Foreign Direct Investment, Privatization

and Insolvency Regimes

Introduction
Foreign Direct Investment
• refers to the direct investment in productive assets -by
a company incorporated or un-incorporated in a foreign
country to the host country
• it is a system entirely different from the investments in
shares of local companies by foreign entities.
• has grown steadily in volume and is major source of
development finance
• all governments want to attract it as it contributes to
economic development
• source of private external finance for developing
countries
• Economic theory suggests that FDI can generate
positive spillovers to domestic firms in the host country.
Introduction
Multinational Corporations (MNCs)
• sources of international capital and technology
• facilitates the transfer of technical and business
know-how
• causing productivity gains and competitiveness
among local firms
• their entry increases competition force domestic
firms to imitate and innovate
Introduction
Domestic firms benefit from spillovers and
externalities associated with FDI through:
• best practice demonstration and diffusion
• creation of linkages becoming suppliers or
customers
• movement of experienced workers from foreign to
local
• exports and international integrations
Introduction
Two Broad Classifications of Technological Spillovers
from FDI to Domestic Firms
• Horizontal–within or intra-industry
• Vertical–spillover effects
a. Backward linkages
b. Forward linkages

Existing FDI literature shows an increasing number of

studies examining the technology spillovers from FDI to
Domestic firms. However, they present limited diverse
results which may be attributed to varying levels of
absorptive capacity and market structure of countries.
Introduction
To attract FDI inflows and positive spillover effects,
Philippines liberalized its FDI policy and offered Foreign
Incentive measures. However, due to the paucity of FDI
firm-level panel data, it is difficult to measure the
contribution and effects of FDI.
Developing countries have many developmental needs
and often have savings or trade gap.
In an Economy Equilibrium, it is an accepted identity that
Savings is equals to Investments (S=I).
Developing economy normally have shortfall between
savings and desired level of investments and is sought to
fill by capital inflows. As such, country’s Development
depends on domestic and external financing as it is
important for economic and social development
Introduction
Since Bretton Woods and United Nations system
were established, Official Development Assistance
(ODA) has grown steadily and played a role as a
source of external capital for less developed countries
around the world.
Since early 1980s, private capital flows, particularly
FDI have grown at a phenomenal rate
FDI is long-term in contrast with Foreign Bank
Lending and Portfolio Investment which are often
motivated by short-term profit considerations
FOREIGN DIRECT INVESTMENT IN
DEVELOPING COUNTRIES
Foreign Investment –one of the indicators that the host
country’s economy is growing and opening to globalization.
FDI is more than just moving capital across borders but also
has certain advantages to both host country and the
investor.
Major Determinants that attract FDI to developing countries:
• Open Door Economic Policy
• Market Size
• Political Stability
• Host Country’s Economic Policy
• Tax Regime
• Regulatory Practices
FOREIGN DIRECT INVESTMENT IN
DEVELOPING COUNTRIES
Multinational Enterprises (MNEs)
• own and control operations abroad to benefit from diverse
production location and globalization of market
• undertake production in different countries to minimize production
costs and expand globally
Firm chooses least cost locations and get involved in international
productions which depends on:
• Ownership advantages
• Location advantages
• Internalization advantages
Internal factors are also important determinants and they all play a
crucial role in a firm’s decision to enter a host country. There are four
types of FDI:
• Resource seeking
• Import substituting
• Export Platform
• Rationalized or vertically disintegrated
FDI Policy Shift in the 1990s

Republic Act 7042 or the Foreign Investment Act (FIA) 1991

Philippines allowed foreign equity participation up to 100%
in all areas not specified in the FI Negative List. At the same
time, pursued changes in its investment incentive schemes
to encourage FDI inflows.
Investment Incentive Measures were granted through different
investment regimes administered by:
• Board of Investments (BOI)
• Philippine Economic Zone Authority (PEZA)
• Subic Bay Metropolitan Authority (SBMA)
• Clark Development Corporation (CDC)
• Other bodies (economic or free port zones
FDI Policy Shift in the 1990s
FDI Performance
• During 1980’s –FDI is fluctuating
• Due to liberation efforts in the early 1990’s, steady increase in FDI
inflows were registered from 1991 to 1994
• Decline were observed in 2001 and 2003
• Recovered and increased in 2004 to 2007
• Finance and telecommunication sectors continued to rise
• Manufacturing sector inflows slowed down
• In terms of FDI resources, USA was the country’s largest source
of FDI inflows up to 1980s from 56% but dropped to 13 percent in
the 1990s and 2000s.
