FDI outlook not promising

MANILA, Philippines - The outlook for foreign direct investments (FDI) to Asia remains favorable despite a worldwide forecast of a 10% decrease next year, but the Philippines may not be able to ride the wave as its market size and a current fund outflow tell of the country’s limited attractiveness. The annual World Investments Prospects Survey and the World Investment Report, jointly released Wednesday by the United Nations Commission on Trade and Development (UNCTAD), found that South Asia, East Asia, Southeast Asia, and Oceania remained the top preferred region of transnational corporations (TNCs). Roughly two-thirds of the 5,000 TNCs surveyed still intend to increase investments from now to 2010, the reports read. This comes even as a fifth said they had scaled back investment plans for the next three years due to a worldwide "climate of uncertainty." "Overall, prospects for new FDI to the region remain very promising. Sustained economic growth, demographic changes, favorable business sentiments, and new investment opportunities were among the main factors contributing to the region’s good performance in 2007, and they should continue to attract FDI in the near future," the report read. But it is not certain whether the Philippines will benefit from the investor interest. Data from the reports showed that $3.442 billion worth of FDIs flowed out of the country in 2007, offsetting an inbound $2.928 billion. This came even as the region — accounting for two-fifths of worldwide FDIs — was the largest recipient of FDIs that year among all other developing regions. "That’s a concern. Investments are leaving rather than coming [in]," Former Budget secretary and now University of the Philippines economist Benjamin E. Diokno said in a telephone interview Wednesday. The Philippines ranked 49th out of 141 economies in the world in terms of outflows and placed in the bottom half in terms of FDIs received, the report further read. In Southeast Asia, the Philippines ranked sixth in terms of FDI receipts, trailing behind Singapore, Thailand, Malaysia, Indonesia and Vietnam. "Political uncertainty and corruption worry foreign investors," Mr. Diokno claimed. Ateneo de Manila University economist Fernando T. Aldaba agreed, citing poor governance as a hindrance to attracting investors. Lack of infrastructure and high energy costs also put off investors, he said in a telephone interview. The top factor investors consider before locating to a host country is market size and growth, the UNCTAD said. "Market size and growth are by far the most important factors influencing companies’ choice of location [comprising] 50% of answers overall," the report read. Although the Philippines’ population is large and can rival those of its neighbors, purchasing power is weak, Mr. Aldaba said. But the economic integration of the members of the Association of Southeast Asian Nations can help boost market size. Mr. Diokno disagreed, saying, "Integration takes too long. In a competitive world, we should focus on strengthening our own domestic economy [because integration may] not necessarily be in our favor." But University of Asia and the Pacific economist Peter Lee U noted in another telephone interview that Filipinos’ purchasing power may not be as small as people think, being propped up by remittances from relatives working abroad. Philippine Institute for Development Studies president Josef T. Yap said market size and purchasing power were only important if FDIs were intended to cater to the domestic market. "The more important source of FDI is the type related to establishing production networks or supply networks [not limited to domestic consumption]," Mr. Yap said in an e-mail. "This type of FDI requires physical infrastructure, good logistics, and a stable business environment ... [which] are sorely lacking in the Philippines." The report cited other factors that investors consider, such as the availability of skilled labor, suppliers and infrastructure, and the legal environment. Cheap labor, the report said, is only a major determinant for few labor-intensive manufacturing activities. The UNCTAD also found that more than a quarter of the firms surveyed expect to focus FDI expenditures on the services sector, which the report defined as telecommunications, transport, and utilities. "In these activities, more than 25% of companies expect to considerably increase their FDI expenditures from 2007 to 2010," the report read. Board of Investments managing head Elmer C. Hernandez said that in the case of the Philippines, the services sector had reason to be upbeat. "Services sector will continue to be bright spot as we are very competitive here in terms of quality manpower and logistics support, [like in] telecommunications [for instance]," Mr. Hernandez said in a text message. Data from the central bank show that FDIs in utilities, hotels and restaurants, transport, storage and communication, financial intermediation, and other services accounted for 16.4% or roughly $80 million of $487 million FDI receipts in the first six months of 2008. The manufacturing sector accounted for nearly the same share. "Services is one of our major drivers," Mr. Aldaba said, also citing the large contribution of business process outsourcing (BPO) firms in the country. "We may be getting more inflows from BPOs as companies abroad may outsource [to cut costs]," he said. Mr. U, however, warned that the ongoing US financial crisis may hurt the local outsourcing industry as many of its clients are based in the United States. - BusinessWorld