Foreign Investment and Philippine Development: A Comparative Approach | A Policy Brief

Written by Manuel Montes and Jerik Cruz on .

This study evaluates the role of foreign investment in Philippine development in the last two decades by comparing the Philippine investment experience with that of Malaysia and Thailand. While it has become an article of faith that foreign investment is essential to successful economic development, we argue that political economy factors—via appropriate state interventions and the embedding of investment policy in broader visions of industrial development—have been decisive processes behind these countries’ relative success at securing salutary investments and maximizing their benefits for industrial upgrading. VIEW PDF 

Policy Debates: Can Foreign Investment be Harmful for Economic Development?

Not all foreign investment is created equal. The International Monetary Fund (2009) defines foreign direct investment (FDI) as a financial transaction involving the purchase of an ownership share in an enterprise that is resident in one economy by a resident in another economy with the objective of establishing a lasting interest in the resident enterprise. Moreover, the purchase of a ten percent or higher of voting shares is considered a direct investment; anything below this is classified as portfolio investment. Portfolio investments occur through the purchase by non-residents of asset positions in the domestic equity and bond markets, bank deposits by non-residents, and the stock purchases of an existing enterprise. Foreign direct investment has three domestic destinations: (1) “greenfield” investment leading to the establishment of new facilities; (2) additional investment in existing foreign investment; and (3) cross-border mergers and acquisitions. Of these, only greenfield investments have a consistent connection with capital formation.

Impact of foreign investment on the balance of payments. Foreign investment is generally viewed as a boon to balance-of-payments performance for developing countries.  However, foreign enterprises tend to depend more on imported equipment and imported inputs for their operations, offsetting foreign exchange inflows by equipment imports and imported production inputs. It is also reasonable for domestic authorities to presume that such investments will eventually be repatriated. At the same time, because portfolio positions are driven by portfolio motives, they can be subject to “mood swings.” This is because portfolio flows are highly responsive to different interest rates between major financial markets, which are in turn driven by policies of national authorities of developed countries (Montes, 2014).   

Impact on investment environment and macroeconomic stability. FDI can be associated with increased productive capacity, demand  for domestic goods and services, technical change, and domestic business investment. Yet to catalyze such benefits, complementary public interventions have historically been of vital importance, whether in the form of domestic content and sourcing requirements, and technology transfer conditions.1  Similarly, in terms of the macroeconomic environment, unregulated portfolio flows have had significant, and often adverse, consequences. The IMF itself has linked open capital accounts to the inability of economies to achieve “durable expansion” (Ostry, Loungani, and Furceri, 2016, pp. 38–41), reflecting a growing consensus that high domestic interest rates, the channeling of finance to financial investment instead of real investment, and volatile exchange rates can have negative impact on domestic investment.2 

Impact on structural change. In recent years, developing countries have been encouraged to participate in global value chains (GVCs) coordinated by multinational lead firms, by liberalizing investments and extending foreign investor protections, among others. Yet, according to economy-wide studies, GVC participation has often failed to deliver promised dividends, either by triggering a shift to lower value-added GVC exports, sustained balance-of-payments difficulties on account of imported inputs, and, rather than technological upgrading, by facilitating the transition of countries into sinks of well-educated, flexible but low-cost labor (Montes and Lunenberg, 2016). Although participation in GVCs could be beneficial for developing economies, state  strategic planning for production upgrading, and negotiations with GVCs (to condition their entry on positive spillovers for the local economy) remains indispensable for realizing envisioned benefits. For such purposes, infant industry protections, performance requirements, and other well-known industrial policy tools may be more appropriate for achieving upgrading objectives. [back to top]

The Philippine, Thai and Malaysian Investment Records: Why the Divergence?

