Foreign investment and industrial policies

There is a formal legal limit of foreign ownership defined for various business sectors. For example, pharmaceutical companies have a foreign ownership limit of 75% shareholding.⁶ Independent pharmacies have a foreign limit of 0%, while educational facilities are at 49%, private hospitals 65% and financial services 80%. The latest version of this regulation was introduced in 2007, when restrictions on foreign ownership were introduced into 23 sectors. The Indonesian Government is, however, currently revisiting its “negative” list.

The Ministry of Health issued Decree No. 1010 in late 2008, as part of its efforts at technical reform. The 1010 regulation requires every company to manufacture every one of its pharmaceutical products in Indonesia.

If companies do not agree, then their product licences will be withdrawn and they will not be able to sell drugs that are not manufactured in Indonesia. Existing foreign firms that are importing drugs will be classified as pharmaceutical wholesalers and lose their registration rights for their products 2 years following the promulgation of the Decree. Imported pharmaceuticals can be registered by local pharmaceutical companies with

4 Statement by Kimia Farma staff during an UNCTAD workshop in Jakarta, 11 November 2010.

5 See the 30 August 2003 Decision on the Implementation of Paragraph 6 of the Doha Declaration.

6 A grandfather clause allows Eisai’s shareholding in PTEI to be higher than 75%.

written consent by a foreign company. The written consent must include technology transfer to allow local manufacturing within 5 years.

The 1010 Decree is, quite understandably, controversial. Although it aims to secure greater technology transfer to Indonesia in a strategic industry that the government is trying to strengthen, a factory of a multinational firm manufactures only a handful of products and the rest are imported from other factories around the world because of the need to be globally efficient. Some of the fiercest criticisms of the Decree therefore come from the trade association of multinational pharmaceutical firms in Indonesia, the International Pharmaceutical Manufacturers Group (IPMG), which has 29 members, 12 of whom are strongly opposed to the new policy and may have to withdraw as they do not have a factory in Indonesia. These companies include Merck, Novartis, Eli Lilly, Novo Nordisk, Astra Zeneca and the Japanese company Astellas, although Astra Zeneca is said to be setting up a new facility in Indonesia (while it is closing its plants in Europe). The 1010 Decree will also be an issue for Malaysian and Thai pharmaceutical companies that want to export to Indonesia as part of ASEAN trade, who will find that they now need a local factory in order to register a drug for distribution. It remains to be seen whether any countries will legally challenge the Decree.

For its part, the National Agency of Drug and Food Control appears to recognize that it might be problematic to require that all pharmaceuticals be produced locally, and that a rigid implementation of the Decree could have potentially negative consequences for access to medicines. It has indicated that the Indonesian Government is prepared to be flexible in the interpretation of the Decree. In this regard, it should be noted that even before the issuance of the 1010 Decree in 2008, the Indonesian Government was encouraging foreign firms to establish local factories to manufacture pharmaceuticals. Before the 1010 Decree, however, companies wanting to distribute any of their products (including those manufactured abroad) could hold a distributor’s licence, which would not necessarily require a factory in Indonesia.

Free trade agreements with China and India are seen as threats to the domestic industry. For example, the China–ASEAN Free Trade Area (CAFTA) will open Indonesia’s health sector to competition from abroad. It took effect on 1 January 2010, but its impact is yet to be seen.

In the early 1980s, there was a 5-year tax holiday for new investments in the pharmaceutical sector, but this programme ended in 1984. Now there are few incentives offered by the Indonesian Government specific to the pharmaceutical industry. There is, for example, no tax relief on pharmaceutical exports or on R&D expenditure. At present, there is no particular Government policy in place to lower the cost of APIs. This is unusual in the light of the significance of the pharmaceutical industry to Indonesian inward investments.

5.4 Science and technology policies

The Indonesian Government has a Tropical Diseases Centre and the Indonesian Center for Agricultural Biotechnology and Genetic Resources Research and Development. The major focus of research seems to be on herbal products and vaccines, which appears in part to be driven by the concerns in the country over avian flu. It should be noted that in 2007 Indonesia, in a controversial move, had restricted access to H5N1 virus samples to parties who agreed to use them for noncommercial purposes. More recently, and with the adoption of the Nagoya Protocol to the Convention on Biodiversity in November 2010, a Japanese non-profit-making organization, announced technology transfer and joint development of a vaccine for avian flu with the state-owned enterprise Biofarma. Biofarma is also part of a WHO project to respond to the need for stepped-up vaccine production in the event of a pandemic.

Apart from the exceptions mentioned above, there appear to be few incentive schemes to encourage science, technology and innovation in Indonesia.

Discussions with the State Ministry of Research and Technology revealed that there are neither special economic zones nor R&D grants or soft loans for new technology. Overall, there appears to be little coordination of science and technology policies with industrial and economic policies. Apart from the opportunities presented by the Nagoya Protocol and biodiversity-based products, there appears to be little interest in developing indigenous R&D capacity beyond the generics market.

As far as private-sector initiatives are concerned, medium-sized Indonesian companies (such as Pyridam) are focusing on expanding their contract manufacturing business. The biggest pharmaceutical company in South-East Asia is Indonesia’s Kalbe, which is also developing its own innovative products.

Kalbe owns a research coordination and licensing entity based in Singapore called Kalbiotech. Most of the other R&D in Indonesia is based on licensing in products and carrying out additional development. It will take some time for research to come close to replacing manufacturing as a growth driver in Indonesia.

5.5 Education

While Indonesia spends 5% of Government expenditure on health, it spends 17% of total Government expenditure on education – compared with 25%

in Thailand. Indonesia has, nonetheless, undergone a major improvement in the area of education. The literacy rate among people aged 10 years and over has increased from 62% in 1971 to 91% in 2002. The adult literacy rate is now 92% (WHO, 2007). Indonesia is probably doing better with its Millennium Development Goals (MDGs) in terms of primary education and enrolment in secondary education facilities than in areas of health. However, the focus on higher education is weaker, and scientific and medical education in particular needs strengthening. The graduate programmes en masse started in the mid-1980s, but the brightest students preferred to go overseas to study. Quality appears to be the main issue. The Times Higher Education

(2008) World university rankings 2008 report ranks the leading university of Indonesia at 287th and Bandung Institute of Technology at 315th. This comes after Singapore (77th), Taiwan Province of China (124th), Mexico (150th), India (154th), Thailand (166th), South Africa (179th), Malaysia (230th), Brazil (249th) and the Philippines (276th). However, both Indonesian universities have improved their ranking on the previous year in the same report. The Indonesian President is encouraging the Indonesian universities to take up business school subjects such as entrepreneurship.

5.6 Good governance

The Corruption Perceptions Index of Transparency International (2009) places Indonesia at 111th, ahead of other ASEAN countries, with Viet Nam ranked 120th, Laos 158th and Myanmar 178th, but behind Singapore at 3rd, Malaysia 56th and Thailand 84th. The Political & Economic Risk Consultancy (PERC, 2010) put Indonesia at the bottom of its Asia Pacific corruption perception ranking in March 2010.

The multinationals often blame the local industry for controversial marketing activities. Local firms deny engaging in unethical marketing, and some firms, such as Kalbe, conduct public relations to explain their marketing policies to the outside world.