International Political Economy February 26, 2018

Prudencio, Ma. Theresa U. Mr. Jumel G. Estrañero

AB Foreign Service FS 302

Political Economy of Foreign Direct Investments and its Implication on Economic

Development in the Philippines

I. Introduction
Abstract:
This study aims to analyze the benefits and costs of Foreign Direct
Investments to the host country. It also aims to identify different governmental
policies, conditions and incentives posed to foreign investors. Also, this provides
foreign investments data in the Philippines in the past four years with information of
annual and quarterly reports to study the economic growth of FDI in the Philippines
and how it contributes to the economic growth and development of the country.
Introduction
The Philippines, as a developing country influenced by its governmental policy
actively attracts foreign direct investments (FDI) over the last two decades. It is
poised to become the next FDI destination of Asia 1. It has considerably liberalized
its FDI policies in the last two decades. At the same time, it has implemented
reforms in its investment policy and investment incentive measures. Philippines'
openness and restriction on foreign investment also hinders inward FDI as
Philippine laws and governmental policy such as Philippine Constitution, Omnibus
Investment Code of 1987 and Foreign Investment of 1991, as the laws treats foreign
investors the same as their domestic counterparts and the 60/40 foreign ownership
rule. Thus Philippines, being laggard among its Southeast Asia neighbors and as
influenced by its governmental policy has been keen on alluring inward FDI.
Foreign Direct Investment (FDI) as has played a significant role in economic
productivity and growth of developing countries. These developing countries
provide inducements to attract substantial amounts of inward FDI. Foreign Direct
Investments (FDI) as defined by de Mello Jr. (1999), a form of international inter-
firm cooperation that involves significant equity stake and effective management
decision power in ownership control of foreign enterprise.

1 Priscilla Tacujan, "Protectionist clauses in the Philippine Constitution restrict foreign direct investment,"
Corr Analytics Inc., May 2013, , accessed March 13, 2018, http://www.canalyt.com/protectionist-clauses-
in-the-philippine-constitution-chill-foreign-direct-investment/.
 Foreign Direct Investments

Foreign Direct Investments (FDI) is a key component in global economic

integration, in the form of cross-border investment through establishing business
operations or acquiring business assets with the goal of forming a lasting interest
from a resident enterprise from one country that would operate in another
country. Based on International Monetary Fund and Organization for Economic
Co-operating and Development (OECD) defines Foreign Direct Investment
reflects the aim of obtaining a lasting interest by a resident entity of one economy
(direct investor) in an enterprise that is resident in another economy (the direct
investment enterprise). The lasting interest insinuates a significant degree of
influence in the management of enterprise between the investor and the
investment, as a result of globalization. States attracting the inflow of FDI
strengthens its connection to world trade networks and finances its development
path2.
Foreign Direct Investment emerged which involves the integration of the
domestic economic system with global markets. Through opening up local
economic sector and domestic capital for foreign investor to establish business
resulted to the accomplishment of FDIs within the economy3. According to the
guidelines established by the Organization of Economic Cooperation and
Development (OECD), a minimum 10% ownership stake in a foreign-based
company, the threshold for a FDI is a minimum of 10% ownership stake in a
foreign-based company represented for the investor acquiring 10% or more of
the ordinary shares or voting shares of a foreign company. However, effective
controlling in the investment in some instances, can be establish even with less
than 10% of the company’s voting share4.

The integration of domestic economic system with global markets have resulted
to the rise of foreign direct investment through opening up of the local economic
sector as well as domestic capital for foreign investors to establish business
within the host country. With the technological advancement that led to the
emergence of transportation and communication (led) to the movement of
investors beyond political boundaries5. During the 1990s until the Asian financial
crisis in 1997, the share of FDI hosted by developing countries increased, as the

2
Eva Nejar, "Review of Foreign Direct Investment Flows and Tax Incentives in the Philippines and in the
ASEAN Region," July & aug., 2015, , www.ntrc.gov.ph/images/journal/j20150708a.pdf.
3
Ibid2
4
N.A, Foreign Direct Investment, n.d., https://www.investopedia.com/terms/f/fdi.asp\
5
Nejar op. cit.,
 share of host country Gross Domestic Product (GDP), FDI flows in developing
countries are greater than those of developed states6.
Determinants of FDI

According to Njeru 2013, the Dunning’s OLI framework (Dunning

1997, 1981) is an approach best to understand the FDI. To be a
competitive FDI in a foreign environment, a firm needs some of
Ownership advantage, in the form of unique production process, a
patented good, access to more intangible assets like management
system, trademark and most importantly, reputation. Location advantage
should also exist to penetrate foreign markets. It may come in different
forms; firms aiming at reducing costs may be attracted by low wages,
firms wishing to expand their international market share may be attracted
by a large home market. The firm given its decision to produce abroad, it
can choose various contractual arrangements such as licensing
agreements and strategic partnerships. Therefore the theory propose
that there must internalization advantages in making ownership
preferable to more contracts, and would have greater control over
technology and reduced transaction costs.

Horizontal and Vertical FDI

In horizontal FDI, the investor undertakes the same production

activities from the parent country in multiple countries7. It is a type of
direct investments acquiring a similar company in the same industry,
seeking to increase its size, diversify its product offerings or services,
achieve economies of scale, reduce competition or gain access to new
markets or customers. "Market seeking" is also referred as horizontal FDI
and its advantageous closeness to customers may be due to the factors
such as avoidance of tariffs, smaller cultural barriers or reduced
transportation costs. High tariff barriers have made it more profitable for
firms to set up local subsidiaries than to serve the market by export from
other countries. The horizontal FDI is accredited to as export platform
FDI, when a substantial share of foreign affiliate's sales is to third
countries8. Most of global FDI is horizontal, an example is Toyota

6
NJERU NYAGA, "THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN KENYA," ,
accessed March 13, 2018, http://chss.uonbi.ac.ke/sites/default/files/chss/MSc%20Finance%20Project%20-
%20Benedict%20Nyaga%20Njeru.pdf.
7
Aizenman, Joshua and Nancy Marion. "The Merits Of Horizontal Versus Vertical FDI In The
Presence Of Uncertainty," Journal of International Economics, 2004, v62(1,Jan), 125-148.
8
NJERU NYAGA, op. cit.
 assembling cars in both Japan (parent company) and the UK (host
country)9.

Vertical FDI requires a geographical decentralization of firm's production

where they invest in low-wage countries to produce labor-intensive
intermediates that are shipped back to the parent company to reduce the
production costs. This is often referred to as 'efficiency seeking' that
locates the plant to the host country and its parent company to its home
country, which aims to improve cost effectiveness of production.
According to Chung 2014, vertical FDI involves production processes
into three stages; first stage is the production of headquarter (parent
company) services by means of capital and labor, second stage involves
the manufacture of components, and lastly the assembly of components.
Such examples are the textiles and clothing industry. The capital-
intensive stages (textiles) are located in relatively capital rich countries,
human capital-intensive stages (design and up-market apparel) are
located in human capital rich countries, and labor-intensive stages
(apparel) in labor abundant countries10.

