NSCB - Statistically Speaking... Foreign direct investments: why do we need them? by Dr. Romulo A. Virola

Foreign Direct Investments: why do we need them?²

Since 1996, when the NSCB started compiling statistics on approved foreign direct investments (FDIs), until the first quarter of 2005, the cumulative amount of approved FDIs in the Philippines reached 1.07 trillion pesos. The highest annual turnout of FDI pledges was posted in 1997 amounting to 262.2 billion pesos. In the aftermath of the Asian financial crisis in the same year, foreign investors' confidence gradually weakened as FDI pledges continued to drop until 2003. Last year was a particularly good one as the value of approved FDIs zoomed to 173.9 billion pesos, the highest since 1997.

Almost half of approved FDIs from 1996 to 2005 worth 483.2 million pesos were meant for the manufacturing industry. The rest of the top intended industry recipients were the gas, power, finance and real estate, and services sectors. Japan and the USA were the top potential sources of FDIs with a combined worth of 357.8 million pesos which is 33 percent of the total value of all FDI pledges during the same period. Other leading countries include the Republic of Nauru, France, Hong Kong, and the United Kingdom.

But before we say alleluiah for all these blessings, it is imperative to know that approved FDIs, while generally a good indication of the prevailing investment climate and foreign investors' confidence in the country, do not go immediately into the nation's coffers. Why not? It is because approved FDIs are, until they are realized, merely pledges of investments from foreign investors who have applied for any of the various incentive packages offered by our investment promotion agencies such as the Board of Investments (BOI), Philippine Economic Zone Authority (PEZA), Clark Development Corporation (CDC) and Subic Bay Metropolitan Authority (SBMA). It usually takes some time, a year or more, before these pledges get implemented through the actual infusion of capital, which FDI enterprises (corporations and joint ventures) register with the Securities and Exchange Commission (SEC), or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry (DTI).

After registration, an FDI can start being accounted as actual FDI by the Bangko Sentral ng Pilipinas (BSP), which compiles it in the Balance of Payments (BOP). Actual FDIs or the non-residents investments in the Philippines as used in the BOP, are what should have gone into the financial system and the economy. These cover the net equity capital, reinvested earnings and other capital of FDI enterprises in the country. The BSP also compiles the inward and outward stock of FDIs which are reflected in the international investment position (IIP) of the Philippines.

One way of analyzing FDIs is to look at the share of the actual FDI inflows as percentage of the gross fixed capital formation (GFCF) and the share of FDI inward stock as a percentage of the gross domestic product. The share of FDI inflows to GFCF measures the relative weight of FDIs in the total aggregate investment (both public and private) in the country while the share of FDI inward stock to GDP provides an indication of the importance of inward FDI stock in relation to the aggregate economic activity in the country.

FDI Inflows as Percentage of Gross Fixed Capital Formation and FDI Inward Stock as Percentage of Gross Domestic Product: ASEAN
Level in US$ million; share in percent

Country	Share of FDI Inflows to GFCF				Share of FDI Inward Stock to GDP
Country	2000	2001	2002	2003	2000	2001	2002	2003

Brunei Darussalam	0.0	0.0	0.0	0.0	89.4	105.6	126.6	156.0
Cambodia	29.1	21.0	16.0	12.3	43.3	45.8	46.2	46.4
Indonesia	-13.9	-9.7	0.4	-1.8	40.4	40.3	33.3	27.5
Laos PDR	9.1	6.2	6.9	5.2	31.6	32.6	32.9	30.1
Malaysia	16.4	2.5	14.5	10.8	58.5	60.6	59.5	57.2
Myanmar	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Philippines	8.4	7.7	13.2	2.6			14.7	15.5
Singapore	62.8	60.1	25.6	45.7	121.5	141.0	153.9	161.3
Thailand	12.4	14.4	3.7	5.2	24.5	28.8	27.7	25.8
Vietnam	15.0	13.6	11.4	15.2	48.2	51.5	50.2	50.6

Based on available data from 2000 to 2004, the ratio of inward FDI flows to GFCF significantly decreased in the last two years to an annual average of 3.0 percent from a 9.8 percent annual average in the period 2000-2002. On the other hand, the share of inward FDI stock to GDP from 2000 to 2003 has been relatively more stable at around 15 percent.