• US dominance was diluted by the increasing presence of Japan,
Netherlands, UK and Singapore. Japan from 13% (1980s)
increased to 24% in the 1990s although fell to 18% in 2000s.
• FDI inflows to the Philippines have been limited and country’s FDI
performance has lagged behind its neighbors in East and South
East Asia.
Key Features of Investment Climate
Access to Finance and International Integration
• Expected benefits exceed cost of investment
• Less credit constraints with well-developed and functioning
financial system
• Healthy financial system = expansion
• Openness to trade and FDI accelerates economic growth
Governance
• Complex and bureaucratic regulations are not associated
with better societal outcomes
• Strict regulations = increased corruption
Key Features of Investment Climate
Infrastructure
• Better infrastructure = more foreign investors
• Ernst & young identified the following infrastructure factors
as important in attracting FDI:
•Good base of related and supporting industries like
suppliers, sub-contractors, university research center,
business services and raw materials
•Good transport facilities roads as well as port system for
both sea and air
•Low cost and availability of utilities such as
telecommunications, energy and water
•Environmental regulations and procedures
•Availability of sites and premises
Key Features of Investment Climate
Macroeconomic Factors
•Optimistic business sector is measured in terms of Gross Domestic
Product (GDP), growth rate, inflation rate, level of industrialization,
etc.
•China and India exhibits Foreign direct investment attraction while
Nepal, Bangladesh and many slow growth third world economies
received negligible amounts of FDI
Political Stability
• Political certainty and transparency = determinant for developing
countries to attract FDI
• Instability results in uncertain investment which may depreciate
the firm's value
• Pre-investment
• Business and political risks are credible determinants of FDI
location variables
Key Features of Investment Climate
Technology Factors
• Technological progress encourages innovation and attracts
FDI
• well-developed technology infrastructure = better business
processes
• take on research and development
Privatization
The act of transferring in whole or in part the ownership of a
public sector to the private sector.
PRO-PRIVATIZATION
• Private sectors can do the functions and tasks more
efficiently
• Government is not generally known as a good provider of
goods and services most specially in less developed and
developing countries.
• Privatization will lead to lower prices, better quality, more
options, lesser corruption, lesser red tape, and faster
delivery of both goods and services.
• Government doesn’t have the fullest of technical
competence
• Taxpayers’ money will not be used to cover loses.
Privatization
PRO-PRIVATIZATION
10 reasons to transfer state-owned assets into private hands:
• Accountability
• Funds
• Dispersion of Resources
• Corruption
• Tainted Purpose
• No more subsidies
• Natural Monopolies
• Political Influence
• Profits
• Security
Privatization
ANTI-PRIVATIZATION
• Governments are ultimately accountable to the people so
they have to make certain that the enterprises they own are
well managed.
• Certain parts of the social terrain should remain closed to
the market forces in order to protect them from the
unpredictability and ruthlessness of the market.
• Monopolies are better administered by the state. -Anti-
Privatization perspective is the need for responsible
stewardship.
• Privatization is not compatible with government mission. -
Have the entire military of a nation to draw upon for security
Privatization
ANTI-PRIVATIZATION
11 reasons to not transfer state-owned assets into private hands:
• Accountability
• Capital
• Concentration of Wealth
• Cuts in Essential Services
• Downsizing
• Job Loss
• Political Influence
• Goals
• Natural Monopolies
• Privatization and Poverty
• Profit
Insolvency Regimes
Insolvency
•inability of a person/entity to pay its debts as they fall due. -it
can be defined by two aspects; Cash Flaw Liquidity and Asset
Insolvency.
Insolvency Vs. Bankruptcy
• Insolvency is a state of being.
• Bankruptcy is matter of law.
• A person/entity can be insolvent but not legally bankrupt.
• they can take measures to keep afloat at least by using lines
of credit to borrow money, selling off assets to other
companies, or allowing a takeover from a larger corporation.
• Insolvency does not necessarily lead to bankruptcy, but all
bankrupt companies are insolvent.
