The Role of Japanese Affiliated Enterprises and Technology Transfer: Implications for Indonesia

The economies of East Asian countries are being severely suppressed by the recent currency crisis. Since the currency turmoil in July 1997, East Asian countries have faced serious economic depression. Domestic demand shrunk and production levels dropped sharply in 1998. Many factories had to lay off their workers. This led to serious unemployment problems in the region. This paper discusses the influences of the economic crisis in East Asia and the need for job creation in this region. In such suppressed economies, an autonomous recovery cannot be expected immediately. Governments should prepare special policy to invite export-oriented FDI (foreign direct investment) for promoting export and transforming the structure of industry. Under the present situation FDI can play an important role for activating economic activities by increasing export and then relief the unemployment problem. In the long run, it is essential to deepen industrial linkages and to upgrade national technological and managerial capabilities. The importance of employees training at foreign affiliated companies in the host countries will also be emphasized. This article investigates the role of Japanese affiliated enterprises in East Asia by making a special reference to Indonesia. The seriousness of the unemployment problem In East Asia, many countries have experienced negative growth in 1998. Since their economies have kept high growth rates until the previous years, no one could have forecasted the current economic depression. Because of the currency turmoil and monetary crisis, economic activities have shrunk abruptly. Many factories had to lay off their workers. The number of jobless has unexpectedly increased because of the monetary crisis. In Thailand the number of unemployed was reported to be two million in the middle of 1998, and in Indonesia it was said to be thirty million during this year,. It was also reported that in Indonesia twenty million people lost their jobs because of the monetary crisis since July 1997. The unemployment rate of Indonesia is said to be roughly 30% of the labor force. The most urgent task for Indonesia now, besides political stability, is to reduce the number and the rate of unemployment. For solving the unemployment problem, export promotion policy is recommendable. There are several reasons. Firstly, the devaluation of the currency will strengthen international price competitiveness and secondly, under the present economic conditions, autonomous recovery in the domestic market cannot be expected in the short run. When exports increase, domestic production will also expand. Factories will need to hire more workers and the economy will be activated through the effect of positive linkage. However, the actual situation in Indonesia is not as expected. In Indonesia, export increased 19.6% in quantity in the first quarter of 1998, compared with the same period of 1997. But, in monetary terms (US dollars), it declined by 2.8% ,. The export of some manufacturing commodities also increased. These commodities were mainly agro-based industrial products such as shrimps and cocoa, or products which utilized domestic materials and intermediates. However, the export of manufacturing commodities such as electrical and electronics products, hightech commodities etc., drastically declined. The production style in Indonesia is basically a final assembling stage relying on imported main parts and materials from Japan, Singapore and other East Asian countries. When prices of imported parts and materials have doubled or tripled, domestic manufacturers have lost their comparative advantage and had to stop importing parts and components. Besides the fact that the costs of imported materials have increased, foreign banks have not accepted L/C (letters of credit) issued by Indonesian banks. The system of wholesale and retail has been damaged, and the transportation network has also declined, since these sectors had mostly been managed by overseas Chinese people. Many of them left the country and have not returned yet. In case of apparel, foreign buyers have cancelled the contracts of importing Indonesian apparel after the monetary crisis. The decline of export and the shrinkage of the domestic market has made the operation rate of factories low and forced managers to lay off their workers. This situation is similar to Thailand, even though they have had a favorable exchange rate for export. East Asian economies thus face the most serious unemployment problem they have ever experienced. We cannot leave this problem untouched, because it may lead to the kind of disorder and riot which destroy the social and economic basis of the country.