No. 2020 - 08

Chinese Investments in Industrial Parks:
Indonesia and Malaysia ComparedTham Siew Yean
ISEAS - Yusof Ishak Institute, Singapore
Email: tham_siew_yean@iseas.edu.sg

Siwage Dharma Negara
ISEAS - Yusof Ishak Institute, Singapore
Email: siwage_dharma_negara@iseas.edu.sg
September 2020

AbstractIndonesia and Malaysia are keen to use Chinese investments in industrial parks to foster
industrial development in their respective countries. This paper seeks to compare Chinese
investments in two industrial parks. Specifically, it analyses changes made in the investment
climate in each country to facilitate inflows of Chinese investments for the development of theIndonesian-Morowali Industrial Park (IMIP) and the Malaysia-China Industrial Park (MCKIP).
Investment climate refers to the FDI institutions in a country that are used for facilitating
foreign investments. For Chinese investments in industrial parks, a pertinent question to ask iswhether these investments are privileged in terms of FDI institutional arrangements and theirdifferences from the existing investment institutional arrangements in a country. The paper
finds that Indonesia and Malaysia made special arrangements to facilitate Chinese investmentsin the two parks although differences also abound in the way FDI is facilitated.
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Chinese Investments in Industrial Parks:
Indonesia and Malaysia ComparedTham Siew Yean and Siwage Dharma Negara

1. Introduction
Infrastructural projects have become the focus of Chinese investments in Southeast Asia as
these tend to be mega projects. Apart from these investments, there are also investments inother sectors, including manufacturing. Manufacturing investments are equally valued as
infrastructure investments in host economies as they can create employment opportunities andenable these economies to hasten industrialisation through technology transfer. In particular,industrial parks are commonly used in developing countries as vehicles for industrial
development through the provision of some common infrastructure support for a cluster offirms to locate within a specific geographical location and which will eventually lead to thegeneration of agglomeration economies. These parks can be used to attract foreign direct
investment (FDI) in manufacturing activities. This is especially important in countries where
the overall business and investment environment is weak and industrial parks are used to offer
a better investment environment on a priority basis, in a limited geographical area, to attract
FDI.
At the same time, China is facing excess production capacities and manufacturers arealso seeking opportunities to move their production to other countries. As these efficiency
seeking investments move outwards, there are many possible host economies in Southeast
Asia. These economies vie for FDI by enhancing their investment climate through investment
promotion and the provision of various incentives for foreign investors.
The objective of this paper is to compare Chinese investments in two industrial parks;
one each in Indonesia and Malaysia. Specifically, the paper analyses changes made in theinvestment climate in each country to facilitate inflows of Chinese investments for thedevelopment of the Indonesian-Morowali Industrial Park (IMIP) and the Malaysia-China
Industrial Park (MCKIP). Investment climate refers to the FDI institutions in a country that areused for facilitating foreign investments. For Chinese investments in industrial parks, apertinent question to ask is whether these investments are privileged in terms of FDI
institutional arrangements and their differences from the existing investment institutionalarrangements in a country. For example, are special institutions or incentives given to these1

investments; are these investments facilitated by stakeholders that have special relations withexisting institutions or who can influence decision making in some significant way. It also
includes the provision of new infrastructure provided by the government and/or park operatorsthat can enhance the locational advantages of the two parks. Although these investments are
driven for the benefit of host and source countries, the outcomes of the parks are assessed interms of the types of investments and immediate impact on the domestic economy as this paper
focuses on host economies. The long-term impact is also explored based on the existing
investments, in view of the interests of host economies to tap on industrial park development
for their industrial development.

2. FDI Institutions and Chinese Investments in Indonesia and Malaysia
North (1990) defined institutions as constraints on behaviour imposed by “the rules of thegame” in society: “Institutions include any form of constraint that human beings devise toshape human interaction.” The definition covers the formal or written rules – political systems,
laws governing contracts, crime, product information, the imposition of taxes, tariffs,
regulation of banks, universities, etc. It also includes the informal or unwritten rules – culture,norms of behaviour, customs, values, religions, etc.
However, institutions are ineffective when they are not enforced. Enforcement
mechanisms are an integral part of the institutional framework of a society for institutions tofunction fully. Therefore, although North made a distinction between institutions andorganizations with the latter denoted as the “players” of the game, we include organizations aspart of the enforcement mechanisms for the FDI institutions that are explored in this paper. We
define FDI institutions as the rules and organizations that are used to facilitate and attract FDI
into a host economy.

2.1 FDI Institutions in Indonesia
Indonesia’s policy towards FDI has shifted from a closed-inward oriented to an open-outward
looking policy and later to somewhere in the middle, depending on the domestic politicalsituation (Booth 1998, Hill 2000). Indonesia’s openness towards FDI is reflected in the lengthof its negative investment list (Daftar Negatif Investasi or DNI), which is a regulation that
limits foreign ownership in selected sectors that are deemed as strategic or critical for the local
economy (Table 1). The business community has been pressing the government to revise the2

DNI and open more sectors for FDI.1 While FDI liberalisation enhances the investment climate
for foreign investors, it needs strong political commitment, as an administration risks being
perceived as being too liberal which can be very costly for an administration’s politicallegitimacy (Aspinal 2016, Warburton 2018, Gede Wahyu 2019).
Under President Joko “Jokowi” Widodo’s administration, foreign investments play animportant role for boosting growth.2 There are three key ministries that play critical roles inattracting FDI. The first is the Coordinating Ministry of Maritime and Investment. In October
2019, Jokowi made a controversial FDI policy decision by placing investment affairs under thejurisdiction of the Coordinating Ministry for Maritime Affairs, held by Luhut Pandjaitan. This
portfolio was previously under the jurisdiction of the Coordinating Ministry of Economic
Affairs. Jokowi’s decision demonstrates his trust Luhut’s capability to push for prioritised
major investment projects. Luhut was also assigned to lead the Indonesian delegation to attract
investments from China.3 He also played a critical role in expediting the realization on somepriority projects, such as smelter development, oil and gas, and tourism among others. Luhut’s
close relationship with Jokowi gave him enormous influence within the government (Negara
and Ramayandi 2020), providing him significant leverage to direct economic policy as he is
the gatekeeper for a number of big foreign investment projects.
The second key FDI ministry is the Coordinating Ministry of Economic Affairs,
headed by Airlangga Hartato. Airlangga was the former Industry Minister in Jokowi’s firstcabinet (2014-18). He is also the Chairman of Golkar Party, which supports the government
coalition. In terms of job division, this Ministry is responsible for overseeing investment related
regulations and licensing. Airlangga is tasked by the President to lead the government’s effort
to reform investment climate in the country. Specifically, he leads the preparation of thedrafting of the omnibus law on job creation and small-medium enterprises empowerment. The
law is deemed as critical for providing legal certainty for investors. It is designed to synchronise
a number of laws and regulations simultaneously to simplify investment regulations.4

Kontan, “Revisi DNI, Menko Airlangga rancang daftar positif investasi “, 11 November 2019.
https://nasional.kontan.co.id/news/revisi-dni-menko-airlangga-rancang-daftar-positif-investasi. (accessed 30
July 2020).
1

The Jakarta Post, “Reinvigorating investment “, October 29, 2019.
https://www.thejakartapost.com/academia/2019/10/29/reinvigorating-investment.html. (accessed 21 July 2020).
3
https://money.kompas.com/read/2017/05/27/123104826/cerita.luhut.soal.investasi.china.dan.wantiwanti.jokowi.soal.komunisme?page=all. (accessed 21 July 2020).
4
https://www.thejakartapost.com/news/2019/12/13/one-law-to-rule-them-all-government-to-amend-thousandsof-articles-through-omnibus-bills.html. (accessed 21 July 2020).
2

