Proceeding of International Conference

Internationalization of Islamic Higher Institutions Toward Global

Competitiveness
Semarang, Indonesia - September 20-21th, 2018
Paper No. XXX

The Dynamic Situation of Foot Loose Industry in Indonesia

Artha Yudilla, S.I.P, M.A

Universitas Islam Riau, Department of International Relations
Jalan Kaharuddin Nasution No 113, Pekanbaru, Riau
arthayudilla@gmail.com

Abstract -

Introduction
In this era of globalization, the flow out of the entry of foreign
investment in the country is one of the things that needed to be able to
exist in the forefront of the world economy. According to Gilpin, the influx of
foreign investment in one country tends to be seen as two sides of the
coin. There is a view which sees the entry of MNC or the foreign capital
brings positive impact, but it can also negatively impact for the recipient
country/host country. The plus side is that the MNC will give such impact
like the existence of technology transfer, as well as product, financial,
capital and advanced management techniques transfer from developed
countries. New working fields also will be opened and automatically will
reduce unemployment rate. The inclusion of an MNC also gives local
companies chance to be the supplier of materials needed by MNCs. MNC
also could help balancing the finance of host country with tax levy of MNC.
In the balance sheet of capital host country there is a flow of incoming
capital. The problem is the balance is reduced by the capital outflow the
form of profits, fee upon licensing, and royalties which are sent back to the
home country, that will make the balance gradually become
negative/reduced.
Discourse about who is stronger or have higher bargaining position,
the host country or MNC also discussed, Gilpin saw this form of bargaining
position of the obsolescing bargain which MNC has a strong bargaining
position before entering the host country due to having the FDI. But later
after cooperation was formed the host country supposed to also having
strong bargaining position as the owner of the resources and labour.
As for those who see the MNC in more pessimistic way contend that
the MNC and FDI will not much help in giving a profit even worse, it
probably will just give negative effects for the host or home country. From
host country point of view, one of the issues raised was that the flow of

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capital of MNC actually do not come directly from the home country but
from international organizations/world like the World Bank, the IMF or the
WTO. Even a lot of incoming investment came from the profits of a
subsidiary company, not from the main. As for the transfer of technology, in
fact sometimes it doesn’t give such significant change because only very
few locals got the training and even the technology that came in mostly
are less needed in a host country. And the most negative impact is the
exploitation of labour and resources and subsequent displacement of
many small to medium-sized enterprises (SME) of host country due to
being failed in competing with MNCs. Even worse, Governments of host
countries tend to act in favoritism toward MNC that detrimenting local
businessmen by making a series of regulations as the result of dealing
with the MNCs, such as privatization. MNC can also indirectly influence
the public policies os decision making process. A proliferation of MNC and
increasingly powerful role of the market weaken the role of the State and
this can also cause a crisis of democracy in the country. It also strengthen
the dependency of host country toward home country.

Analysis
The location and relocation of international business activities are
strongly influenced by a variety of variables in the macro level (country) as
well as at the level of micro (industry). Among them:
1. Request. The demand of society in one country will greatly affect the
process of the relocation.
2. Changes in the structure of the economy. Changes in the structure of
the economy both in developed countries and in the developing countries
have affected either the location or relocation of industrial activities
internationally.
3.Macro-economic policy and regional economic
A wide range of literature on track record of multinational companies
prove that macroeconomic policy in a country which is implemented
consistently by always keeping the stability in the monetary field (like the
stability of exchange rates and inflation), can attract an influx of
investments of the company drastically. The Government's deregulation
which removes various barriers to trade and investment flows have been
frequently expressed by the senior executives in the business magazine
Fortune and Asian business as one of the attractiveness of investment in
developing countries in Asian region during the last five years. Indonesia
Government's policy of lowering import duties and tariff rate known as
Government Regulation No. 20 Year 1994 also reported by most investors
as Foreign Direct Investment attraction for investment since 1994 in
Indonesia.
Similarly, the policies and the economic development of the region. A
variety of literature have discussed the various efforts of the local
governments in formulating economic policies at the local level in
attracting foreign investment, including the industrial area; Tech Industrial

