Gov’t confident in PHL’s future as investment destination

By Janina C. Lim, Reporter

ACCORDING to the United Nations Conference on Trade and Development’s (UNCTAD) 2019 World Investment Report, released in June, global investment flows in 2018 fell 13% to $1.3 trillion, marking the third consecutive year that global flows have fallen.

It may not be a coincidence that this period of decline was rife with rapid policy shifts, geopolitical tensions and beginnings of the latest industrial revolution — the fourth one by the reckoning of economic historians — which is among the challenges UNCTAD recognizes that economies will have to face sooner than later.

With the technologies ushered in by the Fourth Industrial Revolution (FIRe), we are now seeing profound shifts in various industries, reshaping our patterns of consumption, production, storage, distribution and management.

In particular, companies in developed economies such as the United States are increasingly tapping various technologies that are redefining how they achieving economies of scale, thereby doing away with the need to move production to countries where wages are low.

“That means you don’t need to have it made outside the United States. That’s happening slowly. So that’s a challenge to all countries that are currently manufacturing and exporting,” American Chamber of Commerce of the Philippines, Inc.’s (AmCham) Senior Adviser John D. Forbes said in a phone interview.

The challenge is something that needs to be confronted by special economic zones (SEZs), which generate a significant portion of the Philippines’ exports of both goods and services. The performance of even one or two zones can significantly affect a country’s foreign direct investment (FDI) and export results, UNCTAD said.

In the report, the Philippines had the second-most number of SEZs in the world, totaling 528 at the end of 2018, well behind the 2,543 in China.

Despite widespread use of SEZs, FDI inflows to the Philippines last year fell 25.75% to $6.46 billion, UNCTAD said.

AmCham’s Mr. Forbes attributed the decline mainly to the uncertainties in the investment environment last year. These include the proposal to alter the fiscal incentive structure, which succeeded in the House of Representatives, causing investors to balk at expanding their investments while delaying new investments to relocate operations fleeing China to escape the consequences of the United States-China trade war.

The uncertainty cost the electronics industry $1 billion worth of investment.

“These companies are all advanced in technology. Sayang lang kasi (What a shame because) in the nature of the electronics industry, if you don’t bring in new products, pretty soon, your product line will become obsolete and eventually over time they may consider shutting down. It may happen over one year or two years, depending on what products they have. But for sure, without new investment, we’ll just be running on legacy products,” Semiconductor and Electronics Industries in the Philippines Foundation, Inc. President Danilo C. Lachica said in a phone interview.

Mr. Lachica said fiscal incentives remain a “big motivation” for investors, especially in the Philippines where power and logistics costs are much higher than in other Southeast Asian neighbors like Vietnam.

He noted, however, that a country’s technological competitiveness is also a consideration for foreign locators.

“That’s a concern. In fact, there was one company that talked to me and wanted to start an R&D center in Asia. It evaluated factors such as the capability of universities, clusters, technology. They were debating whether to put it in Vietnam or the Philippines,” Mr. Lachica said.

“Good news is they did not put it in Vietnam. Bad news is they did not put it in the Philippines. They put it in Singapore,” he added, noting the massive number of science and technology-driven universities in the city state as being the main attraction.

Mr. Lachica estimates the facility would have taken in $10 million to $20 million in initial investment. But an R&D facility means more than investment.

“The thing about setting up an R&D facility is not so much for the investment but the trickle-down effect because what happens when you have an R&D company (it will produce investment in) new products… in country. So imagine, they have an operation in the Philippines and the new products could have been (produced) in the Philippines,” Mr. Lachica said.

He estimates that less than 20% of its 340 member firms, a mix of foreign and locals businesses, are now operating with Fourth Industrial Revolution technologies that allow fully automated interfaces controlled from one central data system.

Asked to name electronic firms’ main concerns about the Philippines’ technology landscape, he listed the incentives available for R&D centers, the strength of the universities, and availability of students in science and technology.

EDUCATION AND DIGITAL CONNECTIVITY
AmCham’s Mr. Forbes agreed with the need to encourage Filipinos to specialize in science and technology.

According to the “Towards 2030” report published in 2015 by the United Nations Educational, Scientific, and Cultural Organization (UNESCO), the Philippines invested 0.3% of its gross domestic product in higher education in 2009, “one of the lowest ratios among ASEAN.” Meanwhile, the number of full-time equivalent researchers per million inhabitants stood at just 78 in 2007 while the level of national investment in R&D was 0.11% of GDP that same year. UNESCO said these levels are “low by any standard.”

“One clear necessity is for government to increase, I mean we are increasing but it needs to happen fairly quickly, is the emphasis on STEM (Science, Technology, Engineering and Mathematics) education,” Mr. Forbes said.

He added, this, alongside the promotion of the creative economy will help the Philippines take gains in the FIRe.

“One area where I think the Philippines has a lot of advantage in the fourth revolution is creative industries,” Mr. Forbes said, noting the country’s creative economy is now estimated to be approaching $1 billion in revenue.

“In creative intelligence and creative innovation, the Philippines is competitive, although not yet as sophisticated as Thailand or Singapore, but they have great potential of being able to compete successfully and the machines cannot be creative,” Mr. Forbes said.

He also said the government has failed to provide enough digital access for students and must address the root cause of poor access by building more cell towers and ensuring market competition in Internet services.