9
"Lexicon," Foreign Direct Investment Definition from Financial Times Lexicon, , accessed March 13, 2018,
http://lexicon.ft.com/Term?term=foreign-direct-investment.
10
NJERU NYAGA, "THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN KENYA,”,
accessed March 13, 2018, http://chss.uonbi.ac.ke/sites/default/files/chss/MSc%20Finance%20Project%20-
%20Benedict%20Nyaga%20Njeru.pdf.
 II. A. Statement of the Problem

1. What are the benefits and costs of Foreign Direct Investment in the
host country?
2. What are the policies and restrictions of Foreign Direct Investments
in the Philippines?
3. How Foreign Direct Investments does influences the economic
growth in the Philippines?

B. Methodology

This research study used the Historical Development and Descriptive

Method as an approach, to observe the progress of the economic condition of
foreign direct investments in the Philippines. The historical development will help
to answer questions based on hypothetical ideas. This research methods are
used to describe past circumstances and to understand the present patterns of
FDI in the country. The researcher used information and utilize resources from
readily available secondary sources from various related literatures and studies
such as articles, web journals, dissertation, thesis, related videos, economic
reports, government and international organizations’ presentations and other
related studies from credible sources to evaluate economic circumstances and
create necessary and valuable conclusion with knowledgeable foundation. The
data used are annual FDI data with observations from 2015 to present and
focused on the result on the three five years due to limits on data availability for
qualitative variables.
 III. Review of Related Literature

Effects of FDI Inflows in Host Countries' Economic Development

Foreign direct investments certainly affect the economic growth and

development of the host countries where their investments are located. That is
why countries, mostly developing countries, attracts foreign investors to bring in
capital and modern technology that are key players in the economic industry.
Capital, one of the key factors of production, is significant in the increase of Gross
Domestic Product (GDP) per capita in capital-importing countries11. Furthermore,
technology has a great edge in sustainable economic growth, however, some
developing countries suffers from weak technological advancements, thus relying
on FDI perhaps may be the most cost efficient way for them to access and
upgrade their technological sophistication. FDIs have affected growth on the Host
country through these several mechanisms: direct, spillovers, linkages and
competition effects which will be discuss as follows.

Direct effects
The most direct effects of FDI in the host country’s economy are: raise of
capital stock, increase in labor demand, and balance of payments effect. The
increase in capital formation through FDI inflows implies a significant economic
development in developing countries since they allow capital inflows that seek
out highest rate of return12. Capital inflows that result from foreign direct
investment benefit all countries by making more resources available, but it
particularly benefits those nations with limited domestic sources and restricted
opportunities to raise funds in the world’s capital markets13. Jenkins and
Thomas (2002) argue that FDI can contribute to economic growth not only
providing foreign capital but also by crowding in additional domestic
investment. Moreover, Borensztein et al (1998) found evidence of a “crowding
in effect” such that, FDI complimentary to a domestic investment. There are
advantages in relation to unrestricted capital inflows according to Feldstein
(2000) such as: reducing the risk faced by owners of capital that allows them

11
Njeru op. cit.,
12
Lawrence Chung, "The impact of horizontal and vertical FDI on host country’s economic growth," The
impact of horizontal and vertical FDI on host country’s economic growth, June 2014, ,
https://thesis.eur.nl/pub/16162/Chow-Wei-Chung.pdf.
13
Micahel Czinkota, "Pros and Cons of Foreign Direct Investment," Professor Michael Czinkota, March 05,
2015, , accessed March 13, 2018, http://michaelczinkota.com/2015/03/pros-cons-foreign-direct-
investment/.
 to diversify investments, a global integration of capital markets, and global
mobility of capital limits14.
FDI also increase the level of employment or labor demand in the host
country. Between the two classifications of FDI, Vertical FDI has a larger effect
on the employment of final goods production as it employs labor force in
production for home and host country, than of Horizontal FDI production for the
local market. Hence, FDI creates employment for the local citizens of host
country especially for those developing host countries where labor force
dominates that compliment capital production of developed countries. With
highly skilled workers they are efficient source of economic growth because of
the know-how in production and management efforts. Moura and Forte (2010)
added that FDI foster economic development in the host country by increasing
its productive capacity due to the improvement of the labor force. This
productive capacity improvement of human capital takes place through informal
training received by employees and workers during observation of operations
and also adopted through formal trainings. Adoption of new technologies by the
host country through FDIs are requisites in the labor force so they can be able
to apply it in the production activities. Aside from these positive consequences,
there exist negative repercussions from FDI inflows. The use of advanced
technology by Multinational Corporations (MNC) both have positive and
negative outcomes, its negative outcome is that technological advancements
may lead to lower the need of workers which will lead to an increase of
unemployment (OECD, 2002). Another one is that white-collar workers may
seek jobs in a foreign country, since domestic research and development
(R&D) is absent in the host country15.
FDI also affects the Balance of Payment (BOP) which is important policy
issue for the host governments16. A state's Balance of Payments (BOP)
comprises of current account, capital account and authority settlement account.
The Foreign Direct Investment (FDI) inflows are accounted for under the capital
record of BOP. The early impact of an inflow of FDI on BOP is invariably
positive. The FDI inflows likewise influence the BOP statement by implication
through the present record of BOP on the grounds that FDI inflows have
noteworthy effect on the volume of import and export of a country. Hence the
FDI inflow has a vital part to determine the BOP record of the host state17.

14
Selma Kastrati, "The Effects of Foreign Direct Investments for Host Country’s Economy," European
Journal of Interdisciplinary Studies 5, no. 1 (2013): , http://www.ejist.ro/files/pdf/369.pdf.
15
Rui Moura and Rosa Forte, "THE EFFECTS OF FOREIGN DIRECT INVESTMENT ON THE HOST COUNTRY
ECONOMIC GROWTH - THEORY AND EMPIRICAL EVIDENCE," The Effects of Foreign Direct Investment on
the Host Country, , accessed March 13, 2018,
https://www.fep.up.pt/investigacao/workingpapers/10.11.02_wp390.pdf.
16
Selma op. cit.
17
All Answers Ltd. (November 2017). Foreign Direct Investment And Balance Of Payments Economics
Essay. Retrieved from https://www.ukessays.com/essays/economics/foreign-direct-investment-and-
balance-of-payments-economics-essay.php?vref=1
 Spillovers
Another important channel that promotes growth in the host country is
the spillover effect which domestic firms benefit from FDI. Firms affiliates
abroad have some technological advantages which allow them to compete
successfully with local firms18. Domestic and local firms have the potential in
technological advances from foreign affiliates, in which technological spillovers
resulted in higher factor productivity for local firms and higher factor rewards
should not be presume as shown in some empirical studies.
Muora and Forte (2010), expounded the ideas of Frindlay (1978) that FDI is
a way to improve a country’s economic performance through the transmission
effect of more advanced technologies introduced by multinational firms which
are often regarded as more technologically developed firms. Almost every state
in the world invest on research and development R&D that is multinational firms
are accountable for, as they are major source of technology dispersion. The
state of technology used is another factor to determine the growth rate of a
country. In developing host countries most economic growth depends on the
application of advanced technology brought by MNC firms.
Wei Chung (2014) explained that there are opposing theories on literatures
related to technological spillover. Kojima (1973) argued that if technological gap
between foreign affiliates and local firms is relatively small enhance in growth
will be more likely due to technological spillover. With this, developing host
countries should target to strengthen more on labor and less on technology
intensive industries. When the entry or presence of a foreign affiliate in the host
country leads to productivity and efficiency benefits for local firms when the
affiliate cannot internalize the value of these benefits, occurs in Productivity
spillovers while the Market access spillovers refer to which local firms can
benefit from foreign firm’s export markets. A raise in capital stock in less
technological industries lower the export prices of host countries that resulted
in a decline in terms of trade19.

