The United Nations Conference on Trade and Development (Unctad) has warned the Philippines and other developing countries against too much dependence on the non-equity modes (NEMs) of foreign direct investments (FDI), such as business-process outsourcing (BPO) and contract manufacturing owing to their “footloose” nature that makes them easy to get but also easy to lose.
In its World Investment Report 2011 that was launched in the Philippines on Tuesday, the Unctad made a particular mention of the positive and negative implications of NEMs and urged governments to come up with policies that would make full use of their benefits, minimizing their risks.
Economics Prof. Jovi C. Dacanay of the University of Asia and the Pacific, who presented the World Investment Report, said NEMs are types of FDI and contractual agreements that may be business-to-business or government-to-business that have no high fixed assets. Their popular forms are contract manufacturing, services outsourcing, contract farming, franchising, licensing and management contracts.
This was the first time that Unctad made special mention of the NEMs, apparently as it noticed an emerging trend where these types of “footloose” FDI are being directed more to the developing economies.
“Unctad wants to caution the governments of the developing economies that while NEMs have disadvantages, they can be lost easily as well so they should set up regulations for NEMs,” Dacanay told the BusinessMirror.
In the Unctad report, the Philippines received about $1.71 billion of FDIs in 2010, although there was no report on how much of this were NEMs. Dacanay said this is because there was no record available on this.
Dennis Arroyo, who served as director for national planning and policy of the National Economic and Development Authority (Neda) from 2005 to 2010, admitted that during his stint in the agency, there was no attempt to separate NEMs in the investment picture. Nor were there policies crafted specifically for these types of activities.
“This appears as a new concept to us. There were no records that separate NEMs from the FDI and there were no policies for them as well. But I hope, given this Unctad report, that the government will start considering it,” Arroyo said.
Diwa C. Guinigundo, deputy governor of Bangko Sentral ng Pilipinas (BSP), said the pull factors of host countries for NEMs are language capabilities, labor cost, talents and infrastructure.
While NEMs contribute to development, it co-opts the host economies into the unstable cycles of the advanced economies.
“Transnational corporations can outrightly cancel when demand drops. NEMs will be the first to be pulled out,” Guinigundo said.
Also, since majority of the jobs they require are in the lower-skills categories, local workers may be forced to just settle for jobs that are mismatched with their skills. They are also forced to take on irregular work hours.
If not handled well, Guinigundo said NEMs could abuse their power in the market, and also affect the social fabric as they may force lower wages without meriting productivity.
Unctad noted that NEMs employ about 14 million to 16 million workers in developing countries, and their value represents up to 15 percent of GDP in some economies. Their exports account for 70 percent to 80 percent of global exports in several industries.
In the Philippines, for instance, Unctad said IT/BPO activities accounted for 4.8 percent of GDP and generated $9 billion in export revenues in 2010 while employing 525,000 people.
Unctad said maximizing developmental benefits from NEMs requires action in four areas.
“First, NEM policies need to be embedded in overall development strategies. Second, governments need to support efforts to build domestic productive capacity. Third, promotion and facilitation of NEMs requires a strong enabling legal and institutional framework, as well as the involvement of investment promotion agencies in attracting TNC [transnational corporation] partners. Finally, policies need to address the negative consequences and risks posed by NEMs by strengthening the bargaining power of local NEM partners, ensuring fair competition, protecting labor rights, and the environment,” it said.
Meanwhile, the BSP on Tuesday said more substantial foreign capital inflows are expected once the government’s Public-Private Partnerships Program or PPP takes off.
A total of 10 infrastructure-related projects are up for grabs under the PPP, although not one has actually been bid out thus far.
Nevertheless, Guinigundo struck a positive note on its prospects down the line, saying its launching “should usher in the coming of foreign direct investments in a strong way.”
“It is just a matter of time before we finally see the initial launching of the PPP Projects. But once these are launched, that should usher in the coming of FDIs in a strong way because that should establish the fact that the Philippines is truly capable of conceptualizing big projects with big economic and social impact,” he said.
Foreign capital in the form of FDIs, or those actually invested in brick-and-mortar business ventures in the Philippines, totaled only $552 million in the first four months.
On the other hand, portfolio investments, also called “hot” money or speculative investments, amounted to only $9.1 billion in the first half.
Such numbers compare poorly against the billions of dollars flowing into other jurisdictions in the regions, such as Singapore or India and Thailand, the senior BSP official acknowledged.
“If you talk about getting [substantial] foreign direct investment here in the Philippines, I think it is something that may be expected in the near future,” Guinigundo said.
Nevertheless, he said good government issues hounding the country’s image as investment destination “are slowly being addressed by the government.”
“The commitment to good governance is there and the State of the Nation Address of President Aquino stressed that very forcefully. The issue of worthwhile projects will also be addressed by the PPP,” Guinigundo said.
(With Jun Vallecera)
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