How Removing of EXCESSIVE Restrictions Concerning Foreign Direct Investment (FDI) Will Benefit the Philippines

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The Philippines has had a history of protectionism. Back then, Carlos P. Garcia declared the Filipino First Policy in 1935. Later, Ferdinand E. Marcos Sr. also carried out more or less the same policy in the 1973 Constitution. Eventually, the Foreign Direct Investment Act of 1991 (R.A. 7042) kicked in which limited certain sectors to only 40% for foreigners. On paper, it sounds good but the practice is rather excessive in reality. As said, the 60-40 policy isn't about land ownership. Instead, it's all about the limits that an FDI has concerning a foreign firm.

Why is 60-40 rather impractical in practice than in theory?

The practice of 60-40 or limiting foreign ownership in certain industries is pretty much excessive. Here's a bit of an illustration you want to think about. Just imagine yourself opening a commercial space or looking for one. Do you think tenants would want to rent a space if they had to give 60% of their net profits to their landlowners? Do you want to rent a space if your landowner demands you to give 60% of your net profits to him or her in that branch? Obviously, the answer would be no which is why 60-40 is actually impractical in practice.

A good illustration of 60-40 is like selling overpriced merchandise the value isn't worth it. Some people sell overpriced items hoping to make a quick profit. A person may open a rent-a-car business with fancy cars at a high cost. Another person may open a rent-a-car with non-fancy cars at a lower cost. However, the problem of the first rent-a-car business is that the luxury cars have the tendency to lose power in the middle of the road. The second rent-a-car business may not have fancy cars but those cars reach the destination on time because they don't have the tendency to lose power in the middle of the road. Obviously, the one with a lower cost with better service will reap better profits in the long run. 

Not having 60-40 restrictions would be much better in the long run

It may seem impractical (at first) not to demand 60% of net profits from FDIs. However, it would be more beneficial if you think about the tenant-landowner relationship. Think of it as a commercial building of any kind. Do you think the real estate empire of the late Henry Sy and the late John Gokongwei would expand by getting 60% of the profits of their lessons? Instead, it was all about setting an agreement on rentals. Tenants can continue to enrich themselves if they (1) pay reasonable rent, and (2) follow rules in the contract. The tenant can only be evicted if they fail to follow the contract. Otherwise, the tenant can sue for unlawful eviction if ever the landowner breached the contract.

Instead, it's best to view the FDI-Philippine government relationship as that of the tenant and the landowner. Just think of the FDI as the tenant and the Philippines as the commercial building such as a shopping mall. An FDI enters the Philippines and does business. However, like a tenant in a shopping mall, they will be subjected to rules. The rules can be as follows:
  1. FDIs are required to follow Filipino labor laws and practices in regard to employment. In short, the priority for employment is to provide jobs to Filipinos. Where you do business--it's best to hire the locals first.
  2. FDIs are required to pay their rentals to their Filipino lessors. True, the Filipino lessor won't get 60% of the net profits. However, the Filipino lessor gets a monthly rent which becomes the basis of the tenant is either worthy of another contract or getting evicted. A Filipino lessor may have the freedom not to renew any expired contract but the tenant must be put on notice beforehand.
  3. FDIs are subjected to pay their taxes even if they own more shares than the Filipino partner or don't even have a Filipino partner. True, their payment of rentals to Filipino lessors will be considered a deductible (since it falls under expense) but their net profits before taxation are subject to taxation. There's the computation of the gross income minus expenses (allowable deduction). What's left of the net income before taxation is subjected to the tax bracket. Failure to pay taxes can result in financial penalties, possible imprisonment, closure of business, and even deportation. Taxes are pretty much like rentals--except it's subjected to a bracket based on income. Tenants can get kicked out for not paying rent. FDIs can get kicked out if they don't pay taxes. After all, taxes are the source of government revenues for its expenses like rentals are the source of income for the lessors for their expenses.

This in turn will invite more FDIs which translates into more revenues meaning more taxes for the country. True, the money wouldn't come in fast. 60-40 should be treated like a Get Rich Quick Scheme--you want to earn a lot of money so fast but it will backfire badly if you implement it. Instead, earning the money at a reasonable pace (and learning to be frugal while at it) is what works. Sometimes, an FDI might be looking for a Filipino partner to own in a 50-50 agreement. We call that the joint venture agreement. Gong Cha, for example, was a joint venture between a an Korean and a Taiwanese. Currently, the Korean party owns more shares now than the Taiwanese partner. It still continues to give revenues in the Taiwanese branch and taxable income everywhere it operates.

More FDIs also equal more choices for local businesses. It would also mean filling in the supply and demand gap. The big reason why utilities cost more with lesser quality is all about high supply and low demand. Do you think two to three telecommunications company can provide better Internet? Do you think a few power companies can provide better electricity? They will eventually exhaust themselves if they have too many customers. FDIs will end up bridging the gap when customers who are either fed up with slow service or find a new provider can get a new provider. These FDIs in the utilities sector can bridge the supply-demand gap. At the same time, the local utility companies will have to innovate and upgrade if they want to compete. 

Just think that the inflow of FDIs from previous terms up to the late Benigno Simeon C. Aquino (Noynoy) was because certain sectors were liberalized. Economic reforms for easing restrictions on certain sectors of R.A. 7042 had allowed it to happen. However, there are still sectors that need to be liberated. In fact, I believe we need to get rid of the 60-40 clause completely because it's really hindering any further development in the Philippines. After all, FDIs should be viewed as opportunities for the local investors to learn and grow instead of cowering in fear of competition.

References

"R.A. 7042 – “Foreign Investments Act of 1991.”

"SINK OR SWIM: CHANGING THE 60-40 RULE ON FOREIGN OWNERSHIP AS KEY TO SURVIVING GLOBALIZATION" by Glenndale Cornelio

"Joint Venture (JV)" written by Marshall Hargrave, reviewed by Somer Anderson

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