By Katrina Sarah A. Fontanilla and Gabriel Christian J. Lacson
The role of foreign direct investments, legal regimes, and their impact upon job confidence and economic perceptions provides an interesting area for study and research, particularly here in the Republic of the Philippines. This study aims to exhibit what may be a compelling case for legal reform and a pivot away from the status quo towards a more open national milieu at par with global standards. While this research does not seek to invalidate or nullify the Constitution, it aims to expose and discuss the state’s constitutional protectionism vis-à-vis its effect on employment opportunities, opportunity perception, and economic growth.
The researchers would like to thank the college students of the University of St. La Salle, its University Student Government, the Kausa sa Paghili-usa kag Pag-alagad Students’ Alliance for Progress (KAUSAP), and Arendo Coworking Space for their participation and in making this research possible. The researchers likewise thank Atty. Jocelle Batapa-Sigue for the opportunity to hone and improve skills in legal research. That in all things, God may be glorified.
Foreign direct investments, generally, are highly valued by developing countries such as the Philippines. Apart from the inflow of capital, foreign direct investments also introduce a wide array of favorable productivity spillovers such as, technological advancement, improved research and development, superior management skills, and expanded marketing network, among others. It is widely acknowledged that developing countries are capital-scarce and have limited access to international markets in contrast to developed nations. Since capital accumulation is recognized to stimulate economic growth, many developing nations offer incentives to attract foreign direct investments as an alternative source of capital.
In brief, this paper theorizes that the State’s constitutional policy of protectionism and preferential treatment for its citizens at the expense of non-citizens remains inconsistent with its explicit Constitutional policy to “free the people from poverty through policies that provide adequate social services, promote full employment, a rising standard of living, and an improved quality of life for all”, and is therefore detrimental to economic growth and consequently, to employment opportunities. Pertinently, it may explore legal options such as constitutional amendment or revision in order to fully uphold its developmental obligations to its people outlined in the Constitution.
By delving comprehensively into these substantive issues, this thesis fully intends to provide a pathway to greater opportunity for the Filipino people, the youth and studentry as jobseekers of tomorrow, as well as contributing valuable knowledge into issues of Philippine and international law. This paper purports to expose how systems, particularly the availability of economic opportunities, shape human behavior.
The aim of this study is to examine existing legal regimes on restrictions placed upon foreign direct investments within substantive law and respective national constitutions and their impact on job confidence.
Overview of the Issue
The main question with regard to discussions on foreign direct investments is whether or not such investments will stimulate new domestic investments, or have the opposite effect of displacing domestic businesses or pre-empting their investment opportunities. There has been an ongoing discourse between the desire to preserve national patrimony and the pursuit of foreign investments to boost economic endeavors.
Specifically, this paper inquires: what determines the rise and fall of nations? Can statistics show that economic inclusiveness, transparency, and openness elucidated clearly in the laws of various states provide a way for states to improve the economic outlook of its citizens?
The economic circumstances of the Philippine republic have remained a vital area for study and research, noting its present as a developing economy positioned to become a highly-developed economy within a generation according to the 2018 iteration of the Human Development Index. This study will:
1. Analyze the Philippines’ existing legal regimes, constitutional provisions, its laws pertaining to investment, political and economic institutions, and economic data;
2. Define Foreign Direct Investment (FDI), its role, and correlate the same to employment while discussing other legal regimes and economic institutions of countries more open to FDI;
3. Gather input from the college students (undergraduate) of the University of St. La Salle as to their perceptions of job availability in consideration of number 1.;
4. Propose a realistic roadmap for future development alongside an alternative legal regime tailored to global best practices as a step above the existing situation.
Evolution of Philippine Foreign Direct Investment Legislation
Several studies have examined the investment policies of the Philippines. Aldaba (1994) made a comprehensive review of the country’s FDI policies and patterns from the 1960’s to 1990s. Matriano (2002) provided a brief summary of the Philippine FDI experience during the late 90’s to early 2000’s.
Similar to trade policy, investment policy in the Philippines has experienced reforms. Aldaba (2006) pointed out that the attitude of the Philippines toward foreign direct investment has changed considerably beginning the 1980’s. Austria (1998) identified the factors that defined the foreign direct investment patterns in the 1990’s. Included in the factors that attracted foreign direct investments is the government’s general policy of openness.
