Chinese businesspeople, mostly from Fujian province, have been sailing south to establish livelihoods in the Philippines for several hundred years. Many of these early entrepreneurs remained in the country. Over the generations, Chinese entrepreneurs built up one of the Philippines’ most successful business sectors, becoming especially prominent in the banking, real estate, and retail industries. In fact, some businesspeople claim that Chinese-owned enterprises now account for between 50 and 80 percent of the Filipino economy.
Taiwan investors began relocating to their southern neighbor in significant numbers during the 1960s and 1970s. Today, they are the country’s fourth largest overseas investor after the United States, Japan, and Hong Kong. For Taiwanese entrepreneurs, the one-hour flight to the Philippines may be less exciting than the sometimes dangerous several-day sail required in generations past, but the challenges they face once they arrive are often just as tough.
Twenty or thirty years ago, the primary draw for Taiwan businesspeople relocating south was the domestic Filipino market. Chemical manufacturer David Lih (酈德瑞) and his father moved one of their factories to Manila eighteen years ago. With a total investment of US$1.1 million, Lih began producing the paint additive nitrocellulose. He now employs 145 workers at TNC Philippines, Inc. All production is sold domestically. “We decided to come because of the local market,” Lih says. “Since few people here were in this industry, the competition was not very strong.”
Ben Liaw (廖芳洲) also relocated his factory, Kyoto Leather Goods, to Manila in 1980 because of market considerations, but his target market was the United States. When Taiwan’s economy began growing rapidly in the late 1970s, Liaw predicted that the island would soon lose its status under the GSP (general system of preferences), a system of tax breaks established by the United Nations for developing countries. Without GSP privileges, Liaw would face import duties of 6.5 percent on U.S. sales. He therefore decided to export from a country with a more secure GSP status. The Philippines was a likely candidate. Liaw predicted well: Taiwan’s GSP status was withdrawn in 1985, but the Philippines remains on the list.
In the years after Lih and Liaw left Taiwan, rising labor costs pushed increasing numbers of businesspeople to move offshore. Before 1990, when the ROC government forbad investment in Mainland China, most companies going offshore targeted Southeast Asia. Taiwanese investment in the Philippines grew rapidly in the 1980s, rising from US$7 million in 1986 to US$149 million in 1989.
The main draws were the country’s competitive labor costs and its English-speaking environment. “While other conditions were similar among Southeast Asian countries, language became the main consideration,” Ben Liaw explains. About 90 percent of the Filipino population speaks English. This eases language barriers because Taiwan students begin learning English as a mandatory subject in junior high school, and many businesspeople become fluent in order to conduct international trade. “Here, we didn’t have to learn another language to be able to talk or read legal documents and accounting books,” Liaw says.
Taiwan investment dropped off dramatically after 1990, to US$12.5 million in 1991 and US$5.5 million in 1993. The biggest factor was the rush to invest in Mainland China after the ROC government lifted the ban on direct investment in October 1990. Another reason was the political instability in the Philippines. Between 1986 and 1992, President Corazon Aquino faced seven military coup attempts. The most serious, a December 1989 struggle, attracted widespread international news coverage because a group of foreign businesspeople and tourists were held hostage in a hotel in downtown Manila. All banking, postal services, and air travel were suspended for four days.
Some Taiwan investors say the media has exaggerated the dangers and difficulties caused by political upheaval. Ben Liaw stresses that civilians have rarely been endangered even during the most serious struggles. The only time he has been inconvenienced during his fifteen years in the country was during the 1989 incident when the banking district of Manila was surrounded by rebels.
But other investors remain unconvinced. “For foreign investors, the most important thing is political stability,” David Lih says. “When they hear about attempted revolutions, they feel unsafe, and they turn to other places.”
When Fidel Ramos was elected Philippine president in June 1992, he made political stability his top priority. During the past three years, the country has not experienced any military coup attempt (although some unrest has continued, mostly sparked by radical Muslim groups based in the southern island of Mindanao). The government is working hard to shed the image of political volatility. “Many people have the impression that the Philippines is not stable,” says Wang Kai (王愷), deputy representative of the Taipei Economic & Cultural Office in the Philippines. “The situation has improved quite a lot since President Ramos took office. It is actually very safe to invest in most areas.”
