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Common Sense: Foreign Investment Isn't Foreign Debt

Listen to him and those who think alike, not the naysayers!

Amazingly, some people confuse foreign direct investment (FDI) with foreign debt. They think letting foreigners invest in the country will increase the national debt. These are two totally different terms. I really have to laugh when somebody tells me that FDI will increase debt. I would say it's laughable because debts and investments may be related but they're two totally different words. A person may get into debt to invest in something. A person may get into some debt to build a commercial building or buy the land. However, a person invests when the commercial building is open for rent to pay back the debt. Debt is basically an expense because you need to pay back the money. An investment is an inflow of money. 

What is foreign debt? 

The Investopedia defines foreign debt as:
Foreign debt is money borrowed by a government, corporation or private household from another country's government or private lenders. Foreign debt also includes obligations to international organizations such as the World Bank, Asian Development Bank (ADB), and the International Monetary Fund (IMF). Total foreign debt can be a combination of short-term and long-term liabilities.

Foreign debt, also known as external debt, has been rising steadily in recent decades, with unwelcome side-effects in some borrowing countries. These include slower economic growth, particularly in low-income countries, as well as crippling debt crises, financial market turmoil, and even secondary effects such as a rise in human-rights abuses.

In effect, foreign debt is when a country borrows money from another country. For example, the Philippines will borrow money from Singapore to finance the COVID-19. It didn't ask for investments but a loan from Singapore. It might also borrow money to finance some infrastructure projects that taxes may not be able to cover. Even developed countries may borrow form each other every now and then depending on the situation.

Per see, foreign debt isn't always bad unless one's paying power is in shambles. To achieve this, we would need a combination of local and foreign investment to generate income for the government.

What is foreign investment? 

Meanwhile, foreign investment is what it is--an investment. The Investopedia defines foreign investment as:
Foreign investment involves capital flows from one country to another, granting the foreign investors extensive ownership stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role in management as a part of their investment or an equity stake large enough to enable the foreign investor to influence business strategy. A modern trend leans toward globalization, where multinational firms have investments in a variety of countries.

This is how foreign investment works, according to Investopedia:

How Foreign Investment Works

Foreign investment is largely seen as a catalyst for economic growth in the future. Foreign investments can be made by individuals, but are most often endeavors pursued by companies and corporations with substantial assets looking to expand their reach.

As globalization increases, more and more companies have branches in countries around the world. For some multinational corporations, opening new manufacturing and production plants in a different country is attractive because of the opportunities for cheaper production and labor costs.

Additionally, these large corporations frequently look to do business with those countries where they will pay the least amount of taxes. They may do this by relocating their home office or parts of their business to a country that is a tax haven or has favorable tax laws aimed at attracting foreign investors.

Foreign investment would mean that companies would invest in other countries. Obviously, there the cheaper production and labor costs to take advantage of. Sometimes, a business may want to do business where taxes aren't so heavy. That's why I'm in favor of having tax cuts when needed. The foreign investor opens a business in the said country. 

However, foreign investors are required to follow rules even if they don't need a local partner. There's still the need to be registered, follow labor laws, and pay taxes. If they're going to get rich in the Philippines, then they'll enter the taxable bracket. What happens is that the government starts collecting applicable taxes. Multinational companies (MNCs) would be paying corporate taxes. These people will be under the tax mapping of the Bureau of Internal Revenue (BIR). What happens is that the foreign investor is essentially owing to the Philippine government its taxes whenever payable. Both foreign investors and local investors are debtors in the sense that taxes are always due as long as the business is generating net profits before taxes. 

Foreign investors will not only create jobs, bring capital, and introduce markets, but also provide taxes. It's because taxes don't create jobs. It's the job providers that create taxes. A trip to the BIR office will show a list of registered companies. The BIR didn't create the jobs. Instead, job creators gave the BIR its purpose to collect taxes. The revenue office will be rendered inoperative unless there are job providers. The BIR collects these taxes which is allocated to the government treasury. The taxes collected would also mean having the money to pay back foreign debts accumulated. 

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