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Park; the center of innovation; public venture funds; subsidies in the form
of tax incentives for the development of R & D; small and medium industry
development; the development of the area of the city; global transport; and
so on (UnitedNation, 1994; Gottlieb dkk, 1994; Young dkk, 1994 Greis dkk,
1994 Kasarda, 1995). “Virtually engineering” economic policy can be seen
to be succeeded in attracting global investment inflows.
4. Access to a lower cost factor
Access to lower cost factors can be given by various alternative locations
are the most dominant influence in global relocation (Kinoshita, 1995;
Daniels, 1994; Robock, 1989).These costs include labor, raw materials;
price and lease land/-industry; the price of the plant/building; taxes and
licensing charges. Central Government policy changes and areas that
encourage an increase in these costs can affect the global company
relocated his factory to the region or country to another.
5. Access to human resources and Local Sourcing
Human resources those well-educated and skilled is an attraction of
the relocation of the manufacturing company. In addition to the intrinsic
quality inherent in the well-educated workforce, a global company is quite
sensitive and bias in choosing an alternative location where their
businesses, including, among others, the existence of cultural support or
work ethic by it means being good workers, and the social conditions of
the community where the level of polycentrism and ethnocentrism are not
excessive.
Recalling also the global trend of the company carry out some or all of
the production of the components manufacturing business through local
sourcing with recipient country (host countries), the local partner is forced,
in collaboration with global investors, to show its competency in mastering
the technology, maintaining the volume of supply throughout the year, as
well as maintaining quality of delivery and prices competitively. In this case
the Government assistance to develop the capacity of local supplier is
very expected.
4. Access to the location of production inputs and External Savings
(Anglomeration Economies)
The last factor is important enough to attract global investors carry out
its relocation is a commitment of the Central and local Government in
providing the infrastructure and facilitating access to the location of the
source of raw materials and auxiliary materials and also to the location of
the factory and delivering the goods. Some urban amenities around the
location of global company is also very important, including the provision
of electricity supply facilities, drinking water, education and skills of the
workforce.
In Indonesia itself, the development of the realization of investment
since the advent of political crisis in mid-1997 and then a prolonged
economic crisis to date, as well as the issue of other factors such as the
issue of terrorists, government bureaucracy, corruption and others bring no
exhilarating impact against economic growth and investment in Indonesia.

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Some indicators can be seen from the comparison between the approved
investment plans since the year 1997 with the realization from year to year
until October 2007. In 2005 the realization of Foreign Direct Investment
rose to 66% of the commitment that has been approved in the year in
question, and in 2006 and 2007 the realization of these commitments is
seen from the FDI flow where the ouflow FDI is bigger than inflow FDI,
reflecting how poor investment climate is in Indonesia. It happen
specifically in footloose industry including electronics, textiles and apparel,
shoes, etc. Which are not too dependent on natural resources or raw
materials locally in Indonesia and made cheapness wage labour as the
main factor of investment make it easier to move its investments to
neighbouring countries if it is no longer profitable to stay in the current
country. (Stern, 2002). It is certainly very detrimental.
Indonesia's Foreign Direct Investment “booming” era happened since
the year 1985, with two reasons. First, at that time Indonesia was one of
the countries that experienced very rapid economic growth so that
according to the World Bank known as Asia Miracle. The Government
itself changes the process of industrialization of the import substitution
strategies to the promotion of exports. The result is Indonesia became one
of the most “attractive” investment destinations.
Second, at that time also happened a massive relocation of industries
in Asia such as Japan, Taiwan, Korea, and Hong Kong. This relocation
occurred because production costs in those countries were experiencing
significant increase so that the products, at that time, were no longer
competitive. The increase in workers ' wages is one of the factors of the
increase in production costs. Areas for relocation of industries is the
countries in Southeast Asia such as Indonesia, Malaysia, Thailand, and
the Philippines.
One of the incoming footlose industries in Indonesia is Nike Inc. Nike
itself has been operating in Indonesia since 1988 and nearly a third of the
shoes on market now are products from here. In a press interview in
December 1994, the Coordinator of the Nike company in Indonesia, Tony
Band, said the companies used in Indonesia totaled around 11
contractors. Among them were former company association base in South
Korea and Nike Taiwan-which which at the same time also producing for
other brands such as Reebok, Adidas and Puma.
In the year 2007 Nike Inc. had cut ties with PT Hardaya Aneka Shoes
industry (HASI) and PT Naga Sakti Parama Shoes Industry (NASA) by
reason of the bad quality of the resulting products. But then again
employment contract extended. However, the chaos in both the
companies with Nike Inc. is the sign of the weaken of national shoes
industry. And that was not not the first. Since the economic crisis that
caused the inconvenience in investing in Indonesia, some companies
subcontract in Indonesia was forced to shut down its plant. In November
2001, PT Doson the subcontracting company of Nike has also been
disconnected order, citing poor quality.