3

The third key ministry is the Ministry of Finance, which is currently held by Sri
Mulyani. It is responsible for granting tax incentives for investors upon the recommendationfrom the Indonesian Investment Coordinating Board (BKPM). Sri Mulyani is tasked to leadthe preparation and implementation of the omnibus law on tax reforms, which is designed togive more tax incentives, including tax holidays, for investors.
In terms of investment licensing, BKPM is the designated investment managementcompany dealing with foreign investors.5 BKPM is tasked not only to promote investment but
also function as a one-stop advisory centre for processing FDI into the country, thereby
assisting investors on all the processes for the approval and establishment of a foreign entity inthe country.
Under the current administration, BKPM reports to the Coordinating Ministry of
Maritime and Investment (Table 1). The current Head is Bahlil Lahadilia, an entrepreneur fromthe Eastern part of Indonesia and Chairman of Young Entrepreneur Association (HIPMI).
Under the coordination of a powerful senior minister like Luhut, who will make most of theinvestment decisions, Bahlil’s role is primarily on implementation, especially for dealing with
regional governments to expedite investment realization (Negara and Ramayandi 2020).
The current investment regulations states if a foreign entity intends to operate inIndonesia, a minimum investment cost of IDR10 billion (US$700,000) is required. Foreignbusinesses should declare 25 percent of the minimum investment price as paid-up assets of atleast IDR2.5 billion (US$170,000). This is deemed necessary because the government wants
to protect local businesses, especially micro, small and medium enterprises (MSMEs). The
fixed amount of paid-up equity and asset cost are also used to ensure foreign companies havethe funds and a long-term strategy to operate in Indonesia.
Upon completing all the requirements, BKPM will issue an investment registration,
which is valid for 1 to 5 years as determined by BKPM. In 2016, BKPM launched a special
help-desk to assist Chinese investors realizing their investment in the country. 6 The desk
provides interpreters for the investors and help them to secure permits from the BKPM, withstaff who are conversant in Mandarin.
Jokowi is very keen to attract Chinese FDI. After attending the BRI Summit in Beijing
in May 2017, Jokowi instructed Minister Luhut to lead a team for preparing the list of projects
to be prioritized under the BRI umbrella. The team consists of the Coordinating Economic

56

https://tabloid.kontan.co.id/news/bkpm-pintu-tunggal-izin-investasi. (accessed 21 July 2020).
https://jakartaglobe.id/context/bkpm-launches-special-desk-chinese-investors/. (accessed 21 July 2020).
4

Ministry, the Ministry of Planning, and several technical ministries as well as BKPM (Negara
and Suryadinata 2018). Indonesia offered four working areas in North Sumatera, North
Kalimantan, North Sulawesi and Bali for future BRI projects, but it is not exclusive for the BRI
alone (Damuri et al. 2018). China, in turn, agreed to provide grants amounting to RMB100
million to prepare feasibility studies for BRI projects in the four designated locations.
In March 2018, the government passed Presidential Regulation No. 20 on the use offoreign labour. This regulation aims at simplifying the permit application process for foreign
workers, hence making the process more efficient and faster, in order to attract FDI in
Indonesia.
Several other regulations have also been issued in order to expedite the implementationof national strategic projects (Proyek Strategis Nasional or PSN). A project included in the
PSN list will be granted an easier licensing process and fast-tracked land procurement, as itgets the full political support from the government.7 Currently, there are 245 national strategic
projects worth around IDR4,200 trillion (US$300 billion) on the priority list, which has seen
several revisions since 2016. IMIP is placed under the PSN list as it fulfils all the criteria as anational strategic project, including job creation, infrastructure development in remote areas,
and linkages with other sectors.
A number of key regulations support the PSN. Government Regulation No. 13/2017 on
National Spatial Plan (RTRWN), was released in April 2017. The issuance of RTRWN is
important to resolve spatial planning mismatches in the implementation of infrastructure
projects. With this regulation, the Minister of Agrarian and Spatial can issue a recommendationof spatial utilization, thereby expediting the process of obtaining project permission. There isalso Minister of Finance regulation No. 60/2017 on Procedures for the Provision of Central
Government Guarantee for the Acceleration of the National Strategic Projects Implementation,
which was released in May 2017. This regulation is meant to support the previous Presidential
Regulation No. 3/2016 on the Acceleration of the National Strategic Projects Implementation.
This presidential regulation regulates the scope and general requirements and procedures that
propose and grant guarantees, as well as allocate state budget obligation on government
guarantees to all PSN. The provision of a guarantee is necessary to increase the feasibility ofthe project and to attract private investors to participate in the implementation of National
Strategic Projects.

7

https://kppip.go.id/en/national-strategic-projects/. (accessed 30 July 2020)
5

Apart from investment regulations, Indonesia has also ratified several free trade
agreements to signal liberalisation efforts to potential investors (Table 1).

2.2 FDI Institutions in Malaysia
Malaysia has long welcomed FDI into the country and has over time established different
institutions for attracting FDI (Table 2). The Malaysian Investment Development Authority(MIDA) was established in 1967 under the Malaysian Industrial Development Authority(MIDA) Act as the government's principal agency for the promotion of the manufacturing andservices sectors in Malaysia.8 MIDA reports directly to the Ministry of International Trade andIndustry (MITI), which is the lead agency on all matters related to international trade, foreignand domestic investments, productivity and competitiveness in industrial development.
Besides investment promotion, MIDA is also a one-stop advisory centre for processing
FDI into the country, where investors can be advised on all the processes for the approval andestablishment of a foreign entity in the country. However, since MIDA does not have theauthority to approve all the processes, especially with respect to other agencies such as waterand electricity, the government decided to hasten the time taken for investment approvals by
establishing a National Committee on Investments (NCI) in 2019. This committee is chairedby Minister of Finance and Minister of International Trade and Industry was empowered by
the Cabinet on 8 May 2019 to be the sole approving committee for investments received by all
investment promotion agencies including MIDA, Regional Corridors, Halal Development
Corporation (HDC), Malaysia Digital Economy Corporation (MDEC), BioEconomy
Corporation and the Ministry of Agriculture.9
Incentives are also provided for FDI, for targeted sectors 10 which are periodicallyrevised according the Malaysia’s prioritised sectors in the country’s five-year plans. Special
infrastructure such as industrial parks and special economic zones are also used to attract FDI
and domestic investments.11
FDI in manufacturing is governed by the Industrial Coordination Act (ICA), which
requires the application of a manufacturing license for companies with shareholders’ funds of
RM2.5 million and above or engaging 75 or more full time paid employees. The manufacturing

8

See https://www.mida.gov.my/home/about-mida/posts/ (accessed 25 July 2020).
See https://www.miti.gov.my/miti/resources/Media%20Release/Media_Release__Malaysia_Approves_Four_Manufacturing_Projects_Worth_Rm5.4_Billion_.pdf (accessed 25 July 2020).
10
See https://www.miti.gov.my/index.php/pages/view/532?mid=117 (accessed 25 July 2020).
11
See https://www.mida.gov.my/home/infrastructure-support/posts (accessed 25 July 2020).
96

sector allows foreign investors to hold 100 percent equity for greenfield investments. Mergers
and acquisitions (M&A) are allowed and governed by the Guidelines on Mergers andAcquisitions 17 May 2019.12 Disputes are to be settled in the courts according the laws of theland and under the relevant Ministries.
Land is a state issue and can be acquired in the relevant state where the manufacturing
facility is located. Likewise, foreign employment is permitted. Malaysia has also enacted aCompetition Policy under the Competition Act 2010, which came into force on 1 January
2012.13
Malaysia has signed seven bilateral agreements (with Australia, Chile, India, Japan,
Pakistan, New Zealand and Turkey), and has seven free trade agreements with ASEAN and its
Plus partners (China, Japan, India, Korea, Australia and New Zealand, and Hong Kong). It has
also signed the CPTPP, although ratification has stalled and it is also a party of the incoming
RCEP. Malaysia has 64 investment guarantee agreements, including one with China,14 as wellas 71 bilateral investment treaties, including one with China.15
There were also special efforts made to attract Chinese FDI into Malaysia during former
Prime Minister Najib’s administration. This includes his visit to China on 1 November 2016
and the signing of 14 agreements reportedly worth RM144 million, including one for the
production of solar cells and modules with Wuxi Suntech Power at the MCKIP.16 Najib also
participated in the First BRI Forum held in China in May 2017 in Beijing to demonstrate his
support for BRI initiatives.17
A Belt and Road Initiative National Secretariat (BRINS Malaysia) was established in2017 at the Ministry of International Trade and Industry (MITI). The main function of thesecretariat is to coordinate, monitor and facilitate BRI projects in Malaysia as well as projects
with the involvement by Malaysian companies globally.18