The investment records of the Philippines, Thailand, and Malaysia have been distinguished by major long-term differences, with Malaysia largely leading the pack, the Philippines lagging, and Thailand boasting an initially-low but fast-improving position over the years. Especially striking has been Thailand’s performance in terms of FDI levels: from levels below that of the Philippines (FDI share: 3.9% vs. 3.0% of GDP in 1980), the country has since overtaken the Philippines, and has, according to UNCTAD (United Nations Conference on Trade and Development) data, surpassed Malaysia in terms of total FDI as of 2015 (FDI: 44.4% vs. 39.7%). Despite this, Thailand’s performance in attracting greenfield investment has still fallen below that of Malaysia throughout the 2000s and 2010s, indicating Malaysia’s sustained advantages in attracting quality investment.

“Market”-oriented Philippine investment policy. What explains this divergence? Since the late 1980s, in this regard, the Philippines has stood out in its decisive pursuit of a pro-liberalization agenda that has downplayed the strategic role of government and relied greatly on foreign investment in fostering industrial growth (Action for Economic Reforms, 2014). Yet as the Philippine post-democratization experience demonstrates, the promises of this shift in investment policy have not been realized. Not only have market-oriented reforms been unsuccessful at drawing FDI relative to the country’s peers; the limited FDI the Philippine government has secured has apparently failed to translate into an expansion and deepening of the country’s industrial base. Amidst a broader trend of industrial malaise, the country’s export base has become even less diversified than it was before liberalization—with 76% of total exports being concentrated in electronics, garments and textiles, and machinery and transport equipment manufacturing operations in 2008 (Aldaba, 2013, p. 29).

Idiosyncratic intervention in Malaysia. With the rise of Mahathir Mohammad as Prime Minister in 1981, strategic policy efforts in Malaysia towards promoting intermediate and heavy industrialization took shape, with the Proton car project being the single, most famous large-scale industrial project. While controversial among neoclassical economists, this “Look East” policy nonetheless resulted in the formation of state-business ties, the accumulation of negotiation experience over technical upgrading, and the rationalization of industrial policy-making capacities that would continue to be harnessed as the country liberalized investment following 1985 (Khoo, 2012). Confronted with a mid-decade recession, the Mahathir government quickly opened up the investment policy regime. But far from epitomizing state rollback, these moves towards FDI-led growth also incorporated far more idiosyncratic strands of intervention for leveraging foreign investment for industrial priorities.3 From the vantage point of technological upgrading, such efforts reaped visible dividends: between 1992 and early 1998, the Malaysian Investment Development Authority (MIDA) approved 21 mainly foreign, high-technology projects worth around 14-billion Malaysian ringgit (Felker, 2001, p. 152).

Government gatekeeping in Thailand. A similar trend has been evident in Thailand. To solve balance-of-payments difficulties and respond to changes in the international economic context (the Plaza Accord devaluations), Thailand’s investment regime was liberalized throughout the 1980s and 1990s, with the Thai government loosening foreign investment restrictions to enable full foreign ownership of ventures exporting 80% of output as well as those establishing themselves in further-flung regions. Yet, even with liberalization, discretionary controls and state intervention have remained. Through upgraded local content programmes, joint venture-formation approaches, and the proactive efforts of the Thai private sector itself, the country was able to reap even greater success than Malaysia in fostering greater local business involvement in leading export industries, such as mould and die-making and metal parts fabrication.4  As such, the Thai case demonstrates the consequences of a local business-led approach to leveraging FDI for achieving national development goals, with the state kept in tow as a guarantor of domestic private interest.

Revisiting the role of the state in investment policy. If a political economy analysis of the Philippine investment experience reveals the pitfalls of a scattershot-liberalization investment policy, Malaysia and Thailand’s economic records attest to the centrality of appropriate government interventions in leveraging FDI for more successful industrial deepening. Not all foreign investment is likely to support domestic industrial upgrading, and even when those benefits exist, they will not automatically materialize. For this reason, strategic interventions remain necessary for attracting the right kind of foreign investment and fully harnessing the potential of such investment for local industrial development, technological upgrading and job creation. Ongoing industrial policy initiatives in the Philippines would be well-advised to pay heed to such lessons on investment-related intervention, so as to reform Philippine investment policies for maximum impact on long-term industrial development. [back to top]

About the Authors

Dr. Manuel Montes is a Senior Advisor on Finance and Development at the South Centre in USA. Jerik Cruz is a Lecturer at the Department of Economics, Ateneo de Manila University.

