Foreign direct investments are very important especially for developing economies like the Philippines. The country needs private funds in infrastructure, power generation, tourism and manufacturing to generate jobs and improve wages.
Such investments are more desirable because these stay longer, create employment and bolster economic growth. In contrast, short-term foreign portfolio investments, or “hot money” are pulled out of the economy easily, as these are invested mainly in the local stock market and do not add much to economic production.
The inflow of foreign direct investments to the Philippines may be improving in the past few years. However, compared with many of our neighbors, the level still lags and remains insufficient to help propel the economy to more sustainable growth.
In the first quarter of 2019, for instance, the net inflow of foreign direct investments reached $1.9 billion, down 15.1 percent from the $2.3 billion in the same period last year.
In 2018, the Philippines remained one of the countries with the lowest inflow of foreign direct investments, according to data from the Bangko Sentral ng Pilipinas (BSP).
With only $9.8 billion in net inflow, the Philippines ranked seventh out of 10 Asian countries that the BSP tracks. It was ahead of only Malaysia (with $8.57 billion) and Taiwan (with $7 billion).
The rest of the Association of Southeast Asian Nations (Asean)-5 performed better: Singapore attracted $81.85 billion in net inflow for the year, followed by Indonesia’s $20.17 billion and Thailand’s $12.46 billion.
The United Nations Conference on Trade and Development’s (Unctad) 2019 World Investment Report on special economic zones, meanwhile, showed that foreign direct investment flows to Southeast Asia last year rose 3 percent to a record $149 billion, raising the group’s share in global inflows to 11 percent in 2018 from 10 percent in 2017.
However, net inflow to the Philippines’ economic zones slid by 25.75 percent to $6.46 billion from $8.7 billion in 2017, said the same report.
What is worth mentioning at this point is the case of Vietnam. Foreign direct investments in Vietnam climbed 9.1 percent in 2018 to $19.1 billion, marking six straight years of increase. The Vietnamese government reported that industries like apparel have been moving production out of China and into Vietnam to avoid higher US tariffs brought about by the ongoing US-China trade dispute.
A prolonged trade war could accelerate this shift and Vietnam would become Asia’s biggest beneficiary of the Sino-US trade war, according to Japan’s Mizuho Research Institute.
A slowdown in foreign investments here has been attributed in part to the uncertainty over the current tax incentives for foreigners. The government seeks to change the structure by removing incentives to industries that have enjoyed such perks for decades. This “rationalization” plan pending in Congress has apparently forced potential foreign investors to wait and see.
There are also other restrictions to the entry of foreign investors enshrined in the Constitution and other existing laws. The Duterte administration’s economic managers have been calling on Congress to amend the Public Service Act to open up sectors like telecommunications to foreign ownership.
However, the administration itself can liberalize the entry of foreign businesses by relaxing the Foreign Investment Negative List, a roster of sectors of the economy that are off-limits to foreign investors.
The American Chamber of Commerce of the Philippines earlier noted that the Philippines and Vietnam were nearly comparable in most aspects. While the Philippines has an important advantage as an English-speaking nation, it also has perceived downsides such as the considerably higher cost of key manufacturing factors like electricity and minimum wages, as well as the higher number of nonworking holidays.
If Congress and the administration can get their act together and move to address decisively the obstacles and bottlenecks to the entry of more foreign investors, the Philippines may yet become a more attractive destination for doing business, and land somewhere in the coveted upper list of beneficiaries of foreign direct investments.
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