FDI-based Technology Transfer- JICA’s experience in domestic private
sector capacity building in Indonesia -4th High Level Forum for the Phase II of
Policy Dialogue of Industrial Development inEthiopia

Toru Homma

Senior Advisor on Private Sector Development
Japan International Cooperation Agency (JICA)
Homma.Toru@jica.go.jp

Addis Ababa, 30 July 2013

Contents
1. Basic understandings of FDI-based
technology transfer
2. JICA’s experience in domestic sector
capacity building in Indonesia
 In relation to FDI-based technology transfer
 Menus: Supporting industries, resource oriented
local industry/export promotion, institutionalization,
FDI promotion

3. Implications for Ethiopia21. Basic understandings on
FDI-based technology transfer
 Typical patterns of FDI-based technology transfer
mechanism (JBIC & OECD, 2002 etc.)
1) Vertical linkage• Backward linkages (TT for local suppliers)• Forward linkages
2) Horizontal linkage• Demonstration and competition effects• Corrective effects
3) Labour movement• Spin out and turn over4) Multinational enterprises (MNEs) internal• From HQ to local subsidiaries including R&D
3

Basic understandings on
FDI-based technology transfer
 Technology spill over really happens? Correlation between
FDI and technology diffusion(Micro data comparative analysis at enterprise level by
Todo 2009 etc.)
1) Spill over effect by FDI in same sector: Not always
happens (Yes in the cases of Mexico and Taiwan, No
in the cases of Morocco and Czech)2) But spill over effect by backward linkage is confirmed(from several surveys such as Lithuania, Indonesia
and China)

42. JICA’s experience in domestic private
sector capacity building in Indonesia

OUTLOOK

247 mil. Population (2012), 4th largest, G20
 GNI per capita $3,420 (2012, current, WB) from $560 (2000, ditto)
 FDI inflow $24.5 bil. (2012, realized base, source:BKPM) from
$15.1 bil. (2001, ditto), became more manufacturing oriented
 Turned from oil export dependent into net oil import Economic integration (ASEAN & APEC)
 Traditionally deep ties with Japan both in public/private: EPA, East
Asian industrial network All the menus are available here
5Key questions
 Supporting industries?
• “industries which supply various components, partsand materials for assembly makers”: key industrial
structure in Asia, in particular FDI-based TT• How it works in Indonesia? JICA assistance?
 Any other alternatives?
• Local resource-based SMEs? Export-oriented SMEs?
Champion product? JICA assistance?
 Any example of institutionalization?
• SME Management Consultant System
 Investment promotion in Indonesia?
• Japanese investment, JICA assistance, investment
opportunity, SEZ …
 What are applicable to Ethiopia and how?
6

JICA in Indonesia: Private Sector
Development Programme
Support for Sound Environment for Sustainable Growth
Driven by Private Sector Investment

Supporting Industries
Development

SME Human Resource
Development (SME
consultant system,
training system)
Local Industries
Development(Design, Cluster)
Micro

Trade & Investment
Climate Improvement
Trade
Export Promotion,
Trade Training

Investment
Investment
Promotion

Trade Facilitation
Trade Policy

Intellectual
Property
RightsInvestment
PolicyEconomic Infrastructure

Higher Education

SME/SI Promotion

Economic, Fiscal & Financial

Private Sector Development

Competition Policy
Standards &Conformance;
Metrology
Macro(Source:
Homma(2006))
7

Major approaches in relation to domestic private
sector capacity building / FDI-based TT
Pvt Sector
Capacity Building /SME development
Investors / FDI

TT by
FDI

Government
TT by JICA etc.

Product
dev.

Exportoriented SMEs

Dom. Marketoriented SMEs

ImporterParts
supplyQC,
Kaizen,Metal

ExportSupporting
industries

Assemblers

Investment
promotion /Investment
climateimprovement

TT by Gov, JICA etc.

TT

HRD,
BDS,
Shindan
SME FinanceSource: Homma

8

Major approaches for TT for investment promotion

Effective
Investment
promotion
Increase ofinvestment
Quantity

Quality

IPA’scapacitybuilding

JICA’s assistance

Development

Investment policy reform

Investment climate
improvement
Source: Homma (2013)9

Project on Supporting Industries Development
for Casting Technology in Indonesia• Project Period: 1999-2004• Metal Industries Development Centre (MIDC) and JICA
Assembly Industries
MOIT
Final Users
RelatedOrganizations

Small & Medium
Scale Foundry
Industry

JICA
Other Schemes

MIDC
Technical
Services

JICA Experts

and other
InputsTechnology
Transfer

MIDC
Staff

Source: Homma (2009) and JICA (2002)(= technology
transfer toindustry)10Micro level mode of Technology Transfer
in MIDC Lecture