Linkages
In relation to spillovers, linkages is developed between foreign firms and
local firms. The interaction between these two- local suppliers and foreign
affiliates channels through which knowledge capital takes place. Bjorvatn et al
(2002), expound the idea of linkages for instance in a foreign firms may place
higher demands on the quality of intermediates, which force local suppliers to
become more efficient. This benefits locally owned firms if they will be more

18
NJERU op. cit.
19
Lawrence Chung, "The impact of horizontal and vertical FDI on host country’s economic growth," The
impact of horizontal and vertical FDI on host country’s economic growth, June 2014, ,
https://thesis.eur.nl/pub/16162/Chow-Wei-Chung.pdf.
 efficient local suppliers. Linkages that refer to relationship with customers are
forward linkages while multinational's relationship with suppliers are backward
linkages. According to Lall (n.d), there are several practices on how foreign
firms can increase productivity and efficiency of domestic firms through its
relationship with local suppliers or the backward linkages. First, supporting local
suppliers by setting up production facilities, foreign firms invest on production
facilities to help domestic laborers to work effectively. Second, providing
information and assistance to produce higher quality products through formal
and informal seminars. Third, provides assistance in purchasing resources and
lastly, support the set-up of the management and organization structure20.
Horizontal FDI most often purchase from domestic firms rather than vertical
FDI for they found that local firms are more market oriented.

Competition

With the presence of foreign firms, competition exist between MNC and
domestic firms. Hence, it is beneficial for the local market to use their
technology and R&D more effectively which will lead them to higher
productivity, lower prices, efficient allocation of resources, and a wider choices
for consumers. According to OECD (2002), the presence of foreign enterprise
may greatly assist economic development by spurring domestic competition.
Kastrati (2013) explain that the increased competition tends to encourage
capital investments by firms in plant, equipment and R&D as they struggle to
gain over their rivals. When local and foreign firms are competing with each
other, local firms take a survival behavior where they copy the production
techniques of multinationals21. Tougher competitions may also force firms to
reduce organizational inefficiencies in order to stay competitive22
Costs of FDI to the Host Country’s Economy
All of the benefits are favorable and rewarding to the host country in
attracting FDIs, however certain costs arises as well. Dealing with advantages and
disadvantages differs on every host countries, and industry to which FDI affects in
varying degrees. In small economies, large foreign firms can and often do, abuse
their dominant market positions23. There is a greater risk of interference by foreign
government that influences FDI to monopolize domestic market. Political situation
in the country can change in an instant, thus, such political actions of the state may
affect international trade and investments which in turn make political policy and
economic choices are formulated. These political changes could lead to a situation
of expropriation, a scenario where government can take control of a firm’s property
20
Ibid19
21
NJERU NYAGA, "THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN KENYA," ,
accessed March 13, 2018, http://chss.uonbi.ac.ke/sites/default/files/chss/MSc%20Finance%20Project%20-
%20Benedict%20Nyaga%20Njeru.pdf.
22
Ibid21
23
Selma Kastrati, "The Effects of Foreign Direct Investments for Host Country’s Economy," European
Journal of Interdisciplinary Studies 5, no. 1 (2013): , http://www.ejist.ro/files/pdf/369.pdf.
and assets if this enterprise is a threat to national security24. Lower comparative
advantage for the host country as FDI acquire domestic firms and if this firms
produce a commodity that is a comparative advantage of the host state, it is more
likely to be dominated by foreign enterprises dropping the comparative advantage
of the host state and reproducing it for international trade.
There is also an impact of technology of FDI, basing the argument on
technological gap between developed countries from which generally foreign firms
originate and host country. The ease of transfer of technology to host country firm
where technology gap is pronounced may lead to major transfers25. OECD (2002)
suggests that the technological gap should not be very strong since when the
technological gap between them is very sharp local firms do not have capabilities
to absorb and / or copy the new technologies brought in by multinationals. Adverse
effects on employment that not all investments created by FDI proposed jobs for
local laborers. There’s no likely a ‘beneficial’ competition between FDI and domestic
firms, sometimes FDI subsidiaries have economic power than local competitors,
therefore downfall of domestic firms are more likely to happen. Recognition of
economic benefits afforded by freedom of capital movements that sometimes clash
with concerns about loss of national sovereignty and other possible adverse
consequences. There are adverse effects on employment that not all investments
created by FDI proposed jobs for local laborers. Although in the previous section
we outlined how FDI can boost competition, host governments sometimes worry
that the subsidiaries of foreign MNEs may have greater economic power than local
competitors. Another one is the set against the initial capital inflow that comes with
FDI must be the subsequent outflow of earnings from the foreign subsidiary to its
parent company26.

Foreign Direct Investment in the Philippines

Philippines as a developing country is heavily dependent on the rest of the

world, as it actively seeks direct foreign investment. Reforms in the governmental
policy on foreign investments attracted massive FDI inflow to the economy, prior to
the Asian financial crisis, the Philippines became the destination of foreign direct
investments in Asia. In the last decades, the government liberalized policies to
attract FDI inflows, as they viewed that this is a potential source of employment
and exports along with spillover benefits from knowledge and technology it
brings27.

24
N.A, "Advantages and Disadvantages of FDI," WealthHow, , accessed March 14, 2018,
https://wealthhow.com/advantages-disadvantages-of-fdi.
25
Rui Moura and Rosa Forte, op. cit.
26
Selma Kastrati,, op cit.
27
Rafaelita Aldaba, "FDI Investment Incentive System and FDI Inflows: The Philippine Experience,"
November 2006, , accessed March 15, 2018, https://dirp3.pids.gov.ph/ris/dps/pidsdps0620.pdf.
 In the 1997 Asian financial crisis that affected many Asian countries including
South Korea, Thailand, Malaysia, Indonesia, Singapore and the Philippines,
following these event there was a massive FDI outflow from Philippine economy.
Philippines still continued its basic policy in liberalizing the economy and despite
global uncertainties Philippine economy showed resilience28. Factors such as
increased private consumer spending, buoyed substantially by remittances by
overseas workers and the recovery in the services and manufacturing sectors have
contributed to the growth experienced as retrieving the FDI destination in Asia.