12

See https://www.mcmc.gov.my/skmmgovmy/media/General/pdf/Guidelines-on-Merger-andAcquisitions_1.pdf (accessed 25 July 2020).
13See
http://www.agc.gov.my/agcportal/uploads/files/Publications/LOM/EN/Competition%20Act%202010%20as%20at%2015%20August%202016.pdf (accessed 25 July 2020).
14
See https://www.miti.gov.my/index.php/pages/view/771?mid=167 (accessed 25 July 2020).
15
See https://investmentpolicy.unctad.org/international-investment-agreements/countries/127/malaysia(accessed 25 July 2020).
16
See https://www.thestar.com.my/business/business-news/2016/11/01/malaysian-and-chinese-firms-sign-14agreements-worth-rm144bil/ (accessed 25 July 2020).
17
See st.com.my/news/nation/2017/05/238998/pm-najib-among-20-other-world-leaders-international-forumchina (accessed 25 July 2020).
18
See https://www.miti.gov.my/miti/resources/MITI%20Report/MITI%20REPORT%202017.pdf , page 22(accessed 25 July 2020).
7

The unexpected change in administration in 2018 after the general elections in May(GE14) did not change Malaysia’s positive response towards the BRI, despite the campaign
rhetoric to the contrary by Mahathir. Instead, the controversial ECRL was renegotiatedsuccessfully and reinstated in 2019. Mahathir also attended the Second BRI Forum in May
2019, indicating Malaysia’s continued support for BRI projects.19
Finally, the establishment of National Committee on Investment (NCI) in 2019 wasmeant to fast-track investment approvals due to trade war and relocation of Chinese
investments.

19

See https://www.nst.com.my/news/nation/2019/04/483090/dr-mahathir-given-honour-present-speech-pledgesfull-support-bri (accessed 25 July 2020).
8

Table 1: Key FDI Institutions in Indonesia
FDI
promotionagency andone stop
agencyFDI
incentives

Targeted
sectors

Industrial
Parks andSpecialEconomic
Zones

FDI laws

Land
Acquisition

Employmen
t ofexpatriates

Competition
PolicyFTAs, IGAs and BITs

Coordinating
Ministry of
Maritime andInvestment
oversees oninvestment
promotionand ensuring
investment
realization

Upon
recommendationfrom
BKPM,
Ministryof Financewill decide
on type oftax orfiscalincentives
to begranted to
selectinvestors
or taxholiday fortargeted
sectors

Pioneerindustry;

Industrial
parks aresupervisedby theMinistry ofIndustry

Law No. 25/ 2007 on
investment both foreignand domestic.

Yes

Yes

Yes

Yes.

GovernmentReg. No.
13/2017 on
National
Spatial Plan
(RTRWN)

PresidentialReg. No.
20/2018 on
Use ofForeign
LabourCoordinating
Ministry of
Economic
Affairs
oversees
overall
investment
regulations.
Investment
Coordinating
Board(BKPM)

Industry
which hasbroadlinkages;
Industry
with added
value andhighexternality;
Industry
with newtechnology;
Industrywithstrategic
value forthe national
economySpecialEconomicZones areapproved
andsupervisedby theCoordinating
Ministry of
Economic
Affairs

In addition, there is a
Presidential Regulation(Perpres) No. 44/2016
on negative investment
list (Daftar Negatif
Investasi or DNI). This
regulation limits foreign
ownership in certain
sectors deemed as
strategic or critical forthe local economy.

Government
regulation(PP) No. 24/2018 onOnline Single
Submission

PresidentialReg. No.
56/2017 on
SocialImpactHandling inLand
Acquisition
Process for
National
strategic
project

In 2013, ChinaIndonesia signed anagreement to develop
integrated-industrial
parks. This is part ofChina-Indonesia
comprehensive strategic
partnership signed by
two countries in thatyear.
Through ASEAN,
Indonesia is party to
several investment
agreements with China,
India, Korea and Japan
as well as Australia and
New Zealand.
Indonesia has signed andimplemented a number
of FTAs or PTAs, suchas:Indonesia-Japan
Economic Partnership
Agreement (2007);
Pakistan-Indonesia
Preferential Trade

9

(OSS) for
integrated
investment
licenses
service.

Agreement (2012);
Indonesia-Australia
Comprehensive
Economic Partnership
Agreement (IndonesiaAustralia CEPA) (2019).
In May 2017, President
Jokowi attended BRI
Forum in Beijing andoffered some projects
cooperation under BRI
framework.

Presidential
regulation(Perpres) No.
71/2019,
BKPM that
previously
were under
the Office oftheCoordinating
Economic
Ministry has
been now put
under thecoordinating
minister ofMaritime
Affairs.

Source: Compiled by authors

10Table 2: Key FDI Institutions in Malaysia
FDI promotion
agency and one
stop advisoryagencyFDI
incentives

Targeted
sectors

Industrial
Parks andSpecialEconomic
Zones

FDI laws

Land
Acquisition

Employmentofexpatriates

Competition
PolicyFTAs, BITs and IGAs

⚫ MIDAYes fortargeted
sectors,see

Yes basedon
Malaysia’s
economicplans, andrevisedfrom time totime

Yes listed
at MIDA
web-site

Generally speaking, there
is no legislation limiting
the foreign ownership in
the share capital of
Malaysian companies.
However, where acompany requires certain
licences to operate, equity
conditions or requirements
to employ a certain
number of local
employees may be
imposed. This is toincrease Bumiputera
participation in the wider
economy.

Yes

Yes

Yes

⚫ Bilateral FTAs: 7⚫ Budget 2020:
Govt has set
up National
Committee on
Investments(NCI),
chaired by
Minister ofFinance andMinister ofInternational
Trade andIndustry

MANUFACTURING
The Industrial
Coordination Act 1975
requires manufacturing
companies withshareholders’ funds of
RM2.5 million and aboveor engaging 75 or more
full time paid employees
to apply for a
Manufacturing License(ML). ML application will
11

⚫ With ASEAN and
Dialogue Partners:
7⚫ Malaysia has signed
the CPTPP but has
yet to ratify it.
⚫ It is also a party of
the RCEP which isscheduled to besigned at end on
2020⚫ Malaysia has signed
71 bilateral
investment treaties(BITs) including
one with China,
signed in 1988 andentered into force in1990⚫ Investment
Guarantee
Agreement (IGA)
with China in 1988,
and which enteredinto force in 1990

be processed by MIDA
Effective from 17 June
2003, foreign investors
can now hold 100%
equity for all investments
in new projects, as well as
expansion or
diversification projects byexisting companies in the
manufacturing sectors,
irrespective of the level ofexports.
MalaysianCommunications andMultimedia Commission
Guidelines on Mergers
and Acquisitions 17 May
2019
Dispute Settlement
To be settled at the courts
under the jurisdiction of
the relevant ministries

Source: Compiled by authors122.3 Chinese Investments in Indonesia and Malaysia
Using Singapore’s advantage as a financial hub, Chinese companies conduct their investment
strategy in Southeast Asia, through their subsidiaries in the city-state. Figure 1 shows that thefirst wave came in 2008. This coincided with Tsingshan group’s investment in the mining
industry in Sulawesi, Indonesia. The second wave came in 2015. This coincided with thesigning of comprehensive strategic partnership between Indonesia and China. Since then,Tsingshan has invested significantly in smelter projects in Sulawesi.
During Jokowi’s first term (2014-19), majority of Chinese investment was directed totransportation, storage and communication sector, with almost US$3 billion investment.
However, in recent years, there has been increasing Chinese investment in the manufacturingsector. Chinese FDI in the manufacturing sector escalated especially since 2016, after BKPM
established a special help-desk for Chinese investors.
Chinese investments in Malaysia escalated after 2013 and grew steadily up until 2018.
The investments are spread over a large number of sectors, ranging from infrastructure to
manufacturing and services (Tham 2018, Terence et. al. 2020). For manufacturing, China was
the largest source country from 2016 to 2019.20
Figure 1: China’s outward investment in Indonesia, Malaysia and Singapore(US$ million)
14,00012,00010,000
8,000
6,000
4,000
2,000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
-2,000Indonesia

Malaysia

Singapore

Source: PRC Ministry of Commerce via CEIC

20

See MIDA, 20 April 2020. https://www.mida.gov.my/home/10222/news/approved-investments-in-themanufacturing-servicesprimary-sectors-in-2019-totalled-rm207.9-billion/ (accessed 26 July 2020).

