study suggested that NIEs didn’t strengthen the superior labor intensive production capabilities of the LDC firms because the natural endowments are available for any firms located in the same country or location.

We have witnessed that plenty of equity FDI firms pursue various kinds of business objectives. According to Das & Teng (2000), many firms expanded rapidly in emerging markets by using international joint venture entry. Beforehand, the foreign joint-venture partner (FP) and joint-venture partner (JP) must determine their ownership of joint venture, as majority ownership or minority ownership will reflect a firm’s overall control. Yan & Luo (2001) present the importance of the ownership structure which has direct and critical implications in IJV. Whether a firm chooses majority or minority ownership is closely tied to its capability to contribute

resources to the business practice. Ownership structure may impact strategic control over international subsidiaries, bargaining power, and globally integrated synergy. Firms who contribute more in tangible or intangible assets will tend to have bigger ownership percentage. The ownership structure also reflects the structure of the control over the venture’s operation between the firms. Majority ownership is likely to have control power in the venture’s operation, while minority ownership is likely to be passive or inactively involved in the venture’s management. The study also shows that the higher the degree of the dependence of the venture on local relationships, the more contextual risks will be in the venture. Greater equity ownership of foreign investor reflects lower local risk and uncertainty. The foreign investor unfamiliar with the market will tend to have minority ownership to anticipate the risks of failure.

One of the major factors of success for IJVs is the selection of the joint venture partner. A study of Hitt & Dacin (2000) about partner selection between emerging and developed markets concludes that partners are selected mostly for access to resources and organizational learning opportunities that may compliment the firm’s capabilities. Firms from developed market or emerging market will have different criteria in choosing their partner. The study collected data through the survey on 202 firms, 89 of which were developed market countries and 113 of which were emerging market countries. The data also collected by interviews with executives from 24 firms in both developing and emerging markets. The results from the studies are mostly significant in proving the hypotheses. The result of this research also showed the importance of both tangible and intangible resources in the selection of business partner. Except for the tangible asset of financial capital, the most important criteria for emerging market firms were intangible resources.

The result also showed the importance of organizational learning in partner selection. Emerging market firms seek for partners from which they could learn technical and managerial capabilities.

Developed market firms seek for the partner from which they could learn market knowledge or gain market access. These results suggest that both emerging market and developed market firms place an emphasis on a potential partner’s willingness to share organizational learning. Besides, the research strongly emphasized other different preferences of partner selection between emerging and developed markets. The firms leverage the tangible or intangible resources from each other for complementary benefit.

Chapter 3

Indonesia Business Environment

3.1 Demographics

Indonesia with a total population around 257 million individuals in 2015 has been the fourth most populous country in the world (Table 1). The official national motto of Indonesia is

“Bhinneka Tunggal Ika” which means “Unity in Diversity.” Although the country contains a variety of ethnic groups and cultures, Indonesia has promoted a national spirit to unite the country.

Based on total sum of land area and sea, Indonesia is the 7^th largest country in the world with a total area of 1,919,440 square kilometers. The average population density is 134 people per square kilometer which ranks 79^th in the world. In Figure 1, it obvious that Indonesia is consisting of thousands islands. Indonesia’s main islands are Sumatra, Java, Kalimantan, Sulawesi and Papua.

Java Island is the center of urbanization and the most populous island. Jakarta, the capital city of Indonesia, also located in North Java.

Source: United Nations, November 2016

Table 1 World Top Ten Most Populous Countries in 2011-2016 (in millions)

3.1.1 Population

According to Statistics Indonesia, the annual national population growth rate of Indonesia between 2010 and 2015 stood at 1.40 percent on average. United Nations estimated that Indonesia’s population would increase to 295 million in 2030.

Java island is the center of economy and politics. The biggest cities in Indonesia are Jakarta (North Java), Surabaya (East Java), Bandung (West Java), Bekasi (West Java) and Medan (North Sumatera). Over the years, Indonesia has experienced

Source: Indonesia Investments, November 2016

Figure 1 Map of Indonesia

Source: CIA Factbook, November 2016

Figure 2 Indonesia’s Population by Age and Sex Group

urbanization, with the urban population reaching 53.74% in 2014. In Jakarta, the capital city, the recorded total inhabitants are about 10 million in 2015. This centralization results in massive daily traffic of workers in Jakarta.

Indonesia population consists of many ethnic groups which the country keeps its culture as diversity which keeps the country’s culture diverse. In 2015, Statistic Indonesia report that the largest ethnic groups are Javanese (40,22%), Sundanese (15,5%), Batak (3,58%), and Overseas Chinese accounted for 1,2%.

According to CIA Factbook (Figure 2), the highest percentage of Indonesia’s population by age group is between 25-54 years which account for 42.35%, while the least percentage age group (6.79%) is between 55-64 years. The ratio of male and female are mostly balanced for the total population.

3.1.2 Language

The Indonesian’s official language is Bahasa Indonesia which most Indonesians understand. However, according to a survey of Statistic Indonesia in 2010 (Figure 3), 79.45% of citizens above five years use their own ethnic language to communicate

Ethnic

Figure 3 Indonesia’s Daily Language (in percent)

with others. Only 19.94% of the total population use their official language to communicate, and 0.3% of citizen use a foreign language. Soeharto in his presidency forbade all foreign languages and required them to change their name into the Indonesian language. Around 1978, Chinese schools were also forced to close and led to difficulties for Chinese Indonesians to enroll in state university, apply to be civil servants, or join the military or police.

