CHAPTER I

Foreign capital has long played a prominent role in the Philippines and it can be of major importance in the future development of this new nation. A large part of the total foreign investment for many years has been American, and private investment capital reaching the Philippines from abroad contínues to be largely American.

Future American investment can be expected, but the amount of such investment will expand at an accelerated rate only with a favorable investment climate. Thus in this book an attempt is made at the outset to appraise the general investment climate, which shows some signs of improvement, and to point out present factors favorable and unfavorable to investment.

POLICY ON FOREIGN INVESTMENT

Philippine officials of every administration since independence in 1946 have stated that the national policy is one of welcoming the entry of private foreign capital as a necessary element in economic development. They have emphasized the need for foreign enterprise capital and technical assistance in making adjustments necessary to change the Philippine economy from one dominated by the production of raw materials to one which is more diversified and balanced. Leaders, in expressing the desire to increase industrialization and to raise the living standards of the people, appear fully aware that domestic capital alone cannot achieve these ends.

An expression of welcome to foreign investment, as well as the intention of improving the investment climate, was summarized by President Magsaysay in his state-of-the-nation address in January 1954: "We welcome foreign capital, assuring it fair treatment. I propose that we work out clearly a stable basis on which foreign investors can put their capital to work in this country."

Although much remains to be done to achieve the aims indicated by this statement and those of other leaders, steps have been taken that indicate new efforts on the part of the Philippine Government to attract foreign investment. These include the dispatch of a Presidential group to the United States in the fall of 1954 to seek out reasons for the hesitancy of American capital to invest in the Philippines and preparatory work toward a for

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eign investment law. Other basic steps toward improving the investment climate are expected to follow.

FACTORS AFFECTING INVESTMENT

Favorable Aspects

In addition to the Government's stated policy toward foreign investment, there are a number of other favorable factors. Important ones are summarized briefly here and some of them are discussed in further detail elsewhere in this volume.

The United States and the Philippines have had a close political and economic association for more than 50 years. Although the two countries are now politically independent of one another, their mutual interests and their continuing friendship and good will constitute a strongly favorable basis for American investments. The strategic position of the Philippines in southeast Asia, reflected in the several mutual defense agreements, underlines the United States stake in the well-being of the country. Economic assistance provided by the United States, which was large during the early postwar years, is being continued on a smaller scale through a Foreign Operations Administration program as well as Export-Import Bank assistance. Foreign trade, which is predominantly with the United States, adds to the economic ties of present American investment in the area.

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In contrast with the situation in a number of new nations, the Philippine Republic has a stable government. Moreover, the communist-led "Huk" movement which was a source of internal dissidence and unrest several years ago has been successfully checked.

The country's economy has, for the most part, been rehabilitated since the end of World War II, and is functioning at a level higher than before the war. The economy now shows considerable

In

1 Several bills which would establish a basic foreign investment law were introduced in the Philippine Congress in early 1955. the event that a foreign investment law is passed the text of the law will be reproduced by the Bureau of Foreign Commerce, U. S. Department of Commerce.

The Foreign Operations Administration (FOA) continued programs started under its predecessor agencies, Economic Cooperation Administration (ECA) and the Mutual Security Agency (MSA). After this report was written, FOA functions were taken over by the International Cooperation Administration of the U. S. Department of State.

stability as compared with the critical period of a few years ago. Steadier prices have been achieved and the international reserves have been generally maintained at adequate levels. The Government is showing a real awareness of the country's major economic problems.

Within the broad area of United States-Philippine relations, certain privileges and advantages not usually met elsewhere accrue to American citizens and corporations in the Philippines. In recognition of the fact that the new Philippine nation could not rebuild its devastated economy without outside private capital, in addition to the financial aid extended by the United States Government, the United States-Philippine Trade Agreement of 1946 granted Americans and American corporations equal rights with Filipinos and Philippine corporations in the disposition, exploitation, development, and utilization of natural resources and in the operation of public utilities. Natural resources are listed as including "all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces and sources of potential energy and other natural resources of the Philippines."

The so-called "parity" rights thus guaranteed the rights to Americans during the life of the agreement (until 1974). The "parity" provision has been interpreted by Philippine authorities as granting Americans national treatment also in land ownership.

Any change in the legal rate of the Philippine peso or any restriction on the flow of funds to the United States, without consent of the President of the United States, is also prohibited by the 1946 trade agreement, which has provided, in the eyes of American businessmen, additional protection.

