Philippine Economy – (Part IV) – Lessons from Manufacturing Promotion and Foreign Direct Investments (FDIs)

Manufacturing is important in enhancing the performance of the industrial sector and the economy as a whole. Sadly for the Philippines, manufacturing has become a weak sector in the economy. The share of manufacturing on output (as measured by the gross domestic product or GDP) declined from 26 percent in 1980 to 21.4 percent in 2010. To foster industrialization, policies that hold back the growth of manufacturing must be changed and manufacturing must be placed on the forefront of growth.

Trade liberalization policies of the past removed trade protectionist measures and introduced competition to domestic producers. However, non-trade protection remained in the form of regulatory and investment incentives policies. BOI investment incentives promoted joint ventures where foreign capital is restricted by the 60-40 equity rule in favor of domestic investors.

The current rules limited the participation of foreign direct investments (FDIs). As such, industrial ventures were directed only to sell to the local market. Industries that use the country’s ample labor resources remain untapped because the manufacturing of raw and intermediate materials could not be set up. Had these rules allowed for a more liberal input of foreign capital, the results might have been more positive for the economy.

Thailand shows a great example of how a more inclusive industrial policy for FDI can develop the domestic market. Even if Thailand started its industrialization two decades later than the Philippines, it allowed 100 percent foreign ventures. They welcomed local and foreign investors alike to set up their enterprises.

Contrary to the perception of some, the attraction of FDIs did not suppress the growth of Thai enterprises. The Thais knew where to effectively position their activities with respect to FDIs. They are well aware of their advantage over foreigners; they set up ventures that supplied or serviced the foreign companies. Over time, this policy promoted a growing intensity of industrial domestic product mix. 

Filipino businessmen, on the other hand, engaged in limited arrangements with foreign partners along the 60-40 rule. This limited their market development potential. They only benefited as long as they had little import competition.

Thai joint venture companies fostered national development even as FDIs grew in size and number. FDIs, on the other hand, created new industries that supported their operations. This resulted into a diverse but linked products and services. Moreover, local Thai companies, joint venture companies with FDI partners, and fully owned FDI companies bought their raw materials from the country. These companies export their products not only to ASEAN countries but also to other countries around the globe. As a result, a more vibrant economy emerged in the country.

In addition, the Thai automobile industry has become the center of the automobile industry in Southeast Asia. The Philippines could have had this title since the progressive car manufacturing concept within the ASEAN region started here. However, what gave Thailand the advantage was the fact that automobile assemblers had greater ease of entry in Thailand than in the Philippines. In fact, full ownership was allowed for investors there. The Philippines, however, was again restricted by the 60-40 rule. Also, compared to what the Philippines required, the Thais promoted a more lenient policy regarding the requirement that foreign car assemblers undertake a progressive increase in the domestic content in the assembly of the automobiles sold in the country. Such policies resulted to the swift entry and expansion of suppliers of automobile assemblers in Thailand.

Source:

Sicat, Gerardo, “Philippine Economy – (Part IV) – Lessons from Manufacturing Promotion and Foreign Direct Investments (FDIs),” Crossroads (Toward Philippine Economic and Social Progress), The Philippine Star, April 4, 2012.