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Conclusion
If discovered, the cause of the leaving by the company with the
footloose as the model:
1. first, from the businessman point of view. Labor movement increasingly
strengthened. Labor rallies with demands for wage increases often occurs
even often accompanied by destructive actions. As the result, the smooth
production of the plant is disturbed and the company suffered losses.
2. Second, a classic problem, the complexity of bureaucratic Government
Affairs with a variety of unofficial charges. According to research
conducted at the industrial park Karawang and Bekasi, this is not the
official charges. When the factory was established, it must pay the levy
started permission principle, site license, IMB, or some money for the
participation of development. During operation there is a levy of dues
include APPKD (industrial area), Polsek or security contribution, to the
Regent, Kapolres, Dandim, holidays and holy days charges.
3. Non-economic factors such as a lack of legal certainty, like the
increasing of country safety risk after Bali tragedy, worsen the investment
climate in Indonesia.
The holder of these brands use some scenario-based production
contracts because the shoes industry based on labor-production process
(labor intensive) . Because of the costly labor wages in countries where
holders of this brand and they are producing in countries that offer cheap
labor wages, such as Indonesia.
National shoes industry itself is one of the mainstay export of non
petroleum Indonesia has after oil boom since the Decade of 1990. Export
of footwear ranked third in product-based export work force after the
apparel and textiles. If before 1990 shoe exports less than US $1 billion,
then in 1990 had reached export value of US $1,324 billion. Even once
peaked to US $2.2 billion in 1999.
Although the economic crisis occurs, the export industry is labor-intensive
industry as shoes are not suspended, thus steadily ascending trend. In
2002 the value of shoe exports reached US $1,148. Exports continued to
increase. In 2003 the value of ekpor to US $1.182 billion. In 2004 and
2005 ascending back into each of US $1.320 billion and $1.42 billion US.
At yesterday's 2006 also increased to US $1.61 billion. In addition, the
shoes industry is the object of the expectations of the workers in Indonesia
are mostly educated low. Based on data from the Association of Indonesia
shoes industry (Apresindo), shoes industry able to absorb roughly 400,000
labor workforce. This amount does not include supporting shoes industry
Power as the leather industry. So it is natural if there are LAYOFFS from
industrial shoes due to the termination of the order of the holder of the
brand will be a serious issue for the Government. Though actually, labors
in the company also are not even really prosperous and get exploited with
only hired 2 US dollars a day and forced to work 18 hours per day. This is
another form of other problems.

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 In addition, due to the investment climate in Indonesia was less
conducive to the economic crisis, since holders of brands such as Nike,
Reebok, Adidas and other brand turn its order to other countries such as
Vietnam and China. This condition certainly makes the national shoe
industry in the shadow of gloom. In fact, this type of industry is in line with
the strategy of industrialization in Indonesia which is still based on
comparative advantage.