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Research Agenda

Phase 2: 2005-10
Programme 1:
Public Action & Private Investment
Programme 2:
Collective Action Around Service Delivery
Programme 3:
State Capacity

Phase 1: 2000-05

Programme 1:
Financing the State

Programme 2:
Mobilising Public Action

Programme 3:
Co-Producing Public Services

Public Action and Private Investment

Project: 'The Political Economy of the Local Investment Climate in Indonesia'


Much of the investment climate focuses on the national level. In an increasing number of countries this makes little sense, since the political drivers of change and conditions for investment and growth differ enormously between regions or localities. This applies in particular to Indonesia. It provides a unique opportunity to decipher some of the factors that contribute to better local governance and economic performance. The world’s fourth largest country has undergone a remarkable transition over the last 10 years. After the Asian crisis and General Suharto’s resignation in 1998, Indonesia’s government put an end to thirty years of authoritarian rule and implemented far-reaching political and administrative reforms. In 1999, Indonesian citizens were called upon (for the second time in history) to elect their national and regional representatives in a truly democratic way. At the same time, the national government enacted decentralization laws that fully dispersed authority for local taxes and services to more than 400 district governments. This made Indonesia – at least in administrative terms - one of the most decentralized countries in the world.

This “big bang” decentralization presents an important opportunity for researchers interested in the political economy of the investment climate. Under Suharto’s regime, policy reform was orchestrated, almost entirely, by a small group of national elites. This ensured coherence and certainty, but also suppressed public-private reform initiatives on local levels. Today, the situation is a completely different one. Indonesia's rapid regime change has created a large variation in political economy features – including interest group constellations, leadership qualities, and local checks and balances. This pronounced district-level variation presents a rare opportunity to explore effects of different types of public-private cooperation on local investment and growth.


The aim of this research project is to understand how the ability to construct and maintain coalitions of interest between the district level public and private sector actors has determined the levels of investment growth and economic performance of Indonesian districts.

Overall, our study is guided by two overarching questions. The first one asks whether heterodox public-private interest alignments (based on relationship- rather than rule-based cooperation) have positive effects on local investment climates. The second question goes one step further and inquires whether these heterodox reform alignments also have an impact on local investment and economic growth.


In order to answer these two questions, we draw together empirical evidence in two municipalities – Manado and Solo – which distinctly differ in the character of public-private cooperation: Manado exhibits an exclusive stetting, in which a small group of senior officials and business elites with narrow interests dominate the policy arena; whereas Solo displays a more inclusive setting, in which senior officials and a large range of multi-sectoral/ scale/ethnic firms are engaged in the reform process.

In order to measure the effect of different types of public-private cooperation on local investment (climates) we apply three different data collection techniques:

  1. In-depth interviews
  2. Local business surveys
  3. Desk reviews of secondary data

In-depth Interviews:
To gain important contextual information, we conducted roughly 50 in-depth interviews with local stakeholders. Interviews were semi-structured and covered salient issues of public-private relations, government performance (efficiency, services, corruption), and economic growth and investment. Key informants included city mayors and other public officials (from finance, planning, small-industry, economic planning departments), local firms (retail, manufacturing, public construction, service), NGO members, media representatives, and academics. In addition, local opinions were complemented by national perspectives. With the objective to add some additional crosschecks, we consulted a number of policy experts (World Bank, The Asia Foundation, UN-CAPSA, and KPPOD), and academics (University of Indonesia, CSIS) in Jakarta

Local Business Survey:
During our fieldwork in November 2007 and February 2008 we conducted business surveys with over 100 local firms in Manado and Solo. The applied sampling frame was guided by practical considerations. Due to the limited availability of reliable business data, respondents were randomly chosen by local ‘yellow pages’ and evenly stratified across retail, manufacturing and service sectors. Consistent with employment structures in rural Indonesia, the vast majority of the surveyed respondents were owners of firms with less than 20 employees

Secondary Data:
As a third and final step, we collected a range of secondary data sources. Official reports from government departments, business associations and local media offices were useful to triangulate interview information and further enlarge our technical understanding of district tax regulations, license requirements and business services. Moreover, local news clippings proved a rich source of information on local business, corruption, and politics.

Consistent with our research questions, the data collection is primarily focused on attaining a better understanding of (1) observable changes in local investment climate policies, (2) local interest, power, and incentive systems – in economic, political and societal arenas, (3) and the origin/ character/effect of public-private reform coalitions.


Neil McCulloch, Economist and Research Fellow, Institute of Development Studies, University of Sussex, Brighton.

Arianto Patunru, Director of Research, Institute for Socio-Economic Research, University of Indonesia (LPEM-UI), Jakarta

Christian von Luebke, APARC Shorenstein Fellow, Stanford University



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Latest News

The published working paper compairing the two case studies is now available here.

(1) Literature reviews:
(a) The Political Economy of Local Investment Climates - by Christian von Luebke.
This review of local policy drivers provides a set of useful insights for the ongoing project. It helps to spell out the conceptual framework and identify important analytical questions for field and data analyses. Click here for details.
(b) Indonesia’s Investment Climate – by Arianto Patunru.
This review summarises the experiences of Indonesian firms with local government policies since the enactment of decentralisation. In particular, it sheds light on salient business climate problems such as administrative red tape, policy uncertainty, and public corruption. Click here for details.

(2) Manado Case Study -
summarising the field results from in-depth interviews and business surveys in Manado.
(In process. To be revised)
'A draft version can be accessed from the website of our Indonesian partner, the Institute for Economic and Social Research at the University of Indonesia (LPEM).
Click here.

(3) Solo Case Study –
summarising the field results from in-depth interviews and business surveys in Solo.
A long can be accessed here.
A shorter version of this paper will be published in the Asian Economic Journal, 22 (3), Sep 2009. Click here to access







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