What is Foreign Direct Investment?
Foreign Direct Investment (FDI) as defined by the Organization for Economic Cooperation and Development (OECD) is “a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy. Ownership of 10 percent or more of the voting power in an enterprise in one economy by an investor in another economy is evidence of such a relationship. FDI is a key element in international economic integration because it creates stable and long-lasting links between economies. FDI is an important channel for the transfer of technology between countries, promotes international trade through access to foreign markets, and can be an important vehicle for economic development. The indicators covered in this group are inward and outward values for stocks, flows and income, by partner country and by industry and FDI restrictiveness”
FDIs are also indicators of trust and confidence in the economy of a particular country; the higher FDI levels are indicative of the country’s adherence to the best practices criteria as defined by leading credit ratings agencies and investment banks. Banco Santander’s foreign investment unit characterizes the strong points of the Philippines as an investment destination as follows:
A skilled young English-speaking workforce
A large domestic market (with a population of over 108 million people)
A gateway to other countries in the region facilitated by the country’s membership in ASEAN
An economy that has successfully integrated enterprise outsourcing (BPO)
A very advanced legal system
Considerable natural wealth
FDI restrictiveness is the stumbling block and is a risk foreign investors need to take into account before making the decision to invest. The risk assessment profile of Banco Santander lists the following:
Poor quality of its infrastructure
Restrictions on foreign investment in certain sectors
Legal uncertainty and a lack of transparency of procedures (total banking secrecy favouring money laundering) generating tensions and a lack of confidence of the business community towards the legal system
High level of corruption in the government bureaucracy and various state agencies
Strong disparities in development according to the regions: income and security inequalities (problematic security situation in the Muslim regions of the South)
FDI flows have an inward and outward nature. The OECD defines these as “Foreign Direct Investment (FDI) flows record the value of cross-border transactions related to direct investment during a given period of time, usually a quarter or a year. Financial flows consist of equity transactions, reinvestment of earnings, and intercompany debt transactions. Outward flows represent transactions that increase the investment that investors in the reporting economy have in enterprises in a foreign economy, such as through purchases of equity or reinvestment of earnings, less any transactions that decrease the investment that investors in the reporting economy have in enterprises in a foreign economy, such as sales of equity or borrowing by the resident investor from the foreign enterprise. Inward flows represent transactions that increase the investment that foreign investors have in enterprises resident in the reporting economy less transactions that decrease the investment of foreign investors in resident enterprises. FDI flows are measured in USD and as a share of GDP. FDI creates stable and long-lasting links between economies.”
FDI restrictiveness measures the ease or the restrictions on foreign investors by a particular country. “FDI restrictiveness is an OECD index gauging the restrictiveness of a country’s foreign direct investment (FDI) rules by looking at four main types of restrictions: foreign equity restrictions; discriminatory screening or approval mechanisms; restrictions on key foreign personnel and operational restrictions. Implementation issues are not addressed and factors such as the degree of transparency or discretion in granting approvals are not taken into account.”
The Bangko Sentral ng Pilipinas (BSP), released the latest foreign direct investment data on the heels of the Philipppine Statistics Authority (PSA) confirming that the Philippine economy has formally exited its recession with an 11.8% GDP growth recorded for the second quarter of 2021, to wit:
FDI Net Inflows at US$429 Million in May 2021; January-May 2021 Growth at 37.8% YoY
August 10, 2021
Foreign direct investment (FDI) net inflows in May 2021 was at US$429 million, a decline of 25.4 percent from US$575 million net inflows in May 2020 (Table 1).1,2 Despite this, the cumulative FDI level remained higher by 37.8 percent at US$3.5 billion net inflows in January–May 2021 from US$2.5 billion net inflows in the same period last year. In particular, non-residents’ net investments in debt instruments rose by 76.2 percent to US$2.2 billion from US$1.2 billion. Further, reinvestment of earnings grew by 3.0 percent to reach US$407 million from US$395 million in the same period last year. Meanwhile, net investments in equity capital remained broadly stable at US$1.3 billion.
The FDI decline in May 2021 reflected renewed investor concerns on the rising cases of the new variants of COVID-19 globally. By component of FDI, non-residents’ net investments in debt instruments during the month contracted by 23.4 percent to US$269 million from US$351 million in May 2020.3
Likewise, non-residents’ net investments in equity capital declined by 53.4 percent to US$60 million in May 2021 from US$130 million in the comparable month last year. This was on account of the increase in equity capital withdrawals (by 70.2 percent to US$21 million from US$13 million) coupled with the decrease in equity capital placements (by 42.6 percent to US$82 million from US$142 million). Bulk of the equity capital placements during the month came from Japan, the United States, and Malaysia. These were channeled mostly to the 1) manufacturing; 2) real estate; and 3) financial and insurance industries. Meanwhile, reinvestment of earnings rose by 6.0 percent to US$99 million from US$94 million in May 2020.
On a year-to-date basis, equity capital placements declined by 5.4 percent to US$1.0 billion (from US$1.1 billion). Equity capital placements were sourced mainly from Singapore, Japan, and the United States. These were infused largely to the 1) financial and insurance; 2) electricity, gas, steam, and air-conditioning; 3) manufacturing; and 4) real estate industries. Equity capital withdrawals also decreased by 26.7 percent to US$139 million (from US$190 million).
1 The BSP statistics on FDI are compiled based on the Balance of Payments and International Investment Position Manual, 6th Edition (BPM6). FDI includes (a) investment by a non-resident direct investor in a resident enterprise, whose equity capital in the latter is at least 10 percent, and (b) investment made by a non-resident subsidiary/associate in its resident direct investor. FDI can be in the form of equity capital, reinvestment of earnings, and borrowings.
2 The BSP FDI statistics are distinct from the investment data of other government sources. BSP FDI covers actual investment inflows. By contrast, the approved foreign investments data that are published by the Philippine Statistics Authority (PSA), which are sourced from Investment Promotion Agencies (IPAs), represent investment commitments, which may not necessarily be realized fully, in a given period. Further, the said PSA data are not based on the 10 percent ownership criterion under BPM6. Moreover, the BSP’s FDI data are presented in net terms (i.e., equity capital placements less withdrawals), while the PSA’s foreign investment data do not account for equity withdrawals.
3 Net investments in debt instruments consist mainly of intercompany borrowing/lending between foreign direct investors and their subsidiaries/affiliates in the Philippines. The remaining portion of net investments in debt instruments are investments made by non-resident subsidiaries/associates in their resident direct investors, i.e., reverse investment.
Investments in debt instruments may be in the form of purchase of commercial papers and bonds issued by both the public sector and private companies. Most equity inflows are purchases of stocks and other forms of stock-related investments in the Philippine Stock Exchange. Capital expenditure inflows are direct investments in the establishment of businesses in the various industry sectors.
The Cabinet’s Economic Development Cluster led by Secretary of Finance Carlos G. Dominguez III has pushed for the amendments to the Public Service Act, the Retail Trade Liberalization Act, and the Foreign Investment Act. All these will help attract both foreign and local direct investments, increase our growth potential, create more and better jobs and ease the dependence of the national government on domestic and international borrowings to finance the budget deficit by the generation of additional tax revenues from new businesses. All of these are part and parcel of the integrated economic recovery strategy as formulated by the Department of Finance (DOF), the Department of Trade and Industry (DTI) and the National Economic Development Authority (NEDA).
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