FDI is considered a vital economic strategy for growth and development with
benefits to the host country including increased employment, foreign exchange
from exports, technology transfers and many others. The Philippines is becoming
a more attractive destination for foreign direct investment. Recent FDI inflows
surge in the first full year of the Duterte administration that reached $10 billion in
2017, with major components registered increases such as net equity capital
investment expanded by 25.9% to $3.3 billion, with gross placements of $3.7 billion
exceeding withdrawals of $479 million29. Equity placements were channeled to
gas, stream and air-conditioning supply; manufacturing; real estates; construction;
and wholesale and retail trade activities, stated by Lucas (2018) 30. According to
Bureau of Economic and Business Affairs, the Philippines has improved its overall
investment climate, thus, the Philippines’ sovereign credit ratings remain
investment grade, due to the country’s robust economic performance, continued
fiscal and debt consolidation, and improved governance but still, improvement is
needed31.

Foreign Direct Investment Policy

Inward Investments

The Philippines as influenced by its governmental policy has been keen on

alluring inward FDI. Investment are most welcome in the Philippines, anyone
regardless of nationality is welcome to invest in the country. Philippine laws and

28
Agbola, "Foreign Direct Investment and Economic Growth: Some ...," , accessed March 15, 2018,
http://esacentral.org.au/images/Agbola.pdf.
29
Daxim L. Lucas, "FDIs Surge to $10-B in Dutertes First Full Year," Inquirer Business FDIs Surge to 10B in
Dutertes First Full Year Comments, March 12, 2018, , accessed March 15, 2018,
http://business.inquirer.net/247542/fdi-
foreign-direct-investment-duterte-economy-inflow-increase.
30
Ibid29
31
"Philippines," U.S. Department of State, June 29, 2017, , accessed March 15, 2018,
https://www.state.gov/e/eb/rls/othr/ics/2017/eap/269846.htm.
regulations guarantee the basic rights of all investors and enterprise according to
SGV report32 that includes the following:
- Freedom from expropriation without just compensation
- Right to remit profits, capital gains, and dividends within the guidelines
of the Bangko Sentral ng Pilipinas (BSP),the country’s monetary
authority
- Right to repatriate the proceeds of the liquidation of investments
- Right to obtain to meet principal and interest payments on foreign
obligation

The major investment laws are discussed as follows.

 Omnibus Investments Code of 1987 or Executive Order (EO) No.

226, as amended by Republic Act (RA) NO. 7918
The Omnibus Investments Code of 1987 provides a comprehensive set of
incentives for local and foreign enterprises engaged in activities considered by
government as high priority for national development33. This law is
implemented by the Board of Investments (BOI) which is an agency, under the
Department of Trade and Industry, which is the lead investments promotion
agency of the Philippines to help uplift the general economic welfare of
Philippines34.

BOI is mandated through the Omnibus Investment Code to encourage

investments through tax exemption and other benefits such as incentives
define in an annually-prepared Investment Priotitues Plan (IPP). Such
conditions are:
• At least 50% of the production is for export (for 60% Filipino and 40% foreign-
owned enterprises; or
• At least 70% of production is for export (for more than 40% foreign-owned
enterprises35
BOI provides incentives available to those registered enterprises including
fiscal incentives such as: income tax holiday; additional deduction of labor
expenses from taxable income, tax credit for taxes and duties in raw materials
used in the manufacture, processing, or production of export products;
additional deduction of necessary and major infrastructure expenses from
taxable income; exemption from wharfage dues and fees; exemption from local
business taxes for four or six years. Nonfiscal incentives such as: simplification
of custom procedures; unrestricted use of consigned equipment; access to
32
SGV & Co., "Doing Business in the Philippines," SGV & Co. 55, 2012, , accessed March 16, 2018,
http://www.ey.com/Publication/vwLUAssets/Doing_business_in_the_Philippines/$FILE/Doing-business-in-
the-Philippines.pdf.
33
Ibid32
34
"BOI," Triple I Consulting, Inc., July 23, 2014, , accessed March 16, 2018,
http://www.tripleiconsulting.com/board-of-investments/.
35
Ibid34
 bonded manufacturing and warehouse system; and employment of foreign
nationals36.
Investment Priorities Plan which is lists of the priority activities for
investments, containing specific activities formulated by the BO. The extent of
entitlement to incentives shall be based on the project's net value, job
generation, multiplier effect and measure capacity; and the preferred activities
are:
1. Agriculture or Agribusiness and Fishery (commercial production and
processing of agricultural, herbal and fishery products)
2. Creative Industries/ Knowledge-Based Services (BPO activities, IT and
IT-enabled services)
3. Shipbuilding (construction and repair of ships,
shipbreaking/shiprecycling)
4. Mass Housing (development of low-cost mass housing and the
manufacture of modular housing components)
5. Iron and Steel (basic iron and steel, long steel and rolled products)
6. Energy (exploration, development and/or utilization of indigenous energy
sources and energy sources adopting environmentally-friendly technologies)
7. Infrastructure (transport, water, logistics, waste management facilities,
physical and Public-Private Partnership projects)
8. Research and Development (R&D activities and the establishment of
research/ testing laboratories)
9. Green Projects (manufacture/assembly of goods, establishmemt of
energy efficiency-related facilities which will lead to either the efficient use of
energy, natural resource; minimizing pollution or reducing greenhoyse gas
emissions)
10. Motor Vehicles (manufacturing and assembly of motor vehicles)
11. Strategic Projects (projects that exhibit very high socio-econimical
returns that significantly contribute to country's economic development)
12. Medical/Hospital Services (establishment and operation of primary and
secondary hospitals)
13. Disaster Prevention, Mitigation and Recovery Projects (projects that
prevent or mitigate adverse impacts on calamities, rehabilitate areas affected by
calamities, training or disaster preparedness, mitigation or reconstruction)37

36
Ibid35
37
Ibid35
 The Omnibus Investment Code contained several onerous provisions that
have dissuaded prospective investor. The code limited foreign equity to less
than 40% and required divestment of foreign equity of the amount. It also
barred foreign ownership of real estate as also require under the Constitution
and provided a broad definition of the industries in which all or most forign
investment is prohibited. It also required that all foreign investment is seeking
investment incentives receive prior to approval of the BOI. There many
restrictions and conditions imposed of foreign direct investment, yet many
investors chose to invest in the Philippines38

 Foreign Investments Act of 1991 or Republic Act 7042

The Foreign Investment Act (FIA) of 1991 or RA 7042 as amended by the
RA 8179 is the basic law that governs foreign investments in the Philippines as
it liberalize the entry of foreign investments in the country that was considered
a landmark legislation. Under this law, foreign investments are generally
allowed to conduct business in the Philippines subject to restrictions as
stipulated in the Foreign Investments Negative List (FINL), which is a shortlist
of investment areas or activities which may be opened to foreign investors
and/or reserved to Filipino nationals39 and that has two components as follows:
List A
This consist of areas of activities reserved to Philippine nationals where
foreign equity participation in any domestic or export enterprise engaged in any
activity listed therein shall be limited to a maximum of 40% as prescribed by
the Constitution and other specific laws.
List B
Under this list, contains the areas of defense-or law enforcement- related
activities and those with implications on public health and morals also included
on this list are the small and medium-sized doemsticmarket [doing business].
The FIA clearly states that if activity to be engaged in: is not included in the
FINL, is more than 40% foreign-owned and will cater ti the domestic market,
capital required is at least US $200,000. The capital may be lowered to US
$100,000, if any activity involves advance technology or the company employs
at least 50 direct employees in the domestic market.
If the foreign company will export at least 60% of its output, or a trader that
purchases products domestically will export at least 60% of its purchases, the

38
John Pierce, "PHILIPPINE FOREIGN INVESTMENT EFFORTS: THE FOREIGN INVESTMENTS ACT AND THE
LOCAL GOVERNMENTS CODE," 1992, , accessed March 16, 2018, https://digital.lib.washington.edu/dspace-
law/bitstream/handle/1773.1/996/1PacRimLPolyJ169.pdf?sequence=1&isAllowed=y.
39
Philippine Board of Investments, "Foreign Investments Act," Philippines Board of Investments - One
Window Network, , accessed March 16, 2018, http://boiown.gov.ph/db-main-final/foreign-investments/.
 required capital is only PHP 5,000 as a paid in capital. However, most banks
require a minimum of PHP 25,000-50,000 to open a corporate account.

