Government Investment News Analysis

In Vietnam’s wake

Some South Korean companies are looking west from the Philippines; they see a land which offers them better prospects. Many of their compatriots are already there; well established.

Some South Korean companies are looking west from the Philippines; they see a land which offers them better prospects. Many of their compatriots are already there; well established. It’s a land where electricity, communications and people cost less, where transport logistics are better, where there’s less red tape, where doing business is easier. That land is Vietnam – and if that trend builds, the Philippines’ loss of Korean enterprises will be Vietnam’s gain.

It’s only a tiny trickle right now, but if it persists it’ll be a severe blow to a stuttering Philippine manufacturing sector which the present government has pledged to invigorate. It won’t help foreign direct investment (FDI) prospects either, and the knock-on effects will telephone through the rest of the Philippine economy. So how has this happened?

A look back in time makes this shift even more remarkable. Prior to 1986, Vietnam had been a centrally planned peasant economy, economically isolated from the wider world. Then, in that year, it launched its Doi Moi Policy and went hell for leather to create a socialist-oriented market economy, pulling out all the stops along the way as it opened up to the world. In terms of rapid economic development, it’s one of the finest examples anywhere.

Back then, the Philippines had already been a member of the General Agreement on Tariffs and Trade (or, the GATT) – the forerunner to the World Trade Organization (WTO) – for seven years. Moreover, the Philippines joined the WTO in 1995 becoming its 95th member; it would be another 12 years before Vietnam acceded as the 150th member of the organisation.

And so while the Philippines already had treaties and an international trade infrastructure in place, Vietnam was starting from scratch. But it wasn’t interested in just playing catch-up; its plan was to get ahead. And it did.

The Vietnamese entrepreneurial spirit, unleashed by Doi Moi, saw the number of newly registered private companies rocket. In 2002, the government introduced its Enterprise Law – disposing of unnecessary business licences and permits and lowering the time and cost of registration. In 2000 there were 14,457 newly registered private concerns in the country; four years later there were 95,357. Pretty good for a communist state just learning the ropes of capitalism.

By comparison, the Philippines didn’t seriously get down to rationalising its cumbersome and unnecessarily processes and costs for starting businesses in the archipelago until 2012. That’s when the last administration unveiled its “Gameplan of Competitiveness” – spurred on by the country’s embarrassing performances in that year’s World Bank Ease of Doing Business Index.

Bogged down by the all-too-familiar bureaucracy overload, however, it would be 2015 before those reforms took effect. But they certainly helped. In the 2016 Index, the Philippines recorded a 54-place improvement from 2012.

But Vietnam hadn’t been resting on its laurels either. In the World Bank’s 2017 Ease of Doing Business report, the Philippines is ranked 99th out of 190 countries world wide; Vietnam is in 82nd position. For ‘Ease of Starting a Business’, the Philippines is placed 171st; Vietnam, 121st.

And elsewhere it gets worse with the Philippines lagging Vietnam in six more of the 10 categories of assessment. And mostly by a considerable margin. For ‘Dealing with Construction Permits’, Philippines, 85th; Vietnam, 24th. For ‘Registering Property’, Philippines, 112th; Vietnam, 59th. For ‘Getting Credit’, Philippines, 118th; Vietnam, 32nd. For ‘Protecting Minority Investors’, Philippines, 137th; Vietnam, 87th. For ‘Enforcing Contracts’, Philippines, 136th; Vietnam, 69th. For ‘Trading Across Borders’, Philippines, 95th; Vietnam, 93rd.

Furthermore, the World Economic Forum 2017 Global Competitiveness Report lists the Philippines’ “most problematic factors for doing business”, in order as: inefficient government bureaucracy, inadequate supply of infrastructure, corruption, and tax rates – all areas where Vietnam has proved to be far better equipped having already implemented a raft of reforms to address them.

Now it seems we can add to that the ‘Cost of Doing Business’. According to Ho Ik Lee, president of the Korean Chamber of Commerce in the Philippines, costs in the archipelago are “almost three times higher than in Vietnam”. For start-ups that makes the Philippines prohibitive – and, according to Lee, it’s those costs coupled with little reward for them that’s prompted the relocation of a number of Korean companies to Vietnam.