Though substantial progress has been made in liberalizing the country’s FDI policy, barriers to foreign investment entry still remain. For instance, due to constitutional constraints, foreign investment is restricted in certain industries – mass media, small-scale mining, private security agencies, and the manufacture of firecrackers and pyrotechnic devices, among others. Limit on foreign ownership remain on enterprises engaged in domestic air transport, public utilities, pawnshop operations, education and employee recruitment, among others.
1980’s – Omnibus Investment Code of 1987
One of the most important steps taken to liberalize investment policy was the passage of the Omnibus Investment Code through Executive Order No. 226. The Omnibus Investment Code of 1987 simplified and consolidated previous laws and provided two important incentives, namely, the provision of income tax holiday for enterprises engaged in preferred areas of investment and taxable income deductions for the use of skilled and unskilled workers that satisfy certain Bureau of Investment requirements. Under EO 226, enterprises may avail of fiscal investment incentives such as exemption from income taxes, exemption from custom duties and other industry specific taxes. In addition, there are non-fiscal incentives such as the permission to employ foreign nationals in supervisory and advisory positions as well as simplification of custom procedures certain businesses.
1990’s – Foreign Investments Act of 1991
In the 1990’s, an important step undertaken to liberalize investment policy was the passage of Republic Act 7042 as amended by RA 8179, also known as the Foreign Investments Act of 1991 (FIA). It is considered a landmark legislation because it liberalized the entry of foreign investments into the country, thereby expanding employment opportunities for Filipinos. The Act liberalized existing investment regulations such as foreign equity participation. It allowed up to 100 percent foreign equity participation in all areas unless the investment is prohibited or limited under the Foreign Investment Negative List (FINL). Over time, the negative list was considerably reduced.
1994 – Foreign Bank Liberalization Act of 1994
In 1994, entry and operations of foreign banks was liberalized thru RA 7721, otherwise known as “An Act Allowing the Full Entry of Foreign Banks in the Philippines”. Foreign banks were allowed to acquire up to 60% ownership of domestic banks. The Act was instrumental in the entry of foreign banks through either of three modes: acquisition of up to 60% of an existing domestic bank’s voting stock; establishment of branches with full banking authority; or investing up to 60% of the voting stock of a new banking subsidiary incorporated under Philippine laws.
The capital market was likewise liberalized with the removal of some foreign exchange controls, including the surrender requirement for export proceeds and Bangko Sentral ng Pilipinas (BSP) approval of forex transactions and capital repatriation.
1995 – Special Economic Zone Act of 1995
In 1995, Republic Act 7916 allowed greater private sector participation in the development and management of the country’s special economic zones and expanded the activities permitted within the zones. According to the World Bank (1997), the integrated package of policies, streamlined procedures and physical infrastructure offered by economic zones resulted in a net positive economic impact.
2000’s -General Banking Law and The Retail Trade Liberalization
By the 2000s, more liberalization efforts specific to FDI were undertaken. For instance, in 2000, the General Banking Law provided a seven-year window during which foreign banks may own up to 100 percent of one locally-incorporated commercial or thrift bank. The Retail Trade Liberalization was likewise passed in 2000 that allowed foreign investors to enter the retail business and have 100 percent ownership with minimum equity requirement.
2014 – Act Allowing the Full Entry of Foreign Banks in the Philippines
In 2014, President Aquino, under RA 10641, foreigners have been allowed to own 100% of Philippine domestic banks. Proponents of the law justify the opening of the banking industry to more established foreign banks on various reasons, but collectively, for the economic benefits it will bring and the strengthening of the financial system in the country. Regulators also see this as a vehicle for foreign direct investments in the country.
2019 – House Bill No. 300, Practice of Profession excluded from FINL
In September 2019, the House of Representatives approved on 3rd and final reading, a bill that would amend the Foreign Investments Act of 1991.The two provisions that were amended pertained to the removal of the ‘practice of professions’ from the Foreign Investment Negative List (FINL), as well as a reduction in the number of mandatory direct local hires by foreign investors. To be eligible, foreign investors must utilize advanced technology or hire 15 local employees.
Review of Related Literature
The Philippine Constitution
The Philippine Constitution sets the boundaries of foreign participation in the country. It is a key feature of the Philippines’ current Constitution where certain investments are “reserve(d) to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe” Our fundamental law allows for foreign participation of up to 40% in corporations that will endeavor with the State in co-production, production-sharing agreements, or joint ventures in the exploitation, development, and utilization of natural resources. Similarly, it also declares that such endeavors are under the full control and supervision of the State. ( PHIL. CONST. art. XII, § 2, para. 1.)
