Refuting the Myth that Only FDIs Will Get Rich If You Invite Them to Do Business in Your Home Country
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2022 is just around the corner. It's really something to think that some Filipinos still don't understand economics. I remembered talking about the need for economic liberalization. However, the common misconception about foreign direct investment (FDI) can be linked to nonsense such as, "Why will you let them invest here? Only they will get rich!" This is baloney when you've got access to the rich digital media to access real great constitutional experts who made their country great. I would be referring to great men such as former Malaysian prime minister Mahathir bin Mohamad, the late Lee Kuan Yew of Singapore, Deng Xiaoping of China, Kishore Mahbubani the former dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore. Maybe, we can also talk about how foreign investments played a role with the administrations of Fidel V. Ramos, Gloria Macapagal-Arroyo, and the late Benigno Simeon C. Aquino III (Noynoy).
Foreign investment amendments in the Philippines helped sustain the country to a certain extent
How did Noynoy do some economic reforms? We must think about these words from Global Risk Insights that would show us how foreign investment actually plays a huge part in national development:
By all accounts, the Aquino administration has had a strong economic record. The Philippines is an emerging economy, which has steadily grown under Mr. Aquino due to the inflow of foreign direct investment (FDI).
FDI has been rising steadily in recent years, and between January and November 2014, FDI flows reached USD 5.7 billion, which represents a more than 60% increase compared to 2013. Most of these investments went into manufacturing gas, steam, and air-conditioning supply, finance and insurance, transportation and storage, and professional, scientific and technical activities.
Economic amendments were passed during Noynoy's administration which contributed to the economic boom. Though, I still feel Noynoy was wrong not to pursue the liberalization of the utility sector. There needs to be more players in the utility sector aside from other investments.
It would also be important to look back and analyze before Noynoy. Per Se also reflects on the following about the performances of those before Noynoy's administration:
Fidel Ramos: president, 1992-1998 (June). Fidel Ramos had an eventful presidency given that he entered with a massive economic problem to solve – the electric power crisis. He turned to the private sector and to foreign investment for immediate remedy. He further liberalized the economy in a faster way –opening up the telecommunications sector to competition and creating more private export processing zones. He worked to overcome many obstacles and restrictions in investment promotion through innovative incentives in contracting – providing high returns to investments. As a result, he was able to address the power crisis. Sometimes, he was thwarted by the Supreme Court (e.g., privatization of Manila Hotel).
Ramos brought in $9,482.7 billions of foreign direct investments, which meant that on a yearly basis, he succeeded in bringing in $1,580.6 billions of new FDI.
Joseph Estrada: president 1998 (July) to 2001 (January). Erap had a good start, armed with a popular mandate. But his skills as a small town mayor did not match the requirements of the presidency. Falling short on leadership as well as lifestyle, he was booted out of office by impeachment and a people power revolution. His concern for improving FDIs led him to set up a commission to recommend amendments on the restrictive provisions of the Constitution, but his term was cut and this initiative was likewise short.
Economic uncertainties and other problems arising from his rocky leadership led to FDIs shying away from the country. He attracted $3,429.3 billion, or a yearly inflow of $1,146.4 billion.
Gloria Macapagal Arroyo: president 2001-2010 (June). GMA filled up the four-year unfinished term of the deposed Estrada presidency and was elected to a six year term, affording her a longer time to make an impact on the nation. She began her presidency auspiciously, but squandered much of it on the basis of her mainly political approach to important economic issues. The “Hello, Garci” scandal and the fertilizer scam shot down her credibility as elected leader.
Despite this, however, her record in bringing in FDI appeared not to be different from that of other presidents. During her term, $16,012.4 billion of FDI flows came in. On a per year basis, this was $1,779.2 billion, just slightly higher than the comparative data during the Ramos presidency.
Note that FDIs are measured in current US dollars so that the two presidents brought in relatively the same amount of FDIs into the country on a yearly basis due to weakening of the US dollar and inflation.
