Corrosive Foreign Direct Investments: The case of Offshore Gaming

President Duterte may have flip-flopped on his stance on several issues, but he has been consistent in his accommodation of Chinese investments and loans. And understandably so. Chinese money has filled the gap vacated by Westerners and has covered the funding requirements of developing nations. Critics, however, argue that China may use its economic foothold to gain political influence in its host country.
For the Philippines, Duterte’s overtures towards China have resulted in a surge in Chinese investments. While the Philippines counts the US, Japan, and the four Asian tigers as traditional sources of foreign direct investments (FDI), a new narrative emerged when Duterte stepped into office. In 2016, FDI from China only amounted to USD 10.77 million, with almost 80% amassed during the second half of the year. By 2018, Chinese investments have ballooned to USD 195.25 million, accounting for almost 10% of total foreign investments.
For the duration of Duterte’s presidency, Chinese FDI already amounted to USD 232.24 million, surpassing the inflows in the last two administrations combined. This figure does not even include FDI from Hong Kong, through which a significant share of funds from the mainland is also coursed.
Nowhere has the effects of the rapid inflow of Chinese capital been more visible than in metropolitan areas. Unfortunately, most Filipinos do not share Duterte’s affinity for China. According to a Pulse Asia survey conducted at the end of 2018, Filipinos remain wary of China, with our northern neighbor earning the highest distrust rating among the countries included in the list.
On February 21, 2019, Stratbase ADR Institute hosted non-resident fellow, Mr. Alvin Camba, as he presented his research exploring whether Chinese capital, particularly foreign direct investments, is corrosive to the Philippines during the current administration. Mr. Camba defines FDI as corrosive if it “bypasses and transforms preexisting procedures, concentrates profits in specific groups, and strengthens existing and generates new patronage networks.”
Rapidly expanding Chinese capital in Duterte’s Philippines, Mr. Camba argues, fits this definition.
The emergence of the offshore gaming industry, in particular, exemplifies his central thesis.

The online gaming industry’s rise was driven by both push and pull factors. Xi Jinping’s crackdown on corruption and state centralization of capital hurt the gambling industry in Macau. This coincided with the current administration’s efforts to strengthen the fight against illegal gambling. President Duterte signed Executive Order 13 in 2016, which effectively transferred the regulation of gambling and online gaming facilities to the Philippine Amusement and Gaming Corporation (PAGCOR). Before this, offshore gaming operations were largely limited to special economic zones. In that same year, PAGCOR issued 35 licenses, allowing these firms to operate more openly. To date, there are already 57 licensed operators.
The first corrosive effect is the migration of illegal workers, with operator groups preying on innocent recruits and promising them thousands of dollars.
Responding to concerns over the deluge of Chinese workers in the country, the Senate launched an inquiry on the issue. During the hearing, it was revealed that half of alien employment permits issued in 2016 and 2017 were given to Chinese nationals, of which a significant share comprised of those involved in offshore gambling. The hearings also unearthed how these workers were able to skirt local laws, initially coming in as tourists before obtaining work permits. Many others have also overstayed or do not have work permits altogether.
The influx of workers has also pushed real estate prices upwards. In several instances, floors and even entire condominium buildings have been rented out to Chinese nationals. While a win for the real estate industry, the average working Filipino has been priced out of prime real estate, and forced to look for more affordable options elsewhere.
Another corrosive effect is that these offshore gaming companies are not taxable. According to Mr. Camba, these companies are supposedly domiciled in another country — a technicality that allows these firms to be exempt from taxes on goods and services, a 5% franchise tax, among others.
Moreover, the Finance Secretary estimated that the country loses roughly Php 3 billion in revenues each month from workers employed in the offshore gaming industry.
Other corrosive impacts of Chinese FDI include kidnapping, sex work, and money laundering.
Mr. Camba concludes that the government is moving in the right direction, particularly in increasing taxation, clarifying juridical boundaries, and bringing Chinese workers under the Philippine law. He contends, however, that the Philippines’ lack of a coherent and sustainable development strategy for its economic growth provided the opening for offshore gambling to thrive in the first place. It is clear then that more efforts should be expended to diversify and strengthen the economy.
 
Weslene Uy is an economic fellow at the Stratbase ADR Institute.