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

Labels:

Popular posts from this blog

Honoring the Recently Deceased Jose de Venecia Jr. in a Business/Economics Perspective

That's right. Jose de Venecia  recently passed away yesterday. As an advocate for reform, it's sad but true that de Venecia didn't win because he was boring . It was easy to think of him as a boring guy. I remember the time when he was called in ISPUP as Yoda De Venecia (after the Star Wars character). I was just a clueless college student at that time when the ISPUP episode was shown. I was only 13 years old when de Venecia ran for president. It was also that era when Joseph Estrada (who's now 88 years old) ran for president, and it was that time when Atty. Hilario G. Davide Jr. (who turned 90 last year) became the chief justice.  Just recently, I found this eulogy   for JDV. I will not post the whole eulogy, but only the one from the one that would "fit better" for a business-economics blog: He helped advance policies that enabled major infrastructure projects through public private partnerships, converted former military bases into thriving economic centers...
Read more

Yes to Filipinas Marrying Foreign Men, No to 100% FDI Shares Ownership?!

Today is Valentine's Day. I feel Valentine's Day is plain overrated. Some people just get a date for the sake of it--even if it means enduring that materialistic girlfriend or abusive boyfriend! Isn't romance a year-round thing? A few Valentine's Day ago, I wrote about Filipinas marrying foreigners and that FDI doesn't include Filipinas dating foreigners . This time to add some comedy, I wrote this post. It's something to say, "Yes! Somebody is married to a foreigner!" It's the hype to get job opportunities abroad or to marry a foreigner. Blossoms Why do Filipinos want to marry foreigners? The Blossoms blog writes down the following: Love and Affection: Love is often the primary reason for marriage, and Filipinas who marry foreigners may do so because they have fallen in love with someone from another country.  Financial Stability: Some Filipinas may marry foreigners because they believe a foreign husband can provide financial stability and secur...
Read more

China's Real Great Leap Forward and Economic Cultural Revolution Under Deng Xiaoping

Nobody can dare deny that China has become a big superpower. I remembered I went to China last 2007 (which would be more than 10 years ago). China had become such a huge metropolis of power that I'm amazed at it. I was thinking about how Shanghai, Shenzhen, and Beijing were truly magnificent cities before the pollution problem (which should call for eco-capitalist measures). I was thinking about how I never realized China was once dirt poor.  Did you know China used to be so dirt-poor? The "economic legacy" of Mao Zedong was a disaster with the so-called "Great Leap Forward". It was a great leap forward all right--a great leap forward to ruin. Mao seeking to avoid the use of foreign resources to launch China proved disastrous. The 1970s would see a dramatic change when Deng Xiaoping finally took over the Chinese Communist Party (CCP). The beginning of the rise of Communist China under Deng's new political policy would pave the way to China becoming a great s...
Read more

Facts vs. Gossip: Did Vietnam (According to Filipino MARITESes) Develop from Its Own Treasury Before Opening Up to FDI?

Vietnam Youth Union It's been 80 years since Vietnam achieved its independence in 1945. Some time ago, I wrote about how Vietnam's Doi Moi actually disproves the Trust Me Bro School of Economics . I wasn't too accustomed to researching Vietnam's ironic economic miracle . Vietnam is a one-party state ruled by the Communist Party of Vietnam. The word Communism would evoke fear and terror. What I find funny is that some people are using Vietnam as an excuse not to open up the Philippine economy (read here ). Such misinformed  people think that Vietnam "won this revolution," supposedly self-industrialized from its own treasury before opening up to FDI. In short, some people either believe that (1) Vietnam is an example of how a highly protectionist economy works, or (2) that Vietnam made itself rich before opening to FDI. Both of them are lies. I'll focus on the second point for this new blog post!  Right now, some people say that I'm just another marites...
Read more

Going from Tet Offensive in 1968 to Doi Moi in 1986

Foreign Trade University The Lunar New Year isn't just celebrated by the Chinese. Chinese New Year is one form of the Chinese New Year. Other forms of Lunar New Year follow   the Chinese New Year cycle, such as the Tết Nguyên Đán of Vietnam, the Japanese Lunar New Year, and the Seollal in South Korea. There's also the Tibetan New Year and the Mongolian New Year. I remember when talking about Vietnam celebrating the Lunar New Year together with the Chinese, my fellow Chinoy made the squity-eyed gesture to talk about most Vietnamese looking like Chinese. Should we even be surprised that there's a Vietnamese student who looks like the deposed Alice Guo, aka Guo Hua Ping?  What was the Tet Offensive about? Right now, I want to talk about the infamous Tet Offensive , which was a Lunar New Year attack of January 31, 1968. The Western concept would prefer to talk about it on January 31 instead of the Lunar New Year. A Filipino would probably say, "So what if it was Lunar Ne...
Read more