PH: Overcoming decades of missed FDI opportunities
investment to the Philippines – FDI as a percentage of GDP actually declined half of that in Indonesia, barely a fourth of its counterpart in Thailand
During the past decade, Singapore has remained Southeast Asia’s leader $74 billion in 2014.
More recently, the FDI performance of both Indonesia and Thailand has - er FDI players – Myanmar, Cambodia, Laos and Brunei – continue to generate about $1 billion to $2 billion annually.
Consequently, Malaysia, Vietnam and the Philippines are now competing for FDI flows in the same category. In the early 2010s, Malaysia was the leader with some $12 billion the mantle with almost $13 billion, to the Philippines grew to almost $8 billion last year and there is potential for far more (see Figure 1).
Viewed historically, the picture is worse because, unlike its more successful Asean peers, the Philippines FDI for decades.
In the 1990s, FDI stock as percentage of the GDP was more than 30 percent in Malaysia, close to 28 percent in Vietnam but only 8 percent in the Philippines. By 2016, the ratio had soared to 57 percent in Vietnam, while climbing to 41 percent in Malaysia. In the Philippines, it was 20 percent – and remained stagnant through much of the Aquino era (see Figure 2).
The good news is that change Duterte era. The bad news is that it has been preceded by three decades of missed opportunities.
But how should the Philippines attract FDI?
Using FDI to upgrade competitiveness
The bottom line is that FDI competitiveness over time. Otherwise, companies and their investors – but not Philippine living standards. In the Global-Competitiveness
Index, the Philippines is today ranked 56th, right after Vietnam. In the Cor--
ruptionPerceptionIndex, the country (101st) is ahead of Vietnam (113th).
But here’s the real challenge: Despite impressive growth performance, the Philippines (113th) remains far behind Vietnam (68th) in the Ease of Doing Business rankings, along with Malawi, Swaziland and Palestine. That’s unconscionable. The Philippines needs substantial structural reforms to unleash entrepreneurship.
But how should the Duterte government use FDI to upgrade competitiveness?
First of all, the objective should not be to attract investors with subsidized input costs, but with higher productivity. For instance, subsidizing electricity rates may offer private gains for inves quality of the electricity grid would support the productivity of the entire business environment.
Second, the goal should not be to improve the quality of the location multiple companies and industries. For instance, tariff exemptions generate market distortions, whereas improved customs procedures enhance national competitiveness.
Third, it is vital to develop “sticky” incentives that are tied to the location. Corporate tax breaks boosts the “race to the bottom,”’ whereas general improvements in the business environment contribute to the country’s attractiveness.
Fourth, focus should be on sustained investment rather than transient one-time deals. If incentives are tied to the total size of the invest the country (and to the investors). Indeed, the government’s “Build, Build, Build” infrastructure plan is one vital instrument in this regard. Similarly, incentives that encourage to upgrade activities in the country contribute to more sustained FDI.
Indeed, boosting FDI flows should be linked with efforts to enhance innovation in strategic clusters that will be vital in the future as the Philippines competitiveness is enhanced and upgraded.
The magnitude of challenges
Nevertheless, increased foreign investment is no panacea, as labor and nationalist leaders often argue. If FDI long-term productivity and economic development, the nation’s sovereignty will be penalized. Furthermore, without appropriate efforts at the long-term “indigenization” of foreign prove transient.
In much of emerging Asia, including China, national leaders did not opt for FDI as a way to enhance productivity because it was the best option, but because alternatives were worse.
Second, the countries that have truly have excelled in “learning by doing.” Initially, foreign multinationals arrived with their own eco-systems; over time, foreign suppliers were replaced by cost-effective indigenous contractors.
Third, as China’s success has demonstrated, assembly manufacturing, coupled with unleashed entrepreneurship, can make a great difference in economic develop of industrialization to many.
Even currently favorable “demographic sweet spots” will only prove tomorrow’s development traps unless jobs are available, under-employment is marginal and the best and the most industrious are not being exported to other countries.
Moreover, significant FDI flows are necessary but not enough in countries in which manufacturing lacks adequate presence and in which landed elites are reluctant to renounce historical privileges – even in the name of their children or grandchildren.
Undoubtedly, the Duterte government is now paving the way to the missed decades. Yet, the magnitude of the challenges should be taken seriously.
What the Philippines needs is inclusive foreign investment, which requires a long-term focus on economic development.
Dr Dan Stein bock is the founder of Difference Group and has served as research director at the India, China and America Institute( USA) and visiting fellow at the Shanghai Institutes for International Studies( China) and the EU Center( Singapore ). For more, seehttps://www.differencegroup.net/