The path to maintaining an upswing in FDI starts at home

September 29, 2016 at 13:25

Foreign investments are important in filling the gap that local investments are unable to fulfill. Not only do they fund projects in the Philippines, they also expand Filipinos’ technological choices and access to foreign buyers. Where trade flows fast, investments tend to follow suit.

Unfortunately, recent portfolio investments in the country have not been keeping with expectations. The benchmark Philippine Stock Exchange (PSE) has been declining since August until the third week of September. There are a number of external and internal factors that have contributed to this rather dismal performance in the country’s stock market, but stock market corrections are relatively easier to expect and address because this capital is highly mobile and sensitive to short-term changes.

However, it is the attractiveness of the country to foreign direct investments (FDI), or more long term, more stable market access in trade and investments, that is more a cause for concern. Once investors have chosen to invest in a country or not, there is little flexibility involved, as the sunk cost of putting up a factory, power plant or hotel is often large.

The past administration was generally successful in attracting FDI into the country. The UN Conference on Trade and Development (UNCTAD) World Investment Report 2016 shows that FDI inflows into the Philippines in 2015 was huge compared to its level in 2010: $5.234 billion compared to $1.298 billion. The administration’s success came despite some inherently less attractive aspects of the Philippine economy. The restrictions in and protectionist tone of our Constitution, where several sectors are either closed outright to FDI or limited to 40% maximum equity ownership, are two aspects.

Despite the country’s progress in the last five years, the overall amount of FDI into the country is still modest compared to many of our dynamic Asian neighbors’. According to the same World Investment Report, countries like Vietnam, Thailand, and Malaysia each attracted more than $10 billion in 2015. Vietnam overtook the Philippines around two decades ago in attracting FDI and newcomer Myanmar is also catching up.

Another indicator of the country’s investment attractiveness is the share of FDI in gross investments in the economy. Hong Kong, Singapore, and Macau likely top the list in this category. A closer look at the numbers, however, provide us with some interesting insights.

First, Cambodia and Vietnam are very consistent and determined in opening up their economies to foreign investors and entrepreneurs.

For Cambodia, the FDI share of gross investments moved from 22.1% in the year 2000 to 32.1% in 2005, and more than doubled in 2010 to 73.8%. In 2015, the share had settled at 45.7%. For Vietnam, the FDI share went from 15.0% in 2000 and 10.8% in 2005 to 21.7% in 2010 and 25.5% in 2015.

Second, in China and South Korea, FDI is dropping as a share of overall investment. For China, the figures moved from 10.2% in 2000 and 8.0% in 2005 to 4.3% in 2010 and 3.0% in 2015. For South Korea, the FDI share stood at 6.5% in 2000 and 4.9% in 2005, dropping to 2.8% in 2010 and 1.4% in 2015. The figures do not tell us exactly why this change has occurred — there may be fewer foreign investors coming on or local investments expanded at a more rapid pace.

The Philippines has a see-saw record in this category. FDI share of investment was 12.5% in 2000 and 9.0% in 2005. In 2010, however, FDI was only 3.2%. It recovered to 8.2% in 2015.

For the Duterte administration to maintain the upswing of foreign investments into the Philippines, it will need to hurdle a few challenges.

A first step for the Duterte administration will be for it to reduce or remove uncertainties that can sour investments. The high and rising state-mandated national minimum wage, the always extended and never concluded agrarian reform program, and anti-mining, anti-coal power policies in the environment sector, the unstable policy environment, however well-intentioned, reduce investors’ and businesses’ confidence in long-term planning.

Second, and in an area the administration has already begun to work in — it could continue to work on significantly reducing red tape and the bureaucratic burdens on business, both local and national, that discourage many foreign and local investments.

The final and most serious challenge will be to liberalize the Philippine economy and lift the protectionist provisions of the Constitution. More specifically, the administration could explore lifting the caps on foreign equity ownership, except in critical resources like land. This will be a significant challenge on its own, that would need to be part of any charter change to occur within the next six years.

The flow of much needed FDIs that would directly generate jobs and revenues will depend on how wide this administration will open the country’s doors to global enterprises. Looking at what Vietnam and Myanmar have done, we may need to build an even bigger door.

Prof. Victor Andres “Dindo” C. Manhit is the founder and managing director of the Stratbase Group and president of its policy think tank, Albert del Rosario Institute for Strategic and International Studies (ADRi). Prof. Manhit is a former chair and retired associate professor of Political Science of De La Salle University. He has authored numerous papers on governance, political, and electoral reforms.