Similarly, the Constitution provides the same limitation on foreign equity ownership in corporations with respect to private land ownership (PHIL. CONST. art. XII, § 6.); and to the permissible 25-year lease of alienable lands of the public domain of not more than 1,000 hectares, renewable for another 25 years (PHIL. CONST. art. XII, § 3, para. 1.)
The same rule applies to franchises, certificates, or any other form of authority to operate public utilities for a period of not more than 50 years (PHIL. CONST. art. XII, § 11.), and to educational institutions other than those established by religious groups (PHIL. CONST. art. XIV, § 4 (2).)
Additionally, there are certain endeavors where the Constitution places even greater restrictions; the Constitution limits the operation of mass media to corporations wholly-owned and managed by Filipino citizens (PHIL. CONST. art. XVI, § 11 (1)), while a 30% limit is imposed on foreign equity for corporations engaged in advertising (PHIL. CONST. art. XVI, § 11 (2), para. 2.)
Finally, the Constitution provides a general rule where the Congress may, upon recommendation of the nation’s economic planning agency, reserve certain areas of investments to Filipino citizens or associations or corporations at least 60% of the capital of which is owned by Filipino citizens, with the power to prescribe an even higher percentage of Filipino ownership (PHIL. CONST. art. XII, § 10.)
Legislative efforts are evident in terms of the search for openings to relax our policies on foreign investments to be injected in our body of rules ; either through a careful examination of what will fall within or outside of the barriers set by law or Constitution, or to search for structures within the boundaries reserved for Filipino ownership.
Foreign Constitutional Provisions
In a comparative review of international laws of ASEAN countries conducted by the International Institute for Social Development (IISD) in 2017, it was revealed that not every ASEAN country has an investment law. In countries without investment laws, foreign investment is governed by laws of general application such as corporate laws, contract laws, environmental protection laws, land-use laws, laws guaranteeing compensation for expropriation of property, along with sector-specific laws, which govern the admission of new investment in sectors in which entry is regulated.
Although the comparative review conducted by International Institute for Social Development concludes that there is no single “good practice” approach to an investment law, it is worth noting that, for instance, Singapore, which is the most successful ASEAN country in attracting foreign investment, does not have an investment law. Singapore’s approach is consistent with the fact that most developed countries do not have investment laws. This study benchmarked with three countries: Singapore, Malaysia and Ethiopia. The selection was based on geographical proximity, policy benchmark and historical and economical comparators.
In Singapore, investment is governed by laws of general application—for example, the common law of contract and the Singapore Companies Act—and sector-specific legislation. In general, there is no difference between the treatment of foreign investment and domestic investment, except insofar as differences in treatment are authorized by a specific law.
Investment in Malaysia is governed by several laws which include laws governing investment in particular industries, such as the Industrial Coordination Act (1975) which covers investments in manufacturing, and laws of general application, such as the Environmental Quality Act (1974). The closest thing to an investment law in Malaysia is the Promotion of Investments Act of 1986 which is a framework law. It grants the Minister of International Trade and Industry broad discretionary powers to determine which investors and investments are eligible for certain classes of investment incentives. The two most important type of incentives are the pioneer status and the investment tax allowance.
In Ethiopia, since the introduction of the free market in 1991, proclamations have been enacted regulating investment and all of such proclamations in the past followed a negative listing approach until the enactment of the most recent one in 2012 which adopted a more open approach of having both a positive list and a negative list.
Philippine jurisprudence is replete with cases dealing with foreign stock ownership, including the landmark cases of Gamboa vs. Teves (G.R. No. 176579, October 9, 2012) and Roy vs. Herbosa (G.R. No. 207246, April 18, 2017), wherein the Supreme Court upheld the intent and requirement of at least sixty percent Filipino control over corporations and associations at the expense of foreign entities.
Barriers to foreign investment to protect the interest of the nation hovers over an inconvenient truth. Cochingyan (2017) observes that for many endeavors, Filipino capital is insufficient, Filipino access to foreign markets is limited, or Filipino technology and knowhow ranges from the non-existent to the inadequate.
