Philippines: Looking better

Michael Alan Hamlin

Posted on October 4, 2006

Danger lies in taking good fortune for granted

Tomorrow, seven foreign chambers of commerce in the Philippines, including members of the local business community, will conduct a joint workshop on foreign direct investment (FDI). The title of the workshop is aspirational: “How the Philippines Can Attract $3 Billion a Year.” To put that goal into perspective, according to World Bank (WB) data, FDI in the Philippines rose to approximately $1.1 billion in 2005, from less than $500 million in 2004.

By comparison, Malaysia received $4.2 billion in FDI last year, and Thailand received $3.7 billion. Indonesia received $3.5 billion. The bulk of developing Asia FDI went to China, which received a staggering $60.3 billion. These statistics are sobering because the Philippines trails its closest neighbors with similar development challenges, and has done so for many years.

The workshop will begin with presentations that will provide updated data from the WB and the Asian Development Bank. That data will likely show that the Philippines continues to enhance its attractiveness to foreign investors, and appears to be on track to reach $1.6 billion in FDI in 2006. But it is important to remember that FDI should be evaluated not just on the basis of its quantity, but its quality as well.

And this is where the diamond in the rough known as the Philippines has started to shine. While the Philippines may continue to trail its regional competitors in attracting FDI, the kind of FDI it is attracting shows that the Philippines is leveraging an inflection point in one industry, and business-thinking momentum in another, with substantial returns in the form of export earnings, job-generation, and per capita income.

The inflection point has to do with semiconductors and China. For the past decade, Southeast Asia has sought desperately to retain factories in the face of relentless competition from China. A number of these countries, notably Malaysia and the Philippines, were reasonably successful in doing so, but new FDI, even by existing investors, dried up.

According to investors in the semiconductor industry here – which accounts for about two thirds of total exports – that’s beginning to change. The principal reason, I’m told, is that while the cost advantage in China is disappearing, other factors such as quality, efficiency, and productivity still trail those of factories and assembly operations in the Philippines. And although the Philippine government still has important bureaucratic hurdles to address, agencies here are easier to work with than many local governments in China.

Industry momentum has to do with enthusiasm for outsourcing in general, and outsourcing to the Philippines in particular. The result has been a significant rehabilitation of the country’s image, and increasingly positive international press coverage. For example, in September, BusinessWeek published not just one, but two articles on the Philippines’ status as an increasingly attractive destination for outsourcing.

In a September 18 article entitled, “Let’s Offshore the Lawyers,” journalist Pete Engardio reported that DuPont has 30 lawyers and 50 other staff in Manila working on claims against insurers that could result in the recovery of more than $100 million. By offshoring the work to the Philippines, Engardio writes that DuPont “aims to save 40 to 60 percent on document work and cut up to $6 million in legal spending.” If the DuPont engagement is successful, the firm providing the lawyers and staff, OfficeTiger, says it may have nearly 1,500 employed doing similar work by the end of next year, including hundreds of lawyers.

Journalist Assif Shameen reported for the September 18 article from Manila. On September 19, he wrote his own online article, “The Philippines’ Awesome Outsourcing Opportunity.” According to Shameen, “Manila is catching up fast” to India which employs 750,000 in its outsourcing sector, compared to the Philippines’ 200,000. He cites Business Processing Association of the Philippines data indicating the industry will grow to $3.3 billion this year, up 57 percent, and to $4.9 billion, another 48 percent increase, in 2007.

“Economists and analysts are startled by the Philippines’ runaway growth in the sector,” Shameen writes, citing a recent Goldman Sachs report that said, “‘Three years ago there was a question mark whether the Philippines could develop some momentum. Now it’s a $3 billion industry. It is clear that the Philippines is very much on the global map for outsourcing.’”

But it is important not to take this momentum for granted. Already, there are signs some in the political sector are. The most obvious is Senate Bill 2411, which seeks to remove investment incentives that have encouraged investors to choose the Philippines over other attractive alternatives. The bill, developed without consulting investors, is obviously no way to increase investment, and could very well eclipse it.

Participants in tomorrow’s workshop have an important task. That task is to leverage the momentum the Philippines has built up in the last three to five years in key growth sectors to accelerate investment and development. Doing so will involve building on successful initiatives that have generated these impressive results, not dismantling them.

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