Mr. Forbes said adding to the problem was the non-passage of certain bills that could have provided wider digital access to the public at a lower cost.

“PSA (Pubic Service Act), open access, amendments to the NTC (National Telecommunications Commission) law, were all passed by the House… but they were not passed in the Senate. They could have helped in broadening telecommunications (access). I think the business groups want to see those bills prioritized in the next Congress,” Mr. Forbes added.

GOV’T NOT CONCERNED ABOUT FDI IMPACT
The UNCTAD report said SEZs will need to adapt their value propositions to include access to skilled resources, high levels of data connectivity and relevant technology service providers.

Although some stakeholders perceive the Philippines to be progressing slowly in some of these areas, regulators are unfazed by the risks from technological upheaval on the country’s attractiveness as an investment destination.

“Remember, they came to the Philippines because of several other reasons,” Trade Secretary Ramon M. Lopez said in an interview at his office in Makati City.

“We have special ecozones, the basic infrastructure, they know it’s being aggressively pursued now, they appreciate this. They know we’re pursuing other reforms to open up more sectors to foreign equity,” he added.

Philippine Economic Zone Authority (PEZA) Director-General Charito B. Plaza is of the same view, calling the labor force the Philippines’ “biggest advantage” in attracting investment.

However, both agree that Filipino workers should undergo continuous retraining and upskilling to win the race against the machines.

In the business process outsourcing industry, this means outsmarting machine learning technologies which threaten to drastically cut the need for low-skill jobs.

The Contact Center Association of the Philippines (CCAP), the biggest employment generator of the country, issued in March a statement assuring the public of its continuous work in engaging professionals to deliver complicated tasks that require experience or specialized expertise, involving with abstract reasoning and situational responsiveness and autonomy.

“The industry is investing heavily in training for both entry-level and tenured positions,” CCAP President Jojo J. Uligan was quoted as saying.

Based on internal research by CCAP, mid- and high-skilled jobs in the contact center sector account for 85% of positions.

Market research firm Frost & Sullivan has estimated that about 73% of the global business process management industry will be in mid- and high-skilled jobs by 2022. For that year, the consultancy also forecasts that tasks that require basic skills in the global BPO industry will decline by 29%.

Mr. Lopez, also the chairman of the Board of Investments, the biggest investment promotion agency in the Philippines, believes humans will remain relevant in the artificial intelligence (AI) revolution that is currently taking place.

“Kakailanganin pa rin ng tao (We will still need people) to operate those technologies… those developing AIs are people also,” Mr. Lopez said.

He added that there is even hope that the Philippines will be an “AI center of excellence” that can develop its own technology, noting that over 10% of graduates here are in the science, math and technology field while Filipinos have excelled in Silicon Valley.

To further develop the country’s technological competitiveness and attractiveness for investors, Mr. Lopez cites the DTI’s inclusive, innovation-led, industrial strategy or i3s. The strategy includes setting up I3 zones where universities and industry hubs can collaborate on innovation initiatives.

The I3 program offers fiscal and nonfiscal support to promote local manufacturing of key products that are heavily imported such as pharmaceutical products or medical devices while furthering collaboration among industry, the academe, other government agencies and stakeholders in building the inclusive innovation ecosystem.

The I3 centers now total five — one each in the Bicutan area, Regions 5 (Bicol), 7 (Central Visayas), 10 (Northern Mindanao) and 11 (Davao Region). The DTI hopes to have such centers initially in each region, and then each province.

PEZA is now working with a university to assess the possibility of developing certain ecozones, particularly in Baguio, Cavite, Pampanga and Cebu, to be “green, smart and high-tech.”

“They’ll review these ecozones and we’ll bid them out to developers. We are going to invite the BPOs, the IT industries, the KIST (knowledge, innovation, science and technology) kasi sila maglalagay ng (because they have the potential to build) high-tech capacities,” Ms. Plaza said, adding that she hopes the bidding to be conducted within the year.

Ms. Plaza is also inviting educational institutions, particularly those that own large sites, to invest in the development of KIST parks, an ecozone that encourages schools to have a portion of their properties leased by potential locators, preferably those industries the schools can work with to develop new technologies.

“So hopefully makahabol tayo sa (we can catch up with the) Fourth Industrial Revolution,” Ms. Plaza added.

Both investment promotion agencies are also working on enhancing the digital infrastructure available in these ecozones in coordination with the Department of Information and Communications Technology.

In all, Mr. Lopez said that the Philippines lags a number of countries in embracing technology.

“We recognize the shortcomings in digital technology preparedness. But other countries are more advanced, that’s why we’re catching up,” he said.

Nevertheless, Mr. Lopez firmly believes the Philippines has huge potential to advance in tech, citing the increasing number of science and technology graduates as well as government’s efforts to introduce STEM at the early education level.

Meanwhile, he added that the country’s ongoing move to legislate policies that will open sectors to foreign investment will also help attract investors who can bring more new technology into the country.

The UNESCO report said that applying science to underpin future innovation and development is likely to remain a challenge for the country until the level of investment rises.

“This will include leveraging FDI in areas like electronics, in order to move closer to the higher end of the scale for value-added goods in the global value chain,” according to the report.

As such, SEIPI’s Mr. Lachica is asking legislators to really think through the impact of the proposed changes in tax incentives for SEZ locators.

“We really have to think through the tax reform aspect…. If the incentives of FDIs are throttled back, it is a concern,” Mr. Lachica added.