Figure 1: Regular Foreign Investments Negative List

Source: Doing Business in the Philippines- SGV & Co. Report 201340

40
Due to limitations set by the Constitution and other specific laws, above are the following
industries are fully or partly nationalized under the Seventh Foreign Investments Negative List.
  Special Economic Zone Act of 1995 or Republic Act 7916 (as
amended by RA No. 8748)
The Philippine Economic Zone Authority is another government agency
tasked to promote investments, extend assistance, register, grant incentives to
and facilitate the business operations of investors in export-oriented
manufacturing and service facilities inside selected areas in throughout the
country proclaimed by the President of the country as PEZA Special Economic
Zones. PEZA implements the Special Economic Zone Act of 1995 that also
grants incentives to qualified enterprises that locate in the Ecozone41. Areas
earmarked by the government for development into balanced agricultural,
industrial, commercial and tourist/recreational regions are called the Ecozones.
Industrial Estates are tracts of land developed for the use if industries that have
basic infrastructure. Special industrial estates whose locator companies are
mainly export-oriented are those Export Processing Zones (EPZs) that include
incentives such as tax-and duty-free importation of raw materials, and spare
parts. Also Free Trade Zones are areas in nearby ports of entry where
important goods may be unloaded, repacked, manipulated or sorted without
being subject to import duties, but are moved into a non- free trade zone, it will
be subjected to customs duties. Each ecozones are to be developed as an
independent community with minimum government interference and shall
administer its own economic, financial, industrial and tourism development
without help from the national government. These shall provide adequate
facilities to establish linkages with surrounding communities and other entities
within the country.

Outward Investment
According to 2017 Investment Climate report by the US State Department, there
are generally no restrictions on outward investments by Philippine residents,
although, foreign exchange purchases from banks and foreign exchange
subsidiaries or affiliates above USD $60 million per investor, or per fund per year,
require prior approval from the central bank42

41
SGV & Co., op. cit.
42
"Philippines," U.S. Department of State, June 29, 2017, , accessed March 15, 2018,
https://www.state.gov/e/eb/rls/othr/ics/2017/eap/269846.htm.
 IV. Presentation, Interpretation & Analysis of Data

Aside from identifying the benefits and costs; the restriction policies and
conditions to foreign direct investment, it is important if foreign investments
influence the growth in economic development in the country. It is best to present
data through graphs and tables especially in identifying the growth of FDI Inflows
and how does it affect the Philippine economy. The following graphs and tables will
be classified by year with data starting from year 2014- (date 2017/2018) focusing
on the annual total approved Foreign Investments FI, total approved FI by country
of investor and total approved FI by industry to limit and observe the growth and
influence of FDI inflows in the economic development in the country.

Approved Foreign Investments in the Philippines 2014

Figure 1: Total approved Foreign Investment Annual 2014

Figure 1.A Total approved Foreign Investment by Country of Investor 201

Figure 1.B Total approved Foreign Investment by Industry 2014

Approved FI Percent
Industry to

2013 2014 Total

2014

A. Agriculture, forestry and 2,678.8 536.7 0.3

fishing
B. Mining and quarrying 1,976.7 - 0.0
C. Manufacturing 77,557.6 109,495.3 58.6
D. Electricity, gas, steam and 74,497.3 6,179.9 3.3
air
conditioning supply
E. Water supply; sewerage, 132.2 135.2 0.1
waste
management and remediation
activities
F. Construction 8.7 7,735.3 4.1
G. Wholesale and retail trade; 155.0 551.8 0.3
repair of
motor vehicles and
motorcycles
H. Transportation and storage 55,468.1 6,103.4 3.3
 I. Accommodation and food 25,380.8 5,520.8 3.0
service
activities

J. Information and 3,560.8 4,937.4 2.6

communication
K. Financial and insurance 48.6 77.5 0.0
activities
L. Real estate activities 6,434.7 15,584.5 8.3
M. Professional, scientific and 632.0 64.8 0.0
technical
activities

N. Administrative and support 24,567.6 29,755.3 15.9

service
activities
O. Public administration and 31.6 47.2 0.0
defense;
compulsory social security

P. Education 254.7 65.6 0.0

Q. Human health and social 1.2 144.6 0.1
work
activities

R. Arts, entertainment and 579.6 4.7 0.0

recreation
S. Other service activities 47.8 2.8 0.0
Total 274,013.5 186,943.1 100.0
Sources of data: AFAB, BOI, BOI ARMM, CDC, CEZA, PEZA, SBMA

In Figure 1, total approved FI for the year 2014 reached PHP 186.9 billion,
down by 31.8 percent from PHP 274.0 billion pledges recorded in the previous year.
For 2014, top investing countries were Japan, the Netherlands, and USA, sharing
19.1 percent, 17.5 percent, and 9.3 percent, respectively, of the total approved FI.
Investment pledges from the three countries totaled PHP 85.9 billion as shown in
Figure 1.A. Meanwhile, manufacturing received the largest amount of FI
commitments for the whole year of 2014, contributing PHP 109.5 billion or 58.6
percent of total approved FI43.

43
Philippine Statistic Authority, The Foreign Investments in the Philippines, ISSN 1655-8928 (Quezon City,
Philippines: Philippine Statistics Authority, 2015).
Approved Foreign Investments in the Philippines 2015

Figure 2: Total approved Foreign Investment Annual

Figure 2.A Total approved Foreign Investment by Country of Investor 2015

Figure 2.B Total approved Foreign Investment by Industry Annual 2015
Approved FI Percent to
Industry 2014 2015 Total
2015

A. Agriculture, Forestry and 536.7 8,507.9 3.5

Fishing
B. Mining and Quarrying - - -
C. Manufacturing 109,495.3 134,552.1 54.9
D. Electricity, Gas, Steam and Air 6,179.9 46,488.8 19.0
E. Water supply; Sewerage, 135.2 60.5 0.0
Waste
Management and Remediation
Activities
F. Construction 7,735.3 3,663.3 1.5
G. Wholesale and Retail Trade; 551.8 1,717.8 0.7
Repair of Motor Vehicles and
Motorcycles
H. Transportation and Storage 6,103.4 2,745.4 1.1
I. Accommodation and Food 5,520.8 5,650.7 2.3
Service
Activities
J. Information and 4,937.4 3,143.5 1.3
Communication
K. Financial and Insurance 77.5 240.9 0.1
Activities