Benigno Aquino III: president, 2010 (July) to present. The FDI flows during Noynoy’s term have been relatively higher. He has brought in so far $4,300.2 billion of FDI flows, the equivalent of $2,150.1 billion average per year. (Note: The dollar weakness also affects the amount of the FDI flows.)
FDI flows are likely to be higher going forward in the Noynoy Aquino presidency. With investment grade rating and continued sound macro fundamentals, the Philippine economic record is likely to be much better.
However, that potential will be capped unless he improves the FDI climate in the country through direct reforms dealing with FDI policies. He appears to be under an illusion that the move to change the restrictive provisions to foreign investments in the Constitution would not make a big difference. Unless his mindset changes on this point, Aquino’s future performance on this account will not be spectacularly much better.
It would be important to note that Ramos himself was a truly competent man. Arroyo, in spite of her shortcomings, was still able to rake in FDI. Noynoy had managed to continue certain policies that helped the Philippines have another miracle. I don't think Noynoy was the first to pull it off. Rather, Ramos himself established the foundations through FDI. It was by amending the Foreign Investment Act of 1991 by liberating certain sectors that helped the Philippines.
Ramos himself had disagreed with Noynoy regarding charter change or constitutional reform. I think Ramos is right where Noynoy is wrong on that issue. Noynoy did focus more on amendments. Ramos, however, desired to do charter change. Ramos himself could've been the Philippines' own version of Mohamad and Lee Kuan Yew. However, the single-term limit for presidents had prevented it. I think Noynoy's mistake was to focus more on easing restrictions over the overall framework. It's pretty much how Deng amended China's governance but refused to follow Lee Kuan Yew's parliamentary system. The result was that China may be a rich country but getting rid of corruption is still a challenge.
So, in spite of the disagreement between Noynoy and Ramos, there was still some economic improvement during Noynoy's term. Perhaps Noynoy was more concerned about raking investors in over changing the form of governance. Though, I still think Ramos' plan for charter change would've been better to emulate Singapore's and China's progress.
The economic miracle of countries once poorer than the Philippines due to acceptance of FDI
These were situations worse than what the Philippines was left with after the 1986 EDSA Revolution:
- China was once left battered by Mao Zedong's poor economic policies. The "Great Leap Forward" of Mao only made China leap forward to disaster instead of progress.
- Japan was practically crippled after the Second World War. The atomic bomb hit Hiroshima. You can imagine how Japan was left with so little to work with.
- Singapore was once a country so battered that Lee Kuan Yew had more work to do than the Philippines after the Marcos Years.
- South Korea just separated from North Korea. South Korea was just starting to build itself as a democratic country.
- Taiwan had separated as the Republic of China separate from Mao. Chiang Kai Shek wasn't a very good leader either.
- Vietnam was once impoverished after the Vietnam War. The Philippines became a host country for Vietnamese refugees.
- Deng introduced drastic economic reforms. His trip to the United States of America (USA) was to start emulating American success by introducing free markets in Communist China. Lee Kuan Yew had called Deng a great man. Deng also went to learn from Lee concerning economics. I guess the same might be said when Noynoy went to Singapore to visit Lee Hsien Loong. Though, Noynoy, perhaps like Deng, wasn't too concerned about the form of governance.
- Japan passed through the phase of rehabilitation. Japan's days in the Axis had come to an end. Nazi Germany is no more. Imperial Japan is no more. Emperor Hirohito removed the old-age idea that the emperor is divine by renouncing his so-called divinity. Japan passed through an important rehabilitation to bring it to the modern era. A new constitution was written with the emperor as a figurehead, the Japanese parliamentary as the actual government, and its acceptance of FDI into the country. Japan ended up as the home of much innovative thinking such as the rice cooker and the DVD technology to name a few.
- One of Lee Kuan Yew's important reforms was focused on FDI. What he did was turn Singapore from a small island into a business hub. He opened Singapore to FDI to create jobs and to create income for Singapore. He did mention in one of his speeches that we will learn different stuff and stop trying to do everything ourselves. Self-dependence is good but doesn't be afraid to ask for help from others.