Higher costs “is killing manufacturing and that is why the Korean companies are leaving and moving to Vietnam,” he said. These firms are mostly in the labour-intensive manufacturing sectors – garments and electronics. Poor infrastructure and high logistics costs have dampened incentives to remain. He also alluded to the Bureau of Customs but didn’t elaborate; though we have a good idea what he left unsaid.

“We’re not saying open your country, all of it. We just ask your country [to meet the] same level as other Asian countries like Indonesia and Vietnam,” Lee said. He had in mind the 60:40 rule, a provision in the Constitution and certain laws – such as the 1991 Foreign Investments Act – which limits foreign equity in the Philippines to 40% while prohibiting foreign participation completely in certain industries.

This rule, which has allowed Philippine oligarchs to remain big fish in a small pool generation by generation, has been defended by them from time immemorial as a means of safeguarding Philippine sovereignty. But while national pride is one thing; national stupidity is another. Restrictive policies such as that have played right into the hands of Vietnam and other regional competitors – and continue to.

We’re sure Hanoi would love for the Philippines to retain its protectionist 40% rule – after all, it’s one of the best adverts they could have for doing business in Vietnam where wholly foreign-owned private businesses are not just permitted, they’re encouraged. That’s been part and parcel of the country’s opening up and has provided a significant impetus to its success. Foreign-owned small businesses in Vietnam are common; while the presence of international firms and franchises continues to grow year by year.

In 2015, the Vietnamese Government decided to relax its rules on foreigners even further. It implemented its new Law on Enterprise and its new Law on Investment. Between them, these two pieces of legislation did away with most foreign-ownership restrictions in private Vietnamese companies. It also adopted Decree 60, allowing foreign ownership in public companies. The result of all that is that today, according to the International Monetary Fund (IMF), Vietnam is one of the world’s “most open” economies.

It’s not surprising then, with that amount of market liberalisation that FDI piled in. In 2016, Vietnam’s actual FDI inflows hit a record US$15.8 billion – up 9% on the previous year. The Philippines, meanwhile, managed to attract just US$7.93 billion – though that too was a record.

Furthermore, while the Philippines has done precious little to help boost manufacturing – having the second highest electricity costs in Asia is just one factor – Vietnam has been setting out its stall specifically to attract foreign participants to the sector.

According to the IMF, Vietnam has produced the biggest market-share growth in low-end manufacturing of any country in recent years. But it didn’t stop there – it also targeted electronics manufacturing and managed to gain the highest market share for finished products with the exception of China.

Now we come to South Korean participation in the Vietnam market. US$51.6 billion of Korean FDI was in Vietnam as of November last year. In the first quarter of this year, South Korea took over from Singapore as the largest investor country in Vietnam, accounting for 48.6% of total FDI pledged for that period. Meanwhile, South Korea was the sixth largest FDI investor in the Philippines in 2016 accounting for 7.4% of inflows.

Vietnam’s biggest corporate investor is South Korean electronics leviathan, Samsung, which produces more than 40% of its mobile handsets there (photo). Hyundai Heavy Industries operates a shipyard there in partnership with the state-owned Vietnam Shipbuilding Industry Group (or, Vinashin). These companies are components of South Korea’s two biggest chaebols (corporate conglomerates) and their commitment to Vietnam is deeply rooted.

According to the Embassy of the Republic of Korea in Hanoi, low labour costs, political and social stability and a solid skills base are the key attractions for South Korean investors going to Vietnam. But there’s another factor which shouldn’t be underplayed – culture. There’s a far greater affinity between Koreans and Vietnamese, who share a Confucian heritage, than there is between Koreans and Filipinos who don’t.

Generally speaking, this makes Koreans more comfortable in doing business with the Vietnamese whom they find more pragmatic and certainly far less bureaucratic, facilitating business decisions and allowing projects to get off the ground with minimal delay; minimal red tape – and at far less cost.

It’s almost as if the Vietnamese had been studying the Philippines’ weaknesses and putting in place their own very-contrary policies to attract foreign enterprises and foreign cash. For while the Philippines continued to deter overseas investors with its outdated policies, bureaucratic assault courses and gouging rates, Vietnam went in entirely the opposite direction by reducing costs, simplifying processes and fully embracing every part of the free-market doctrine.