The most serious problem the Philippines now faces in courting Taiwan investors is the increasingly tough competition from neighboring Southeast Asian countries. During the past thirty years, the Philippines has gone from being one of the region’s most developed countries to one that lags far behind its neighbors. Thailand and Malaysia, for example, now offer better infrastructure, such as roads, power supplies, and telecommunications capabilities, plus the incentive of a local market with growing consumer power. Meanwhile, Vietnam and Mainland China offer far lower production and labor costs. Along the spectrum of Asian investment destinations, the Philippines seems to be caught in the middle, offering neither the benefits of developing economies nor the cost cuts of less-developed nations.
Wages, for example, are at mid-level for the region—slightly lower than those of Malaysia and Thailand but higher than Mainland China, Indonesia, and Vietnam. But they are still far below Taiwan rates. At David Lih’s factory, workers make US$230 per month, a rate that is not particularly low compared with other Asian countries but that is less than one-fourth the amount paid to factory workers in Taiwan.
One of the main draws for Taiwan investors is the country’s large Chinese population, which assures a business and social network, as well as Chinese-language schools for children. Manila alone offers more than one hundred Chinese schools. And local businesspeople say they generally do not experience resentment or prejudice against Chinese, which is sometimes a factor in other Asian countries. Another plus is the Philippines’ proximity to Taiwan. Within two days, a company can ship semi-finished products from a factory in the Philippines to one in Taiwan.
The large population of qualified workers is another attraction. “Our best asset is our highly skilled labor force,” says Milfreda Guevarra, Philippine undersecretary of finance. “They are young and well educated, and therefore are very reliable and can be trained.”
The Philippine education system is more highly developed than in many neighboring counties. The literacy rate among adults stands at 94 percent. Each year, the country produces more than eleven million high school graduates, one million college graduates, and half-a-million vocational or technical school graduates, providing a wider variety of skilled employees than most ASEAN nations.
Guevarra also points out that employers can benefit from the emphasis that Filipino culture places on a friendly demeanor. She points to a recent study on the quality of McDonalds employees in Asia. In it, Japanese workers were named most efficient, but Filipinos were found to be the friendliest.
Nevertheless, Taiwan employers have experienced some difficulties in working with Filipino labor. The biggest problem is the propensity among workers to go on strike. The Philippine constitution gives citizens the right to strike, a privilege that workers exercise frequently, sometimes initiating short-term walkouts over relatively small disagreements with management. Elsewhere in the region, strikes are extremely rare.
Although the government will not give figures on the number of strikes, officials claim the problem is decreasing. “Past years were bad,” says Finance Undersecretary Milfreda Guevarra. “But since 1993, the situation has been improving.” Meanwhile some labor organizations have taken steps to reassure potential employers. The workers union in the new Subic Bay Special Economic and Freeport Zone recently proclaimed the area a no-strike zone.
Both David Lih and Ben Liaw say they work well with their employees, and neither has had a strike at his factory. “You have to talk to them and let them know you care,” Liaw says. “The more you communicate, the fewer problems you have.” Lih says building strong relationships with employees can guarantee a steady labor source. “Some of my workers have been with me since I first started,” Lih says. “Some have brought in their younger family members because they like it here.”
Leticia Ibay, executive director of the technical services group for the Board of Investment, also stresses the importance of foreign employers establishing a friendly relationship with employees. “A little ‘good morning’ or a little smile will help you out as an employer,” she says. “Don’t treat them like employees. If you treat them like members of a team, you’ll have fewer problems.”
But some Taiwan employers have complained that workers are not willing to put in extra hours or to work under pressure. “The main complaints from my workers are about the workload and overtime,” says Ben Liaw. He adds that the pace of work is generally faster in Taiwan. “The Filipinos prefer to do things slowly,” he says. “You’d better get used to it.”
Faced with tough competition within the region, the Philippine government has made it a high priority to improve its investment climate. Since President Ramos took office, the government has initiated a number of development projects and investors say they have already seen some improvement. Power generation for example, which was a significant problem in the early 1990s, has improved under a thirteen-year, US$32 billion improvement project begun in 1982. Under it, fifteen new private power projects have been constructed as of mid-1994. Investors say the frequent power blackouts that plagued businesses for as much as ten hours a day during periods of peak use have decreased in the past two years.
