Foreign direct investments

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By Neil Honeyman

An Independent View

Wednesday, March 26, 2014


FOREIGN investments are important for economic growth. Without these investments the growth of our economy would be much less or perhaps zero or even negative – particularly when nature is unkind, such as the Cebu-Bohol earthquake and typhoon Yolanda.

Foreign investments are in two basic forms.

The first is what the media graphically calls “hot money.” This is money which is invested in stocks and bonds of Philippine entities. These stocks and bonds are traded briskly so that an investor can disengage at a moment’s notice. Easy come, easy go.

The second form of foreign investment is foreign direct investment (FDI). This occurs when a foreign entity makes a tangible investment in the Philippines. For example, the investment could be a hotel, a factory, an industrial plant, or in a business processing outsourcing operation.

FDI investments are, to a greater or lesser extent irreversible – the investor cannot, usually, withdraw from the investment without incurring losses. This distinguishes an FDI investment from a “hot money” investment.

The Philippines is competing with other countries for FDI investments. Usually, the Philippines is less successful than other neighboring countries in attracting FDIs.

Investors have two main areas of concern when deciding whether to invest. These can be categorized into (a) risk and (b) uncertainty.

Risk is a situation where we are exposed to the possibility of adverse circumstances. Investors can handle risk. If an investor is considering whether to build a hotel, he evaluates risk in terms of possible market size, competitive environment and many other factors. A rational decision may be made on the basis of risk assessment.

Uncertainty is a different matter altogether. This occurs when our business environment is not properly known or is not definite. Investors are not relaxed about uncertainty. It makes them skittish.

One reason why the Philippines does relatively badly in FDI is that we have a higher degree of uncertainty than many countries.

Specifically, government inspired incentives (tax holidays, investment grants etc) are fraught with uncertainty. For example, we have a scheme involving economic zones which would, if granted, attract investors.

Unfortunately, the bureaucracy responsible for these zones, the Philippine Economic Zone Authority (Peza), headed by Lilia de Lima, sister of Justice Secretary Leila de Lima, is not perceived by potential investors as issuing clear and unambiguous statements as to whether or not particular projects will attract Peza support.

This is regrettable because uncertainty causes investors to disappear.

For example the Province has built a Cybercenter which, obviously, we would like to have fully tenanted. This is much more readily achievable if tenants know whether or not they will attract economic zone privileges.

Uncertainty is bad!

***

There is much talk about poverty and what can be done to reduce poverty levels which remain obstinately high.

We believe there should be greater emphasis on the fact that some Regions are much poorer than others. It would seem reasonable, therefore if government incentives were increased in the less wealthy parts of the country.

Last October, incoming British Ambassador Asif Ahmed made reference to problems experienced by British investors. I hope that these potential problems are aired to relevant Philippine government departments which, in principle, are eager for foreign investments here. It is an act of friendship to be frank with our friends.

“Diplomacy is to do and say, the nastiest thing in the nicest way” - Isaac Goldberg (1887-1938). The Reflex, October 1927, p77.

Published in the Sun.Star Bacolod newspaper on March 26, 2014.

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