Attracting investment funds, the lifeblood of corporations, markets and economies, is a highly competitive business – and perhaps more so for emerging economies, such as the Philippines, where national aspirations have put the acceleration of economic growth and development and poverty reduction at the forefront of their agendas.
To greater and lesser extents, the majority of countries in the Association of Southeast Asian Nations (Asean) face similar problems in terms of these goals. And for that reason this close-knit group of states find themselves as firm rivals for investment dollars.
Returning to our infographics series based on the 2017 Global Innovation Index (GII) – a league table in which 127 countries worldwide are ranked in terms of their innovation levels – we find the following. In the section/category, ‘market sophistication’/’investment’, the Philippines comes 16 places from the end of the list. But it’s the Philippines ranking among its Asean peers which causes the most concern.
In the category ‘investment’, here are the GII’s world-ranking results for eight Asean states – Laos and Myanmar were not surveyed. Singapore, 1st; Malaysia, 22nd; Brunei, 28th; Thailand, 50th; Cambodia, 88th; Indonesia, 96th; Vietnam, 109th; Philippines, 111th. So, in the very region where the Philippines needs to be most competitive, it comes last
Now we turn to the sub-category which was largely responsible for the Philippines’ dismal ‘investment’ score – ‘Ease of protecting minority shareholders’. Here are the GII placings for that. Singapore, 1st; Malaysia, 3rd; Thailand, 26th; Indonesia, 67th; Vietnam, 80th; Brunei, 86th; Cambodia, 92nd; Philippines, 105th. What’s clear from that is that the Philippines needs to invest in protecting these minority interests.
But why is this important?
Protection for minority investors in companies is needed for the same reason that protection of minority shareholders in the stock markets is needed. When their interests are properly looked after, small shareholders will have greater confidence to commit funds to the market – ergo, turnover levels and capitalisation increase; the size and dynamism of the stock market grows.
The other side of the coin is that lack of safeguards for minority shareholders deters investment and cuts off a large potential source of funding.
The same applies in the corporate setting. If they feel there’s a danger that their interests will be negated, they’ll be reluctant to invest. One problem is self-dealing – corporate decisions or transactions that might reflect the will of controlling shareholders and ignore those of minority investors. Having such protections in place, therefore, is an important part of corporate governance.
But it’s also good business sense.
Companies need shareholders to provide the necessary capital to operate, innovate and compete. If they can’t get those funds from investors their only recourse to cash is through the banks by means of expensive loans.
Furthermore, according to a study – “Why Does the Law Matter? Investor Protection and Its Effects on Investment, Finance, and Growth” – published 17 January 2012 in the Journal of Finance, “[in] economies with stronger investor protections, investment in firms is less sensitive to financial constraints and leads to greater growth in revenue and profitability”. Thus, by protecting the minority stakeholders, the economies would also be protecting themselves.
Taking all that into account, then, the Philippines’ inability to ensure protection for minority investors makes little sense. Whether it’s the result of neglect, oversight, a lack of will, unawareness of the ramifications or a mixture of all these, the fact is that by not affording this protection, corporations, the market and the wider economy are disadvantaging and hampering their own growth.
Furthermore, this also plays into the hands of the Philippines’ Southeast Asian rivals which have put in place higher levels of protection for minority investors. It gives them the advantage of providing a more attractive home for those funds which can be used for poverty reduction and economic development in those countries. And all at the expense of the Philippines.