American Investment

Following the establishment of American administration in the Philippines early in the 20th century, United States capital sought outlets in the development of electric power and other public facilities, in the development on a commercial scale of the sugar industry, and, with the advent of World War I, in expansion of the copra and coconut oil industries. American capital also participated in the formation of importing and sales organizations and to a lesser extent in real estate activities and financial undertakings.

Gold mining activities prior to World War II accounted for nearly a fourth of United States capital in the Philippines, including the investments of resident Americans, and for well over half the total investment in gold. Other fields in which Americans invested are lumbering, the growing and canning of pineapple, and the production of abaca and rubber. More recently, Americans have entered the field of manufacturing.

American direct investments rose to an estimated $188 million at the close of 1953 3 from $90.7 million at the end of 1940, the last prewar year for which returns were made to the U. S. Department of Commerce (see table 1). The doubling of the total during the 13-year period resulted from heavier investments in all main categories except agriculture.

In both years American capital was invested in the Philippines mainly in public utilities, which accounted for 40 percent of the total U. S. investment there in 1940 and for about 28 percent in 1953. Valued at $53 million in the latter year, compared with $36 million in 1940, investment in this category represented American ownership of or predominant interest in the leading electric power, telephone, and gas companies, as well as radio communication and shipping and other transportation companies.

Claiming $33 million of American capital in 1953, or more than double the 1940 figure, trade was the second most important field for American direct investment in the more recent year and third in the earlier. Petroleum, negligible in 1940 as a field for United States capital participation, was third in 1953, primarily in petroleum importing and distribution facilities.

While investments in manufacturing are not large, over the 13-year period holdings in this field more than tripled-from $6.9 million in 1940 to $25 million in 1953. Investment in agriculture, which was mainly in the sugar industry, declined from $22.5 million in 1940 to about $17 million.

American direct investments in 1953 were considerably larger in the Philippines than in any

* Estimate of the Office of Business Economics, U. S. Department of Commerce. This figure includes only those investments in which the controlling American interest is resident in the United States. The figure represents the book value of such investments rather than the market value.

A considerable portion of the increase in American investment in 1953 as compared with 1940 represented capital used in salvaging and reconstructing prewar facilities. Funds obtained in settlement of war-damage claims under provisions of the Rehabilitation Act were utilized, together with the reinvestment of earnings, in reconstructing existing American enterprises in the Philippines.

American venture capital, attracted by the urgency and extensiveness of Philippine consumer demands immediately following the war, also entered heavily the fields of trade and distribution. The unprecedented expansion in import trade, causing large losses in dollar reserves, brought about the imposition of import and exchange controls in 1949. As these controls became more rigid, new capital sought the protection thus offered domestic manufacturing.

Emphasis was placed on short-range projects involving relatively limited overhead, notably the manufacture and packaging or the assembly of consumer products, especially nonessentials, imports of which were materially restricted. The production of cigarettes, drugs, and toilet preparations and the assembly of motorcars were notable examples of industrial undertakings encouraged by economic controls.

The Department of Commerce data report U. S. direct investments in 1953 for other Far Eastern countries as follows, in millions of dollars: Indonesia, $88; India, $68; Japan, Korea, and Formosa, $89; Burma, Ceylon, Thailand, Indochina, and Iran, $24; and Pakistan, $8.

Although there has been considerable interest in investment in the Philippines and considerable expansion in some fields, in the aggregate the flow of new American capital to the Philippines since the war has not been large. Moreover, to date there has been relatively little postwar foreign investment in basic enterprises which did not exist prior to the war.

Recently, however, there has been a trend for capital, both domestic and foreign, to seek investment in industries of a more essential or substantial nature. This is reflected in the largest new American postwar investment, a petroleum refinery nearing completion as of late 1954, and in the aluminum mill financed by a combination of American and domestic capital which was about to be started.

A selected list of American firms operating in the Philippines and Philippine firms in which Americans hold an interest is given in appendix C of this study.

