In recent years, the Philippine government has made tremendous efforts to improve the country’s business and investment climate. In addition to the recent policies and laws that make it easier for foreign businesses to be opened and operated in the Philippines, the country’s safe and dependable macroeconomic fundamentals warrant a sovereign credit rating that is investment grade.
To this day, the country continues to see an increase in foreign investment, mostly in manufacturing, finance and insurance, gas and oil, steam, tourism, real estate, and retail. While the Philippines continues with this upward momentum in acquiring foreign investment, the nation’s Foreign Direct Investment still ranks relatively low compared to other Association of Southeast Asian Nations, ranking fourth out of the ten countries making up ASEAN.
This is largely due to the limitations on foreign ownership in the country imposed by various factors. If you would like to know more, here are the Foreign Ownership Limitations in the Philippines:
1. Restriction of Company Ownership
The Philippines is fairly strict about who owns the company. To this day, the following industries cannot be owned in part by foreigners. Take a look at this Foreign Investment Negative List:
- Mass Media (except for recording)
- Practice of Professions (ex. Lawyers, doctors, pharmacy, forestry)
- Retail trade enterprises with paid-up capital of less than $2.5 Million
- Cooperatives
- Private security agencies
- Small-scale mining
- Utilization of marine resources
- Cockpits
- Nuclear weapons
- Biological, chemical, and radiological weapons and anti-personnel mines
- Manufacture of firecrackers and other pyrotechnics
The Nuances of the Ordinary Standard
The Philippines is fairly strict about who owns the company. To this day, the following industries cannot be owned in part by foreigners. Take a look at this Foreign Investment Negative List:
- Mass Media (except for recording)
- Practice of Professions (ex. Lawyers, doctors, pharmacy, forestry)
- Retail trade enterprises with paid-up capital of less than $2.5 Million
- Cooperatives
- Private security agencies
- Small-scale mining
- Utilization of marine resources
- Cockpits
- Nuclear weapons
- Biological, chemical, and radiological weapons and anti-personnel mines
- Manufacture of firecrackers and other pyrotechnics
Other than that, traditionally, the Philippines restricts company ownership to 40% of total equity. The rest of the 60% is reserved for Filipino citizens. In recent times, the government initiation the relaxation of this rule to attract foreign investment to help the country’s economy. For example, the following industries can be foreign-owned:
- Up to 20% foreign equity-private radio communications network
- Up to 25% foreign equity-private recruitment for employment or contracts for public work
- Up to 30% foreign equity-advertising
- Up to 40% foreign equity-ownership of private lands, operator of infrastructures, etc.
- Up to 100% foreign ownership-retail trade, domestic subsidiaries of foreign businesses, and export businesses
2. Wide Disparity in Economic Sectors
Another deterrent is that the Philippines faces a stark disparity between economic sectors. Power shortages, limited water access, poor infrastructure, and slow internet connections are major investment disincentives in the lower-income area. In addition, the lower wages in lower-income sectors result in the lesser buying power of individuals.
This means that it can be quite tricky to build client bases in certain areas. Safety is also a major concern as certain economic sectors (lower to mid) see higher crime rates. Thus, this issue can be a huge deterrent for some foreign businessmen.
3. Severe and Debilitating Congestion
Congestion poses another limitation on foreign investment. The country’s most productive areas, like Manila, Cebu, and Davao, are highly congested. This results in poor road traffic conditions, difficulty finding commercial or workspace, higher cost to operate in such places, and a highly saturated market.
While most consumers reside in these cities, investing in such an overly populated area has its pitfalls. Besides, with the tag from BBC as one of the worst places in the world to drive, many foreigners do not look forward to setting up their business in the country’s metropolitan cities.
4. Corrupt Judicial System
Though there is supposedly an Anti-Red Tape or Anti-Corruption Law and the Ease of Doing Business Act created by legislators, many feel that these are all just lip service. Having these guidelines is different from having them implemented. Unfortunately, being a developing country, the Philippines has a high number of corrupt individuals both in the public and private sector, but mostly in the former.
This makes it difficult for businesses to carry out proper functions and ensure that taxes imposed on investment are not pocketed. In addition, the safety of the investor or business is not entirely protected, and their welfare is not sought after in certain courts and offices, especially those headed by corrupt powers. For this reason, some foreign nationals feel reluctant to set up their headquarters in the country.
5. Geographic Condition and Location
The Philippines is an archipelago. This means that transportation from one locality to another, especially between islands and island groups, can pose a difficulty for work travel, deliveries of supplies for inventory and construction, and proper monitoring of different branch locations. Many communities can only be reached through air or boat travel. A bridge connects only a few islands.
Moreover, the geography and government structure of the Philippines makes it so that each island, province, or city, has its own set of ordinances and rules on top of national laws. Apart from that, the Philippines’ unique location in the globe’s typhoon belt makes it prone to natural disasters and flooding.
But All Investment Hope Is Not Lost
All that being said, many foreigners still choose to invest in the Philippines because the advantages outweigh the limitations, as stipulated in our article here. Since it is a developing country, you can make massive gains and experience a faster investment return. Operating costs are also cheaper with lower minimum wage rates compared to developing nations.
If you are looking, dabble into this region, it is important to take note of the pros and cons so you can make a sound business decision. Should you need help with analysis, research, and evaluation of a specific market, give our team a call. We can help you procure the necessary documents and assist in business registration. Our team offers free 30-minute consultations.
