Skip to main content

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. 

References

Popular posts from this blog

Toxic Positivity: Shielding Our ECONOMICALLY OUTDATED Constitution

ABS-CBN News I thought about what life was like in the late 1990s. It was a boomer vs. millennial clash . I remember how often I kept complaining about high school during the K+10 era. Even worse, the real problem why I hated school was that school cared more about grades for the sake of grades , instead of teaching students how to get good grades based on learning first. What may have compounded it is that we've had boomer parents who thought that fatigue is a badge of honor .  What I realized is the common problem of toxic positivity . We have the "good vibes only" or "everything will turn out right in the end". Sadly, life doesn't always turn out that way. You can tell a terminally ill cancer patient that, and the cancer patient would die anyway. No amount of toxic positivity ever fixes the problem. This time, I'd like to rant once more about how toxic positivity has been used to defend the outdated 1987 Constitutio of the Philippines.  The classic r...

Hussam Middle Eastern Cuisine's New APM Prime Mall Location

It was sad when I went to Ayala Center Cebu to eat at Hussam Middle Eastern Cuisine. They had closed their office at Il Corso. They moved out of Ayala Center Cebu at the end of January . I remember talking to someone who said that the old location can be "very hard to find" when you enter the mall. Right now, I remember how trying to find Hussam in Ayala can be comparable to trying to find the magic lamp in Aladdin's  Cave of Wonders. That's what I felt back then, I ate at Hussam back in 2024 . Ayala Center Cebu probably had a low visibility problem. They had their soft opening on Black Saturday. They missed the Hari Raya Puasa date, a holiday for the Muslim population. This time, the use of glass walls makes it obvious to passersby that it's a Middle Eastern restaurant, that grilling is underway, and that it's certified halal .  The place still maintains the same pristine cleanliness I recall from Ayala Center Cebu. The place's transparent glass windows ...

How is IBON Foundation Viewing and/or Representing FDI in Their Articles?

Some time ago, I wrote about why I can't take IBON Foundation seriously . As the battle for economic charter change is on, I believe it's time to tackle them again. They're tweeting here and there. Okay, I'm no researcher or organization. However, it doesn't mean that I can't do some basic research, share the research of others, and read other books. Even an intellectually stupid person can actually make sense if they gather the best materials. I even recall someone I know who's not intelligent but he actually spoke well about career opportunities, in the very school where he wasn't performing well! Trying to understand IBON's data presentation  I would like to address how IBON Foundation presents FDI growth. They would say stuff such as the claim job creation weakened despite FDI growth .  I was looking at IBON Foundation's claim (above) where it says that job creation allegedly weakened despite FDI inflows. Sure, they named sources but do they ...

A Destructive Obsession with Ayuda (Cash Handouts)

IBON Foundation Yesterday, I decided to write about how Pinoy Pride won't help pay that enormous PHP 13.42 Trillion debt . I thought I'd probably take a bit of a break to do some more research. However, I feel the need to write this post today since one of IBON Foundation's articles says that there's a destructive fetish for foreign investment . Then, another of IBON Foundation's articles says that there's money for Ayuda . I really feel insulted reading these since I'm a Masters Degree graduate in the School of Business and Economics. This really shows the destructive obsession with ayuda (cash handouts) and protectionism. IBON Foundation Above is one of IBON Foundation's charts. Some people on Facebook have gone as far as to call them Birdbrain Foundation. So what if there's money for ayuda or cash handouts? The problem here is that "think tanks" like IBON Foundation want to make it look like ayuda is more important. If asked to account ...

Why I Don't See IBON Foundation as a Real Economic "Think TanK'

It's one thing to criticize presidents for their performance. It's another without analyzing the data. Sure, we need to study mathematics but the way it's presented can be a reason why it's hated. I felt that high school mathematics focused too much on numbers. Mathematics, in all its aspects, is part of life. Trigonometry is part of life. Calculus is part of life. Statistics is part of life. Speaking of statistics, I was thinking about how IBON Foundation has given its assessment of Duterte's administration. This isn't to say that outgoing President Rodrigo R. Duterte hasn't made mistakes. Rather, this is to point out how IBON Foundation has that tendency to be illogical. IBON Foundation (click to enlarge) This data by IBON Foundation was gathered. I'm not saying that the figures are lies or manipulated. My problem with how IBON Foundation works is their failure to account for the cause and effect  more often than not.  Malaya Business Insight It's ...