Crossroads (Toward Philippine economic and social progress)
Philippine Star, 11 April 2012


The Philippine economy has succeeded to attract foreign direct investments, but not nearly as well as other neighbors. Despite economic reforms that allow more import competition, the domestic economy continues to harbor restrictive provisions against FDI.

Three reasons for more FDI liberalization in the economy. Three important reasons may be cited why further liberalization of the rules affecting the admission of FDI in the domestic economy will yield good fruit for the nation and every one.

First is the growth of industrial exports in the country. After decades of subjecting FDI to restrictive rules in the enjoyment of investment incentives, the government liberalized export incentives to attract more FDI, spurred by the opening of export processing zones where even 100 percent foreign enterprises were encouraged to set up. Today, the country is host to a generally successful manufacturing export sector.

A second reason is the spectacular recent success of the BPO (back-office operations) industry, where the initial moves began with the establishment of call centers. In this sector, fully owned FDIs were encouraged to set up call centers and other BPO operations. Today, the country is at the forefront of the international BPO industry.

A third reason is that nearly one-tenth of the country’s employed labor force is holding passports while working in foreign countries. In the places where OFWs work, the capital ownership of enterprises is certainly totally foreign-owned! If more FDI came to the country, more Filipinos would find comfortable living at home.

The domestic market needs investment stimulus for high growth. The worst problems that afflict the national economy are felt in the domestic market. This is the part of the economy where all the nationalistic restrictions against foreign capital are concentrated.

Such restrictions have further fueled monopolistic consolidation of economic power. Those firms that succeed in the domestic market often consolidate such success by eliminating effective competition. Competition would guarantee market outcomes that improve the lives of all Filipinos, raise efficiency and still reward enterprises with profitability.

The domestic economy is hampered by lack of investments. The “60-40” equity rule defined by BOI incentives helped to discourage the entry of more foreign capital when the country needs more. It also denied Filipinos of foreign partners with more capital with which to manage economic success.

 The liberalization of the “60-40” investment rules should permit greater FDI into the country’s economy. While this could be done by legislative correction, the best route toward it is the Enrile-Belmonte initiative on constitutional change. (See my earlier discussions of this topic). The investment inflows will provide stimulus for higher economic growth. Why?

With few exceptions, the Philippine economy is afflicted by problems arising from the restrictions to more investments. Such restrictions lead to high cost and poor quality of the services of public utilities thus penalizing domestic economic enterprises. Under investment in public infrastructures and in public utilities has been an inevitable outcome.

In another present day context, current investment incentives inhibit the implementation of PPP (public-private participation) projects that the government is encouraging. They also create conditions for the monopolization of the opportunities for PPP to a few participant firms.

Creating a strong link between domestic firms and the export sector. A further reason is the need to provide a robust linkage between the export industrial sector and the domestic economy.

A concrete example of this problem is taken from a survey of Japanese FDIs operating in other East Asian countries. In China, Japanese exporting companies buy 60 percent of their supplies from other companies located in the domestic economy. These supplies are bought from other Japanese companies but they also include other FDIs and domestic companies.

In Thailand, the Japanese FDIs have a domestic procurement ratio of export sales amounting to 53 percent. Even in Indonesia, Japanese FDI local procurement amounts to 41 percent of total supplies.

In the Philippines the local procurement ratio of export manufacturing sales of Japanese companies is only 26 percent according to this survey. Even Vietnam which only began to export heavily in manufactures in this decade has a local procurement ratio of 29 percent from Japanese export locators!

Further concrete examples from Japanese investment migration to new locations. Nomura Research Institute makes the following commentary about Philippine industrial strategy if it is to encourage a mass influx of Japanese companies in the electronics industry in particular, to target for example, the domestic manufacture of products like the printer, the multifunctional peripheral (MFP), the projector, scanner, and digital camera.

Such electronics products have high commonality among themselves in their manufacture. These enjoy high demand in the modernizing world especially more so in emerging markets where future expansion is expected to explode.

In the case of the printer/MFP, the following Japanese companies are not manufacturing in the Philippines but they could be attracted if conditions are favorable: Toshiba, TEC, and Ricoh. Toshiba manufactures parts in the country but it does not assemble its brand lines here where that is feasible.

Among the companies producing projectors, Canon, Hitachi, and Panasonic are already locators but they do not yet manufacture their product lines of projectors in the country. Some assembly of more brands is possible. In the case of scanners, Canon and Epson have possibilities here. And PFU, another big brand, is not yet in the country.

Among digital camera manufacturers, Canon and Panasonic already undertake some manufacturing of product brands, but not much more of their product lines in the country. And there are big names like Casio, Fuji Film, Nikon and Sony – that are located in Japan or in other host Asian neighbors – that could be enticed to undertake a larger share of their expansions in our shores.

These types of manufacturing industries can migrate in clusters if Philippine investment planners work out to improve the investment environment, including regulatory framework, in the setting of industry projects. Such an effort entails enormous work, not just saying we are welcoming this new development of relocation of manufacturing sites. There is no room for waiting especially since other countries have the same welcoming posture with possibly better investment incentives to offer.

The major producers of electronics products have a linkage in the supply of raw material inputs essential in the manufacture of the final product. These lead to the targeting of companies that are not based in the country at present in sufficient quality standards as well as in quantity. These are manufacturers of glass, motor, metal processing, dies and molds and so on.

There are many Japanese companies not yet in the country but whose operations would be integral to the needs of the electronics makers. Names such as Mabuchi and Minebear were among the companies suggested by Nomura Research as potential target companies. Of course, an expanding market will attract even more investors in the intermediate stage of manufactures, not only Japanese but involving major foreign investors.