FIELDS FOR INVESTIGATION

Although the discovery, and evaluation, of specific investment opportunities is clearly the function of private initiative, a few observations on investment prospects in various fields of economic activity are included here.

Among the various factors which have a bearing on investment opportunities in the Philippines certain general influences, both external and internal, can be discerned. In the past, external forces represented by needs of the United States for basic raw materials were clearly a major factor influencing the character of the bulk of foreign investment and the timing of such ventures. The development of sugar and coconut production, for example, came when there was a high demand for these products.

Changed demand may mean that these fields are no longer as attractive for development but that other raw materials which the Philippines can produce offer opportunities for investment capital. The course of foreign investment will be particularly influenced by the Philippine domestic attitude and policies, more so than in prewar years before the country's independence.

The Philippine Government is attempting by various measures to encourage "new and necessary industries" and industries using domestic raw materials. Industries which result in "dollar savings or dollar earnings" are also generally considered favorably as they help to improve the country's foreign exchange position. Since there is no clear-cut priority as to industries which the Government will approve, the discussion below should not be considered authoritative but merely suggestive.

Agriculture

As a whole, agriculture does not appear among the most promising general fields for foreign investment, but certain aspects offer opportunities. Imports of foodstuffs account for almost one-fifth of the total import trade and the annual increase in population means an expanding domestic market. Large areas of arable land suitable for the cultivation of a variety of crops are available and the stimulation of manufacturing and other types of enterprises may tend to open up new outlets for foodstuffs and industrial raw materials.

Among the foodstuffs which seem to offer some investment possibilities are the production and processing of coffee, cacao, cassava, spices, fruits (bananas and mangoes), nuts (peanuts and cashew nuts), and vegetables.

The cultivation of Virginia-type leaf tobacco for domestic cigarette manufacture is being encouraged and may offer an outlet for foreign as well as domestic capital. Several fibers which have been produced only in small quantities appear promising. Saluyot and kenaf, for example, are both considered adequate substitutes for jute in the manufacture of bags of which the Philippines imports large numbers. Ramie has not been produced on a large scale although the Philippine Government has expressed interest in its increased production.

Philippine authorities have also indicated possibilities in cattle raising. Mindanao contains extensive virgin ranch lands and the development of beef herds would accelerate domestic meat production, reducing the present heavy imports.

Forestry, Fisheries, Mining

Timber and lumber production is an industry which has already attracted foreign capital, but the resources are sufficiently large to suggest further expansion if production costs can be kept at reasonable levels. Production of rattan and bamboo offer opportunities for expansion for export. Interest has been shown in the production of resins, cutch, derris, and lumbang (which produces a substitute for linseed oil). Some of this interest may be reawakened; abundant supplies await resourceful enterprise.

Expansion of fishing appears feasible if undertaken by experienced operator's with modern methods. In prewar years tuna from offshore areas was canned for export but this industry has not been revived. Systematized industries on a commercial scale may be possible for the production of sponges and other sea products.

Further exploration may open additional opportunities in the mineral field. Known deposits of chrome, copper, iron, and manganese seem to offer possibilities for investigation. Extension of present exploratory petroleum drilling may indi

cate possibilities in oil. Widespread deposits of clay suitable for the manufacture of ceramics have been little exploited.

Manufacturing

The manufacturing field offers the widest choice for investment. Products using domestic raw materials and/or replacing imports are in a particularly favorable position since these are being actively encouraged by the Philippine Govern

ment.

The processing of domestically produced agricultural, forest, and fishery products for domestic and foreign markets can be greatly expanded. Rope manufacture based primarily on abaca, one of the country's leading products, seemingly can be expanded. Production of textiles from domestic fibers is receiving considerable emphasis; these fibers include saluyot, kenaf, ramie, and pineapple or pina, which have not been aggressively marketed abroad. Coir, coconut husk fiber, is available in abundance and has some demand as a mattress fiber as well as being suitable for various woven articles.