Just how important FDI is to the country that our financial and economic managers and planners always place it among the priority development strategies of government, and that the business and donor communities often keep an eye on?

FDI promotion can be considered as a recent economic phenomenon brought about by increasing globalization, finding its roots from the realization of the resource and technology imbalance among countries. FDI has increasingly become a dominant form among other capital flows in both developed and developing economies. And with all the investment promotion strategies and packages of incentives that range from tax concessions and subsidies, shortened administrative processes and reduced red tape, and yes, even mileage that governments are willing to ‘invest' on, it has also become a focal point of competition among countries. It must be so important that investment promotion agencies exist in many countries primarily to serve as a think tank to formulate relevant policies and as a marketing arm to project a competitive investment climate that are expected to draw in foreign investors.

But why attract FDIs? Primarily it is economics. FDI complements domestic investment, expands national income and subsequently, budget revenues by inducing economic production, supplements national savings, and in general, hastens economic development. Attracting FDIs signals the opening of an economy to the world, providing access to the country's natural resources, markets and manpower resources. But FDI is not purely economics as it can also raise standards and welfare in the host economy through more employment opportunities and transfer of advanced technology, labor skills and management best practices that are characteristics of many FDI enterprises.

This multi-dimensional nature of FDI and the more liberal transaction processes that are currently taking place has made it difficult however, to monitor and measure FDIs..

In the Philippines, FDIs are monitored through various statistics compiled by different agencies, which, while related in some respects do not necessarily lend to direct one-to-one correspondence analysis. Confusion could arise when two or more agencies release two or more sets of figures, which differ in terms of concept, coverage, measurement methodology and time reference. Fortunately, in monitoring FDIs in the Philippines, our penchant for creating committees seems to work well and to everyone's advantage. With the creation of the NSCB Inter-Agency Committee on FDI Statistics (IACFDIS)* in 1996, a then persistent problem of conflicting/inconsistent foreign investment figures released by the government, has been significantly addressed, and the system of generation and reporting of FDI statistics institutionalized. Many of our neighboring countries in the ASEAN now looks to the IACFDIS as a good practice that ensures better coordinated FDI statistics generation.

There are 3 forms of FDI statistics being generated, reported and analyzed in the Philippines, namely, (a) approved, (b) registered and (c) actual FDI. As different in form as in their measurement, these FDI statistics serve distinct purposes. Approved FDIs are what usually land in newspapers because of the usually high-profile treatment accorded by the investment promotion agencies and the media, being a reflection of the government's investment promotional policies and programs. Registered FDIs refer to those that have passed through the SEC and DTI-BTRCP registration system. Finally, actual FDIs, as explained above, are what is being measured in the BOP and IIP.

The compilation and analysis of FDI statistics in the Philippines follow internationally-formulated and accepted concepts, definitions, methodologies and practices including those prescribed in the Balance of Payments Manual (BPM) of the International Monetary Fund, the latest version of which is the BPM5, and the principles and agreements in the ASEAN Coordinating Committee on Investments through the ASEAN Working Group on FDI Statistics, of which the Philippines through the IACFDIS, has been a pioneering member.

And so, while news of an incoming or approved FDI is often expected to bring tidings and goodwill to the country, critical evaluation must be exercised in determining the form of investment, its potential benefits not only in terms of economic upliftment but also in acquiring best practices and technology, which is one of the more sustainable and desirable perks of attracting FDI.

The IACFDIS is chaired by the NSCB with members including the BOI, BSP, SEC, CDC, SBMA, DTI-BTRCP, National Economic and Development Authority, and Philippines National Statistics Office. The NSCB serves as secretariat and technical coordinator of the IAC.

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¹Secretary General of the National Statistical Coordination Board (NSCB) and Chairman of the Statistical Research and Training Center (SRTC). He holds a Ph. D. in Statistics from the University of Michigan in Ann Arbor , U.S.A. and has taught mathematics and statistics at the University of the Philippines . He is also a past president of the Philippine Statistical Association.

²This article was written by John Frederick P. De Guia(jfp.deguia@nscb.gov.ph), Statistical Coordination Officer VI and Chief of the Economic Indicators and Satellite Accounts Division.


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