The Ramos administration also introduced a six-year economic development plan, Philippines 2000, aimed at establishing the nation as a newly industrialized country by century’s close. About US$26.4 billion, or 70 percent of the budget, has been allocated for infrastructure development, including the construction of highways, airports, railways, and the improvement of power supplies and telecommunications systems. An external debt of US$36.8 billion has left the Philippines with scant resources for carrying out the plan, but officials have come up with several moneymaking strategies. One major plan is to privatize local industries such as banking, steel manufacturing, shipbuilding, and petroleum.
The government has also taken several direct steps toward attracting foreign investors. In 1991, it loosened investment regulations to offer more incentives, longer landleases, and freer foreign-exchange transactions. Especially attractive to Taiwan investors are the lifting of restrictions on the extent of foreign ownership of export enterprises (defined as exporting at least 60 percent of production), and new regulations further opening access to the domestic market.
These incentives match well with efforts by the ROC government to encourage local investors to target Southeast Asian countries as a way to avoid depending too heavily on investment in Mainland China. “Now that the political situation has stabilized, the first priority for the Philippine government is economic recovery,” says Wang Kai of the Taipei Economic & Cultural Office. “This is the time they need foreign investment most and therefore the timing of our southbound investment policy is perfect.”
In 1992, the two governments signed an investment guarantee agreement. The following year, the ROC government extended a US$60 million loan and technical assistance toward the conversion of the former U.S. military base at Subic Bay into an industrial and duty-free export processing zone. The groundbreaking ceremony took place in February 1994.
Since then, the Subic Bay industrial zone has quickly become one of the most popular sites for Taiwan investors. When the U.S. military pulled out in 1991, it left an infrastructure worth approximately US$8 billion. High-quality water and electricity supplies, roads, warehouses, and other facilities, are strong attractions. Taiwan and Philippine investors will jointly develop 300 hectares in the area. The first phase of the project, in which 120 hectares of former U.S. military facilities were converted into commercial enterprises, has been completed and some Taiwan companies, including the computer giant Acer, are already operating. Fifty Taiwan enterprises had invested a total of US$180 million in the site as of late July.
Other development projects designed to attract foreign investors are also under way. One of the largest is a 1,500-hectare aquaculture zone near the city of Laoag, on the northwestern coast of Luzon. The site is just 480 kilometers south of Kaohsiung, accessible by a direct, 45-minute flight. The ROC Council of Agriculture has found the site promising for production of tilapia, grouper, milkfish, shrimp, and lobster. Although investment applications are not yet being accepted for the project, interest is strong among Taiwan businesspeople experienced in the island’s own highly developed aquaculture industry.
Statistics from the Philippine Board of Investment show that interest in the country is growing among Taiwan businesspeople. In 1994, approved investment from Taiwan increased by nearly fifty times over the previous year, to US$268 million.
But while more NT dollars are coming into the country, the amount is still low compared Taiwan’s investment elsewhere in Asia. One reason is that the Philippines encourages more investment from smaller-scaled enterprises than do other Asian countries. “Small and medium-sized enterprises are our primary need,” says Milfreda Guevarra. “People in the countryside need smaller firms to generate employment.” Ben Liaw’s leather goods factory, for example, represents a total investment of only about US$1 million, but it provides more than one thousand jobs. “Basically, [the Philippine government] welcomes all kinds of industries,” Liaw says. “It doesn’t matter whether an investment is big or small, labor-intensive or technology-intensive, as long as it provides jobs.”
One problem investors complain about is bureaucratic inefficiency. Many say the best way to cut through red tape is bribery. “Laws and regulations are well developed here—the problem is enforcement,” says David Lih. “Most of the time, law enforcement is ‘negotiable’ in the Philippines.” Ben Liaw believes that government corruption has a long history in the Philippines. “It’s a tradition, so it’s very difficult to change,” he says. “For Taiwan investors, the best way is to go along with it.”
The predominant attitude among investors is that although the Philippine environment is improving and now offers several promising new industrial zones, the country will have to improve significantly in certain aspects in order to compete with other ASEAN countries. “The Philippine government thinks it has offered the most attractive environment and incentives, and that this is the world’s best place for investment,” says Ben Liaw. “But many foreign investors don’t think so. The Philippines, after all, has the lowest economic growth rate in Southeast Asia.”
The government is well aware of such reservations among potential investors. “The recovery of our economy will rely a lot on the ability of our government to implement its infrastructure programs,” says Dante Canlas, deputy director-general of the National Economic Development Authority. Leticia Ibay of the Board of Investment puts it more simply, “There is still a long way to go, but we know that we are headed in the right direction.”