BWorld 357, We need further FDI liberalization

* My column in BusinessWorld on August 06, 2019.

Foreign direct investment (FDI) is important because the benefits to the destination economy are not limited to capital infusion but also technology transfer, management systems, sources of more production inputs, and extra access to foreign markets. Thus, Japanese FDIs coming to the Philippines not only bring in Japanese capital and technology, but also additional access to Japan and other export markets.

Since we have not liberalized FDIs enough, and those FDIs from many rich countries are just seeking for more economies that will give them a friendlier environment, other neighbors in the ASEAN have optimized these FDI inflows. Singapore remains the top destination while the Philippines is a relatively late-comer. In the ASEAN-6, five countries — Singapore, Indonesia, Vietnam, Thailand, and Malaysia — would get double-digits of billion dollars for at least two years over the last six years. The Philippines experienced that only once, in 2017. That’s the bad news.

The good news is that the Philippines has gotten the momentum since the previous administration and has overtaken Malaysia in attracting FDIs in 2017 and 2018. Perhaps one reason is that Malaysia has become more of FDI source or exporter. (See Table 1.) 

For intra-ASEAN FDI, the favorite destination is Indonesia. Out of its $22 billion in 2018, $11.8 billion came from its ASEAN neighbors. The least favourite is Malaysia as only $0.5 billion came from neighbors last year. And this probably explains how Malaysia is becoming more of a net FDI source or originator than a destination.

The Philippines is also not a favorite FDI destination for its neighbors. Last year, out of $9.8 billion in FDIs, only $1 billion came from our ASEAN neighbors.

  

In terms of FDI inward stock — the net for inflows minus outflows over the years — Hong Kong, China, and Singapore are the topnotchers. Japan is more of an FDI source or exporter, not a destination.

The expansion of FDI from 1998 to 2018 or over two decades, the average for East Asia is around 8x expansion. The Philippines’ is 7.4x. Mongolia is an outlier with 207.5x because of its very low level in 1998. My data is from the UN Conference on Trade and Development (UNCTAD), World Investment Report (WIR) 2019. (See Table 2).

The continuing challenge for the Philippines is to further deepen and expand its attractiveness to foreign investments. Local investments immediately benefit and expand when FDIs increase because local investors are the partners of these foreigners in equity infusion and as suppliers of materials and services.

Among the important legislative measures needed to further liberalize FDIs in the country are the Public Service Act (PSA) amendment, the Foreign Investment Act amendment, the Lifting foreign equity restrictions, and the Retail Trade Act amendments.

  

The PSA amendment is important because it will liberalize transportation (land, sea, air) and allow more FDIs in rails, bus lines, shipping lines, and airlines. Also, liberalization in telecoms, although the entry of China Telecom in the third telco has become a source of suspicion and unease among legislators and the public.

Shipping lines and airlines liberalization, in particular, are very important because new foreign players with bigger capitalization and more modern technology will also help market the Philippines as a destination country for their tourists, traders, and investors. The ships bring goods in and out, both production inputs and finished products; the planes bring people and services in and out, both local and foreign.

More competition will also make local players more price-competitive, benefitting Philippine-based businesses and tourists. We should further liberalize the economy in commerce, investments, and tourism, not restrict it with nationalist, populist, even socialist sentiments.

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See also:

BWorld 354, Airports, trains and buses, August 02, 2019 

BWorld 355, No climate crisis, August 03, 2019 

BWorld 356, Infrastructure, mobility and liberty, August 05, 2019