Insolvency Regimes
Consequence of Insolvency
Business Turnaround or Business Recovery
– it is the re-modelling of the financial and organizational structure of
an insolvent company to continue it's business and to permit
rehabilitation.
– However, continuing the business while insolvent is a violation under
some jurisdiction.
– In others, it may continue under a declared protective arrangement.
Insolvency Law and Business Rehabilitation
The Philippine Insolvency Law, enacted in 1909 has three principal
subjects:
– Suspension of payments
– Voluntary insolvency
– Involuntary Insolvency
Insolvency Regimes
Features of Insolvency Law
–Rehabilitative -it is considered as such because of the principal subject suspension
of payment which allows the restructuring of debtor's obligation to enable it to
continue its operation.
–Distributive -it is also distributive since the purpose of this provision is to affect an
equitable distribution of properties among the creditors and to benefit the debtor by
discharging his obligation to have a new start.
Rehabilitation Law (The Process)
•Stay Order-Any creditor(s) holding at least 25% of the debtor's liabilities,
can petition the appropriate RTC to replace the debtor under rehabilitation.
•Adequate Protection- A creditor is considered as lacking adequate
protection if it can be shown that
1. the debtor is not honoring a pre-existing agreement to keep the
property insured;
2. the debtor is failing to take commercially reasonable steps to maintain
the property; or
3. the depreciation of the property is increasing to the extent that the
creditor becomes under-secured.
Insolvency Regimes
Rehabilitation Law (The Process)
•Rehabilitation Receiver
-does not take over the management and control of the debtor.
-primary role is to oversee and monitor the operations of the debtor
pending proceedings.
•“Equality is Equity” Principle
-in deciding whether the opposition of creditor is manifestly
unreasonable, the court may consider the ff:
1. the plan would likely provide objecting class of creditors with
compensation greater than that which would have received if the assets
of the debtor were sold by a liquidator within a three-month period.
2. the shareholder or owners of the debtor lose at least their controlling
interest as a result of the plan, and
3. rehabilitation receiver has recommended approval of the plan.
•Cram Down
Insolvency Regimes
Proposed Corporate Recovery & Insolvency Act
• Suspension of Payment
•Moratorium payment of debts
•Three months
•Choosing this remedy-
1.Court Supervised Rehabilitation
2.Pre-Negotiated Rehabilitation
•Election of remedies
• Fast-track Rehabilitation
A debtor is limited to this remedy unless:
1.Pre-negotiated rehabilitation
2.Non stock corporation or partnership
3.Conversion to court supervised rehabilitation
Insolvency Regimes
Proposed Corporate Recovery & Insolvency Act
• Court Supervised Rehabilitation
– Counterpart of rehabilitation proceeding
– Formulation of a plan
– Minimum standard
– Creditors vote on the plan
Converted to liquidation in case:
1.Late submission of the plan
2.Courts failure to approve the plan
3.The debtor’s breach of plan
• Pre-negotiated Rehabilitation
– Suffers from the need of near unanimity among the creditors
– Accelerated court approval
– Summary judicial proceeding for debtors
– Establish comprehensive plan
– Approval=crammed down
– Have combine benefit
Insolvency Regimes
Proposed Corporate Recovery & Insolvency Act
• Dissolution and Liquidation
– Final resort
– Appointment of liquidator
– To ensure the asset are sold quickly
– Existing legal provision
– Distributed to the secured creditors
Remaining proceeds are distributed:
1.To meet unpaid AE
2.To workers for back wages
3.To the government for back taxes
4.To all the creditor
5.To creditors whose claims are subordinate
Openness to Restrictions Upon
Foreign Investments
Foreign Investments in the Philippines
• Highly-promoted for economic development
• Free trade zone is a noteworthy advantage
• Impressive growth in English speaking Philippine labor
industry
Disadvantages that hinder foreign investment include:
– Legal restrictions
– Inadequate public investment
– Regulatory inconsistency
– Lack of transparency
Openness to Restrictions Upon
Foreign Investments
Foreign Investments in the Philippines
• Foreign Investment Act
• Foreign Investment Negative List
• Investor’s Lease Act of 1994
• 2003 Dual-Citizenship Act
• Only Philippine citizens can practice licensed professions
except those covered by Mutual Recognition Agreements
Assessment of FDI Spillover Effects
• Foreign multinationals'- innovative technologies or firm-specific
features
• FDI benefits- capital, advanced technologies, and enhanced
managerial Skills
• Studies found that productivity spillovers occur horizontally at the
five-digit stage
Policy Recommendations
• FDI spillover is created not automatically generated
• FDI boosted the country's high-tech exports and overall economic
development
• Hindrance to spillover- poor competitiveness and inability to
absorb the technology or information being transferred
• improving domestic firms' absorptive ability is needed.
