The Philippine Economy – (Part III) – A historical peep into foreign direct investments policy and economic reality

Recent international economic developments seem to favor the flow of more foreign investments to the Philippines. We have always possessed the propitious factors that could make us a home to foreign direct investment. Through some fault in national outlook, however, we have not realized it fully.

There is nothing automatic that the flow of foreign capital into our economy will happen just because we want it to happen. The more our economic leaders realize this fact, the better shall we be prepared to be pro-active in doing a good job.

“Why foreign direct investments are mainly in the export

processing zones.” There is a reason why most of the foreign direct investments that have come to the country are mainly located in the export processing zones and in special economic zones. This happened relatively late in the country’s recent economic history.

For decades since independence, laws designed to favor industrial development were biased heavily in favor of developing the national economy mainly for domestic Filipino enterprises. This has roots not only in the Filipino First policies of the 1950s but more significantly in the restrictive constitutional provisions affecting foreign capital.

The BOI (Board of Investment) investment incentives for industrial development and for export development had a strong bias to favor Filipino enterprises in this development. When the investment incentives that created the BOI were originally legislated during the late 1960s, Senator Jose W. Diokno, the inheritor of the nationalistic line of Claro M. Recto, guided the legislation in Congress.

The BOI incentives law circumscribed the role of foreign capital into a supporting cast in national industrial development rather than as a major partner. The main provisions of the “60-40” Filipino-to-foreign equity rule defining the recipients of investment incentives were cast in stone in the BOI investment and export incentives.

Over the years, some liberalization of these rules was undertaken in response to the country’s lag behind neighboring countries in attracting foreign investments. The amendments to the investment incentives law were however made on the fringes rather than on the core.

“Two distinct economies result.” The result was that two separate economies developed as far as the involvement of foreign direct investments was concerned.

The dominant economy. The main economy that followed a restrictive, nationalistic development line with a lot of rules, regulations and restrictions became dominated by Filipino owned enterprises which received the industrial incentives. This large economy dominates the entire nation’s production and commercial landscape which is highly regulated and with a lot of problems to be fixed.

This is the highly regulated economy that gets rated in international surveys of economic, social and even political indicators. It is the economy that often characterizes the country when compared to other countries. This economy is marked by high cost, inefficient business processes and has inadequate services marked by bottlenecks in infrastructure facilities. It is for these reasons internationally less competitive.

To this day, this essence of this economic protection remains. The chambers of businesses owned by major Filipino groups – exemplified by the Philippine Chamber of Commerce and Industry and also including the more moderate Makati Business Club – benefited by this rule.

Even though their rhetoric has changed from the extreme nationalistic lines of the past to more pro-open economy lines of the present, this is the main line that the ruling business class continues to espouse – the protection of the domestic economy for themselves. This is why it is difficult to reform economic policy and partly the reason for the country’s stymied industrial growth.

The smaller but competitive economy. The other Philippine economy is the export-oriented enclave that grew out of the laws that promoted export processing zones. This sector was the escape route that enabled the country to become more outward looking, internationally competitive, and attractive to foreign capital.

This economy is more competitive internationally. Enterprises are mostly located in the export processing zones and other special economic zones. The foreign enterprises manufacture for export. Their operations are still essentially separated from the rest of the domestic economy.

“Our neighbors learned from us….” The Philippine BOI became a model for our Thai, Malaysian and Indonesian neighbors. They learned from our mistakes. Compared to us, they launched their industrial development programs later.

They patterned their laws on the agency structure and powers of our BOI but they deviated in a most fundamental way from our policy. They did not incorporate the circuitous nationalistic lines that favored domestic enterprises.

Our neighbors simply allowed full foreign capital participation in their own industrial development programs by permitting 100 percent foreign equity investments to receive incentives. This was the main reason why, when conditions permitted the flow of foreign direct investment to ASEAN, more foreign capital went their way than to us.

Among our neighbors, the problem of governance has been an ever-present problem like in our case. As their development programs matured, they have also been able to put a lever to control or temper corruption. Also, our neighbors have had their episodes of political instability, an experience not unknown to us.

“The two economies need to link.” Today, the critical problem of the economic structure is to link the small, dynamic part of this dual economy with the dominant, sluggish and highly regulated economy.

The resulting union ought to result in having the virus of dynamism in the export oriented sector infecting the sluggish, larger economy to make it more competitive internationally. A worse result would be to hold all regulations and policies unchanged so that little happens in accomplishing such an integration.

Why is it critical to integrate the two economies? At present, the value added created in the export oriented sector is limited. Most of the export companies source their raw materials from imports and they themselves are producing mainly raw material industrial parts for assembly with other products that are produced in other countries.

The more open policy for foreign investment that was instituted in Thailand, and (earlier in both) Taiwan and South Korea – as well as China of course – enabled the foreign investments that located in these countries to have more leeway in sourcing their raw material needs from the domestic sector as well as from imports.

One reason for this phenomenon is the larger set of foreign direct investors succeeded in participating in the domestic economy. Many investors manufactured intermediate goods for the exporting sectors and the larger economy. Suppliers of big foreign investors followed their main industrial partners when they migrated their locations to other countries.

The outcome of this is that higher economic value added in the domestic economy was generated even as foreign investment enterprises were involved.

In these countries, there are also manufacturers that assemble final products that sell these goods in the home economy as well as to other countries. In the Philippines, there are fewer of these final brand assembly manufacturers among the foreign investors.

My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/