Tax incentives and governmental regulations have been established to encourage particular industries. Private industrial enterprises, foreign as well as domestic, meeting criteria as "new and necessary" are exempt from internal taxes for a period of several years. Nor has the foreign exchange tax, levied on most remittances since 1949,

In 1946, shortly before the scheduled date of Philippine independence, the U. S. Congress enacted as companion legislation two laws designed to assist in the rehabilitation of the Philippine war-torn economy and to establish a period of mutually advantageous trade relations. These laws passed by the 79th Congress were the Philippine Rehabilitation Act of 1946 (Public Law 370) and the Philippine Trade Act of 1946 (Public Law 371, sometimes referred to as the Bell Act). A trade agreement signed in Manila on July 4, 1946, implemented the Philippine Trade Act and is almost identical with it. Various aspects of the 1946 trade agreement are discussed in later chapters and the full text is provided in appendix E.

In 1953 the Philippine Government requested revision of the trade agreement and in December 1954 the United States Delegation and the Philippine Economic Mission reached agreement on a revision of the agreement to be recommended to the Congresses of the two countries. The full text of the recommended revision, which is known as the Final Act of Negotiations Relative to Revision of the 1946 Trade Agreement between the United States and the Philippines, is also included in appendix E. References to the trade agreement in this report do not reflect changes proposed by the Final Act.

The Philippine Constitution limits the disposition, exploitation, and utilization of natural resources and the operation of public utilities to Filipinos and Philippine firms, and it is through the trade agreement and a Constitutional amendment covering the period to 1974 that American citizen and firms are granted equal rights.

been applied on remittances in payment of raw materials imported for such industries. Moreover, certain aspects of import control regulations are designed to foster industrialization by facilitating imports of producer goods.

The general level of profits accruing to foreign investors in the Philippines is high, usually higher than on comparable investments in the United States. Taxes, although increased considerably in recent years, are not exceptionally high as compared with those of many other countries. Remittance of profits and repatriation of capital seem not to have caused major difficulties despite a tight foreign exchange position in part of the postwar period.

The Government's general adherence to principles of private enterprise and welcome to foreign capital makes the likelihood of expropriation seem remote. Moreover, the Industrial Guarantee Program of the Foreign Operations Administration, extended to the Philippines in 1952 by agreement between the Governments of the United States and the Philippines, offers American investors an opportunity to insure against nonconvertibility and/or expropriation.

Although the Philippine Government participates to some extent in economic fields ordinarily reserved in the United States for private initiative, there has been no move toward comprehensive nationalization or state ownership. The Government has turned over some of its enterprises to private business, and statements of its officials indicate that the Government does not plan in the long run to be a large investor.

Local capital, although limited, is larger than in many of the other less industrialized countries, and has shown some willingness to join foreign capital. With reorientation, local financial resources can play an important part in development enterprises in cooperation with foreign capital.

The prevailing types of business structure are those common in the United States, facilitating investment. Many of the laws governing business operations are similar to those in the United States, the commercial code in particular showing American influence. Recent labor legislation has also been patterned to a considerable degree after that of the United States.

Labor in general presents no problem to investors. A surplus of manpower exists. Labor is literate and foreign firms operating in the Philippines have found on the whole that Filipinos are adaptable to technical training. The last few years have seen progress toward the development of democratic trade unions.

There is no language barrier. English has long been the language of instruction and is the language of government, trade, and industry. Urban Filipinos, moreover, are familiar with American ways and have adopted to a considerable degree American habits and tastes.

Although full information is not available concerning Philippine resources (especially mineral reserves), the country is known to have abundant arable land and forest resources and some important industrial minerals.

The strong emphasis on economic development in the Government's planning, coupled with the growing recognition of many Philippine officials of the need to attract foreign capital, favors future investment. Steps to ease the path of foreign investors in fields considered desirable by the Philippines can be expected.

Less Favorable Aspects

Notwithstanding these aspects which tend to create a favorable climate for the American investor, a number of factors have served to deter or to delay foreign investment in the Philippines in recent years. Some are in part the result of conditions outside the country, especially those related to general world security. Others are the outgrowth of basic economic conditions, or policies and regulations, within the Philippines. External influences are common deterrents to investment in many areas throughout the world today. The last-mentioned factors vary widely in importance, especially with respect to different types of enterprise. Some are transitory; others may have long-range significance.

The postwar political situation in the Far East, marked by hostilities in Korea and Indochina, has not been favorable to investment. Communist aggression and subversive activity continue to be potential threats, but Philippine participation in recent mutual defense alliances, the country's success in combating the Huk menace, and its vigorous program to insure satisfactory internal security conditions reduce this threat so that it is much less than in most areas of the Far East.

The difficult economic conditions of the early postwar years, characterized by recurring budgetary deficits and balance-of-payments difficulties culminating in the financial crisis of 1949, delayed expansion into new productive fields. Since that time there has been considerable economic progress as indicated by reduced budgetary deficits, price stability, and increased foreign exchange

reserves.

Despite such improvements there are still weak spots in the economy. The 1954-55 budget calls for record spending which contributes to inflationary pressures, and unemployment is at a high level. The increase in production is barely keeping pace with the population growth.