L. Real Estate Activities 15,585.1 9,857.7 4.0

M. Professional, Scientific and 64.8 2,252.5 0.9
Technical Activities
N. Administrative and Support 29,755.3 22,890.6 9.3
Service Activities
O. Public Administration and 47.2 - -
Defense; Compulsory Social
Security
P. Education 65.6 2.6 0.0
Q. Human Health and Social Work 144.6 30.3 0.0
Activities
R. Arts, Entertainment and 4.7 2,937.1 1.2
Recreation
S. Other Service Activities 19.2 474.1 0.2
Total 186,960.0 245,215.7 100.0
 Sources of data: AFAB, BOI, BOI ARMM, CDC, CEZA, PEZA, SBMA

The total approved Foreign Investment in the full year of 2015 reached
PHP 245.2 billion, with an increase of 31.2% from PHP 187.0 billion in 2014 as
shown in Figure 1. Figure 1.A illustrates that the Netherlands ranked first
committing PHP 82.7 billion or 33.7 %. While Japan ranked second with an
investments amounting to PHP 54.7 billion and South Korea on the third spot with
PHP 23.2 billion. These are also the top industries for the whole year 2015 on
Figure 1.B, with Manufacturing receiving the biggest commitments at PHP 134.6
billion or 54.9 percent. This is followed by Electricity, Gas, Steam and Air
Conditioning Supply at PHP 46.5 billion or 19.0 percent and Administrative and
Support Service Activities at PHP 22.9 billion or 9.3 percent44.

Approved Foreign Investments in the Philippines 2016

Figure 3: Total approved Foreign Investment Annual

44
Philippine Statistic Authority, The Foreign Investments in the Philippines, ISSN 1655-8928 (Quezon City,
Philippines: Philippine Statistics Authority, 2016).
Figure 3.A Total approved Foreign Investment by Country of Investor 2016

Figure 3.B Total approved Foreign Investment by Industry Annual 2016

Approved FI Percent to
Industry Total
2015 2016 2016

A. Agriculture, Forestry and 8,507.9 5,221.2 2.4

Fishing
B. Mining and Quarrying - 614.2 0.3
C. Manufacturing 134,556. 95,930.3 43.8
1
D. Electricity, Gas, Steam 46,488.8 55,632.4 25.4
and Air
E. Water supply; Sewerage, 60.5 1,754.7 0.8
Waste
Management and
Remediation
Activities
F. Construction 7.2 19.7 0.0
G. Wholesale and Retail 1,717.8 998.1 0.5
Trade;
Repair of Motor Vehicles and
Motorcycles
H. Transportation and 5,682.5 15,596.3 7.1
Storage
I. Accommodation and Food 5,728.5 5,277.2 2.4
Service
 Activities
J. Information and 3,143.5 3,980.3 1.8
Communication
K. Financial and Insurance 240.9 261.8 0.1
Activities

L. Real Estate Activities 9,879.4 6,960.1 3.2

M. Professional, Scientific 2,868.0 829.4 0.4
and
Technical Activities
N. Administrative and 22,890.6 25,740.3 11.8
Support
Service Activities
O. Public Administration and - 52.4 0.0
Defense; Compulsory Social
Security
P. Education 2.6 4.4 0.0
Q. Human Health and Social 30.3 130.2 0.1
Work
Activities
R. Arts, Entertainment and 2,937.1 0.1 0.0
Recreation
S. Other Service Activities 474.1 35.4 0.0
Total 245,215. 219,038. 100.0
7 6
Sources of data: AFAB, BOI, BOI ARMM, CDC, CEZA, PEZA, SBMA

For annual 2016, total approved investments reached PHP 219.0 billion. This was
a decline of 10.7 percent from PHP 245.2 billion in 2015 presented in Figure 3. In
Figure 3.A for the full year 2016, the Netherlands ranked first with investment
commitments of PHP 49.4 billion or 22.6 percent share. Australia and USA, which
ranked second and third, pledged to invest PHP 32.4 billion and PHP 31.4 billion.
The same industries topped the list of would be recipients of approved FI in 2016.
Manufacturing received the highest investment commitments at PHP 95.9 billion or
43.8 percent share. This was followed by Electricity, Gas, Steam and Air
Conditioning Supply at PHP 55.6 billion or 25.4 percent, and Administrative and
Support Service Activities at PHP 25.7 billion or 11.8 percent presented in figure
3.B, according to PEZA report 201745

45
Philippine Statistic Authority, The Foreign Investments in the Philippines, ISSN 1655-8928 (Quezon City,
Philippines: Philippine Statistics Authority, February 2017).
Approved Foreign Investments in the Philippines 2017
The Philippine Statistics Authority as an agency that deliver relevant and reliable
statistics, quarterly report and annual report of Foreign investments in the
Philippines, haven’t released further annual report of Foreign investment 2017, yet
published first two quarterly accounts and third and fourth quarter press release of
FI in the country, the followings are quarterly report:

- First quarter of 2017 reports

Figure 4: Total approved Foreign Investment First Quarter (January, February and
March)

Figure 4.A Total approved Foreign Investment by Country of Investor in First

Quarter 2017
Figure 4.B Total approved Foreign Investment by Industry First Quarter 2017
Approved FI Percent
Industry to
Q1 Q1 Total Q1
2016 2017 2017

A. Agriculture, Forestry and 1,040.0 - -

Fishing
B. Mining and Quarrying - - -
C. Manufacturing 9,819.6 15,013 65.6
.2
D. Electricity, Gas, Steam and 6,641.3 337.5 1.5
Air
Conditioning Supply
E. Water Supply; Sewerage, - - -
Waste
Management and Remediation
Activities
F. Construction 11.4 0.5 0.0
G. Wholesale and Retail Trade; 160.7 89.1 0.4
Repair of Motor Vehicles and
Motorcycles
H. Transportation and Storage 1,792.2 96.3 0.4
I. Accommodation and Food 8.8 232.3 1.0
Service
Activities
J. Information and 722.6 48.3 0.2
Communication
K. Financial and Insurance 63.8 36.2 0.2
Activities
L. Real Estate Activities 510.4 3,431. 15.0
4
M. Professional, Scientific and 0.1 16.8 0.1
Technical Activities
N. Administrative and Support 5,406.6 3,519. 15.4
7
Service Activities
O. Public Administration and - - -
Defense; Compulsory Social
P. Education 2.6 26.0 0.1
Q. Human Health and Social 62.4 - -
Work
Activities
R. Arts, Entertainment and - 36.0 0.2
 Recreation
S. Other Service Activities 0.3 - -
Total 26,242. 22,883. 100.0
8 3
Sources of data: AFAB, BOI, BOI ARMM, CDC, CEZA, PEZA, SBMA

