So now we focus on the Santos-Amador-Romarate (SAR) study (BSP Discussion Paper Series No. 007, Dec.2021), “ASEAN-5 Countries:  In Competition for FDI”.  Why this particular paper?  Because not only is it the most recent, but it uses the OECD’s FDI Regulatory Restrictiveness Index (FDI Index) as one of the 12 explanatory variables studied to explain differences in foreign direct investment (FDI) across the ASEAN-5 countries (Philippines, Indonesia, Malaysia, Thailand and Vietnam). (Read the paper here)

Congressman Joey Salcedo and various analysts and columnists used  this precise FDI Index to point  out, horror-stricken, that the Philippines ranked as  the third most FDI restrictive country in the world (next to Libya and Palestine, which really don’t count). This high FDI Index was then identified both as the cause of our poor performance in attracting FDI and therefore of our poverty and unemployment, then blaming the restrictive economic provisions of our Constitution.  

 There was not a shred of evidence to back up their argument.  

 In fact, if they only looked more closely at the FDI Index, they would have seen that China, which from the inception of the Index up to 2015, was ranked the most restrictive country in the OECD sample, at the same time was also the largest recipient of FDI among the developing countries of the world.  It still is, even though in 2015 the title of most restrictive passed on to the Philippines. Shortly thereafter, the Philippines the ninth, and the seventh top country of investment choice in a survey conducted by UNCTAD. 

That is why the SAR study is important: they look at the evidence. 

The experience of the ASEAN-5 as host countries over the 10-year period 2009-2019 , from 15 source countries 15 source countries (nine  Asian and 6 non-Asian) who together are responsible for 80 percent of FDI that flows into ASEAN.  They ask questions like “what factors explain differences in FDI across the ASEAN-5? And, relatedly, how do different foreign direct investors choose across host countries?

The SAR study takes into account 12 locational factors both economic and non-economic (e.g., governance, hard and soft infrastructure): market size (real GDP), economic openness (FDI Restrictiveness Index), macroeconomic stability (inflation), labor costs (minimum wage), Human Capital Index, Corporate Tax Rate,  Corruption Perception Index, Rule of Law Index, Ease of Doing Business Score, Telecomms Infastructure Index, Road Quality Index, and Sovereign Credit Ratings.

There were three sets of estimates:  one from the pooled data of Asian and Non-Asian source countries, the second limited to Asian source countries (Japan, China, Singapore, HongKong, Malaysia, Taiwan, Indonesia, India, South Korea) and the third limited to Non-Asian source countries (US, Canada, UK, Australia, Netherlands, Luxembourg). And there were ten specifications for each set of estimates.

Study Conclusion

What were the findings?  One thing is crystal clear: that FDI restrictions do not stand out as a major stumbling block to the inflow of foreign direct investment. 

For the pooled sample,  FDI restrictions are statistically significant for a majority of the specifications , unlike Ease of Doing Business or Corporate Tax Rates, which are statistically significant in ALL specifications.  More to the point, the FDI Restrictiveness Index was negatively correlated and statistically significant for Asian source countries, but for the non-Asian source countries, there was a positive correlation – the higher the Index(the more restrictive the country), the higher the FDI inflow.  No other variable showed  this kind of inconsistency.  

What is even more telling is that the FDI Restrictiveness Index showed the lowest elasticity among the explanatory variables (the Human Capital Index showed the highest elasticity, followed by Ease of Doing Business, but the former loses significance once the latter is accounted for). This means that it has the least impact on foreign direct investment.  To quote from the paper:  “This suggests that while reducing FDI restrictions and the corporate tax rate could provide a boost to a country’s FDI performance, improving the way business is done in a country would most likely have a more positive impact in attracting and retaining FDI.”

Several robustness checks were conducted by SAR, and the one on the FDI Restrictiveness index had results which show that the overall FDI Restrictiveness Index is statistically insignificant for all investors when macroeconomic stability, ease of doing business . and quality of infrastructure are accounted for.” 

In a nutshell, there is hard evidence to show that at the very least,  there are more important factors than equity restrictions  (or absence thereof) in determining whether FDI flows  into our country. That should put paid, once and for all,  to Congressional and other efforts to amend the Constitution by lifting its “restrictive economic provisions”. By concentrating our efforts on making it easier to do business in the Philippines, better infrastructure, and better governance and institutions, we will be able to achieve the objectives of getting the kind of foreign direct investment we want. 

ASEAN-5: IN COMPETITION FOR FDIs, BSP Discussion Paper Series No. 007, Dec. 2021

OECD Regulatory  Restrictiveness Index