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Conflict, Regional Cooperation, and Foreign Capital: Indonesian Foreign Policy and the Formation of ASEAN


  • Author’s note: I thank David Bearce, Seung-Whan Choi, Paul Fritz, Yoav Gortzak, Einat Haftel, Alexander Thompson, and the anonymous reviewers for helpful comments on various drafts.


Despite seemingly little prospects and meager results, many developing countries invest substantial resources in regional cooperation organizations. Considering the widespread skepticism regarding the benefits of these organizations, this enthusiasm is puzzling. This study offers an answer to this puzzle and argues that under certain conditions international organizations among developing countries function as a signal of regional peace and stability. In turn, they reduce the political risk associated with foreign investment and increase the inflow of much needed capital to the economies of their members. I evaluate this argument in the context of the Association of Southeast Asian Nations (ASEAN). I show that Indonesia forcefully promoted the formation of ASEAN and that Indonesian foreign policymakers believed that joining this organization will reverse its aggressive and irresponsible image in the eyes of international donors and investors. Evidence regarding political risk and foreign direct investment in Indonesia and other ASEAN members provide additional support for the argument.