3. Development of IMIP and MCKIP
3.1 IMIP
Indonesia’s Morowali Industrial Park (IMIP) is a joint venture between China’s Tsingshan
Group, and Indonesia’s Bintangdelapan Group that was established to develop an industrial
estate and integrated nickel-content stainless steel production compound in Bahodopi,
Morowali district, Central Sulawesi Province (Figure 2). The industrial park has been heavily
endorsed by Chinese and Indonesian leaders, and it is considered part of China’s BRI (Damuri
et al 2018). But the project does not have a government guarantee as it is a business to businessmodel, which Indonesia considers as the most ideal model for BRI cooperation (Negara andSuryadinata 2018).
The cooperation to develop IMIP was first announced at a 2013 summit between
China’s president, Xi Jinping, and Indonesia’s then-president, Susilo Bambang Yudhoyono.
Both countries agreed to upgrade their bilateral relations under a comprehensive strategic
partnership agreement, which covered cooperation in many areas, including economic, trade,finance, fishery, space and tourism.
While it was only launched in 2013, its development can be traced back to 2007, when
Bintangdelapan Group started its mining operations in a 47,000-hectare concession in
Morowali (Figure 3). The company approached Chinese investors to invest in nickel-basedmining activities as China is the largest market for Indonesia’s nickel export. In 2009, PT
Bintangdelapan Investama (BDI), a subsidiary of Bintangdelapan Group and Shanghai Decent
Investment Group, a subsidiary of Tsingshan Group, formed a joint venture to develop themining industry in the area. The two parties formed PT Sulawesi Mining Investment (SMI),
which produced and exported around 3.5 million tons of nickel ore to China in 2013.
In 2014, the Indonesian government introduced a raw-mineral exports ban, aimed at
encouraging investments in the country’s processing sector in order to create added-value. 21
The ban triggered a massive influx of Chinese investment, as Tsingshan and Bintangdelapan
signed a cooperation agreement in October 2013 to develop a new industrial estate inMorowali, named Indonesia Morowali Industrial Park (IMIP).

21

The government relaxed that ban in 2017 through a quota system. Recently, the government decided acomplete stop to ore exports from the beginning of 2020 – two years earlier than planned.
14

Figure 2: Map of Morowali Regency, Central Sulawesi Province

Source: ISEAS-Yusof Ishak Institute

The industrial park occupies an area of 2,000 hectares located in Bahodopi sub-district,Morowali Regency, Central Sulawesi Province (Figure 3). It is positioned in the eastern partof Sulawesi, 300 km away from Palu, the capital of the Central Sulawesi province. IMIP is
designed as an industrial estate to supply nickel-based products to China and the world.
Shanghai Decent controls a 74.69 percent stake in IMIP, while the remainder is owned by BDI.
Chinese investors decided to build an industrial park in Morowali in order to access theregion’s rich nickel reserves. Indonesia is estimated to have around 24 percent of the world's
nickel ore reserve, mostly concentrated in Central, South, and Southeast Sulawesi provinces.22
Consequently, Indonesia is currently the world’s largest nickel producer, with an average
production of around 800,000 metric tons in 2019.

22https://www.statista.com/statistics/273634/nickel-reserves-worldwide-bycountry/#:~:text=As%20of%202019%2C%20the%20total,of%2020%20million%20metric%20tons. (accessed
21 July 2020).
15

Figure 3: Map of IMIP and its Mining Concession Areas

Source: ISEAS Yusof Ishak Institute

Nickel is widely used as an industrial material for the production of stainless steel andbatteries. Given its importance and scarcity, it is natural for Tsingshan wanted to maintainadequate reserves of nickel for its industrial production of steel. Controlling nickel productionin Indonesia is regarded as a strategic decision to insulate the company from fluctuations
international nickel prices.
In 2017, IMIP produced 1.5 million metric tons of nickel pig iron (NPI) and 3.5 million
metric tons of stainless steel. With this production capacity, IMIP's total sales touched US$ 2.6
billion, which contributed towards government tax revenues of around US$100 million in
2018, based on the export duties. If fully completed, according to its Masterplan, by 2024, theproject will accumulate US$ 29 billion investments with an output value at US$35 billion while
the potential tax revenue may reach US$1.4 billion.
As of now, IMIP directly employs around 35,000 Indonesian workers. The park has
also indirectly created opportunities for business, services, and real estate, and has propelled16

local industrialization. Based on the government’s industrial plan, IMIP has been designated
to attract electric-vehicle makers. The industrial park is set to receive another US$4 billion
Chinese-led project to produce battery-grade nickel chemicals. There are three Chinesecompanies at IMIP that are in construction for the production of battery-grade nickel plants forelectric vehicles, namely Tsingshan Holding Group, GEM Co Ltd and Contemporary Amperex
Technology Ltd (CATL).

3.1.1 Facilitating FDI at IMIP
Incentives for IMIP
In the case of IMIP, the government has allowed the private sector to take the lead while thegovernment acts as a facilitator and regulator only. The presence of some retired militarygenerals in the company’s management board has been deemed a critical factor behind special
treatment given to IMIP.23
Although IMIP is a private-sector led initiative, it has been granted a status as a national
strategic project (PSN). Jokowi made the nickel industrial park a PSN, as stated in Presidential
Regulation No. 3/2016.24 This guarantees full support from the central and local governments
for IMIP to accelerate infrastructure delivery and issuance of relevant regulation as its
regulatory law. The status as a national strategic project also paved the way for IMIP to begin
developing the industrial complex while waiting for the building construction permit (IMB) to
be issued, in addition to the approval from the Manpower Ministry for the use of foreign
workers. IMIP receives discretion from the central government to employ foreign workers to
expedite the construction of the smelters.
The government further banned nickel ore export in 2020 to ensure sufficient raw
materials for IMIP thus expediting nickel smelter development. This is the only metal with anexport ban starting in 2020, while all other mineral ore exports will be banned in 2022.25

Foreign Employment
As one of the national strategic projects, the Indonesian government has given discretion for
IMIP over the use of foreign workers in order to boost the development of the industrial

23

https://www.thejakartapost.com/news/2017/11/15/morowali-a-tale-china-s-grip-rich-region.html. (accessed 21
July 2020).
24

https://kppip.go.id/en/national-strategic-projects/. (accessed 21 July 2020).
ttps://www.thejakartapost.com/news/2020/01/24/indonesia-to-have-four-new-smelters-this-year-as-mineralore-export-ban-nears.html. (accessed 21 July 2020).
25

17

complex. It has been reported in the national media the presence of a large number of Chinese
workers working in Morowali Industrial Park. The exact number of Chinese workers at IMIP,
and how many of them have proper work permits, are difficult to verify. Except for thecompany itself, no one from relevant government agencies seems to have the exact figures(Negara and Suryadinata 2019). Some anecdotal evidences say that the number is more thandouble of the official figures, around 5,000-6,000, and many of them do not have proper work
permits and their presence has triggered frictions with local workers.26
However, according to Minister Airlangga, Chinese workers were needed as thetechnology used in the smelter industry was brought directly by the investor of the country oforigin, i.e. China. With the development of the smelter industry, there will be transfer ofknowledge through training and assistance by foreign workers to Indonesian workers as forexample, in the construction, installation of machinery and equipment, and the production
process.
The government also emphasized that foreign workers in the smelter industry aretemporary, especially only during project development. During construction, the ratio is 60
percent for local workers and 40 percent for foreign workers. In the production period, the firstyear the ratio of local workers was 65 percent and foreign workers 35 percent.
After the construction period is completed, the government will ensure that the foreign
workers will return to their country and will be replaced by local workers. In the fifth year of
the company operation, it is targeted that the portion of local workforce will be 85 percent and15 percent of foreign workers.

