Starting to attract FDI?

If DTI Secretary Greg Domingo is to be believed, we are no longer the wallflower in the FDI ball. Investors are finally lining up to dance with the Philippines. According to Sec. Greg, we became attractive even before we were given an investor grade credit status by Fitch.

Sec. Domingo told me last week two investor briefings they conducted in Japan were full houses and they even had to politely decline late comers because there was no more room. Sec Greg said he has never seen anything like it and was very pleasantly surprised.

Actually, Ambassador Manuel Lopez was telling me about this heightened interest from Japanese businesses a few weeks ago when he last had a home visit. He said he has kept busy using his contacts in Japanese big business to sell the country as an ideal location for manufacturers seeking alternatives to Japanese or even Thai and Chinese factory sites.

A Japanese ADB economist working on the Philippine desk had earlier expressed fear that we will be unable to cash in on the re-emergence of Japanese interest in our region. A number of my economist friends were also afraid that we will miss the FDI train the same way we did during the late ’80s.

It will be recalled that the bloody military coup d’état led by Gringo Honasan, a current senatorial candidate for re-election, scared off investors poised to come here after the peaceful EDSA 1 overthrow of Marcos.  The political turbulence sparked by Honasan, a debt problem and a crippling power shortage deprived us of foreign investment (primarily Japan led) that fueled export oriented industries in Thailand, Malaysia and Indonesia. That explains why the per capita incomes of our Asean peers grew faster than ours.

A rising yen at home and risk factors like floods in Thailand and rising labor costs and violent anti-Japanese feelings in China are making Japanese manufacturers look for alternative bases in other Southeast Asian countries. The Philippines and Indonesia are the hottest prospects these days.

There are many reasons why Japanese manufacturers are making a beeline to the Philippines, Sec. Domingo explained to me. Obviously, the improved governance under P-Noy is a strong motivation to consider our country now as pointed out by the credit rating agencies and analysts like Ruchir Sharma of Morgan Stanley who wrote the book Breakout Nations.

Also an important consideration is our young, English-speaking labor market. The other major plus factor, according to Sec. Domingo is PEZA and its head Lilia de Lima. Apparently Ms. de Lima has a cult following among Japanese investors who simply adore the way she runs her turf.

Indeed, I have heard an investor familiar with the Philippines say that entering a PEZA managed zone is like being in another country. Things actually work… believe it or not, even government agencies whose approvals are required in running a business.

Ms de Lima watches over the investors like a mother hen. PEZA takes care of all their needs with other government agencies, national and local. Corruption has been greatly minimized if not eliminated, I am told.

The flow of Japanese manufacturers locating in the Philippines has important ripple effect that multiplies the value of their initial investment, Sec Domingo said. Their suppliers follow. This creates a supply chain that would attract a wider range of manufacturers and suppliers.

The DTI chief told me that he was surprised during a recent Taiwan visit to find out Taiwanese companies are putting up factories here too. For example, companies making plastic moldings for Canon, Brother and other newly established companies here can also be useful for automotive and other manufacturing industries.

Thus, Sec. Domingo explained, these investments are good for the Philippines because they create more jobs and expand our potential export base. And since these manufacturing entities are here to manufacture for international markets, they are therefore world class competitive. Other than similar incentives granted by our neighbors, they don’t need to be babied with all sorts of protection the way our local industries demand to be given.

Hopefully we have started to overcome a problem in our industrialization experience pointed out by ADB economist Norio Usui:

“A real mystery of the Philippines industrialization is why its initial success in electronics did not spill over to other industrial products. Countries in the region have diversified their production and export structure toward more skill-intensive and research intensive segments of electronics and even more sophisticated products such as machinery and chemicals.

“As a result, they are now engaged in a broad range of industrial activities. The continual shifts toward more sophisticated products have been the key growth engine in their productivity growth. A key challenge for the Philippines is making its success in electronics products lead to industrial upgrading and diversification.”

Well, at least we seem to be making initial progress with the increased investor interest. Now PEZA will have to work double time to expand the land area it covers. The current favorite of investors is the First Philippine Industrial Park in Santo Tomas and Tanauan in Batangas, but it is fast running out of land inventory.

But I think that is a good problem compared to the drought of interest during Ate Glue’s watch when investors stayed away from us. But Sec. Domingo is realistic enough to acknowledge that we have work to do to overcome our continuing problems in attracting investments.

The Secretary is aware of such deal breakers as poor infrastructure, expensive power rates and poor governance. These are also the concerns pointed out by Usui: weak business and investment climate due mainly to governance concerns as well as elite capture of the traditional sectors such as agriculture, sea and air transport, power, cement mining and banking. These are things we need to constantly prod our government to do something about.

I asked the Secretary about his plans on how to make our industries more competitive. He said he asked various local industries to prepare “road maps” that will show their aspirations and how government can help. The one for the automotive industry is just about ready and will be made public soon.

Secretary Domingo explained that the road maps will help guide government and private sector in how to proceed. It responds to the observation of economist Usui who pointed out that “a key challenge to effective public sector support is establishing an institutional framework of public and private dialogue that can maximize the information benefits and limit the rent-seeking costs.”

Sec. Domingo admitted that we are second highest in labor cost in the region, second to Singapore. That is reason enough why much effort is being made to bring down food costs because this drives up labor costs. But he insisted that even as it is, it doesn’t mean we are totally uncompetitive.

Labor costs in many regions are much lower than in Manila, he pointed out, and sectors like the garments industry can take advantage of these lower costs by moving out of the urban areas. Besides, he said, our garments industry has gone up market and more sensitive to quality than price. 

Overall, it is good to know that Japan, our principal trading partner and top foreign aid donor is also now the most enthusiastic about direct investments. Indeed, one area the Japanese, official and private sector, are most excited about is our plan to go into digital television broadcasting.

Even as we are still trying to make up our minds on whether to adopt the Japanese or European standards, official Japanese aid has been received by PTV4 in terms of equipment for digital television broadcasting. Digital television will enable PTV4 to broadcast curriculum based educational television to all public schools nationwide.

Unlike the Europeans, the Japanese have also promised to assemble the set top boxes needed right here, thereby creating jobs and expanding our manufacturing base. Also unlike the Europeans, the Japanese are ready to provide service centers here.

Local officials I have talked to are in favor of the Japanese model specially because of its emergency broadcast capability tested in the recent tsunami and earthquakes. I hope Malacañang makes an announcement soon so as not to disappoint the Japanese and snuff out their current enthusiasm in bringing their manufacturing might into our shores.

Finally, I asked Sec. Domingo why our FDI numbers are so puny at just about $1.5 billion when our neighbors are in double digits. The Secretary said he is told that an independent study that took financial records from SEC and other sources indicate the number to be closer to $5 billion. But yes, he agrees there is a lot of room to grow.

Bahasa

From Robin Tong.

BAHASA MALAYSIA:  Malaysia’s national language;

BAHASA INDONESIA:  Indonesia’ national language;

BAHASA PILIPINAS:  Not the Philippine national language, but its national problem every time it rains.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco