Foreign Investment Access and the Services Industry - Quantitative Policy Analysis for the Philippines

Abstract

The report investigates the impact of regulatory barriers to FDI entry in services, with emphasis on ASEAN countries and the Philippines in particular. A structural gravity model quantifies how large the impact is of different types of regulatory barriers and other business costs on the volume of bilateral FDI entry. This analysis is data-intensive, using information on bilateral FDI patterns between 230 countries, based on a unique database that covers the period 2001 to 2016.The analysis has made it possible to distil a quantitative indicator for the relative costs of doing foreign direct investment in each country, an indicator that also varies over time. The indicator (inward multilateral resistance terms) compares the relative cost of doing FDI in a particular country, compared to all other countries. The world market for FDI funds is thus regarded as a closed system of communicating vessels: FDI policies in one place of the world affect the relative FDI attractiveness of all other countries. The size of the `ripples' that policy changes in any country send through the system depends on the size of its economy. For a particular country this provides exceptionally policy-relevant insights, because it allows to quantitatively evaluate how a particular policy affects inward FDI. And this can be done for any sub-sample of countries. In the case of the Philippines we have used the sample of ASEAN countries as the main reference group. Special attention is given to the role of statutory restrictions on foreign equity participation. The study investigates how current Philippine policies affect the magnitude and pattern of inward FDI stocks, and particular attention has been given to test the impact of the OECD FDI Restrictiveness. FDI in the Philippine services industry is underdeveloped, and the government considers to lift or alleviate existing restrictions on foreign equity participation in services industries. Some 60% of the incoming FDI flows now go to manufacturing, utilities, real estate and financial services industries, while hardly any FDI is attracted in the area of knowledge-intensive business services, transport, telecom, and primary industries. To attract more FDI in the future-important services industries, and move away from the current low-quality and vulnerable FDI jobs in global manufacturing value chains, a structural reform will be necessary, according to the Philippine Development Plan 2017-2022. We have used our quantitative results to design and quantify four reform scenarios and compare the results with the current Development Plan. Four potential reform packages were composed that differed along two dimensions: feasible versus ambitious, and short-term versus medium-term. The feasible policy targets were derived from the average performance of the nine other ASEAN countries. The ambitious policy targets were derived from the 'best practice' performer among the ASEAN countries, which differs by policy variable. The report concludes that the four FDI policy reform packages will not be enough to accomplish a structural change in the Philippine economy. Despite differentiated FDI growth rates per industry, it remains growth from very small initial FDI magnitudes in some industries. So, the overall changes will at best be modest in terms of shifts between industries. The bulk of new FDI jobs after the reform will most probably again be found in the traditional industries, with a particular strong role for GVC-oriented, low-wage manufacturing, while most new services jobs will probably be found mostly in business-support services like call centers. Overall, this study shows that the Philippines is in a good position to attract much more FDI than it is receiving nowadays, by feasible policies that require relatively small policy changes. Structural changes with a strong role for business and connectivity services will require a selective FDI acquisition policy.