Can FDI Catalyze the Free Lunch Program and Boost Indonesia's Agricultural Sector?
FOOD SECURITY
Dewa Gede Sidan Raeskyesa
7/25/20244 min read
The 1945 constitution of the Republic of Indonesia mandated that one purpose of establishing an Indonesian government was to advance the general welfare (memajukan kesejahteraan umum) of the Indonesian people. In this case, we may consider the free-lunch program proposed by the new president of Indonesia from 2024-2029 to be an effort to fulfill that mandate.
While the public debate is skeptical on how to fund this program as it requires high amounts of (taxpayer) money and puts pressure on the national budget, they overlooked another form of financing to support the program, which is foreign direct investment (FDI).
Compared with other financial flow options (e.g., debt and equity flows), FDI is safer and more beneficial to the local economy. The reason is that FDI brings technology and managerial expertise that helps the local economy to thrive. FDI can enter the host countries in two modes: first, via merger & acquisition (M&A), where the foreign investors acquire the existing local companies that have main business related to the free-lunch program. The local companies receive a new capital injection to improve their services by acquiring part of the ownership. Alternatively, foreign investors can establish physical investment directly by building their business (factory) in the related sectors to support the program. This is often known as greenfield FDI.
We can imagine FDI allocated to the food and beverages sector where small-medium size enterprises (SMEs) known as UMKM that specialize in fresh culinary providers (e.g., healthy lunch packages) can work together with foreign investors to escalate their services by providing higher amounts of food deliveries. The joint venture (JV) becomes necessary as it will ensure that the projects will source their raw materials locally. Indeed, studies found that wholly foreign-owned projects often do not provide a positive link to the local economy and heavily depend on imports to source their raw goods. Furthermore, having local participation in the investment projects will help the integration process between local characteristics and foreign knowledge.
The government of Indonesia should target foreign investors that focus on food services (e.g., cooking, packaging) such as Sodexo and Elior Group (France) or SATS (Singapore) as they are more experienced in providing this type of services on a big scale (e.g., school-meal program, airlines catering). Thus, we can imagine each district has its own ‘dapur umum’ (public kitchen) run by these JV companies.
On the input side, the government should encourage FDI in the agricultural, plantation, and fisheries sectors (pertanian, perkebunan, dan perikanan) to provide adequate quantity and quality of raw materials to the previous sector. This is important as Indonesia has low productivity, which may lead to high dependence on food imports.
The government may provide incentives to allow foreign investors in financial sectors, especially the ones that provide specific credit to the agricultural sector or establish cooperation with them to allocate more credit (soft loans) to the agriculture sector, particularly to farmers and organizations that participate in the free-lunch program. For example, the Indonesia Ministry of Agriculture has cooperated with KB Bukopin Bank, which is majority-owned by a Korean investor, to support farmers Millenial Farmers Program in 2022. This initiative could be extended to the free-lunch program. Alternatively, the government can specifically target foreign companies that specialize in food production (e.g., Cargill), both to attract new production facilities or nurture the existing foreign companies within the sector by providing stimulus to expand their technology production capacity, such as tax incentives on importing agriculture technology, which indirectly support the food supply for the free-lunch program.
Allocating FDI into the agriculture sector helps to reduce the inequality gap in the country.The reason is that foreign companies often offer higher wages to compete with domestic companies to attract workers. As most workers in the agricultural sector (e.g., farmers) don't have formal education backgrounds (low-skilled), these workers will have higher salaries, narrowing the income inequality gap. In addition, the wage premium may attract more young generations to work in the agricultural sector. Including local farmers as equal business partners, actively involving them in decision-making, and ensuring they retain control over their land will significantly enhance local social development.
However, it is important to note that the country where the investors come from plays a critical role. Indeed, research found that the FDI in the agriculture sector from developed countries provides a better impact on productivity, than FDI from developing countries. The apparent reason is that investors from developed countries face pressure from their customers in their home countries to practice sustainable agriculture practice. In contrast, these conditions are less likely to be applied to the home countries of investors from developing countries. Consequently, the FDI from developed countries has more advanced and environmentally friendly technologies that improve the agricultural sector in the host countries. This means that the Indonesian government should carefully choose its investors, as agriculture sectors are closely related to food security and environmental sustainability, issues that are essential for the nation.
In addition, the government should do its homework in the agricultural sector while attracting new investors. Indeed, the Agriculture Census 2023 in Indonesia found that various agrarian conflicts are associated with FDI in this sector. The conditions will not be favorable for establishing long-term and inclusive investments or attracting new investments.
After all, globalization provides various financing access to developing countries, one of which is FDI. However, it is the responsibility of the host countries, including Indonesia, to ensure that FDI benefits their development agenda (e.g., free lunch program) and the local stakeholders (e.g., local farmers).
Author
Dewa Gede Sidan Raeskyesa is a Research and Teaching Associate (Ph.D. candidate) at the Institute for International Political Economy at the Vienna University of Economics and Business (WU Wien), Austria. His research focuses on the causes and consequences of Foreign Direct Investment (FDI) policies and Special Economic Zones on local economic development. At WU Wien, he teaches courses on FDI and Development and the Politics of FDI. He can be reached at sidan.raeskyesa@wu.ac.at