Expertled
 Passive Basic
 Discussion
 Demonstration
 Hands-on Training
 On the Job Training Learning by Teaching– self realisation

C/P-led Active Advanced

Sustainability
Source: Homma (2010)11

Target Company A: Cylinder Liner Production
Reject Rate of Cylinder Liner Castings
16
Re je c t
Pr o du t i vi t y* 1 / 1 0

Reject Rate %

14
12
10
8
6
4
2
0

1st year2000

2nd 2001
year

3rd2002year

4th2003year

Capacity 300T/M, Medium-sized Decreased reject ratio to 1/3
 Increased productivity to double

Source: JICA and MIDC (2004) and Homma (2009)12

Target Company A: Cylinder Liner Production

Production T/M

120
100

ExportAssembly
After Market

80
60
40
20
0
0th1999year

1st2000
yearnd year 3rd year
22001
2002

th year42003

th year52004

 Achieved delivery to a Japanese assembler

 Started export
Source: JICA and MIDC (2004)

13

Supporting industries for construction machinery
New JICA Project(2013) on
Enhancement ofMetalworking Capacity
for Supporting
Industries ofConstruction
Machinery: close
collaboration with theprivate sector

IndonesianIndustry
Construction
Machinery Industry
Local content
increase

Parts supply
Increase

Supporting Industry
Raise technical level
Heavy Eq.
Industry
Association(HINABI) andothersTechnical Services(Training, Seminar etc.)

Source: modified fromJICA (2013)

Japan
Targeted
metalworking
organizations

MOI Dir. Machinery

Experts

POLMAN Bandung
Univ Indonesia

JICA

MIDC

PT. Barata

Training inJapan

PrivateSectorUniversity
14Institutionalization of Registered SME
Management Consultant System (Shindan)• Shindan = diagnosis in original meaning• Government certified management consultant for SMEs
(Shindan-shi): diagnosis, advice and consultation(Ministerial Decree 2006)• Japan’s model: transferred to Thailand, then fullytransferred to Indonesia through JICA projects• 250 consultants have been registered in 3 years as“Shindan-shi” who were qualified as candidates,
completed 6 months intensive government training
programme and passed examinations• System fully transferred to MOI; now 417 Shindan-shi• “Production Management” (QC, Process Control, IE,
Inventory etc.) and its in-company training are the coreof the curriculum (40% of the total time devoted)• Providing regional SMEs with managerial and technicaladvice in all over Indonesia
15

Utilization of Shindan-shi in SMI service
delivery institutionalization (2013 JICA Project concept)

SHINDAN-SHI

16

Source: JICA (2012)

Alternative to supporting industries dev.:
Local SMEs development• Various projects for discovering, utilizing and developing
untapped local resources (which may correspond to“Champion Products”)• Both export-oriented and domestic market-targeted; it
could be also another source of attracting FDI• Capacity building for product development andproduction management• TT from importer or JV partner and spill over effect ofhorizontal linkage of FDI-based TT may be available• Major recent projects include: SMI Cluster Development Project (2009-10): Embroidery ofWest Sumatra Province etc.
 South Sulawesi Local Industries Dev. Project (2009-12):
Processed products of cacao, passion fruit, silk, marble andseaweed SMI Development based on Improved Service Delivery
Project (2013-16) (see previous slide)17

Domestic PSD through export training

 JICA’s Technical Cooperation with IETC

(Indonesia Export Training Center) etc.
 Phase 1 Project (1988 – 1993)

Export training; business Japanese language; inspection and quality
control; exhibition training Follow Up Project (1994 – 1995)
 Phase 2 Project (1997 – 2001)

Human Resource Development in Trade Sectors Project
Formulate and device training program RETPCs Project (2002 – 2006)

Through 4 Regional Export Training and Promotion Centers
 Continued cooperation

as a host of various JICA training courses

Source: JICA (2006) et al.

18

Export Training

Face to Face Training

Distance Learning

Source: JICA (2006)

Training utilizing IT
19Proposed action plans for export promotion
organization = Possible menu
Market Information Service

A14 Design/brand awareness for SMEs

A01 Review incl. website design

A15 SME design/brand dev. training

A02 Market intelligence capacity

A16 Design-related information service

A03 Value-added market info Service

A17 Matching SMEs and designers

A04 Buyers list improvement

Network and Alliance

A05 Exporters list improvement

A18 Government support desk

Export Promotion Service

A19 Support for RETPCs & alumni

A06 Customer service center establish

A20 NAFED regional information desk

A07 Free membership service: Club

A21 Service providers partnership

A08 Business partnership program

A22 Export education for awarenessA09 Export Market Dev. Grant scheme

Organizational/Manage system

A10 Industrial cluster dev. program

A23 Organizational restructuring prep.