Impact on Host Economy
To analyse the impact of the industrial park on the economy, ideally one should use firm level
data concerning outputs, exports, employment, wages among others. One can then compare thefirm level data with national or provincial level data. At the time of the writing, there is no such
firm level data available. Nevertheless, given the significant size of IMIP’s investments relative
to the economy of Morowali regency or Central Sulawesi Province, we can use regional or26

https://www.thejakartapost.com/news/2017/11/15/morowali-a-tale-china-s-grip-rich-region.html. (accessed 21
July 2020).
18

country level data to infer the contributions of the industrial park.27 Aside from the Park, there
is no other significant manufacturing development at the Regency.
Figure 4 shows FDI realization in the industrial park in Morowali Regency. In fact, allof the FDI in the region was directed to the industrial complex development, while little
domestic investments were obtained.

Figure 4: Investment Realization in Morowali Regency, (US$ million)
2000.01800.01600.01400.01200.01000.0
800.0

600.0
400.0
200.0
0.0
2009

2010

2011

2012

2013

2014

FDI

2015

2016

2017

2018

2019

DDI

Source: BKPM via CEIC

Since 2013, Shanghai Decent has invested over US$5 billion in developing theinfrastructureinBahodopi

regency,

e.g.

power

plant,

water

supply,houses,telecommunications, seaport, airports, and roads.28 This massive investment has changed thefoundation of the region that once depended on agriculture to support its economy.
Figure 5 shows that the contribution of mining and manufacturing sectors to Central
Sulawesi’s GRDP have increased steadily, accounting for 15 and 13 percent of total provincial
output in 2019. When IMIP started its operation in 2015, Morowali’s economic growth jumped

27

In 2017, total investment to develop IMIP has reached US$ 5 billion, which is about half of the total GDRP ofCentral Sulawesi Province in the same year.
28

https://lokadata.id/artikel/kapital-tiongkok-di-ketiak-sulawesi. (accessed 21 July 2020).
19

to 67.8 percent.29 The growth then stabilizes at around 13 percent average since then. In 2019,the regency’s economic growth reached 14.5 percent, which is much higher than national
growth of 5 percent.30

Figure 5: Sectoral Contribution to Provincial GRDP in Central Sulawesi (Percentage)
MiningAgriculture

Manufacturing

40%
35%
30%
25%
20%
15%
10%
5%
0%
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source: BPS via CEIC

The presence of IMIP has boosted the export performance of Central Sulawesi
Province. Figure 6 shows that the province’s export value has jumped from US$175 million in2014 (before IMIP operation) to US$801 million in 2015 (when IMIP started its operation).
Since then, the export performance of the province has been increasing significantly, reaching
US$6.3 billion in 2019.
IMIP had developed four nickel smelters with a total expected capacity of producing 2
million tons of nickel pig iron (NPI) per year. Three of its current tenants, PT Sulawesi Mining
Investment (SMI), PT Guang Ching Nickel and Stainless Steel Industry (GCNS), and PT
Indonesia Tsingshan Stainless Steel (ITSS) together can manufacture 2.5 million tons of hot

29

As a result of the implementation of the export ban on nickel ore in 2014, Morowali's economy grew by 0.09
percent that year.
30

https://morowalikab.bps.go.id/dynamictable/2017/07/05/10/pdrb-kabupaten-morowali-atas-dasar-hargakonstan-2010-menurut-lapangan-usaha-tahun-2010-2019-juta-rupiah-.html. (accessed 21 July 2020).
20

rolled coil (HRC) and 500,000 tons of cold rolled coil (CRC) per year. All of their HRC
productions are exported as currently the country has no facility to process this material.31

Figure 6: Export Value in Select Provinces (US$ million)
Southeast Sulawesi

Central Sulawesi

Central Java

8000
7000
6254

6000
5463

5000
4000
3375

3000
2000

1879

1000
0

801
352
2012

294
2013

175
2014

2015

2016

2017

2018

2019

Source: BPS via CEIC

Since its establishment in 2015, IMIP has contributed to Indonesia’s export of iron andsteel products (HS 72). It has exported some of its NPI, stainless-steel slab and HRC throughits own port inside the Morowali industrial park. There is no firm level export data available.
Nevertheless, IMIP had routinely reported its exports to the Provincial Customs and Excise
Office in Central Sulawesi, which are later recorded in the national trade statistics. Figure 7
shows the contribution of IMIP in the country’s iron and steel trade. Before its operation,
Indonesia experienced a significant trade deficit in the HS 72 sector. After 2016, two years of
IMIP operation, the situation has completely reversed as Indonesia gradually garnered a trade
surplus in the HS72 sector. Based on Figure 7, the country’s export of HS 72 products has
increased dramatically from US$52 million in 2014 (before IMIP operation) to US$300 million
in 2015 (after IMIP started its operation). The size of export value keeps increasing since then,achieving US$3.1 billion in 2019.

31https://www.thejakartapost.com/news/2017/11/15/morowali-investors-jittery-over-policy-uncertainties.html.
(accessed 21 July 2020).
21Given IMIP’s significant production capacity relative to Indonesia’s steel and ironproduction, we assume that this country level data can be used as proxy of IMIP’s contribution
to the national economy. Since the sector is only dominated by few large-scale manufacturers,
including PT Krakatau Steel, a state-owned company, the role of a large player like IMIP will
make a significant change in the national landscape.

Figure 7: Indonesia’s Export and Imports of HS 72 with China (US$ million)
4000
3115
3000

2609
1935

2000
929

1000
16

6

301

52

0
2012

2013

2014

2015

2016

2017

2018

2019

-1000
-2000
-3000
Exports

Imports

Net trade

Note: HS 72 is iron and steel products.
Source: BPS via CEIC

The development of the park has direct implications on the population in thesurrounding areas. Bahodopi district in Morowali, which is the epicentre of the Park, has been
particularly impacted by the rapid development. The number of residents of Bahodopi has
spiked two-fold after IMIP started its operation in 2015. 32 It employed 15,000 Indonesian
workers in less than five years for its nickel processing industry.33 Since IMIP’s establishment,
Bahodopi has become an economic magnet of Central Sulawesi, attracting workers fromnearby provinces for jobs and business opportunities in an otherwise largely backwater region.

32

https://morowalikab.bps.go.id/statictable/2017/06/07/191/data-series-jumlah-penduduk-menurut-kecamatandi-kabupaten-morowali-1999-2015.html. (accessed 21 July 2020).
33
https://www.thejakartapost.com/news/2017/11/14/china-finds-home-morowali.html. (accessed 21 July 2020).
22

The Park has also contributed towards reducing the level of unemployment in Central
Sulawesi (Figure 8). Figure 8 shows that the Central Sulawesi province has a much lower
unemployment rate compared with other provinces. Since IMIP started its operation, many
domestic migrants came to Morowali for jobs. This in turn has opened up many business
opportunities for the locals, such as renting out places and opening food stalls.34
The existence of a mining industry in the Central and Southeast Sulawesi provinces has
contributed to the relatively high level of minimum wage in the two regions compared withother manufacturing-based provinces in Java. Figure 9 shows that, on average, the minimum
wage in Central and Southeast Sulawesi is about 30-40 percent higher than the minimum wage
level in Java’s provinces. IMIP pays relatively higher salary for its employees, which is thereason why many job seekers from other parts of the country are interested to work in thepark.35

Figure 8: Unemployment Rate in Selected Provinces (percent per annum)West Java

Central Java

East Java

2012

2014

Central Sulawesi

South East Sulawesi

12
10
8
6
4
2
0
2010

2011

2013

2015

2016

2017

2018

2019

Source: BPS via CEIC

34

Ibid
https://www.thejakartapost.com/news/2017/11/15/anti-chinese-specter-raises-head-c-sulawesi-regency.html.
(accessed 21 July 2020).
35

23

Figure 9: Monthly Minimum Wage by Province (IDR thousand)
3000
2500
2000
1500
1000
500
0
2016
West Java2017
Central Java2018
East Java