The total foreign investments (FI) amounted to PHP 22.9 billion, down by 12.8
percent compared with PHP 26.2 billion approved in the same first quarter
period last year. This marks the third consecutive quarter of decline for
approved foreign investments. The Netherlands was the top investing country
for the quarter with PHP 6.2 billion as it shared 27.2 percent of the total FI
commitments. Singapore and the United Kingdom (UK) occupied the second
and third posts, pledging PHP 4.3 billion or 18.8 percent and PHP 3.6 billion
or 15.9 percent, respectively, of the total FI approved in Q1 2017.
Manufacturing bested all other industries as it stands to receive 65.6 percent
of total FI pledges or PHP 15.0 billion. Administrative and Support Service
Activities came in second with investment commitments valued at PHP 3.5
billion, contributing 15.4 percent, followed by Real Estate Activities at PHP 3.4
billion, with 15.0 percent of the total FI46.
- Second quarter of 2017 reports:
Figure 5: Total approved Foreign Investment Second Quarter (April, May June)

46
Philippine Statistic Authority, The Foreign Investments in the Philippines First Quarter, ISSN 1655-8928
(Quezon City, Philippines: Philippine Statistics Authority, June 2017).
Figure 5.A Total approved Foreign Investment by Country of Investor in Second
Quarter 2017

Figure 5.B Total approved Foreign Investment by Industry Second Quarter 2017
Approved FI Percent
to
Industry Q2 Q2 Total Q2
2016 2017 2017

A. Agriculture, Forestry and 1,400.0 7.2 0.0

Fishing
B. Mining and Quarrying - - -
C. Manufacturing 14,242.7 6,662.2 36.7
D. Electricity, Gas, Steam 3,826.7 1,827.9 10.1
and Air
Conditioning Supply
E. Water Supply; Sewerage, - 43.5 0.
Waste 2
Management and
Remediation
Activities
F. Construction 7.7 3.3 0.
0
G. Wholesale and Retail 134.8 128.9 0.7
Trade;
Repair of Motor Vehicles and
Motorcycles
 H. Transportation and 8,416.9 904.6 5.0
Storage
I. Accommodation and Food 3,986.7 44.8 0.2
Service
Activities
J. Information and 115.6 527.5 2.9
Communication
K. Financial and Insurance 62.2 11.1 0.1
Activities
L. Real Estate Activities 1,936.7 3,827.3 21.1
M. Professional, Scientific 4.4 48.0 0.3
and
Technical Activities
N. Administrative and 6,222.3 4,112.5 22.6
Support
Service Activities
O. Public Administration and - - 0.0
Defense; Compulsory Social
P. Education 1.5 11.2 0.
1
Q. Human Health and Social 0.1 - -
Work
Activities
R. Arts, Entertainment and - - -
Recreation
S. Other Service Activities 32.5 0.6 0.0
Total 40,390.7 18,160. 100.0
6

Sources of data: AFAB, BOI, BOI-ARMM, CDC, CEZA, PEZA, SBMA

In the second quarter of 2017, foreign investment equated to PHP 18.2 billion,
lower by 55.0 percent from PHP 40.4 billion recorded in the second quarter
period last year. The top three prospective investing countries for the second
quarter of 2017 include Japan, Singapore, and the United States of America
(USA). Pledges from Japan amounted to PHP 4.8 billion or 26.4 percent of the
total FI during the quarter while Singapore and USA committed PHP 2.4 billion
and PHP 2.0 billion, or 13.0 percent and 11.0 percent of the total approved
foreign investments. Manufacturing continued to be the industry that would
receive the largest amount of committed foreign investments in the second
quarter of 2017. Investments for Manufacturing stood at PHP 6.7 billion or 36.7
percent share. Administrative and Support Service Activities came in second
with investment pledges valued at PHP 4.1 billion or 22.6 percent, followed by
Real Estate Activities at PHP 3.8 billion or 21.1 percent share47

- Third quarter of 2017 Reports:

Figure 6: Total approved Foreign Investment Third Quarter (July, August,
September)

Total approved foreign investments in the third quarter of 2017 consist of PHP 43
billion, which was 61% higher compared to PHP 26.7 billion in the same third
quarter in 2016. Japan was the top investing country for the third quarter followed
by Taiwan and Australia, with pledged of PHP 21.4 billion, PHP 8.9 billion and PHP
2.8 billion respectively. Manufacturing, Real estate activities followed by
Administrative and Support Activities are top invested industry in the third quarter
of 201748.

47
Philippine Statistic Authority, The Foreign Investments in the Philippines Second Quarter, ISSN 1655-
8928 (Quezon City, Philippines: Philippine Statistics Authority, June 2017).
48
Philippine Statistic Authority, The Foreign Investments in the Philippines Third Quarter, Press Release ,
https://psa.gov.ph/foreign-investments-press-releases
 - Fourth Quarter of 2017 reports:

Figure 7: Total approved Foreign Investment Fourth Quarter (October,

November, and December)

In the fourth quarter, FI amounted to PHP 21.6 billion which was 82.8% lower
compared to last year’s fourth quarter of PHP 125.7 billion. A total of PHP 105.8
billion of approved FI for the year of 2017 which is 51.8% lower from PHP 219 billion
of last year. Japan being the top, USA, and Singapore were the top three investing
countries for the last quarter of 2017. Manufacturing receive the largest invested
industry followed by Real estate activities, and Administrative and Support service
activities for the last quarter of 201749.

49
Philippine Statistic Authority, The Foreign Investments in the Philippines Fourth Quarter, Press Release,
https://psa.gov.ph/foreign-investments-press-releases
Total Foreign Investments for the years of 2014, 2015, 2016 and 2017
Figure 8:

Approved FI
300

250

200

150

100

50

0
2014 (PHP 186.9 B)2015 (PHP 245.2 B) 2016 (PHP 219 B) 2017 (PHP 105.8 B)

Approved FI

With the presentation of data based on foreign investment FI in the previous years
(2014, 2015, 2016 & 2017), figure 8 illustrated the growth of FI, the PHP 274 billion
from 2013 was decreased to PHP 186.9 billion in 2014, wherein Japan was the top
investor and manufacturing sector was the most invested industry in the country.
There was an increase of PHP 58.3 billion in year 2015 with a total amount of PHP
245.2 billion, the Netherlands as top investing country and manufacturing industry
has led again in the main invested sector. While 2015 was a boom in FI, a total of
PHP 219 billion was asserted for 2016 there was a decreased of PHP 26 billion
from the last FI, the Netherlands was again the top investing country and
manufacturing was the leading invested sector industry. In the quarterly report for
2017, this was computed as annual report that FI in 2017 equated to PHP 105.8
billion, more than 50% decline than last year’s total FI, Japan was the top investing
country and again manufacturing received the largest investing industry. Thus,
foreign investment is likely to be unpredictable, since above data shows that erratic
changes annual or even quarterly is evident. Political conditions of the state is also
a factor, which influences the growth of foreign investment. The surged of PHP 245
billion in 2015, generated job investments during the last full year of the Aquino
administration50. This FI involved a long term investments in hard assets like
manufacturing that generated employment51. As sound macroeconomic
fundamentals overshadowed the uncertainties brought by leadership changes
within the country52 with an FDI record of PHP 219 billion, as national elections