A11 Dialogue w/ major export industries

A24 Evaluation system establishment

A12 Inter-ministerial meeting

A25 ISO9000-base management system

Product Development Service

A26 HR management system

A13 Design/brand development capacity

A27 Renewal of visual identity

Source: Homma (2012) produced from JICA (2009) Final Report: The Strengthening of Export Promotion Organizationin the Republic of Indonesia
20[“Coffee” Break 1] by the way,
Indonesia’s “Champion Product”
Kopi Luwak (Civet Coffee)
Beans of coffee berries once they
have been eaten and excreted by
the Asian Palm Civet

Photo: Homma (2012)

the most expensive coffee inthe world with retail prices at
US$700 per kilogram
Wikipedia (2013)21

[Coffee Break 2]
Indonesia’s “Champion Product”
Indo Mie (Instant Noodles)
The manufacturer Indofood
becomes the world largest instantnoodle manufacturer. Instant noodle
was first invented in Japan.

Found in a supermarket in Addis Ababa;with AmharicFound along with a main road in Addis Ababa

Rapid expansion in African
market; 3 factories in Nigeria
export to western Africancountries and Europe.
Photo: Homma (2013)22

Japanese investment in Indonesia


Largest investor now
Latest data (issued on 23 July) shows Japan is the largest investor
in the first half of 2013, followed by Singapore, USA and S. Korea.
 Japan was the second largest investor in 2012, after Singapore.
Japanese investment increased 67% from 2011.


Manufacturing investment focusedAutomobile, motorbike, machinery component, electronics, textile,food … more than 90% share of automobile industry

Long-term “quality investment”
As manufacturing focused, it is considered to create large
employment with long-term commitment and a series of expansion
 Tremendous opportunities of trainings and on-site guidance fortechnology transfer; Kaizen is naturally includedJapanese investors’ view on Indonesia as a destination
Considered by Japanese investors as the 3rd most promising
investment host country after China and India (JBIC survey, 2013),
increasing every year from 8th in 200923
 Reasons: 1st - market growth prospects, 2nd – labor forceBilateral investment policy dialogue
frameworks involving JICA


Economic Policy Support Program (2002-4)


I-J High Level Public/Private Joint Forum on Investment(JFI) (2004-2008)

Planning & Coordination Committee (Chaired by MOT) with 4
Working Groups: Tax/Customs, Labor, Infrastructure, Industrial
Competitiveness / SMEs



Strategic Investment Action Plan (SIAP) (announced in June 2005)

Economic Partnership Agreement (IJEPA) (2008 in effect)

Series of Policy Dialogues, Supplemental Studies and Workshops
for six fields including Macro Economy, Private Investment & SME

Wider version of FTA

Cooperation for Establishing Metropolitan Priority Areas for
Investment and Industry (MPAs) (2010-)
24

Assistance for Investment Promotion
Cooperation with BKPM (Investment Coordinating Board)

Investment Promotion Policy Advisor
Expert stationed in BKPM as an advisor
 Advice for investment policy framework and biz environment
 Assistance for investment promotion activities (seminars, missions) Investment Opportunity Studies (See next slide) TOT Training for Provincial Investment Boards
 Information Services (Guidebook, Homepage) Act as a Japan desk in BKPM

Study on Improvement of Investment Policy (2006)
Comparative Study with Neighboring Countries (Thailand, Viet
Nam, Philippines, China) and Recommendations
 Pilot Project (Investment Rule Book etc.)25

Investment Opportunity Studies(looking for “Champion Products”)

 Target• Each province (2-4 provinces per year; 2001-2007)
 Purpose• To clarify investment climate, to identify sectors withcomparative advantage and to propose some prospective
business projects for potential investors Output• Identification of promising sectors/resources/products(ex. Cacao & seaweed processing for South Sulawesi)• Investment Opportunity Report (made available to public)• Seminar (each province & Jakarta)

26

Special Economic Zone (SEZ)
Development Master Plan Survey (2010-12)
 Outputs• Recommendation for SEZ Development Master Plan
• Proposed SEZ Development Guideline• Capacity development of human resources andmanagement unit organizations for SEZ development
 Proposed 3 Types of SEZ

Source: JICA Study Team (2012)27

SEZ Development Master Plan Survey
 SEZ Development Strategy: 3 Linkages• Between Dom./int’l logistic sector & industrial sector• Among domestic industries incl. supporting industries• Between regional resources & industrial development
 Key to success for investment attraction