• industrial policy, creation of FDI-related spillovers, and industry
value chain participation
Assessment of FDI Spillover Effects
Policy Recommendations
1. Human Resource Development and Training
2. Industrial and Technology Upgrading
3. SME Finance Support Program
4. Linkages Improvement and Promotion of Subcontracting
and Outsourcing Activities
5. Improvement of Infrastructure and Logistics and Overall
Investment Climate
6. Capacity Building and Adequate Funding for the Department
of Trade and Industry and Board of Investments’
Competitiveness and Linkages Program
7. Conversion and Transfer Policies
8. Expropriation and Compensation
9. Dispute Settlement
Assessment of FDI Spillover Effects
Performance Requirements
Board of Investments
– Approved project proposal
– At least 25% of total project cost (equity)
– 25% local value-added sourcing requirement
Preference to Filipino Enterprises
– Lowest domestic bidder
– Initial bid should not be more than 15% higher than foreign bidder
Preferential Treatment to Filipino Consultants
– Lead consultants
– Joint ventures with Filipinos
Government Procurement Reform Act
– Countertrade requirement
– At least US $1 Million
– Minimum of 50% of import price
Assessment of FDI Spillover Effects
Incentives
1. Less Developed Areas - BOI-registered enterprises deduct
“pioneer incentives” from their taxable income.
2. Not Listed in IPP - Enterprises with at least 40% foreign
equity and export at least 70% of their products may acquire
incentives despite not being listed in the IPP.
3. Export Development Act of 1994 - Export-oriented
enterprises with export revenues of at least 50% may
register for additional incentives.
Multinational Enterprises -The Philippine law provides
incentives for multinational enterprises to establish regional
or area headquarters, and regional operating headquarters
in the country.
Assessment of FDI Spillover Effects
Incentives
Regional Headquarters’ Incentives
The regional headquarters’ incentives are exempted from:
1. income tax.
2. branch profits remittance tax.
3. VAT.
4. sale or lease of goods and property and rendition of
service to the regional headquarters which are subject to
0% VAT.
5. all taxes, fees or charges imposed by LGUs except for
real property taxes.
6. and value added tax and duty free importation of training
and conference materials and equipment solely used for
the headquarters function.
Assessment of FDI Spillover Effects
Rights to Private Ownership and Establishments
Right on Acquisition and Disposal - The 1987 Constitution grants the
government to regulate competitions and prohibit monopoly, although
there are no implemented laws regarding this.
Government-funded Projects -Only the state-owned GSIS may insure
such, but they must meet the set insurance and bonding requirements.
Protection of Property Rights
The delays and uncertainty along with the registrations for property
rights has long been recognized as a problem, especially in regards with
the sanctity of contracts and property rights which they support.
Transparency of Regulatory System
Philippine National Agencies are required by law to develop regulations
via a public consultation process, often involving public hearings.
Assessment of FDI Spillover Effects
Efficient Capital Markets and Portfolio Investments
The Philippines is generally open to foreign portfolio capital investments.
The securities market is growing but remains dominated by government
bills/bonds.
Philippine Stock Exchange
Membership in the PSE is open to foreign-controlled stock brokerages
incorporated under Philippine Law.
The PSE has introduced reforms in 2006 which states the inclusion of
trading activities and free float criteria in selecting companies comprising
stock exchange index.
Banking
- Banks allocate funds from savers to borrowers in an efficient manner.
- The Central bank has worked to strengthen banks’ capital bases, reporting
requirements, corporate governance and risk management systems.
- Adopting Basel capital adequacy rules.
- 10% loanable funds for Micro, Small and Medium Enterprises (MSMEs).
- 25% loanable funds for agricultural credit.
