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Rechanneling Investments from Private to Business to Nation-building | A Policy Brief

Written by Luis F. Dumlao on .

Since 2012, the economy has become one of the fastest growing in the world. In the process, even if the economy remains to be a consuming economy, it has slightly become an investing one. However, investment expenditure may tend to be confined to private gains as opposed to first, business gains, and second, gains in nation-building. VIEW PDF

Consuming economy and investing economy

From the expenditure point of view, the economy remains to be a consuming economy. From 2000 to 2007, the share of household consumption increased from 71% to 77% while the share of investment decreased from 22 to 17%. This went down to 72% in 2008 and 73% in 2009, at the time of the global financial crisis.

The description of the economy remained the same from 2010 to 2012 with relatively the same shares of consumption, investment, and government consumption. But 2012 was a turning point. As the economy began to outgrow the world, the share of consumption decreased from about 70% to the present 65%, while the share of investment increased from 19% to the present 25%. With the share of government consumption relatively constant at around 10%, what the changes reveal is that the private sector has begun apportioning more of its expenditure from consumption to investment. 

The growth in capital formation has been led by sub-expenditure categories construction, posting 15.7% growth, and durable equipment with 11.3%. The average percentage share of construction in capital formation is 39% and durable equipment is 51%. So it must be true that either households or government or both has been investing particularly in construction and durable equipment.

Investment in private, in business, and in nation-building

Consider the following distinctions between investment for private gains, investment in business, and investment in nation-building. The expenditure on home improvement is an investment because the expenditure raises the value of the property. To the extent that the property is used as a home, or privately, but not as a shop, a factory, or an office, or other commercial or public enterprise,  then the investment is classified as investment for private gains. Investment expenditure can also be in the form of buying financial instruments as those offered by financial institutions and those offered in the financial markets for stocks and bonds. As such, we classify the purchase of financial instruments issued by the private sector as investments in business.

Finally, we define investment in nation-building as expenditure on financial instruments issued by the government. Some examples include the purchase of government securities that finance expenditures on infrastructure, education, social welfare, and others that literally contribute to nation-building.

Investing in business

Given that not all can be entrepreneurs at the same time, this paper discusses further why non-entrepreneurial households invest more in private gains as opposed to in business gains. To the extent that lack of both accessibility and inclusion in the formal financial markets limits households’ ability to invest for business and nation-building, households will tend to invest more for private gains.

The concentration of general economic activity of financial institutions seems balanced with income. In terms of accessibility and inclusion, the allocation of financial resources seems to benefit the National Capital Region (NCR) at the cost of the rest of the country. While deposit liability is savings to defer expenditure, loans are to advance expenditure. Hence, while deposits are leakages to the economy, loans are injections. In the NCR, the share of leakage is 67.6%, while the share of injection is 85.3%, making it a 17.7% net recipient of financing. The rest are the opposite. For example, Region 4A’s share of leakage is 6.8%, while its share of injection is 2.0%, making it a 4.8% net benefactor of financing.

Instead of savings, which are investments in the financial markets through banks, households can invest through the securities markets. This would be the case of a household investing either in stocks in the Philippine Stock Exchange (PSE) or in stocks, bonds, and others in the Philippine Dealing and Exchange Corporation (PDEx). Whether households will do so depends on whether  the rate of return on investment (ROI) at least matches the market’s required rate of return.

It turns out that the latest estimate says the ROI is only 39% of the market’s required rate of return (Dumlao, 2006) and the estimate in a separate study (Gugler, et. al., 2003) is not much different in the group to which the Philippines belongs. That is, for every PhP 1 of return investors get in the rest of the economy, they get 39 centavos from investing in the PSE. 

Here is the case of a firm with perfect corporate governance. It has an unrealized asset of PhP 1,000 which, for example, includes the value of the physical work station and equipment. In the process of conducting business, the firm acquires operating revenue of PhP 100. On the liability side, the firm owes PhP 1,000 worth of equity and PhP 100 worth of dividends to its stockholders. Assuming that there are 10 stocks, the price of each is PhP 100 and the dividend for each is PhP 10, resulting in an ROI of 10% per stock. The firm delivers an ROI equivalent to the opportunity cost of investment. The result is a one-to-one ratio, a Tobin’s q of 1 or a perfect corporate governance score of 1.00.

In the case of a firm with a corporate governance of 0.40 in the Philippines, the unrealized asset and equity are the same as the above example, and in the process of conducting business, the firm acquires an operating revenue of PhP 100. Since the family manages and owns the firm at the same time, there is never a conflict of interest and so the family chooses the best investment ventures. However, the management expropriates minority stockholders by allocating PhP 60 for themselves and paying PhP 40 worth of dividends. Consequently, the ROI for each stock is 4%. The firm delivers an ROI that is only 40% of the opportunity cost of investment.

Another case is when that management expropriates minority stockholders by allocating PhP 36 for themselves, PhP 24 for social advocacy under the heading of corporate social responsibility (CSR) and paying PhP 40 worth of dividends. The result is an ROI of 4% that is only 40% of the opportunity cost of investment. Assuming the same distribution of ownership of stocks, the management distributes the PhP 36 among the six family managers at PhP 6 each. Distributing the PhP 40 dividends among the ten stockholders gives each PhP 4. The result is that instead of each stockholder receiving PhP 10, each family member stockholder receives PhP 6 + PhP 4 or PhP 10 as they should in the case of perfect corporate governance, while each minority stockholder receives PhP 4. In other words, family majority ownership donates to social advocacy as part of CSR but at the expense of taking from minority ownership.


To the extent that investing in business and nation-building requires participation in the formal financial markets and that evidence indicates participation in such markets is low, it is argued that the increasing investment has primarily been devoted for private gains.

Two important factors that make households invest more in business are entrepreneurial mindset and management skills. But even with such, investment in business is argued to be constrained by the investing public’s lack of financial inclusion. But even if reforms are advanced to make the formal financial institutions more inclusive, investment in business will be constrained to the extent that not all in the economy can be entrepreneurs at the same time. The good news is that others can invest in publicly listed firms. But the incentive to do so is not promising because of the lack of corporate governance.

That is, even if the system allows for anybody to invest in corporate Philippines, the investing public will be discouraged given that the ROI will be typically less than the opportunity cost. The obvious policy recommendation is to improve corporate governance.

One might argue that government can only borrow so much and therefore can only offer so many government securities to the investing public and thus limit the size of the market for investing in nation-building. Thanks to the size of the gross international reserve (GIR). The government need not increase its debt to increase the size of the market for investing in nation-building. In “external debt management,” the government increases the size of the market by increasing the part of the total debt that is financed by the investing public. In “active inclusion,” the government uses the GIR either as a collateral asset or as direct source of finance in nation-building. The government has not used either. 

About the Author

Dr. Luis Dumlao is the Dean of the John Gokongwei School of Management and former Chair of the Department of Economics of Ateneo de Manila University. 

About the Policy Brief

This policy brief of Dr. Luis Dumlao is an abridged version of his 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 That is, whether the rate of ROI > market rate of return or i > r.


Dumlao, L. (2006). Economic Assessment of Corporate Governance. Loyola Schools Review, 4, 31–64. [back]

Gugler, K., Mueller, D.  & Yurtoglu, B. (2003). The impact of corporate governance on investment returns in developed and developing countries. The Economic Journal, 113 (491), F511–F539. [back

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