Central Sulawesi

2019

2020

South East Sulawesi

Source: BPS via CEIC

Based on the discussion above, the development of the industrial park in Morowali todate, has shown some positive impact on the regional and national economy. The project hascreated new jobs and business opportunities for the local people and SMEs, either directly or
indirectly. It has also shifted the labour force from the agriculture to the manufacturing sector,
as people shift to a better-paid and formal sector employment.36 The development of the park
has also contributed to Indonesia’s export revenue, thereby reducing the country’s trade deficit
specifically in iron and steel commodities.
Since IMIP is strictly protected by the central government, regional administrations do
not directly benefit from IMIP’s operations. This is because the company pays export duties,
mining royalties, foreign workers’ levies and even reclamation-guarantee funds directly to thecentral government.37
Arguably it is still too early to fully assess the overall impact of the project. Without
firm level data, it is difficult to accurately measure the additional value-added of the industrial
park. Moreover, one may be interested to measure the productivity difference of firms in theindustrial park relative to firms in other regions. In the longer term, it is also important to36

https://www.thejakartapost.com/news/2017/11/16/farmers-lose-out-industrialized-regency.html. (accessed 21
July 2020).
37

https://www.thejakartapost.com/news/2017/11/16/everyone-wants-slice-emerging-morowali.html. (accessed
21 July 2020).
24

analyse spillover effects of the project, e.g. backward and forward linkages with other sectorsof the economy.
Finally, to ensure sustainability of the project and greater benefit for the community,
one also needs to assess the impact of the industrial park on the environment and local people.
Smelter industry requires hydrometallurgy, which creates quite a lot of waste or residue. Someare disposed in the sea or spillover to surrounding areas. This triggers massive environmental
damage. According to a non-profit Indonesian Forum for the Environment (Walhi), most of
the smelters built by China in Indonesia use old, highly polluting technology, and most
Chinese-funded projects lacked environmental safeguards.38

3.2 MCKIPThe Malaysia-China Kuantan Industrial Park (MCKIP) is the first industrial park in Malaysia
to be accorded a national status. It was launched in 2013 and has a twin park, the ChinaMalaysia Qinzhou Industrial Park in China. Qinzhou is located in Guangxi which has a vested
interest in collaborating with Malaysia due to its ambitious Beibu Gulf Economic Region
programme (Ngeow 2019a). In 2008, the central government had included this zone in its
national development strategy, leading to an increasing pressure for Guangxi to open up to
ASEAN. Guangxi therefore forged friendly ties with 53 ASEAN cities, thereby boosting its
trade and economic cooperation and people-to-people exchanges with those regions.
Consequently, ASEAN has been Guangxi's largest trading partner for 17 consecutive years.39
For Malaysia, the choice of Kuantan in Pahang for the location of the Park can be
attributed to several factors. Pahang is the former Prime Minister Najib’s home state andlocating the Park there is a strategic ploy to harness Chinese investments to foster economic
development on the less developed east coast of Peninsula Malaysia. Pahang is also Malaysia’s
third-largest state, while Kuantan it is located roughly halfway up the east coast between
Singapore and Kota Bharu and is the ninth largest city in Malaysia. MCKIP is also conveniently
located near Kuantan port, which faces the South China Sea. It is connected to the major
shipping lanes in the world, serving mainly China, Indo-China, the Far East and the Pacific
Rim.

38

https://www.chinadialogue.net/article/show/single/en/11727-Nickel-mining-resisted-in-Indonesia. (accessed
21 July 2020).
39 http://www.xinhuanet.com/english/2018-12/06/c_137655675.htm.

25

A joint-venture was forged between Malaysia (51 percent) and China (49 percent) todevelop MCKIP. In the Malaysian consortium, IJM Land holds 40 percent equity while
Kuantan Pahang Holdings Sdn. Bhd. and Sime Darby Property together hold 30 percent and
the Pahang State Government holds the remaining 30 percent. According to Nikkei (2019),
GLCs and government entities like Permodalan Nasional Bhd, Employees Provident Fund,
Kumpulan Wang Persaraan and Urusharta Jamaah Sdn Bhd, have invested in IJM, accounting
for 44.2 percent of the company’s shares as at 2019. IJM, however, remains independently run
as a private listed company, with no representation of the government in its board. Hence, theMalaysian consortium is represented by a mix of private-federal state and the state of Pahang.

Figure 10: Malaysia-China Kuantan Industrial Park

Source: ISEAS-Yusof Ishak Institute26

China’s consortium consists of two provincial state-owned enterprises (SOEs), namely
China Guangxi Beibu Gulf International Port Group (CGBGIP) (95 percent) and Qinzhou
Jinqu Investment Company Ltd (QJIC) (5 percent). CGBGIP was established in Nanning in
2007, dealing primarily with the construction and operation of ports, railway and roads. In
2013, it operated four ports in southern China, namely Fangchenggang port, Qinzhou port,
Tieshan port and Beihai port. These four ports reportedly handled about 200 million freightweight tonnes (fwt) of cargo in 2012 (Tham 2019). QJIC, was established in 2012, whollyowned by the Qinzhou City Development and Investment Group Co Ltd, and which belongs to
the Qinzhou City Government (Khor 2013). It is involved in the operation and management ofstate-owned construction assets. Qinzhou City is well-known for its petrochemical andequipment making industries and has a development pattern characterized by energy, papermaking, metallurgical, cereal and oil businesses.
The Park is divided into three plots of land (Figure 10). The first two plots of land
(MCKIP 1 and 2), covering about 2,500 acres is earmarked for heavy and medium industries
while the third plot (MCKIP3) will be used for mixed developments such as light industries,
warehousing, logistics, residential and integrated service centre.

3.2.1 Facilitating FDI at MCKIP
Investment Promotion
Apart from investment promotion conducted by MIDA, there were two other promotional
efforts. Since the park is located within the East Coast Economic Region (ECER), it was also
promoted locally and at the annual China-ASEAN Expo (CAEXPO) in Nanning by the East
Coast Economic Region Development Council (ECERDC) which oversees the development of
the region.40
Significantly, the Chinese partner in the joint venture also sought out investors from
China, especially from the same province. At the launch of the park in 2013, it was announced
by the then Prime Minister Najib that four memoranda of understanding were signed, including
one between ECERDC and CGBGIP for three projects in the park; a steel plant, an aluminium

40

The China-ASEAN Expo (CAEXPO) is an annual event, organised by the provincial government of the
Guangxi Zhuang Autonomous Region, at at Nanning. It is co-sponsored by the Ministry of Commerce of China
and its counterparts in the 10 ASEAN member states as well as the ASEAN Secretariat. It serves to promote
friendly cooperation between China and ASEAN, implementation the Belt and Road Initiative and international
industrial production cooperation within the China-ASEAN region and beyond. See
http://eng.caexpo.org/gonggao/16th/index.html
27

plant and an oil palm refinery.41 This is line with the strengths of Qinzhou city and the natural
resources available at the ECER. CGBGIP was therefore tasked to look for investors for theseprojects.
Visits to the Park by high level officials from Guangxi province were also
accompanied by potential investors from China. For example, in 2016, a delegation led by
the vice-governor of Guangxi province brought in more than 80 investors from all over
China to view the Park for potential investment. 42

Investment Approval and Incentives
The investment projects in the Park are strongly supported by the Malaysian government,
where various attractive incentives were given to investors in MCKIP such as import duty
exemption, stamp duty exemption, 100 percent corporate income tax exemption up to 15 years,
which is five years more than the usual corporate tax exemption as well as existing East Coast
Economic Region’s (ECER) incentives, (Kee 2019).43
IJM, as the Malaysian partner played an important intermediary role between the
Chinese investors and MIDA, the agency in charge of approvals for manufacturing projects
and fiscal incentives. This helped to smoothen the investment approval process since the
Malaysian partner understands Malaysian bureaucracy better than the Chinese investors.

Accessing Land for the Park
The Malaysian consortium included Kuantan Pahang Holdings Sdn. Bhd. and Sime Darby
Property. This is necessary as land is a state matter in Malaysia and the engagement of Simeand the Pahang state is to access the land needed for the Park.