50
Dindo Paragas, "Foreign Investment Pledges Rise in 2015," Securing The Future of Philippine
Industries, March 10, 2016, , accessed March 23, 2018, http://industry.gov.ph/foreign-investment-
pledges-rise-in-2015/.
51
Ibid50
52
Keith Mariano, "Philippines' FDI Inflow Hits Record High in 2016," BusinessWorld, , accessed
March 23, 2018,
occurred in 2016. As new administration emerged, the first five months of 2017, net
inflows of foreign direct investments (FDI) declined by 23.8 percent from the year
before—hitting a total of $3.01 billion this year compared to last year’s $3.95 billion,
according to the Bangko Sentral ng Pilipinas53. With the recent FDI surged, net
inflows of foreign direct investments to the country in 2017 stand in contrast with
the net outflows of portfolio funds for the same period54. The Philippines have a
great advantage on manufacturing industry that includes skilled workers as it ranks
the highest invested industry, which justified the state’s image on valuable labor
force that attracts foreign firms especially those who will invest on labor employment
as it is a benefit for the host country that it generate local employments

http://www.bworldonline.com/content.php?section=TopStory&title=philippines&8217-fdi-inflow-hits-
record-high-in-2016&id=142023.
53
Galang, Jose. "ANALYSIS: The 'growth' in Foreign Direct Investments in the Philippines." ABS-CBN News.
August 13, 2017. Accessed March 23, 2018. http://news.abs-cbn.com/blogs/business/08/14/17/analysis-
the-growth-in-foreign-direct-investments-in-the-philippines.
54
Lucas, Daxim L. "FDIs Surge to $10-B in Duterte's First Full Year." Inquirer Business FDIs Surge to 10B in
Dutertes First Full Year Comments. Accessed March 23, 2018. http://business.inquirer.net/247542/fdi-
foreign-direct-investment-duterte-economy-inflow-increase.
 V. Summary, Conclusion & Recommendation
Foreign Direct Investments are needed for the economic growth and
development in the host country where the business is established. Inflow
investments help to increase capital formation that is significant in economic growth.
Technological advantages brought by FDI inflows allow the host country for higher
productivity for local firms as a key to potential technological advancements. The
level of labor demand grows as FDI inflows create employment opportunities for
domestic laborers especially in developing countries where labor forces dominates.
It also improves management skills that laborers can apply in production and
enhance employees to an efficient productive skills that will lead to effective
productive capabilities. A beneficial competition is also a key advantage brought
by FDI inflows in which research and development will be generated by domestic
firms for higher productivity, lower commodity prices, and efficient allocation of
resources. FDI also affects the Balance of Payments (BOP) as FDI inflow is
invariably positive in BOP accounts of the state. With these economic advantages
also give rise to economic drawbacks in the host country. There are adverse effects
on employment that not all investments created by FDI proposed jobs for local
laborers. There’s no likely a ‘beneficial’ competition between FDI and domestic
firms, sometimes FDI subsidiaries have economic power than local competitors,
therefore downfall of domestic firms are more likely to happen. There is a greater
risk of interference by foreign government that influences FDI to monopolize
domestic market and that will further result to abrasion of the host country’s culture.
FDI inflows are often have longer and higher term outflows that is not beneficial to
host country, furthermore, foreign investments have benefited their host countries
especially those with limited domestic sources and restricted opportunities to
access and compete in the world market.
Therefore concluded that, Philippines has considerably liberalized its FDI
policies in the last two decades. At the same time, it has implemented reforms in its
investment policy and investment incentive measures. Philippines' openness and
restriction on foreign investment also hinders inward FDI as Philippine laws and
governmental policy such as Philippine Constitution, Omnibus Investment Code of
1987 and Foreign Investment of 1991, as the laws treats foreign investors the same
as their domestic counterparts and the 60/40 foreign ownership rule. Thus
Philippines, being laggard among its Southeast Asia neighbors and as influenced
by its governmental policy has been keen on alluring inward FDI. In order to attract
foreign investors, we provide them tax incentives to compete with other countries.
Yet, these efforts resulted in a complicated investment incentive system. According
to Aldaba (2006) complex investment incentive system combined with poor
investment climate explain why the Philippines has performed badly in attracting
FDI inflows relative to its neighbors. This tends to show that in the absence of
fundamental factors such as economic conditions and political climate, tax
incentives alone are not enough to generate a substantial effect on investment
decisions of investors nor can they make up for the country’s fundamental
weaknesses55.
With globalization, developing countries have depended on foreign direct
investment to aid their economies toward development and stability as a
recommendation to this, the pursuance of economic liberalism has been on
discussion to remove existing equity and capitalization requirements and a 100%
foreign owned business to operate. The Philippines in order to achieve economic
growth and stability, should solve national security issues like the insurgency in
Mindanao. Land reforms, as well as domestic investment incentive reforms should
also be of concern to protect and promote domestic businesses and the growing
MSMEs. Economic liberalization shall be taken to consideration especially for
public transportation and infrastructure. On the other hand, countries such as
Philippines, should not allow foreign ownership of companies in strategically
important industries that could lower the comparative advantage of the nation,
according to an IMF report. Philippines has the advantages especially on English
speaking and skilled workers since manufacturing is the most invested industry in
the country. With this, surely the FDI will help to surge greater heights and
Philippine economic development can achieve stability and compete with other
developing countries in the world market. Certain measures, policy and dialogues
should be thoroughly undertaken for the road to economic stability is still a long way
to go for our country.

55
Rafaelita Aldaba, "FDI Investment Incentive System and FDI Inflows: The Philippine Experience,"
November 2006, , accessed March 15, 2018, https://dirp3.pids.gov.ph/ris/dps/pidsdps0620.pdf.
 VI. References
Agbola, "Foreign Direct Investment and Economic Growth: Some ...," , accessed
March 15, 2018, http://esacentral.org.au/images/Agbola.pdf.
Aizenman, Joshua and Nancy Marion. "The Merits Of Horizontal Versus Vertical
FDI In The Presence Of Uncertainty," Journal of International Economics, 2004,
v62(1,Jan), 125-148.
Aldaba Rafaelita, "FDI Investment Incentive System and FDI Inflows: The Philippine
Experience," November 2006, , accessed March 15, 2018,
https://dirp3.pids.gov.ph/ris/dps/pidsdps0620.pdf.
All Answers Ltd. (November 2017). Foreign Direct Investment And Balance Of
Payments Economics Essay. Retrieved from
https://www.ukessays.com/essays/economics/foreign-direct-investment-and-
balance-of-payments-economics-essay.php?vref=1
"BOI," Triple I Consulting, Inc., July 23, 2014, , accessed March 16, 2018,
http://www.tripleiconsulting.com/board-of-investments/.
Chung Lawrence, "The impact of horizontal and vertical FDI on host country’s
economic growth," The impact of horizontal and vertical FDI on host country’s
economic growth, June 2014, , https://thesis.eur.nl/pub/16162/Chow-Wei-
Chung.pdf.
Eva Nejar, "Review of Foreign Direct Investment Flows and Tax Incentives in the
Philippines and in the ASEAN Region," July & aug., 2015, ,
www.ntrc.gov.ph/images/journal/j20150708a.pdf.
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