How to attract investments? Let me count the ways

THE Philippines, the World Bank says in its latest report, continues to lag behind its neighbors in the Asia-Pacific region in terms of attracting foreign direct investments.

Of course, that’s hardly new. We have been suffering that trend in the last decade or so. But can we really reverse it? Can the Philippines, given the current economic and political realities, devise a strategy to address the problem?

We say yes, assuming the present dispensation still has energy left for a three-year push until 2010. Below are a few ideas.

Before coming to that, though, we should welcome two important pieces of news that should help us generate more investments in the next few years.

First, the Bangko Sentral ng Pilipinas (BSP) recently released its Business Expectations Survey (BES) report indicating the continuing rise in business confidence since the last quarter of 2005. In the first quarter of 2007, the BES traces the optimism to these factors: greater business opportunities in the run-up to the May election; improvement in the macroeconomic fundamentals (low inflation, stronger peso, low interest rate and improved fiscal position); increase in consumer demand; and rollback in oil and petroleum prices. Business optimism, BES says, is broad-based and an increasing number of firms are expecting to embark on expansion programs.

The second piece of encouraging news is the report indicating that the country’s savings rate has now reached more than 30 percent, or on a par with our neighbors. The government admits that this higher savings rate is largely due to the higher remittances sent home by overseas workers. It’s quite clear that families of overseas Filipinos are saving their money in the bank, contrary to earlier notions about remittance dollars being squandered on conspicuous consumption.

Both factors—improved and sustained business confidence as well as higher savings rate—should boost the country’s chances of generating investments, both locally generated and foreign direct investments (FDIs). How?

According to the United Nations Development Program (UNDP), three major factors explain the inflows of FDIs, namely economic, government policy and strategy by transnational corporations.

Economic factors would depend on variables like the size of the market, the level of urbanization, access to regional and global markets, among others. They would also depend on labor availability, cost, skills availability, infrastructure, level of technological development and the presence of strong financial markets.

Certainly, the rising flows of remittances from overseas workers boost the size of the local market through higher domestic demand that should make the Philippines more attractive to FDIs. The continuing high unemployment and underemployment rates suggest the continuing availability of skills and labor. Also, the continuing diaspora of skilled professionals, while a negative trend, could also be read as an indicator that the Philippines is actually producing a surplus of talents. That means that in terms of the first determinant (economic factors), all the government could do is to complement these positive aspects by focusing its resources on infrastructure development.

Perhaps, what the Neda could do to inspire confidence is to come up with a detailed list of these infrastructure projects and related information like funding sources and timetables, so that the public can help ensure that these investments are really put in areas where economic and social returns are high.

Government policies, the second most important FDI determinant, are crucial. Among the most important variables are the soundness of macroeconomic policy, promotion of private ownership and participation, relaxed rules on entry and exit, greater integration with the rest of the world through trade, and transparent and predictable rules, among many others.

Certainly, the government has gained so much headway in terms of lowering inflation and interest rates, and improving the fiscal indicators. The government therefore should now focus its energies on delivering a strong signal for a transparent and predictable set of rules in government investments.

There are many ways to do it but initiatives like simplified business-registration procedures, transparent bidding rules and the passage of the Freedom of Information Act should give the public access to important contracts.

And better still, the current administration and its allies in Congress should once and for all drop all its intentions for a Charter change to take away the notion that the government is going to change the rules of the game once the dust settles after the May elections. If there’s one thing that’s really putting a lot of uncertainty in the economic horizon, it’s the Charter-change initiative which has been raising the specter of wholesale and unpredictable reverses in economic and social policies that were enshrined in the Constitution after the 1986 Edsa Revolution.

The third most important determinant is the TNC strategy. Multinationals make decisions to invest in a country based on two things: their perception of risk and rewards and political stability, as well as their own strategies on location, sourcing of inputs and services, and technology transfer, among others. They will invest if they think the country has what it takes to handle the complexities of their global operations in the most cost-effective manner. And they would do so if they could divine the trajectory of local politics and are assured that they are not putting the lives of their executives in harm’s way.

Of course, much of those perceptions about the Philippines are just that—perceptions. But perceptions are important inputs in investment decisions and it would help the country a lot if those already doing business here are confident about the country’s prospects. That is why the recent BES report is a very important piece of information. Again, the government could complement this trend by committing to clean, credible and orderly elections in May. That’s the least the party in power now could do to improve investors’ perception of the Philippines as an investment destination. (Originally prepared as an editorial piece for the BusinessMirror, April 10, 2007)