The Philippines: Industry benefits from rising FDI

A drive to increase the number of industrial parks opening their doors across the Philippines is gathering pace as the country moves to build on a landmark level of foreign direct investment (FDI) notched up last year.

The Philippines Economic Zones Authority (PEZA) is spearheading efforts to expand the network of industrial and information technology (IT) free zones and further boost the growing presence of major multinationals.

FDI reached $2bn in the Philippines in 2012, driven by capital injections and re-invested earnings in the manufacturing, real estate, retail, mining and financial sectors. Strong, new anti-graft measures implemented by the Aquino administration were also credited with pushing up the investment levels. FDI in manufacturing jumped to $1.03bn, up from just $119.4m in 2011.

Early results from 2013 underscore the importance of the manufacturing sector to the economy. In the first quarter, GDP grew by 7.8% year-on-year, led by a 10.9% increase in industrial activity. In May, economist Bernardo Villegas predicted an “avalanche of investments” in the Philippines this year, telling the 2013 Asia CEO Awards that the manufacturing and services sectors were set to drive growth.

“Manufacturing will have its renaissance,” the Business Mirror reported Villegas as saying. “It will compete with services in fueling GDP growth rate of 7% to 9% in the next 20 years… that is because manufacturing investments are more capital-intensive than those in the business-process outsourcing (BPO) sector.”

Villegas also called on the government to take full advantage of economic growth by making changes to the rules governing foreign ownership of business and building new economic free trade zones, particularly industrial cities.

The network of free zones has grown from 16 when the PEZA was set up in 1995, to 277 as of the end of 2012. IT centres, which include BPO facilities, accounted for 139 of this total, followed by manufacturing, with 69 free zones. Multinationals that set up shop in these areas benefit from a number of financial incentives, including up to six years of tax exemptions.

First Philippine Industrial Park (FPIP) has played a key part in spearheading industrial growth since it was set up in 1996.

Located in Santo Tomas and Tanauan City in Batangas, the zone houses businesses operating across a broad range of industrial and manufacturing activities, including electronic and semiconductors, solar cells and aircraft components. The park’s exports totalled around $1.4bn in 2011. Businesses at the Batangas site created 40,000 jobs last year, while FPIP expects a further 10,000 posts to be generated in the zone by 2014.

Last month, FPIP, which is owned by the Lopez Group (70%) and Sumitomo (30%), said it was looking at to develop new industrial parks in Subic, Clark and other key areas in Southern Luzon on the back of increased demand from potential investors.

Elpidio Ibañez, who is on FPIP’s board of directors, told the Philippine Daily Enquirer that increased demand, particularly from Japanese companies, was spurring the park’s expansion plans. “As the Philippines becomes a favoured foreign investment destination, we will continue with the acquisition of additional industrial land, the development of recurring revenue businesses and the creation of new ancillary services,” he said.

Although no specific timeline or details for the new parks have been given, the venture’s expansion record to date, together with demand for industrial space and the Philippines’ incentives, bodes well for FPIP.

The park witnessed a spate of activity last year, with companies such as Canon and Brother establishing facilities at the Batangas location. Other multinationals that recently set up shop at FPIP include the electronic component producer Murata, aircraft interior fabricator BE Aerospace and Danish hearing aid manufacturer Sonion.

Lilia de Lima, director-general of PEZA, told OBG in an interview that diversification was likely to become a significant issue for the Philippines’ economy as its share of FDI in Asia increases. Developers, she said, should not restrict themselves to industrial and IT cities.

“One area that shows particular promise is the agri-industrial sector, which not only offers an opportunity for diversification, but also allows for some development in rural areas, including large tracts of Mindanao,” de Lima said.

However, in the interim, the strongest demand remains in the industrial and manufacturing sectors. Expanding the number of free zones is proving to be a sound business strategy for the Philippines, offering the prospect of healthy returns for developers, foreign investors and the Filipino population.