About the Policy Brief

This policy brief of Dr. Manuel F. Montes and Jerik Cruz is an abridged version of their paper presented at the policy forum, “Making Investments Work: Paradigms, Patterns, Prospects,” held on 24 November 2016 at Balay Kalinaw, University of the Philippines Diliman. It was organized by the Bugkos—”Asia in Transition” institutional research program of the UP Asian Center.  The policy paper was funded by the UP System Emerging Inter-Disciplinary Research Program (OVPAA-EIDR-06-27). [back to top]

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1 Unfortunately, international investment agreements, such as the Trade-Related Investment Measures (TRIMs) of the World Trade Organization, have curtailed the policy space of developing countries to undertake such interventions, forcing them to resort to indirect investment promotion activities. [back]

2 One might note that many issues with regard to the aggregate investment impact of portfolio flows had been observed before the Asian financial crisis of 1997–98 (Montes, 1997). [back]

3 Such strategic measures included, among others, the active solicitation of high-tech investments, the establishment of high-tech infrastructure complexes, intense technology-transfer bargaining, and supplier-developer schemes (Felker, 2001; Felker, 2003). [back]

4 By 1995, a Japanese International Cooperation Agency-led survey pinned down 402 electrical and electronics parts suppliers, 374 auto parts suppliers, the decisive majority of which were either fully Thai-owned or under joint-venture arrangements (79% and 97%); similarly, local businesses were able to make major inroads in resource-based agribusiness, textiles and light manufacturing (Felker, 2001). [back] [back to top]


Action for Economic Reforms – Industrial Policy Team. (2014). An Industrial Policy for the Philippines: Correcting Three Decades of Error. Action for Economic Reforms Framework Paper. Retrieved here.

Aldaba, R. (2013). Twenty Years after Philippine Trade Liberalization and Industrialization: What Has Happened and Where Do We Go from Here. Philippine Institute for Development Studies Discussion Paper Series No. 2013-21. [back]

Felker, G. (2003). New Policy Approaches to investment policy in the ASEAN 4. In Jomo K.S. (ed.), Southeast Asian Paper Tigers?: From miracle to debacle and beyond. London: RoutledgeCurzon. [back]

Felker, G. (2001). The Politics of Industrial Investment Policy Reform in Malaysia and Thailand. In Jomo K.S., (Ed.), Southeast Asia’s Industrialization: Industrial Policy, Capabilities and Sustainability (pp. 129–182), New York: Palgrave Macmillan. [back]

International Monetary Fund. (2009). Balance of Payments and the International Investment Position Manual (BPM6). Washington, D.C.: International Monetary Fund. [back]

Khoo, B. T. (2012). Development Strategies and Poverty Reduction. In B.T. Khoo (Ed.), Policy Regimes and the Political Economy of Poverty Reduction in Malaysia (pp. 25–72). New York: Palgrave Macmillan. [back]

Montes, M. F. (1997). Private Deficits and Public Responsibilities: Philippine Responses to Capital In-Flows. In Papers and Proceedings of the International Symposium on Macroeconomic Interdependence in the Asia-Pacific Region, Economic Research Institute, Economic Planning Agency, Government of Japan, March 1997, pp. 409–460. [back]

Montes, M. F. (2014). If you build it, will they come? G20 and BRICS Update, 19, 6–9. [back]

Montes, M. and Lunenborg, P. (2016). Trade Rules and Integration Trends and Human Development. Unpublished manuscript, South Centre, Geneva, Switzerland. [back]

Ostry, J., Loungani, P. and Furceri D. (2016). Neoliberalism: Oversold? Finance and Development, 53(2), 38–41. [back] [back to top]

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