Canning of fruits, vegetables, and fish seems promising. Cornstarch production was recently undertaken. The important sugar industry provides raw materials for the manufacture of alcohol and bagasse. The former may be used as a local fuel, whereas the latter is of interest in the manufacturing of rayon fiber, wallboard, and paper. Production of charcoal for industrial purposes from coconut shells and making wallboard from coconut husks have been mentioned as possible ventures.

Experiments have been made in the production of coconut oil from fresh coconuts as well as the manufacture of "gasoline" from coconut oil; if such processes are successful they would be of long-range interest. Local cigarette production is growing, based increasingly on domestic tobacco. Leather tanning can be expanded.

Pulp and paper production has been developed on only a small scale although domestic resources are large, and there is some interest in large-scale development. Plywood and veneer production is small, with potentialities for sizable expansion. The output of construction materials based on local products can be increased.

Since textiles constitute a major import and textile manufacture is generally considered desirable, the spinning and weaving of cotton and rayon is indicated by Philippine officials as a field requiring expansion. Potential needs for knit goods and fish nets have also been mentioned. Chemicals and drugs, rubber products, and metal products constitute other large groups of Philippine imports. Each offers possibilities for some new phase of processing or expansion of present pro

duction; appendix A indicates the current status in these fields. Additional handicraft production appears feasible; products such as rugs and mats, buntal hats, and woodcarvings are mentioned as examples.

In connection with manufacturing, it should be pointed out that important deficiencies hold back expansion in many lines. The inadequate commercial production of coal, and the lack of coking coal, is a handicap for some industries. The lack of skilled labor and the low level of labor productivity are handicaps in others. The high transportation and distribution costs in relation to the size of the market are other drawbacks to many fields of industrial development. Entry into ventures in the fields suggested above or in the many other possible types of manufacturing requires careful investigation.

PROCEDURE FOR INVESTMENT

There is no clear-cut procedure to be followed by all prospective investors. The steps suggested below may, however, be helpful, particularly to firms which have not operated extensively in foreign countries.

A useful first step is to become thoroughly familiar with both the opportunities, on the one hand, and the obstacles and risks, on the other, which investments of the type contemplated will meet in the Philippines. This volume has been designed to help in this process by providing a general introduction and a guide to further sources of information (see Bibliography).

A second step is to ascertain whether the general type of investment contemplated will be approved by the Philippine Government. In addition to guides indicated elsewhere in this volume, assistance in this matter may be obtained from the Philippine Embassy, Washington, D. C., as well as from the Bureau of Foreign Commerce, U. S. Department of Commerce, Washington 25, D. C. In Manila, the American Embassy and Philippine Government officials of the Central Bank, and the National Economic Council, can give service in this respect.

Another step, if the proposed investment is to include Filipino participation, is to locate a suitable partner. Assistance of the United States Foreign Service may be obtained by contacting any of the Field Offices of the Department of Commerce, located in major cities of the United States, or the Department's Bureau of Foreign Commerce in Washington. Banks and trade associations in the United States and in the Philippines can also be very helpful.

The next step, in most cases, is to prepare a concrete proposal of the specific investment planned and submit it to: (1) The Monetary Board of the Central Bank, and (2) other Philippine Govern

ment agencies as appropriate (the particular agencies depend upon the field of investment). Since all new enterprises that involve remittances abroad require the approval of the Monetary Board of the Central Bank, it is suggested that this approval be sought as soon as the proposal has taken concrete form.

Other agencies which may be concerned with an investment include bureaus and offices of the Departments of Commerce and Industry, Agriculture and Natural Resources, Public Works and Communication, and Finance. The Rehabilitation Finance Corporation and the Philippine National Bank may also be consulted in matters relating to the financing of some projects. The

early establishment of contact with the appropriate agencies ordinarily is desirable.

A final step is to complete the necessary legal requirements, such as obtaining licenses or filing with the proper authorities, where required, and drawing up agreements with Government agencies as needed to implement special arrangements (see chapter XIII for some of the requirements). Legal assistance may be arranged by the investor in the Philippines or through American attorneys who specialize in foreign law.

Early in the course of the investment procedure the need for further information will ordinarily call for first-hand observation of conditions by the investor or his representatives.