Assessment of FDI Spillover Effects
Anti-Money Laundering Information Exchange
The Paris-based Financial Action Task Force (FATF) continues to
monitor implementation of the Philippine Anti-Money Laundering Act
through the Anti-Money Laundering Council/covered institutions include
foreign exchange dealers and remittance agents, which are required to
register with central bank and comply with various regulations and
requirements related to Philippines’ anti-money laundering act.
Accounting Standards
Adaptation of Philippine Financial Reporting Standards (PFRS)
patterned after International Financial Reporting Standards (IFRS)
The corporations’ president, CEO, and CFO are required to assume
management responsibility and accountability for financials statements.
The SEC Reviews and revises guidelines, as necessary, on the
accreditation of auditing firms and external auditors.
Assessment of FDI Spillover Effects
Outward Investments
- Investing in foreign countries by individuals and companies.
- Qualified investors may apply with the Central Bank for higher annual
outward investment limits.
- All outward investments of banks in subsidiaries and affiliates abroad
require prior Central Bank approval.
Competition From State-Owned Enterprises
Private and state-owned enterprises generally compete equally, with some
clear exceptions
Corporate Social Responsibility
US companies report strong and favorable responses to CSR programs
among employees and within local communities
CSR programs focus on poverty alleviation efforts, promoting of the
environment, health initiatives and education
In the Philippines, the government has mandated that its own agencies
participate in CSR.
Assessment of FDI Spillover Effects
Political Violence
Terrorist Groups and Criminal Gangs
The National Election
The New People’s Army
Major Issues
Peace Talk
Terrorist Groups in Mindanao
Corruption
OECD Anti-Bribery Convention
High-ranking officials - “Sandiganbayan”
Low-ranking officials “ Regional Trial Court”
Congress - bills filed for anti-corruption
Transparency International’s 2019 Corruption Perceptions Index -
Philippines 113th corrupt out of 180
Assessment of FDI Spillover Effects
Bilateral Investment Agreements
Argentina, Australia, Austria, Bangladesh, Belgium-Luxembourg Economic
Union, Cambodia, Canada, Chile, China, Czech Republic, Denmark,
Finland, France, Germany, India, Indonesia, Iran, Italy, Kuwait, Mongolia,
Myanmar, Netherlands, Pakistan, Portugal, Republic of Korea, Romania,
Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Syria,
Taiwan, Thailand, Turkey, United Kingdom, and Vietnam.
• ASEAN regional trade agreements (Australia and New Zealand, Republic of
Korea, India, Japan, and China).
• Investment agreement with Iceland, Liechtenstein, Norway, and Switzerland
under the Philippines-European Free Trade Association (EFTA) Free Trade
Agreement.
• Philippines has neither a bilateral investment nor a free trade agreement
with the United States.
Bilateral Tax Treaty
– 10% - US-Philippines tax treaty, U.S. royalty income recipients are eligible for
preferential tax rates
– 15% - Dividends and interest income from bona fide loans are taxed at a preferential
rate
– 10% - Interest Income from Government Bonds is Taxed
Assessment of FDI Spillover Effects
Labor
– Philippine Labor is relatively low cost and motivated
– Strong English language skills
– International Labor Organization (ILO)
– Department of Labor and Employment (DOLE)
– BPO companies, particularly call center companies
– Kasambahay Bill
Foreign Trade Zones/Free Ports
– economic zones, or ecozones
– freeports are similar to enterprise zones
– outside the customs territory
– import capital equipment and raw material
– usually located around shipping ports and airports
– normal tax or tariff rules of the country do not apply.
Assessment of FDI Spillover Effects
Philippine Economic Zone Authority (PEZA)
– promote investments into the Philippines
– assistance to foreign entities in facilitating business
– doing business in the Philippines is smoother and easier
– ensure that permits and other registration requirements are secured in a
short span of time.
Bases Conversion Development Authority
– Government instrumentality vested with corporate powers
– Engages in public-private partnerships
– Push forward vital public infrastructure
– Transforms former military bases into alternative productive civilian use
– Contributes to the modernization of the Armed Forces of the Philippines
Other Zones
Clark Freeport Zone, John Hay Special Economic Zone, Poro Point
Freeport Zone, Bataan Technology Park, Subic Bay Freeport Zone