None of this should come as a revelation. This present government in Manila is as aware of the shortfalls in Philippine competitiveness as the previous one was – and the one before that, the one before that, the one before that and the one before that. From the start of Corazon Aquino’s presidency in 1986, the country’s bureaucracy has swelled admin by admin producing seas of red tape and ever greater scope for corruption.

Filipino politicians have pontificated about the need for economic reforms with the regularity of the rising sun – great campaigning speeches; stirring; visionary. And with the regularity of the setting sun, the campaigns faded – the speeches little more than hollow words as vested interests with deep pockets made sure the country’s “sovereignty” was protected from foreigners with money, expertise and ideas. And all the while, Vietnam put out a welcome mat and opened up its doors.

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  • Too bad, but still, it’s true!!!Unless government move heaven and earth to make it better to all concern, the country will continue to witnessed this exodus!!!

  • I have seen this coming already 6 years ago. If a foreigner is not allowed to own land. If a foreigner is only allowed to own 40% of his company even if he paid up 100% of the capital. Who then wonders why the Philippipines are not particularly attractive to foreign investors?

  • Saw this coming long ago ! With the 40% rule in effect,plus the constant,inevitable corruption,and the 13th month extorsion pay,any company worth its reputation would be stupid to come to the Philippines for ANY reason !!!!

  • That is what makes our country not investor friendly. There is still those cumbersome bureaucratic red tape inspite of the reforms done in easing business. Corruption is still there in some ways unlike in a communist state they can be readily sent to jail if found guilty. Short court trial & none of the long process of reconsideration. We really do not want investment because there are politicians who have businesses that will compete with these foreign companies. No one wants competition so it is one of those problems affecting investments. We are still protectionist in some products. Electricity is really too high here which seems one family is monopolizing it before until now. Well expect our economy to lag further because of our lack of giving investors a welcoming partner in our progress. Infrastructure is finally being dealth with which was supposed to be done under the previous admin which was always saddled with all kinds of problems. When can we really get our act together so our economy will really boom. Too much politics can be a bane.

  • Emerging Asian markets such as Vietnam, Laos, Myanmar relaxed their foreign ownership laws, to accomodate foreign investors. Meanwhile, in the Philippines, there is the 60/40 foreign ownership law (foreigners can only own 40% and must have a Filipino partner who will own 60%), high corporate tax, red tape, corruption, and difficulty/restrictions for foreigners who want to acquire properties to build their businesses.

  • The 1986 Constitution preserved control of the Philippine economy, away from Marcos cronies, for the country’s oligarchs. From that time, FDI in the Philippines lagged behind its ASEAN neighbors and progress was hindered. Amend the 40% limitation in foreign ownership of Philippine businesses and surely a Big Bang in economic development will ensue. As of now, power and communication problems alone are choking the people and look what and who are behind this dilemma.

    • I hope it will be changed soon. I had been to Vitnam in 2001 and 2010 as a seaman and i saw their progress in my own eyes. Before i did not see much malls and planned cities and infrastructures, but the last time i was there, i felt i was in Malaysia or Singapore because of their sprouting malls and condominiums. Yes, i think we are lagging behind Vietnam. One of their biggest port is i think funded by Maersk and someone said to me that it was supposed to be built in Luzon somewhere in Subic but our gov’t at that time is controlled by the Oligarchs even until now, so that was a lost opportunity for us.

  • Love of country is what is lacking in many of us. Even if we will be able to fix the economy that is more attractive to foreign investments and more promising to small scale businesses, still it does not guarantee that it will stand the test of time because of our crab mentality and our ability to gradually self-strangulate ourselves because of too much dirty politics. Vietnam has endured a long and brutal war and was not beaten, its economy is now on an upward spiral unlike our country who went on a downward spiral for the last 30 years after EDSA. The Vietnamese people love their country so much and that is the main ingredient they have in their national psyche that sustained them and is now lifting their country to prosperity and sustainability. Now is the proper time for us to change all that but we will not succeed if love of country is lacking in many of us. Love of country means to sacrifice, to do positive things for the country, to be proud of your being a Filipino, of thinking non-stop of what you can do for your country and for the good of your countrymen.

  • It is not purely a question of attracting foreign investor but balancing w/ the interest of its citizens. What happen if they own 100percent of our land we will be foreigner in our own country. Econmic gain must be plan w/ future generation of Filipinos in mind.