How can the Philippines woo more foreign investors?

by Jose M. Galang

Posted at Apr 01 2014 10:42 AM | Updated as of Apr 02 2014 05:17 PM

MANILA, Philippines - Despite the improved economic fundamentals and the heroic efforts of the Aquino government’s foreign-investment hunters, capital inflows may still remain modest in the next few years.

A report last week by the French export credit agency Coface described the “quality of the business climate” in the Philippines and four others to now be similar to that in the BRICS group of growth leaders among emerging economies.

In fact, the five (Colombia, Indonesia, the Philippines, Peru and Sri Lanka), together with another five (Bangladesh, Ethiopia, Kenya, Tanzania and Zambia) are tagged by Coface as “new emerging countries” likely to take over the growth lead from the BRICS (composed of Brazil, Russia, India, China and South Africa) which now suffer from a growth slowdown for various reasons.

The ten emerging countries, said Coface in its recent report, “have high growth potential and sufficient capacity to finance this accelerating growth,” with the first five (including the Philippines) with a more favorable business climate.

But the new emerging countries, cautioned Coface, have a combined population that is only 30 percent of the total BRICS population back in 2001 when they gained the status of growth pacesetters. The group of ten nurture average current account deficits of 6 percent of economic output, and they remain dependent on their domestic markets and exports to other developing countries.

In the Coface assessment, the Philippine business climate has a “B” rating, described as “acceptable” but lower than the “very satisfactory” highest rating the French agency can give.

How this will play out remains to be seen and it could be surmised that capital flows will play a crucial role in paving the way for the group of ten new emerging countries taking the role of growth leaders.

Dragon dancers perform inside a trading floor at the Philippine Stock Exchange (PSE) during Chinese Lunar New Year celebrations in Makati. Photo by Romeo Ranoco, Reuters.

A separate survey of Japanese companies with operations in 25 countries and three regions (Western Europe, Central-Eastern Europe, the Middle East) provides a comprehensive view of trade and operations expansion plans over the next three years.

The survey results point to an uphill climb for the Philippines’ goal of attracting large amounts of foreign investment that would trigger major increases in industrial activity and employment as a way of strengthening the current economic expansion.

Conducted last November and December by researchers of the Japan External Trade Organization (Jetro), the survey covered 9,800 Japanese companies either involved in or interested in business overseas on their status and future plans. The respondent companies included 680 large firms and 2,791 small and medium-sized enterprises (SMEs), plus more than 6,400 firms who are not members of Jetro but use the agency’s services.

The survey inquired into the companies’ plans for exports, overseas expansion, business activities in China, their assessments of business risks in emerging countries, and their availment of trade privileges under Japan’s free trade agreements with various countries and regions.

Among the “most promising markets” tagged by the Japanese firms for the next three years, the Philippines landed on 15th place out of the 30 countries in the list. The top five “promising markets” were listed as: Thailand (which was selected by 52.9 percent of the survey respondents), Indonesia (51.8 percent), China (51.3 percent), Vietnam (44.3 percent) and the United States (42.9 percent). The total is more than 100 percent because the respondents were allowed to choose more than one country.

Nearly 65 percent of the companies indicated future plans to expand business overseas, with preference for Asean countries exceeding that for China in locating planned production facilities for both general-purpose goods and high-value goods, according to the survey results.

The Japanese companies said they would like to “localize” the operations of these overseas units but the SMEs said they were hampered by “lack of abilities and awareness of local human resources” while the large corporations encountered “difficulty in the recruitment of executive positions.”

The most notable pattern in the Japanese corporate expansion efforts is the planned shift in domestic and overseas bases and functions from China and Japan to Asean destinations. A total of 46.2 percent of the companies said they were planning to move operations to Asean – notably 13.7 percent of the firms shifting from China, and 24.2 percent of those moving from Japan.

Of the companies shifting operations from Japan to Asean, 10.9 percent plan to set up in Thailand facilities for the production of iron and steel, non-ferrous metals, metal products, cars, car parts, other transportation machinery, and electrical equipment. Another 4.5 percent said they were considering Vietnam and 2.8 percent selected Indonesia.

Of the Japanese companies in China intending to move to Asean, on the other hand, the biggest ratio of 6.4 percent picked Vietnam for a range of trade and wholesale business, and the manufacture of textile/clothing, and coal and petroleum products.

Still, China remained the top country choice for Japanese businesses with overseas expansion plans even if the ratio in the latest survey was lower compared to the previous year’s poll.

The survey also asked executives of the Japanese companies about their assessment of the business risks in emerging countries. In general they felt that business risks in China have grown although there has been an improvement since the demonstrations in China against Japan.

In the Japanese executives’ view, the Philippines’ biggest appeal to business lies in its “market scale and growth potential” (which scored 63.7 percent from 499 respondents), “reasonable labor costs and an abundant workforce” (30.5 percent), “very little language or communication problems” (26.1 percent) and “cooperation of client companies” (16.8 percent).

Other factors in which the Philippines got low ratings were: “quick procedures” (2.4 percent), and “plenty of investment incentives” (2.6 percent).

On the other hand, top business risks and issues raised against the Philippines were: “inadequate infrastructure” (cited by 31.4 percent of the respondents), “natural disaster risks or environmental pollution problems” (23.6 percent), and “political risks or problems in social conditions and law and order” (23.2 percent).

Other risk factors seen in the Philippines that got more than 10 percent ratings were: “undeveloped legal system and problems in application of laws” (12.2 percent), “high level of exchange risks” (11.6 percent), “related industries not concentrated or developed” (11.6 percent), and “risks and problems related to collection of receivables” (11.4 percent).

These perceptions perhaps explain why the Philippines has failed to lure bigger amounts of investments not just from Japan but from other countries as well. Clearly, it is more government action on problem areas, not just glowing forecasts and promises in investment promotion roadshows, that will bring them in.

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