Owing to financial difficulties it was necessary for the Philippine Government several years ago to impose economic controls, including restrictions on the remittances of profits and dividends and capital transfers, imposition of a tax on foreign exchange transactions, and the establishment of import controls. All new investments involving

remittances require prior approval of the monetary authorities of the Central Bank, as do all transfers of capital. These restrictions, which were considered at the time of institution as temporary measures, have continued since 1950 and can be expected to remain in some form or other. The tax on foreign exchange remittances abroad (at present 17 percent) has met with particular criticism on the part of American investors and potential investors. Although industries considered "new and necessary" have been exempt from this tax for several years and recent changes have broadened exemptions generally to include imports of equipment for industries and mining enterprises, some businessmen believe that this tax should be confined to trade transactions so as to make investments more attractive.

There is perhaps more accumulation of private savings in the Philippines than in many of the less developed countries of the Far East, but the funneling of domestic capital into economic development, especially manufacturing, is limited. The prevailing view in the United States is that an American company considering investment abroad prefers to have local capital associated with it, to share the risk and to assist in making the necessary community and commercial adjustments. Unless there are further savings and further channeling into fields other than real estate or the present major export products, there will not be as large a pool of native capital as desirable on which to draw for such partnerships.

At present the Philippines is deficient in certain basic resources and facilities of importance to the industrial investor. Serious shortages of power and fuel have not as yet been overcome, although persistent progress is being made in that direction. With the exception of excellent air services, domestic transportation facilities on the whole are underdeveloped. Internal distribution, moreover, presents problems resulting from the concentration of distribution facilities in Manila and also the prominent role of middlemen.

As in many countries, Government planning plays a more important role in the Philippine economy than formerly. There has been progress in such work and a proposed economic development program for 1955-59 was announced in early 1954, but the Philippine Government has not finalized a long-range plan which would provide potential investors with a clear understanding of the fields of endeavor which are most desired and which are open to private business. This lack may, however, be overcome when the National Economic Council, charged with making studies of the feasibility of specific industrial development projects for the use of prospective investors, progresses further in its investigations.

Although the Philippine Government is not as heavily in business as are the governments of some of the other less developed countries of the world and there are some indications that it may move

away from state enterprises, the lack of a clearcut, long-range policy regarding governmental activities in the fields of industry and trade adds to the uncertainties confronting potential investors. The Government is now operating textile mills, cement plants, a fertilizer plant, and a steel mill. Private companies are sometimes reluctant to erect plants in fields of production in which the Government is the major producer.

The general lack of experience among Government personnel and the inefficiency of many Government operations have added to the problems of foreign firms doing business in the Philippines in the postwar period. In particular, frequent changes in the administration of rules and regulations have been the cause of widespread criticism. Although a greater sense of responsibility is developing, and the general level of efficiencyespecially in the field of import controls and in tax collection is improving, inadequacies are still apparent in public administration.

The tendency to reserve some economic activities for Filipinos or to greatly increase their participation through laws or regulations is viewed with misgivings by potential investors. In 1954 a large number of "Filipinization" bills were introduced into Congress and one was passed (the Retail Trade Nationalization Act). It is recognized that the proposals were aimed principally at resident Chinese; however, the number of bills, the strong support they received, and the fact that some proponents considered them applicable to all foreigners, all indicate an antiforeign sentiment in the Philippines which is inconsistent with the expressed policy of welcoming foreign investment.

For many types of business the Philippine market alone is considered too small because of the low per capita income of most of the people (although higher than in many Far Eastern countries). Moreover, since industrial operating costs in the Philippines are relatively high (as a result of such factors as lack of basic facilities, low labor produc

tivity, shortage of skilled labor, and the need to import essential ingredients), conditions in the country are not sufficiently attractive to many manufacturers who would find business profitable only if they could sell to export markets as well as in the domestic market.

To potential investors interested in the longrange development of natural resources the lease terms are considered too short. Virtually no natural resource may be leased for more than 25 years, with one renewal for 25 years permitted. Moreover, although through the "parity" provision of the trade agreement of 1946 Americans are granted the right to exploit natural resources, there is no assurance that this situation will continue after 1974.

Important uncertainties have existed recently concerning the future economic relationship between the United States and the Philippines as established in the trade agreement. The agreement reached in December 1954 by delegations of the two countries to recommend to their respective Congresses a revision of the trade agreement has partially dispelled these uncertainties which will be fully removed when final action is taken by both countries.

On balance, present conditions in the Philippines, although not exceedingly attractive for American investors, are better than they were a few years ago and better than in many other foreign countries.

In the eyes of some prospective investors the unfavorable factors outweigh the favorable aspects. Others, willing to venture the risks and difficulties involved and challenged by the opportunities, are giving serious consideration to investment possibilities in the Philippines. Many of the unfavorable factors can be corrected and Philippine officials are giving attention to making such changes.