In the case of Garcia v. Executive Secretary (1991), The petitioner challenges RA 7042 or the Foreign Investments Act of 1991 on the ground that it defeats the constitutional policy of developing a self-reliant and independent national economy effectively controlled by Filipinos and the protection of Filipino enterprises against unfair foreign competition and trade practices. Petitioner claims that the law abdicates all regulation of foreign enterprises in the country and gives them unfair advantages over local investments which are practically elbowed out in their own land with the complicity of their own government.
In the landmark battle of Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines, which was mainly a fight to the courts questioning the Filipino ownership of Narra Nickel- a mining business covered by the ownership restrictions set in the FINL, the court ruled that when there is a conflict between a statute and the Constitution, the latter shall prevail. In this instance, specifically pertaining to the provisions under Article XII of the Constitution on National Economy and Patrimony, Section 3 of the Foreign Investments Act will have no place of application.
Cororaton & Cuenca (2000) found that tariff reductions from 1995-2000 led to generally favorable employment effects. In particular, a significant increase in industry employment is registered. However, declines were registered in agriculture and services. Meanwhile, Orbeta (2002) analyzed the impact of globalization measured by trade flows, on employment level and structure for the years 1980 to 2000. Aggregately, the results of the study showed that labor demand increases with higher propensity to export and import. In addition, increases in export propensity increase the proportion of low-skilled production workers employed at the aggregate levels. Orbeta (2002) concludes that expansion in exports has increased the demand for workers in the Philippines with basic skills.
This section describes and explains the research design, the research methods, the participants of the study, the data gathering procedures, the study areas, instrumentation, data processing, and statistical treatment employed in this study.
The research design adopted for this study is descriptive-explanatory anchored on a purely quantitative methodology. The quantitative method made use of survey of the sampled of collegiate-level students from the University of St. La Salle.
The quantitative method mainly made use of the survey method using a face-to-face interview schedule with the randomly sampled college students subject to their availability. The social survey particularly captured information pertinent to the objectives of this study, i.e., statement of current legal and constitutional regimes; foreign direct investment levels in relation to its impact upon employment opportunity and perceptions; and, capturing input towards other practices which may serve to improve upon the status quo.
The overall data gathered through this quantitative methodology were processed and analyzed to provide the descriptive-explanatory analysis of the students’ perception on the impact of restricting foreign direct investments.
Participants of the Study
The participants of the study included college-level students from the University of St. La Salle. A total of 60 participants answered the survey questionnaire and provided their input for this study.
The research instrument was formulated by the authors in December 2019 in the form of a survey questionnaire with both quantitative (and open-ended questions) for the participants to answer. Single-item and plural checklists both featured in the content of the questionnaire was designed specifically to meet the objectives outlined in the statement of the problem.
During the conduct of the survey, participants were shown the current legal regime of the Philippines along with pertinent economic data (Figure 1 and Figure 2), asked about their employment prospect perceptions after graduation, and were subsequently shown the laws and practices of other countries. Ultimately, the participants were asked what regime would prove better for their employment prospects, and were given the opportunity to provide their own unique responses. The researchers were able to acquire the consent of the participants by their voluntary signing of the survey questionnaires.
The guide questions for the survey questionnaire were based on the objectives of this study.
The University of St. La Salle is considered to be the largest university in Negros Occidental. The school’s 12-hectare main campus in La Salle Avenue houses the university’s college and graduate school units with an admission of 2,000 freshmen every year in the undergraduate.
Data Gathering Procedure
A randomized sampling survey was conducted among the five colleges at the tertiary level of USLS, having in total 59 participants with 1 invalidated response. The survey questionnaire was then answered, subject to the availability of the college level students during the interview schedule per respective college. A total of six trips were made on the second week of December 2019.
The data was encoded, collated, and then thoroughly discussed by the researchers after being analyzed and interpreted.
Results and Discussion
A survey was conducted among 59 student participants across 5 colleges of the University of St. La Salle with the most participants from the College of Business and Accountancy. Table 1 below shows the College of Arts and Sciences and College of Nursing, each having 12 participants, while the College of Engineering and Technology, and College of Education each having 11 participants. Table 2 shows that of the total population, 19 are males and 38 are females.
Table 1: Survey Population
Table 2: Population Gender
The survey has 8 questions and instructed the participants to choose the answer that applies to the corresponding question.
Table 3 shows that 19 out of the 58, or 33%, of the participants agree that they intend to work or start a business in the Philippines after graduation.
