Crossroads (Toward Philippine economic and social progress)
Philippine Star, 18 March 2015


Foreign direct investment (FDI) flows into the Philippines have been lately encouraging and the government is hyping all this. President Benigno Aquino thinks we are doing well and there is no need to improve FDI policies.

I will rely today on statistical description taken from an international database of foreign direct investments.  To sharpen the discussion, let us just compare Philippine FDI accomplishments with that of Indonesia. Until the early 1980s, our country was considered economically ahead of Indonesia.

Indonesia’s FDI inflows compared to the Philippines. FDI policies in Indonesia were very simple. They do not have “general” provisions protecting the economy in their basic law, the political constitution. Indonesia simply legislated FDI policies as they needed to deal with them. After the economic reforms of 1987 in Indonesia, FDIs further deepened and broadened.

Inflows of FDIs, 2010 to the present. All data, except those qualified below, are from the country investment reports compiled by the UNCTAD, based on their annual World Investment Reports. The data definitions are similar and are denominated in United States dollars. We compare apples with apples (as they say).

In 2010 (the year that Benigno Aquino assumed the presidency), FDI inflows into the Philippines amounted to $1.07 billion while those to Indonesia were $13.8 billion. Indonesia’s FDI inflows were almost 13 times those that went into the Philippines.

From 2011 to to 2013, FDI inflows steadily moved up in the Philippines, from $2 billion (in 2011) to $3.86 billion (in 2013).  In Indonesia, the corresponding numbers were $19.2 billion (2011) and $12.9 billion (2013).

This means that as a proportion of Philippine FDI inflows, those going to Indonesia were 9.6 and 3.6 times, respectively, for 2011 and 2013. (This might look like the Philippines is closing the gap. This could only happen if outflows of FDIs are insignificant. This is not the case: see below.)

For the year 2014, the Indonesian Coordinating Board for Investment reports that FDIs to Indonesia rose by 16.2 percent over that of 2013. On the other hand, recent reports have it that FDIs in the Philippines have surged by as much as 60 percent (I do not as yet have the numbers.

If the latter is the case, FDI inflows to the Philippines would be slightly closer to $6 billion in 2014, a good number. However, Philippine FDI flows are growing from a small base compared to that of Indonesia.

FDI outflows, 2010 to the present.  FDI outflows are the other side of foreign investment inflows. An FDI outflow means an investment by residents of the country to other countries or the departure or closure of FDI located in the country.

The true measure of the strength of FDI economic policies for a given country is for the FDI inflows to exceed the outflows, especially in the case of a poor country with great need for capital investments; in other words, a capital-short country.

The Philippines is a capital-short country. Otherwise, we would have very high standards of living; poverty would hardly be visible; in short, where most employable persons have fulfilling jobs. Also, it would mean that our facilities and infrastructures are in good shape and not crumbling or overtaxed in usage.

Like us, Indonesia, too, is a capital-short country.

In all the years in question, the FDI outflows in the Philippines have matched, even exceeded, the inflows of FDIs. In fact, from 2010 to 2012, FDI outflows exceeded the inflows by, respectively, $1.64 billion, $0.343 billion and $0.955 billion. It was only in 2013 that the country had net inflow, by $0.022 billion.

In the case of Indonesia, FDI outflows are quite dwarfed by the amount of FDI inflows. During the years in comparison, Indonesia suffered an excess of FDI outflows only in 2012 by $2.169 billion. In 2010, 2011, and 2013, large positive inflows dwarfed outflows, respectively, by $11.1 billion, $11.5 billion, and 6.3 billion.

This tells us the following: the amount of FDI inflows, when very large, can tolerate a high rate of FDI outflows. There were years during this period when the outflows of FDIs from Indonesia were larger than those from the Philippines, but still, Indonesia had substantial net inflows of FDIs.

Stocks of foreign capital investments compared.  Investment flows are measures from year to year. Stocks are accumulations of investment flows.

A country that keeps having substantial net FDI inflows will eventually have a high stock of capital and increase its investment capacity. It is capital in place that enables a country to have high productive capacity.

Another feature of new investments: inflow of capital often are accompanied by technological innovations in production. A rising stock of capital could imply an increasing technological capacity for the country.

The historical data of foreign direct capital stocks (also as reported below by UNCTAD) begin with 1995. From year to year, as FDIs build up (net of outflows) the volume of foreign capital installed in the country rises.

In 1995, the foreign capital stock installed in Indonesia (due to previous encouragements of FDIs) amounted to $20.6 billion. This was already 3.1 times the comparative figure for the Philippines of $6.73 billion.

By 2010, Indonesia’s foreign capital stock was $160.7 billion, by then already 6.2 times that of the Philippines’ $25.9 billion.

By 2013, the latest available, the amount of foreign capital installed in Indonesia was $230.3 billion, 7.1 times bigger than that of the Philippines’ which stood at only $32.5 billion.

This, by any measures, indicates why Indonesia has outstripped our economic performance by a wide margin today. With a higher base, Indonesia has a bigger headstart experience ahead of us. To think that we were so far ahead of Indonesia even as early as the 1970s!

Where FDIs have gone in Indonesia. Indonesia’s Investment Coordinating Board informs publicly that FDIs in 2014 went to the following: mining, 30.1 percent; food industries 19.9 percent; warehouse/ telecommunications 19.2 percent; metal, machinery, electronics 16 percent; and chemicals/ pharmaceuticals 14.7 percent. Such wide variety indicates also the widespread impact on the economy.

The regional composition also tells us that the whole nation is getting covered. The island of Java gets the lion’s share of FDIs, focused more on the western side of the island and in Jakarta. But around 35 percent of all FDIs are in the other island regions, too.