Attracting Japanese investment (China Plus One)

IMF Resident Representative to the Philippines Shanaka Peiris, in a presentation about the country’s economic outlook for 2016 and the opportunities and challenges ahead, he reported about the impressive growth achieved by the economy in recent years.

Peiris said the Philippines’ economic fundamentals, such as real GDP growth, inflation rate, current account balance and general government debt, have been improving. Domestic private demand remains strong, supported by OFW remittances and the rapidly growing BPO sector. He also mentioned that the Philippines continues to have favorable endowments such as a huge English-speaking and literate workforce and an expanding domestic market, which now includes the Asean economic community. Indeed, there is great potential for the Philippines to take off economically.

Unfortunately, some factors seem to dampen this potential. In spite of the very good economic performance in recent years, foreign direct investment (FDI) has been going in the opposite direction. Total approved foreign investment dropped by 21 percent from P73 billion in the first half of 2014 to P58 billion in the first half of 2015, according to the Philippine Statistics Authority.

As the Head of Japan Desk of P&A Grant Thornton, I would like to take a closer look at such investments coming in from Japan, which is the top source of investments for the Philippines, at almost P36 billion for 2014. Investment inflow from Japan grew marginally from P11.098 billion in the first half of 2014 to P11.180 billion in the first half of 2015. I know that our country can still improve on this.

Japan External Trade Organization (JETRO) Executive Vice President Tatsuhiro Shindo in his recent visit to the country was quoted as saying that the Philippines is now the “Plus One” of Japan.

Many Japanese companies have been pursuing the strategy of “China Plus One,” in whic h they invest a certain amount in another country parallel to their investment in China to avoid heavy concentration of investment in China and to reduce and diversify risks. Japanese companies embarked on this strategy, where manufacturing facility is not necessarily moved but diversified beyond China, usually to countries in Southeast Asia.

I see this “Plus One” development as both an opportunity and challenge for the country. It is a great opportunity to attract investors from Japan and a big challenge to improve our investment climate to finalize the investment deals, make the companies stay and help their businesses thrive.

In my interaction with Japanese expats, I have learned what the Japanese companies see as advantages in investing here. The Filipinos are friendly and work well with foreigners. The Philippines’ geographical location of being within four hours flying time to Japan and the time difference with Japan of only one hour also make communication and coordination with Japan head office faster and easier. Moreover, the growing purchasing power from the middle-income class is a big attraction as a market.

In addition to these advantages for their businesses, Japanese expats live a good life in the Philippines. The expats enjoy widely available and inexpensive necessities and comforts such as access to hospitals, shopping centers, golf clubs, hotels and restaurants. Unlike the winters of Japan, which can be harsh, the local weather is warm and pleasant. Add to these the most hospitable people in the world and we are not surprised that many expats are happy to choose the Philippines as their second home.

However, in my conversations with Japanese executives, I also found out they have many concerns and complaints about doing business in the Philippines. The lack of efficient infrastructure to sustain the expansion of the economy continues to be a main concern, as well as the complicated tax system as compared with countries like Vietnam and Indonesia. Not many industries are open to foreign companies, and foreign control in the retail sector, public utilities and professional services is still not allowed.

Administrative inefficiency in government offices is another reason for foreign companies to shy away from the Philippines. One usual example is the processing of permits and certificates, which takes longer than in other countries. Also, income tax rates in the Philippines remain the highest in the Asean region.

In addition to the challenges coming from the side of the government, there are also challenges in the business environment. Not many Japanese expats are familiar with or experts in local accounting practices, taxation, labor laws, etc. These challenges are compounded with language barriers. Hence, several firms and companies (law firms, accounting firms, banks, etc.) formed their respective Japan Desks to ease their struggles with accounting, tax, labor and business management issues. These Japan Desks give helpful advice given the business situation and capability of their clients while complying with laws and regulations.

Many local companies have individual efforts to help increase FDI. As the private sector does its part in bringing in investments, it needs government support. The government should do its best to address these concerns. More importantly, the incoming Administration should be more proactive and strategic in attracting Japanese investors. The Philippines should take advantage of the “Plus One” category before the other Asean countries take a more active role and lure the Japanese investors away.

Nelson Dinio is the Head of Business Development and Japan Desk of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 20 Partners and over 700 staff members.

As published in The Manila Times dated 16 March 2016