Table 3: Respondents who intend to work or start a business in the Philippines after graduation
Table 4 shows that 27 out of the 58, or 47%, of the participants feel neutral when asked how confident are they in finding employment or starting a business in the Philippines after graduation.
Table 4: Respondents’ confidence in finding employment or starting a business in the Philippines
Table 5: Respondents’ answers on whether FDI restrictions should be maintained
Table 5 shows that while 41% of the respondents are neutral on the question of whether the FDI restrictions should be maintained, 34% agreed that FDI restrictions should be maintained.
Table 6: Respondents’ answers on whether they are likely to seek employment or start a business abroad given the restrictions
Table 6 shows 40% of the respondents being neutral on the question on whether they are more likely to seek employment or start a business abroad given the current FDI restrictions, followed by 29% of respondents who agree.
Table 7: Respondents’ answers on whether other countries have a more open legal regime conducive to more employment opportunities
Table 7 shows that 48% of the respondents agree that countries such as Singapore, Malaysia and Ehiopia have a more open legal regime which is more conducive to employment opportunities
Table 8: Respondents’ confidence in finding employment or starting a business abroad
Table 8 shows that 22 out of 58 respondents are confident in finding employment or starting a business abroad in relation to the statistics presented.
Table 9: Respondents’ answers on whether the current laws of the Philippines should be amended to create more employment opportunities
Table 9 shows that 24 out of 58 respondents, or 41%, strongly agree that the current laws of the Philippines should be amended to create more employment opportunities.
Table 10: Respondents’ answers on whether they agree that openness to FDI helps create more jobs.
Table 10 shows that 29 out of 58 respondents, or 50%, agree that openness to foreign direct investment, in terms of laws, helps create more jobs and employment opportunities.
Recommendation and Conclusion
Constitutions, first and foremost, provide the basic framework by which the closely-related political and economic systems of any state operate. They serve as a guide as to how the government relate to and govern over the population of the state. These basic documents are key to understanding the prevailing and current situation over any polity.
This study drew its substantive content from Article XII of the Constitution of the Republic of the Philippines dealing with foreign ownership of companies, stock, and Foreign Direct Investments, namely Sections 2, 10, and 11, taken into consideration across the Constitutional provisions and legal incentives of other countries, namely Singapore, Malaysia, and Ethiopia.
While the intent of the framers of the Constitution is honorable, the execution and effects of such provision remains highly questionable, with foreign investors expressing their hesitation and reluctance at investing in the Philippines due to these provisions and such other economic restrictions according to news reports and scientific studies, resulting in an adverse environment for employment and investment opportunities.
This study lists its recommendations as follows:
The Government of the Philippines may now look at and fully support moves to amend the laws of the nation, namely lifting and deleting Constitutional restrictions on foreign investment, deregulating constrictive employment practices, and overhauling relations between capital and the state. By permitting the entry of foreign employers without hindrance to the benefits they bring such as more employment opportunities, the state then catalyzes the dramatic economic empowering of its people and a possible reduction in the unemployment rates. Pertinently, the workforce participation rate may see a causative rise predicated by the removal of restrictions, and so provide a more conducive environment for Filipino employers and employees to increase their skills and productivity. This is primarily to update the legal systems of the Philippines and to bring it in line with the reasons for the relatively better performance of other countries bearing open economies.
University students and all else may find it suitable to keep advocating and making their voices heard on the crucial issue of legal restrictions which tend to restrict job prospects for them later on in their respective lives. It is highly essential that the Philippines upgrades its economy through the process of amendatory legal actions, and the studentry are key players spreading the message on economic freedom and statutory avenues for such to materialize.
Foreign investors and those who advocate for closer trading ties may find this study to bolster the case for a more open and liberalized Philippine economy, to allow their companies to grow, to develop closer ties between states, and most importantly to develop the vast reserves of human capital now sitting idle due to restrictions. It is in the best interest, this group proposes, for trade and employment to serve as a catalyzing factor in the development of the Philippines resources, whether material or human towards the goal of full employment and the actualizing of every citizen’s potential as productive individuals.
Future researchers may find this study helpful in terms that it broadens the perspective on the intricate relationships between laws, institutions, systems, and the economy. This study aims to create an atmosphere ripe for institutional reform so that the Philippines may finally find a place in the international community of states as another great dynamic, global trading nation nestled at the heart of Southeast Asia. This study looks forward to being expanded by researchers later on in the future owing to its exposition and description of how the Philippines may better improve its situation.
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