Source: JICA Study Team (2012)28

Action plans proposed for IPA’s capacity
building in JICA Cambodia Project

Actions for Investment Information Services
Action 1 Periodical update of investment guidebook
Action 2 Periodical update of website
Action 3 Periodical update of QIP manual for investors
Action 4 Establishment of a library of investment-related information & data
Actions for PR Activities
Action 5 Set-up of units specialized in investment promotion of target countries
Action 6 Improvement of investment seminar management
Action 7 Training of provincial governments on investment promotion
Actions for Investment Consultation and Aftercare Services
Action 8 Upgrading of reception desk (Investors Desk)
Action 9 Introduction of an investment approval tracking system
Action10 Establishment and capacity development of aftercare service
Actions for Policy Advocacy
Action11 Formulation of a proposal for investment climate improvement
Actions for Organization and Management
Action12 Preparation and implementation of organizational reform
Action13 Preparation of job description & job flow to enhance inv. Promo. function
Action14 Introduction of task management system for effective provision of service
Action15 Introduction of annual planning and budgeting mechanism
Action16 Planning and implementation of training program
Source: Homma (2013) produced from JICA Study Team (2010)29

Implications to Ethiopia
1. Technology transfer nexus: Investment climate
improvement  Investment promotion  Technology
transfer  domestic private sector capacity
development  export enhancement & importsubstitution.
2. Rethinking possibility of supporting industries in
Ethiopia: Asian model pyramid-type supporting
industries development for automobile/electronics
assemblers may be impractical but…
1) Wider idea of supporting industries – industries to serve final
product manufacturers, for example, facilities, carton box,
packaging, logistics etc. – may have greater opportunities
2) Parts/components suppliers for existing manufacturers – forexample, meta//plastic accessories for shoes, leather partsfor garments, additive for food etc. – which can flexibly makeand supply parts according to their needs
30Implications to Ethiopia
3. Discovering untapped resources : as further investment
opportunities = technology transfer opportunities
4. Export-based technology transfer: FDI-based
technology transfer, it is more realistic to consider
technology transfer through foreign JV partners or
buyers of export products (these could be “Champion
Products”)
5. Attraction of Japanese investment: Considering
Japanese investment, as the “quality investment” with
manufacturing oriented, long-term commitment,
technology transfer, employment creation etc.;
domestic market prospects and laborcost/quality/discipline matter --- Kaizen will work31

Implications to Ethiopia
6. Kaizen: JICA Mid-term Review Team confirmed rapid
diffusion of Kaizen from Addis Ababa based pilot
manufacturing industries towards regional industries
and various sectoral entities. It could nurture attractive
base for FDI and FDI-based technology transfer.
7. TICAD V in June 2013: It depicted “Foreign investment
adds value to the extent that it creates more
employment and opportunities for local companies aswell as transfer of technology.”
8. Support for private sector’s voluntarily technology
transfer: Rather than imposing the private sector totechnology transfer, it is effective to prepare the groundfor the private sector’s voluntarily technology transfer(see next slides).
32

Support for private sectors voluntary TT
 Father Foster Program (Perusahaan Bapak Angkat)• Ministry of Industry’s program/direction which asked
state-owned enterprises (and later for foreign investors)
to support small-scale enterprises by technology transfer,material supply, training etc. in 1980’s&90’s (for example
1-5% of their profits) (JILPT, 1995)• It is considered it did not work properly due tomismatching, overburden for “fosters” etc.
 Negative impact of obligatory technology transfer system• Obligatory technology transfer system basically gives
negative impact on effectiveness of technology transfer inmanufacturing industry (Urata (1999) etc.)
 Rather than obligatory technology transfer, it should bebetter to prepare the ground for the private sector to conduct
their own technology transfer by themselves
33Support for private sectors voluntary TT

 Local content requirement• It discouraged rather than encouraged TT and slowed
productivity growth. Its policy resulted in a verticallyintegrated production system within large enterprises
rather than subcontracting networks dev. between large
and MSMEs. (OECD Inv. Policy Review Indonesia, 2010)• Gov. strategy shifted to using incentive measures topromote linkages instead of using compulsory
requirements (ex. One-year extension of loss carryforward if domestic parts/materials are used) (ditto)
 In reality, market needs increase local content• Even after withdraw of local content requirement, local
content ratio increases• because assemblers always look for better local suppliers,
especially in terms of cost and delivery (& quality if any)
• and QCD requirement/assessment/training is real TT 34

Amesegenalew
Thank you

JICA’s VISION“Inclusive and Dynamic Development”

www.jica.go.jp
35