Australia-Indonesia: the quest for a better relationship : could FDI have a role?

Australia’s defence planners argue that a strong and productive relationship with Indonesia is critical to Australia’s national security. The Defence Department’s quest to reorder the relational status quo is focused on establishing interdependencies that contribute to Indonesia’s economic development and help mitigate threats to Australia’s interests. Yet, in practice the relationship is marked by tensions, cultural indifference and limited economic engagement. Australia’s formal and person-to-person associations with Indonesia are often problematic and the current commercial engagement is paltry. My thesis uses a deductive secondary source analysis and small n semi-structured interview method to establish whether foreign direct investments (FDI) could change those realities. It has three parts. First, I identify why indifference is the hallmark of this bilateral relationship. The core issues are the legacies of Australia’s anti-Asian immigration policies, the Non-Aligned Movement, cultural differences, conflicts in East Timor and political ineptness. Second, because there is little IR theory on the conflict mitigating role of FDI, I examine the insights that trade security studies may provide into FDI’s likely security effects. I argue that capitalist peace thesis research that has identified causal mechanisms through which trade promotes security are likely to have equal or stronger effect in the case of FDI. Third, I review Indonesia’s published economic development plans which demonstrate a need for substantial foreign direct investments. Based on the precedent of OECD member support for FDI ventures and the likely provisions of an Indonesia-Australia Comprehensive Economic Partnership Agreement (CEPA), I argue that a government economic diplomacy initiative could facilitate Australian corporate efforts to meet many of Indonesia’s FDI requirements. My conclusion is that there is potential for Australian FDI to build economic interdependence, support Indonesia’s economic development and help counter the poverty and political exclusion that fosters extremist violence. That outcome aligns with Australian Defence Department assessments that a faltering Indonesia could become a well-armed, unfriendly, authoritarian nationalist near-neighbour, whereas an economically strong, democratic Indonesia would be a security asset for Australia and the region.