Statistics Indonesia also reported that citizens who mostly use Bahasa for communication are found in 5 provinces. There are Jakarta (90.7%), West Papua (69.7%), Riau (58.7%), North Sumatera (55.6%), and East Kalimantan (53.5%). The citizens who live in the other 28 provinces mostly use their own ethnic languages.

3.3.3 Religion

Despite the diversity of numerous ethnicities, the population of Indonesia divides mostly into several religions. The majority believe in Islam by 87.18% of total population (207.2 million people). This is followed by Protestant Christians (6.96%), Catholic (2.91%), Hinduism (1.69%), and Buddhism (0.72%). The national holidays in Indonesia mostly are based on Islamic calendar. Most of attitudes and tradition of Indonesians are reflected from Islam as well.

3.2 Politics

In 1945, The Republic of Indonesia was born after a long period of Dutch colonial and Japanese wartime occupation. The politics in Indonesia is a presidential representative democratic republic where the power is concentrated in The President of Indonesia. Following the resignation of President Suharto in Indonesian riots incident at May 1998, Indonesia political and governmental

structures have undergone major reforms. Since 1999, Indonesia has had a multi-party system which The President of Indonesia will be elected from the parties. The current Indonesia President, Joko Widodo was elected in the 2014.

3.2.1 Government

The 1945 Constitution provided a limited separation of the responsibilities, authorities, task and relation between state institution (executive, legislative, and judicial). The president election in 2004 was the first time Indonesians directly elected the president and vice-president. A term of maximum serving of a president is two consecutive five-year term.

The legislative institution consists of the People’s Consultative Assembly (MPR) and a House of Representatives (DPR). People’s Consultative Assembly (MPR) is the highest political institution which gathers every 5 years to approve the broad outlines of state policy.

The executive institution consists of President who carries out his tasks with the assistance of Vice President and Cabinet. The President of Indonesia is responsible to the MPR. The judicature institution consists of the Supreme Court which is the highest judicial institution along with other lower legal bodies.

3.2.2 Foreign Relation

After Indonesia declared its independence in 1945, Indonesia has adhered to a free and active foreign policy. Thus in until now, Indonesia has joined a member of international community membership to increase the economic and political relation with others countries. Indonesia has been recorded as the member of some

international communities such as ASEAN, Non-Aligned Movement, Organization of Islamic Cooperation, APEC, G-20 Major Economies, IGGI and CGI.

3.2.3 Politics Performance Indicators 1. Politics Stability Index

The index of political stability measures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism. The range for political stability is from the weakest -2.5 to the strongest 2.5. In Figure 4, among five selected Southeast Asia Countries, the weaker political stability in 2015 below 0 are Indonesia, Philippines, and Thailand while the Malaysia and Vietnam have greater politics stability above 0.

However, among the others countries, the political stability of Indonesia has shown significant increasing number from -2 in 2000 to -1.5 in 2015. This number indicate that the political stability of Indonesia is improving during the time being.

Source: TheGlobalEconomy.com, The World Bank

Figure 4 Political Stability Index of Southeast Asia Countries in 2000-2015

2. Control of Corruption

The index for control of corruption captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as capture of the state by elites and private interests. The range for control of corruption is from the weakest -2.5 to the strongest 2.5. The Figure 5 shows that among the five Southeast Asia Countries, only Malaysia have good control of corruption above 0 rather than Indonesia, Thailand, Philippines and Vietnam.

However, from 2002 to 2015, the control of corruption of Indonesia keep increasing from below -1 to -0.5. It shows the good improvement condition compare to other Southeast Asian countries.

Figure 5 Control of Corruption Index of Southeast Asia Countries in 2000-2015

Source: TheGlobalEconomy.com, The World Bank

3. Voice and Accountability Index

The index for voice and accountability captures perceptions of the extent to which the citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media. The range for voice and accountability index is from the weakest -2.5 to the strongest 2.5. The Figure 6 shows that in 2000, Thailand and Philippines placed above 0 while the other countries below 0. But in 2015 shows that Indonesia and Malaysia placed above 0 and the other countries decreased below 0.

From, the overall performance index is not more than 1 which is indicate that the voice and accountability performance index of these five Southeast Asia countries isn’t that great compare to other developed countries.

Figure 6 Voice and Accountability Index of Southeast Asia Countries in 2000-2015

Source: TheGlobalEconomy.com, The World Bank

3.3 Economy

According to the International Monetary Fund in 2016, Indonesia’s economy is the world’s 16th largest by nominal GDP. CIA World Factbook claimed Indonesia as the world’s fourth largest population, attracting many investors as the next largest emerging market. The total population is estimated to be over 260 million people in September 2016, with half of them living on Java Island.

Strategically located along the equator, Indonesia has abundant natural resources such as oil, natural gas, copper, and gold.

3.3.1 Economy Growth

After the declaration of the independence in 1945, the political instability and economic deterioration due to unstable government system. In the 1960s, President Soeharto gradually took Indonesia to have more sustained economic development. In the Soeharto’s administration, commonly classified under the New Order era, tried to improve domestic economic growth by inviting foreign investment and international trade. At that time, Indonesia’s economy stabilized which resulted in controlling inflation, rescheduling foreign debt, and steadying the rupiah (Indonesia’s currency).

Despite the fact that Indonesia was the only Southeast Asia member of OPEC, Soeharto tried to recover economic performance through oil exports. From 1973 to

Despite the fact that Indonesia was the only Southeast Asia member of OPEC, Soeharto tried to recover economic performance through oil exports. From 1973 to