"We should do better at attracting foreign direct investment."
"We should do better at attracting foreign direct investment."
In the second year of the first non-martial-law term of President Ferdinand Marcos Congress passed what is undoubtedly one of the finest pieces of economic legislation in this country’s history. That was the Investment Incentives Act of 1967. The passage of that law through the legislature was attended by support from both of the two principal political parties, namely, Mr. Marcos’s Nacionalista Party and the Liberal Party.
The Investment Incentives Act was avowedly intended to correct one of the most serious weaknesses of the Philippine economy: its inability to perform competitively vis-à-vis other East Asian countries in the area of FDI (foreign direct investment) attraction. Year after year the Philippines was close to the bottom of the list of FDI destinations. The Marcos administration believed that the time had come to address the low-FDI situation in a determined and coherent manner; Congress was only too willing to cooperate.
In essence the Investment Incentives Act of 1967 was made up of two parts. The first part consisted of a statement of the economic criteria that an applicant for investment incentives needed to fulfill in order to be considered incentives-eligible. The second part was a list of the tax, corporate-accounting and regulatory incentives that would be available to business enterprises registered with the BOI (Board of Investments) created by the new law.
Chief among the economic criteria lad down by Investments Incentives Act were criteria related to employment generation, new industry establishment, technology transfer, regional development and export-trade contribution. Weights were assigned to these and other criteria and only applicants whose weights total reached or exceeded a set minimum level were granted incentives. Applicants that blazed no new industrial trails, were not high on employment generation, and involved no technology transfer received low total weights. The BOI was appreciative of applicants whose projects were located outside urban areas and were export-oriented.
Prior to finalizing the proposed investment incentives bill the Marcos administration’s economic managers met with the business organization and the auditing industry and inquired what incentives were of greatest value to the operations of Philippine business enterprises. In response to the wish list presented by the businessmen and their auditors, the drafters of the investment incentives bill placed accelerated depreciation, operating loss and carry-over and duty-free imports of machinery and equipment among the incentives that would be enjoyed by BOI-approved projects. The BOI, which effectively operated independently of the Department (later Ministry) of Trade and Industry, signaled to the Philippine business community its industrial-project preferences through an annual IPP (Industrial Priorities Plan) and EPP (Export Priorities Plan).
From 1967 to today this country’s experience with FDI attraction has improved very little. Among the ten ASEAN (Association of Southeast Asian Nations) members the Philippines has remained close to the bottom of the list of FDI recipients, way behind Vietnam and Thailand and barely ahead of Laos and Myanmar. Not much has changed in four decades.
To remedy the highly unsatisfactory FDI situation, the administration of President Rodrigo Duterte is doing a revisit of this country’s investment incentives structure. One part of the four-part economic restructuring package presented by DOF (Department of Finance) to Congress has been billed as a measure to rationalize the investment-incentives structure that has developed over the years as Congress has piled one incentive after another in uncoordinated – presumably irrational – fashion. The key element of the incentives-rationalization measure is a reduction of the corporate income tax rate to 25 percent from 32 percent.
DOF appears to be saying that, with the alignment of this country’s corporate income tax rate to the other East Asian corporate income tax rates, the Philippines has become competitive, FDI-wise, with its neighbors.
This is not so. Simply reducing the corporate income tax rate by seven percentage points – and tinkering with the existing investment incentives – is not likely, by themselves, to make this country competitive, FDI-wise, with other East Asian countries. Being an attractive FDI destination is not just about corporate income tax rates; it is about an entire environment that is congenial to FDI.
I venture to say that, with the right environment – economic as well as political and social – the Philippines would be competitive with its neighbors in the FDI arena even without the corporate income tax rate reduction. This country has many things going for it, but those things are being reduced to naught by all the foolishness that is taking place in the political and regulatory fields. The manner in which a business matter like ABS-CBN’s franchise renewal application is being handled by the government is hardly likely to make a foreign business enterprise more inclined to put its FDI in the Philippines.
What this country needs, in order to be able to do a much better job of attracting FDI, is to have not more pro-incentives legislation but more anti-disincentives legislation.