- South Korea greatly differed from North Korea. North Korea became an isolationist, trying to do everything by itself country. South Korea, on the other hand, wasn't doing that. You can imagine how South Korea beat North Korea in no time by welcoming FDI. Now, the world today enjoys Korean products too. We have Samsung, as an example, of the benefit of having endured competition from FDI.
- Taiwan managed to beat China before by accepting FDI--a contrast to Mao's "well-planned" Great Leap Forward to disaster. Taiwan's acceptance allowed it to shine brighter over Mao's poorly planned policies. Mao's industrial programs were idealistic. Taiwan was focused on realism as part of its economic growth.
- Vietnam introduced Doi Moi which was after 1986. The idea was all about restoration going from isolation to prosperity. Its foreign policy was to attract FDI even if they, like other FDI-friendly countries, don't allow foreigners to own land.
FDIs are still required to follow local laws even without a Filipino partner
A good illustration would be this. A Singaporean telecommunications company would want to open in the Philipinnes without a partner. However, that firm has to register with the Department of Trade and Industry (DTI), get a Tax Identification Number (TIN) from the Bureau of Internal Revenue (BIR), and follow employment laws in accordance with the Department of Labor and Employment (DOLE). That means FDIs would need to comply with paying the Social Security System (SSS) of their employees, not go below minimum wage, prioritize employing locals, and the like. That firm is required to do all the necessary steps to be registered as a player in the Philippines. Failure to follow rules such as paying taxes and other by-laws can mean losing one's privilege. A tenant can continue to do business in a commercial space as long as he or she pays rent and follows laws. An FDI can also be deported if ever certain rules aren't followed.
Certain countries can accept FDI to operate without a local partner but not to purchase land. I believe any country has the right to refuse foreigners from buying their land. It's because investing in another country is like investing in somebody else's area. A mall owner has the right to refuse to sell the commercial space to one's tenant. Businesses renting in the mall continue to pay rentals based on the agreement between them and the mall owner. A mall refuses to sell the commercial space because the owner makes money through rentals over purchases. It's like how a rent-a-car business will never selll the car because rentals fuel it. It's like selling your carabao is a one-shot deal in contrast to using your carabao to plow the crops. Having a carabao to plow the crops will produce more income even if the initial income won't be that high.
Local businesses and the government can be greatly benefited from FDI
- Every competitor to your supplier or service provider is a potential new member of one's supply chain. If the local telecommunications company has very bad Internet and you're a call center--you definitely want to switch to the FDI that provides better Internet. Are the local transportation services too short as your business grows big? Why not get the FDI that offers such services to expand the transportation network.
- Every competitor to your local customer may become your new customer. This isn't about disregarding customers you've been with. Rather, it's all about expanding your network. One's customer, a local restaurant buys rice. A new restaurant enters and buys rice as well. If you have several local customers--you get money. If you have both local customers and FDI--you get a more expanded network. It doesn't matter if Jollibee or KFC buys the rice as long as they give good income. A local Filipino restaurant may also benefit from FDI because these companies will still need to eat after all. FDIs would want food that's readily available so think the American or British employer may want a Magnolia ice cream to cool off, Nature Spring Water for their employees' water, or eat bread from Julie's Bakeshop for a quick snack. This can also apply to Filipino landowners who may end up getting more tenants because of the existence of competition. An FDI may avail the nearest and best local trucking company's services to be part of its supply chain. In short, foreigners are also potential customers of the local products and services.
- FDIs get rich but they are bound to pay taxes. Foreigners will still have to pay the Value Added Tax (VAT), Quarterly Tax, and Annual Income Tax in exchange for doing business. The BIR collects all the names of all businesses--whether local or foreign. It's the rule of thumb thawt the higher income one earns, the higher the taxes get charged. An FDI with a huge annual income generates taxable income. A local business that generates huge annual income generates taxable income. So why discriminate based on local and foreign if both FDI and local pay taxes? The BIR should only take action on any business (whether local or FDI) if there are irregularities.