41

See https://www.najibrazak.com/en/speeches/the-official-launch-of-malaysia-china-kuantan-industrial-parkmckip/ (accessed 20 July 2020).
42
See https://www.edgeprop.my/content/877125/kuantan-industrial-park-gaining-traction-says-ijm (accessed 20
July 2020).
43This includes income tax exemption of 100% for 10 years commencing from the year company derives
statutory income derived from the following activities: (i) the disposal of any right over land or disposal of abuilding or rights over a building or part of a building in an industrial park/free zone; and (ii) the rental of abuilding or part of a building located in an industrial park/free zone; See
https://www.ecerdc.com.my/en/investment-opportunities/incentives-for-business-and-investments2/#:~:text=ECER%20INCENTIVE%20PACKAGE%20FOR%20OIL%2C%20GAS%20AND%20PETROCHEMICAL%20CLUSTER&text=products%20or%20activities,Tax%20exemption%3A,tax%20allowance)%20for%205%20years(accessed 20 July 2020).
28

In 2014, the land for developing MCKIP only measured approximately 729 acres only
(IJM 2014). By 2019, the total land size for MCKIP has expanded and stands at 3,500 acres or14.2 km. IJM Land Sdn.Bhd. (IJML), a subsidiary of IJM, was reported in 2013 to have bought
land, including industrial land around Kuantan port for future development.44 The acquired
land were sold for industrial development under 99 year leases, which are considered to belong for Chinese investors who are face much shorter lease periods in China.

Foreign Employment
Permission to use foreign workers greatly enhanced the attractiveness of the Park. In the caseof Alliance Steel, China’s specialists in the factory’s high technology work such as the blast
furnace, were brought in to build the plant at the Park. These specialists helped to shorten thetime of construction (Gomez, et.al. 2020).
The number of Chinese workers used was reduced and the plant has plans toprogressively replace Chinese workers with Malaysian workers over time, subject to the skill
acquisition of the locals through technology transfer programs.

Infrastructure Support: Kuantan Port and Connectivity
Another of the MOU signed at the launch of MCIP by former Prime Minister Najib is between
IJM Corporation and CGBGIP for the expansion of Kuantan Port. The port was originally built
and operated by the federal government in 1984, but it was privatized in 1998. It is managed
by Kuantan Port Consortium Sdn. Bhd. (KPC), which is jointly owned by IJM Corporation
Berhad, (60 percent) and Beibu Gulf Holding (BGH, Hong Kong) Co. Ltd (40 percent), with
the Malaysian government having a special rights share.
The project envisaged an initial investment of RM 3billion. Federal support is seen in
the construction of the construction of the 4.63 kilometres long breakwater, in 2013, with aone-off funding of RM1 billion from the Federal government, using French technology.
The new deep-water terminal is being constructed progressively in three different
phases (Figure 11). Its Phase 1 deep-water terminal commenced operation in Q4 2018. The
port's annual handling capacity will be doubled to 52 million tons when the new deep-waterterminal (Phase 2) is completed. Kuantan Port obtained the Free Zone port status and recently44

See https://www.theedgemarkets.com/article/ijm-develop-land-near-kuantan-port
29

established the Free Trade Zone on 1 April 2019. This will facilitate the volume of transhipment
cargo at the port.

Figure 11: Expansion of Kuantan Port

Source: Tham 2019

A key connectivity is the East Coast Rail Link (ECRL), which acts as a land bridgeconnecting Port Klang on the west coast of Peninsular Malaysia to Kuantan Port on the east
coast (see Figure 1). The reinstatement of the ECRL project in 2019 provided an added boost
to the links between the east and west coast of the Peninsular Malaysia.
Other infrastructural support to improve the connectivity of MCKIP includes the
MCKIP main road and infrastructure, extension of MCKIP main access road to Northern Link
Road, and the construction of an elevated diamond interchange near the park (Kee 2019).

3.2.2

Impact on Host Economy

Impact on investment
As of 2019, MCKIP has 10 committed projects with a total investment of almost RM18 billion(RMB 30 billion) and is expected to create 20,000 jobs for the locals in the area (Table 3). Of
the two projects that are currently operating at MCKIP, Chinese greenfield investment isreported for the steel factory, Alliance Steel. The spun concrete pile project is manufactured
30under one of the subsidiary companies of IJM, namely Industrial Concrete Products Sdn Bhd(ICP), which is the first commercial manufacturer of Pre-tensioned Spun Concrete Piles (ICP
Piles) in Malaysia. There is no media announcement on the participation of Chinese investors
in this project.

Table 3: Investments at MCKIP, as of October 2019
No Industry
Investment.
Value (RM)
A. Approved and Operating Investors
1
Modern Integrated Steel
5.6 billion
Mill

2

Spun Concrete Piles
Manufacturing
Total
B. Approved Investors
3
Processed kaolin,
porcelain tableware andtiles
4Battery Manufacturing
5
Tire Manufacturing
6
Refinery for Petroleum
Based Products
7
Laminated Paper
Manufacturing
Total
C. Committed Investors
8
Potash Fertilizer
Manufacturing
9
Paper Mill
10 Combined Heat andPower Plant
Total
Notes: Tbc: To be confirmed

Job Creation

Land Size (Acres)710

92 million

5,500(currently
employing 3,500
of which 2,400 are
non-Malaysians
and 2,400 are
Malaysians100

5.7 billion

5,600

726

533 million

1,000

24.86

420 million
2.1 billion
5.1 billion

900
1,300
350

41
364.6260

126 million

200

17

8.279 billion

3750

507.48300 million

200

24.71

3.35 billion
250 billion

2000
Tbc

10
10

3.9 billion

2200

334.71

Source: IJM, as of 1 October 201931

16

In November 2019, it is reported that the battery manufacturer, Camel Power (M) has
commenced operations.45 Camel Power (M) Sdn Bhd is a subsidiary company of Camel GroupCo. Ltd. It was established in Kuala Lumpur on March 7, 2017 and its manufacturing plant islocated at MCKIP III. The parent company, Camel Group Co. Ltd, is one of the largest battery
suppliers for Chinese car maker Geely Automobile Holdings Ltd. Proton has appointed Camelas the vendor to supply Camel Power batteries for the new Proton X70 and future models.
Eighty percent of the batteries manufactured in Malaysia was for the export market. About 20
percent of the batteries will be sold in Malaysia while the remaining will be exported tooverseas like America, Australia, New Zealand, Africa and Middle East. Camel Power batteries
are distributed to all major cities across China and exported to over 40 countries. The company
has over 1,000 dealers, 50,000 shops and after market share 22 percent in China.46
For approved investments, the implementation may be delayed due to the on-goinghealth pandemic while the breakdown between foreign and domestic is not provided.
Committed investments are investments that are still waiting for approval and incentives.

Impact on Employment
This section reports only employment of Alliance Steel (AS) since it is the only manufacturing
facility that is fully operational. One of the chief concerns in Malaysia is the use of foreign andlocal workers. For AS, media reports indicated that 1000 Chinese workers are used comparedto 2.600 local workers. This gives a ratio of foreign to local of 0.38, compared to ratio of 0.26
in overall manufacturing and 0.19 in the manufacturing of basic iron and steel in 2016.
AS has however stated that the number of local workers will be increased progressively
over time, subject to acquisition of skills by local workers through the training and technology
transfer programmes (Gomez et .al. 2020).

Impact on Trade
Since the establishment of MCKIP and AS is to provide traffic for Kuantan Port, the data on
Port’s throughput indicates and increase in imports and a shift to import of intermediate inputs

45

See Maybank IB Research on IJM Corporation, 27 November 2019.
http://www.bursamarketplace.com/mkt/tools/research/ch=research&pg=research&ac=885726&bb=901932(accessed 18 July 2020).
46

See New Straits Times, 21 March 2019. https://www.nst.com.my/business/2019/03/471660/camel-powergets-rm609m-capex-expansionary-mode (accessed 18 July 2020).
32

for the construction of AS, but no shift as yet in the exports and export structure, although AS
is supposed to export 80 percent of its output.
Although there is no firm level data available, the trade going through Kuantan Port
indicates some changes that can be attributed to the construction of AS at the Park. While thePort was used primarily to export natural resources and resource-based products from the east
coast region, with little imports due to the lack of manufacturing activities prior to theestablishment of the Park (Tham 2019), the construction of AS in 2017 and 2018 led to a jumpin imports, specifically in machinery and transport equipment that was needed for theconstruction of AS’s factory (Figure 12). All the equipment and major inputs needed were
imported from China in order to expedite the construction speedily (Terence et.al. 2020).
Exports to China increased, especially for palm oil and chemicals. However, exports of steel
have not yet materialized in 2018 and may take time to register with the disruption in 2020 due
to the Coronavirus pandemic.

