“Forging stronger links to the global supply chain” by Cirilo P. Noel (April 23, 2012)

Business World (04/23/2012)

Recently, there has been much praise for the evident turnaround in the Philippine economy, and its rising global competitiveness. In fact, this discussion was a highlight at the recent Euromoney conference titled Philippines Investment Forum: The New Beginning. The focus was on how the Philippines is being considered a leading investment destination in Asia, particularly with the administration’s long-term efforts to sustain economic and infrastructural growth.

One of the key discussions during the conference was the role the Philippines can play in the global supply chain. Just like companies, national economies also compete in the global market place for investments and the trade of products and services. Countries have to woo customers – in this case, multinational enterprises (MNEs) – to bring in fresh foreign direct investments (FDIs) and/or to expand their current operations and presence in the country. MNEs are increasingly looking to build regional/global supply chains in emerging markets as a vital component of their business process.

Technology and circumstances have significantly changed the nature of globalization; countries are now more interconnected than ever. We can see this clearly in the increasing levels of cross-border trade and inter-government cooperation. In particular, MNEs are engaging supply chains to support rapid expansion to enable them to capitalize on the growing number of middle-class buyers in emerging markets. They are further developing their existing supply chains to attain cost efficiencies and boost margins in their mature market operations. On the other side of the coin, governments are also working more closely together to ensure consistent standards and regulations to benefit all parties, as well as promote the growth of trade.

This article will present arguments for building regional or global supply chains; the assumption is that MNEs have already made this decision and are now shopping around for the best location to establish a corporate beachhead. As one of the panelists at the conference’s discussion on FDIs and supply chains, I would like to share my views on why the Philippines, with our recent performance, is becoming increasingly attractive to MNE supply chain agendas.

1. Based on the World Economic Forum’s Global Competitiveness Report 2011-2012, the Philippines is back in the game. The country now belongs to the upper 53% of economies in terms of global competitiveness. The same report also highlights that the Philippines has started to enter the transition phase from a factor-driven to an efficiency-driven economy, given its GDP per capita of US $ 2,007 last year.

It is also noteworthy that the Philippines ranked 37 out of 60 countries in the global economy, with an average score of 3.68 in the Ernst & Young Globalization Index Report of 2011. The global index captures the key aspects of cross-border integration of business, particularly in terms of: a) openness to trade; b) capital investment; c) exchange of technology and ideas; d) labor movements; and, e) cultural integration.

In the latest Logistic Performance Index (LPI) of 2010, the Philippines ranked 44th among 155 countries, with an LPI score of 3.14 or 69% of the highest performer (Germany). Among its lower middle-income peers, the Philippines ranked 3rd behind China (27th) and Thailand (35th). The LPI report cited the Philippines among the ten most significant over performers.

2. The current administration’s good governance agenda towards strengthening institutions has brought optimism and reinvigorated business sentiments. Local and foreign investors have a renewed confidence in the Philippines as a global/regional player and its potential for business investment. This bodes well for the country; it is the break that we have been hoping for in the past several years.

To help sustain this, government has developed more investor-friendly policies. We have, to name a few, the liberalization of foreign exchange; deregulation of certain sectors such as banking, energy, insurance, telecom; and opening the economy by allowing 100% foreign ownership in different sectors and establishing more special economic zones and industrial estates offering Income Tax Holidays or 5% preferential tax rates based on gross income in lieu of all taxes for companies located in these zones.

3. The Philippines offers a young, educated and English-literate workforce that is highly trainable in various fields. Filipinos generally have a very strong work ethic and are highly dedicated to their careers.

We also have a huge market for goods and services with a population of over 93 million, many of whom are young, with over 60% or over 50 million Filipinos between the ages of 15 and 64 contributing to a consumer-driven economy enhanced by increased purchasing power from Overseas Foreign Worker remittances.

4. The Philippines observes laws and regulations that protect investment and/or guarantee the basic rights of all investors and enterprises such as remittance of profits repatriation of capital and protection of intellectual property rights.

5. The Philippines has existing bilateral, regional, and multilateral agreements and is an active member of the WTO, ASEAN, AFTA, APEC. These undertakings show that the Philippines is very active in the community of nations.

6. There are tax treaties in effect that protect investors. There are 38 tax treaties that help avoid double taxation, with 7 more pending ratification. The country also has tax information exchange agreements.

These key attributes are assets that need to be protected and further enhanced. The challenge now is for government to sustain its programs for instituting regulatory reform to improve the overall investment climate in the country. It must not lose sight of the ever-growing burden of bureaucratic and complex regulatory obligations, balancing the need to attract investments with unpopular measures such as: (1) improving fiscal health via higher tax rates, raising tariff, and quota barriers; (2) instituting trade measures that encompass currency devaluations and pricing intervention; and (3) avoiding protectionism.

All parties have to be constantly reassured of a level playing field. Both foreign investors and local companies have been yearning for clarity of rules, consistency, adherence to precedents and certainty of regulatory rules and processes.

A case in point is the area of taxation. As both a regional and global player, the Philippines has to level up with the best practices and norms of international taxation, such as transfer pricing, mutual agreement procedures and advance pricing agreements with treaty countries.

Government and the private sector should stay connected through effective collaboration and constant dialogue. In essence, a working partnership between the two groups in developing policy is a necessary step in the right direction.

The Philippines is now poised to regain recognition and respect as a regional and global player in business. We have much to offer. Let us not lose the momentum; let us seize this opportunity to accelerate our development as a country and as a people.

Cirilo P. Noel is the Chairman and Managing Partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.