PH should take advantage of Asian investment pivot
RECENT analyses and news reports about a clear trend in offshore investment in the Asia-Pacific region shifting away from China should be taken seriously by our policymakers. Even without an aggressive program to attract more foreign investment — the current policies largely being extensions of those pursued in several previous administrations — the Philippines’ profile as a potential investment destination is rising, but so is the competition.
The 2023 Global Services Location Index by the business consulting group Kearney indicates that Asia-Pacific countries are the most preferred investment destinations. China and India are the top two, followed by Malaysia; Indonesia, Thailand and Vietnam are also in the top 10, while the Philippines ranks a respectable 12th. The index ranked 78 countries on four criteria, including financial attractiveness, people skills and availability, business environment, and “digital resonance,” which is defined as digital skills of the labor force and digital outputs of business activity.
Even though China still ranked at the top of the list, the implication was that its place is a result of the sheer size of the Chinese economy; it still scored highly in terms of workforce skills and availability and digital capabilities, but perceptions of financial attractiveness and the business environment are quickly eroding, and it trails other Asia-Pacific economies in these areas by a substantial margin. Thus, the indication is that other economies, particularly giant India and the Asean countries, are moving up in terms of their appeal as investment destinations at China’s expense.
This tends to support other news of late suggesting that major companies and other investors are looking elsewhere, or at least diversifying their portfolios to be less concentrated in China. One recent example is the Singapore sovereign wealth fund GIC, whose chief investment officer told Nikkei Asia in an interview late last month that the fund is looking to invest more in emerging Asian markets as the risks associated with investing in China increase.
Obviously, this trend represents a great opportunity for the Philippines, but it is up to our policymakers to recognize and take advantage of it. The Philippines’ profile in the Kearney survey provides a number of clues as to what strategy the government should consider. The consulting firm noted that the Philippines “continues to be the business process outsourcing (BPO) engine of Asia,” but suggested that it is not doing quite enough to compete with near-shore options for US investors in Latin America or European investors in Eastern Europe. The Philippines’ scores in this year’s index improved from last year, but it still slipped three places in the overall ranking by virtue of countries such as Mexico and Colombia improving much more — a result of active efforts in both of those countries to address shortcomings in their investment environments and improve their appeal to mainly US investors.
While the Kearney report did acknowledge that the government is making some efforts to improve the relevant skills of the workforce, mainly through the Technical Education and Skills Development Authority (Tesda), the implication is that this is not happening quickly enough. A second handicap for the Philippines is the cost of doing business. While the country is “financially attractive” in some respects, such as labor costs, it is much less so in others, particularly in its persistently high energy costs.
From our point of view, this suggests a couple of directions in which the government should focus reform efforts. Current policies clearly acknowledge the need to continue to build up a skilled and flexible workforce, and Tesda and other agencies are indeed doing good work along these lines. However, these efforts may be undermined by the continuing uncompetitive state of the Philippines’ digital infrastructure, where little progress has been made over the past several years.
Along with that, greater attention needs to be given to improving the efficiency and cost of electricity. Over the past several months, it has become apparent that eroding regulatory effectiveness and persistent inadequacies in grid development — a problem that is not unique to this country, it must be said — are not only spoiling potential gains in business investment inflows but are a constant drag on the stability of the domestic economy as well. Major work needs to be done, perhaps even as far as scrapping or comprehensively revising the 2001 Electric Power Industry Reform Act (Epira).
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