Figure 12. Kuantan Port: Imports and Exports from China

Types of Imports from China
2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
-

2014

2015

2016

2017

2018

Types of Exports to China
3,000,000,000
2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
-

2014

2015

2016

2017

2018

Source: Department of Statistics (unpublished data)
33

Long-term Impact
Malaysia aims to gain from technology transfer from inward FDI. The main forms oftechnology transfer lie in training and development, as well as through domestic sourcing ofcomponent products from Malaysian companies. However, by the end of 2019, there was noevidence of technology transfer through domestic sourcing of intermediate goods. It remains
to be seen if these Chinese firms are willing to increase domestic sourcing and help local SMEs
learn new technologies to develop their capacity to meet the specifications of the new
manufacturing facilities at MCKIP. Ultimately, it depends on costs considerations, which arebiased towards Chinese suppliers as they have economies-of-scale, which local producers do
not have unless they export.
Alternatively, the Chinese partner at the Park may act as an intermediary in getting
Chinese suppliers to relocate their production to Malaysia. This can lead to another round ofinvestments from China’s SMEs that are producing the requisite intermediate inputs. This will
depend on the changes in China’s production conditions and costs, as they evolve over time.

4. Variations and Commonalities
The most significant difference lies in the drivers of the industrial park projects in the twocountries. In the case of Indonesia, it is private sector driven with full state support. For
Malaysia, the stature of a national park meant that state support was the key driver while the
Malaysian partner is effectively a government linked company in terms of equity participation
but not in terms of management control. Hence, infrastructural support in Indonesia in termsof building power, energy supply, roads and port are all financed by the private players while
Malaysia’s federal government financed the connectivity linked to the Park, including part of
the finances needed for the expansion of Kuantan port even though the port was alreadyprivatised.
Secondly, although both projects were promulgated to drive industrial development in
the less developed parts of the country as in the outer islands in Indonesia and the east coast ofPeninsula Malaysia, the unemployment rate in the two countries differs considerably,
Malaysia’s and Pahang’s unemployment rate in 2013 was 3.1 and 2.8 percent, respectively
while in Indonesia it is 6.0 and 4.0 percent for the Regency in the same year. The creation of
employment is less important in Malaysia, given its relatively low unemployment rate ascompared to Indonesia. This is partly because Malaysia ventured into FDI-driven industrial
development much earlier than Indonesia and agricultural labour was re-directed into34

manufacturing and formal employment since 1968. Instead Malaysia is dependent on foreign
migrant workers while domestic migration in Indonesia is be used to meet the employment
opportunities created by the Park.
Thirdly, Chinese investment in Indonesia is both resource as well as efficiency seeking
due to the presence of nickel which is an important input in steel production while it is purely
efficiency seeking in Malaysia since there needed inputs are imported into the country for the
production of steel (Tham 2019).
Despite these differences, both countries actively sought out Chinese investments in thePark, especially since these were greenfield investments, which were not financed by loans or
government guarantees. Both projects were endorsed by the political leader of the day at therespective country, highlighting the extent of political support for each project.
It is also reflected in the special arrangements made to facilitate the entry of Chinese
investments in each country (Table 4). Investment promotion were undertaken by Malaysia
and also by China due to the mandate given to the Chinese partner to collaborate with ASEAN.
For AS, a partnership was formed by China with the provincial government partaking in the
new company established in order to tap on loans from the Chinese side for the construction of
the steel factory in Kuantan (Terence et.al., 2020). In Indonesia, the private sector has beenproactively promoting investment opportunities and inviting investors from China. Once a deal
is made and a JV is formed, the Chinese partner started promoting the project, securing
financing from Chinese banks, and inviting other Chinese suppliers to come in.
Likewise, special incentives and treatments were provided for investors in the Parks inboth countries, which were more than the usual fiscal incentives for FDI. Significantly, special
assistance was provided in the form of help-desk for Indonesia while the local partner acted asa local intermediary to handle local bureaucracy in the case of Malaysia.
Essential inputs for manufacturing production such as land and labour were also takencare. Both countries also facilitated the leasing of land for the Park, through the local partners.
Although the use of Chinese workers is a socially sensitive matter in both countries, yet
Chinese workers are allowed especially in the construction of the manufacturing facilities. This
is to hasten the speed of construction and to enable the manufacturing facilities to be up andrunning with minimum delay at the desired speed that Chinese manufacturers are familiar with,though this may not be the case for host economies.

35

Lastly, supporting infrastructure to connect the Park with the external world throughports to support both imports and exports are made in both countries, through private initiatives
in Indonesia and via collaborative investments in the case of Malaysia.

Table 4. Comparing Indonesia and Malaysia
FDI Institutions
Investment Promotion
Incentives and Investment
Approval
Land

Foreign Employment
Infrastructure Support

Indonesia

Malaysia

Endorsed by political leader;
By Indonesia and China
Special help-desk for
Chinese investors, special
incentives for industrial park
Mining operation license(metal mineral) is valid for
20 year and can be renewed
two times (each for 10 year)
AllowedMinimal government
contribution. Private sector
build and operate its
independent port for export
and import

Endorsed by political leader;
By Malaysia and China
Special Incentives andMalaysian intermediary tohandle the bureaucracy
99 year lease

AllowedPort for import and export
and surrounding connectivity
with the rest of Malaysia

Source: Compiled by authors

5. Conclusion
This paper shows that Chinese investments are linked with the host economies’ ambition tobuild its industrial capacity as well as promote its sub-national development. Under the Jokowi
administration, Indonesia has seen a rapid increase in Chinese investment. Some of theinvestment is targeted to promote and develop industrial capacity in backward regions, thus
promoting a more balanced development in the archipelagic country. Compared with investors
from other countries, Chinese investors are more willing to invest in the outer islands, i.e.
outside Java. The latter have long suffered from poor infrastructure and a low level of economic
activities. This is why the Indonesian government has been trying to direct BRI investments
outside Java. Similarly, Chinese investments are also used to develop the less developed east
coast of Malaysia for the Park and port projects, where infrastructure support is inferior to thatfound in the west coast.
The objective of this paper is to demonstrate that host economies in Indonesia andMalaysia sought to attract Chinese investments in the Park projects by enhancing theirinvestment environment through improvements in their respective FDI institutions. For
36

Indonesia, there are many hindrances in tapping FDI, including Chinese investments. The
constraints include Indonesia’s own weak business environment, infrastructure deficit and low
human resource quality. Some of its industrial and trade policies are also not compatible withthe foreign business interest. Similarly, bureaucratic red-tape and delays abound in investment
approvals for Malaysia.
Thus, special investment promotion to Chinese investors with better incentives andtreatments were made in both countries. Both countries also smoothened out the processes forthe acquisition of land and employment of Chinese workers, though the latter is meant to be
progressively reduced over time. Special infrastructure support was also provided in the Park
projects in both countries.
While a concrete assessment of the benefits of Chinese investment in the industrial parkin both countries lies outside the scope of this paper, preliminary analysis on the impact on thehost economy indicates that both projects have increased investments and employment
opportunities in the host economies. For Malaysia, a more detailed analysis can only be madewhen the approved investments are all realised and operating in the country. In Indonesia, since
the Park has been operational for a longer period of time, it would appear that the local economy
has also benefitted in terms of relatively higher wages, output and exports as well as a reduced
deficit in the import and export of steel products.
A longer-term impact in terms of technology transfer to the local small and medium
enterprises in both countries remains to be seen. Given the technological gaps between Chinese
firms and Indonesian as well as Malaysian firms, the impact on local suppliers, and thus
agglomeration effect, is still minimal. Creating agglomeration economies is thus a long-termgoal to be developed as each park continues to move forward.
Ultimately, a full analysis of the benefits and costs of industrial park development in
the long-term will need more detailed firm level data as well as an analysis on the social andenvironmental impact. In the interest of transparency as part of the shift towards better
governance of FDI in host economies, foreign investors including Chinese investors in Park,should publish an annual report showcasing their contributions to the host economy and/or
allow more researchers to access data to assess their development for promoting a better
understanding of contributions of Chinese investments in host economies.

37

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