Why international companies need to invest in ASEAN, especially, the Philippines
By: Chiara U. Mesiona
Setting up business operations in ASEAN [Association of Southeast Asian Nations] is a smart move. Given the 10 Member States, global companies therefore have options. However, business leaders must be discerning of which ASEAN nation to invest in by determining which specific national economic landscape can help to realize operational goals such as productivity and cost efficiency – and the Philippines may be a prime candidate here.
The ASEAN economy is growing. According to the ASEAN Investment Report 2018, foreign direct investment increased between $123 billion in 2016 to $137 billion in 2017.
Growth in foreign direct investments means that the bandwagon may be around the corner, and companies must take it as a signal to invest is now. Indeed, the interest of large international companies to invest in the ASEAN is palpable; multinational companies from the Netherlands, Switzerland, Germany, Australia and China partly account for the increased investment inflow in the region. Four-fifths of European and US executives with existing businesses in ASEAN also expect their organizations’ investment and trade to grow in the region in the next five years.
The sectors investing in ASEAN are also become more diverse. While investments in manufacturing are to be expected, it was only a 50% increase in foreign investment to $31.6 billion whereas wholesale and retail trade had a 75% increase to $38.9 billion.
The increased interest in ASEAN may indicate two things:
- Different sectors are seeing a market share they can capture in ASEAN, and
- Global companies have an increased confidence in the ability of ASEAN nations to support various aspects of business operations such as warehousing, logistics, human resourcing, and others.
As an emerging economic region, ASEAN offers multinational companies the access to growing markets as well as reduced trade barriers.
From 2012 to 2016, an average of 79% of total foreign direct investments went into Singapore, Vietnam and Indonesia. However, in 2017, the concentration was down to 72%, indicating that more investments have reached the remaining Member States including the Philippines. Inflow of foreign investments into the Philippines has actually increased by 21% to $10 billion in 2017.
The country is an ideal gateway into the ASEAN market. In 2016, investment and financial services company, Goldman Sachs, projected that the Philippines would rank as the 14th largest economy across the globe by 2050. Indeed, the country has shown consistent growth in GDP in the last five years, regularly outpacing the growth of many of the other ASEAN countries. The national government’s aggressive plans for infrastructure improvements have also created a favorable backdrop for economic growth.
The Filipino labor force is also suitable to growing a business. Currently, Filipinos comprise 18% of ASEAN’s working population. The country’s working age population growth is also increasing whereas it is declining in most other ASEAN nations. The Philippines labor supply is expected to continually increase in the next 10 years.
The Philippines-or-Vietnam conundrum
Many multinational corporations already have ongoing businesses in the Philippines, taking advantage of the nation’s comparative operational costs and wages. However, when it comes to cost of operations, the Philippines is often directly compared with Vietnam.
The daily wage rate can be lower in Vietnam between $147 and $166 while the rate in the Philippines is from $172 and $300, depending on the specific location of business. If cost were the only consideration, the Philippines can be secondary to Vietnam. However, least cost does not always mean optimal efficiency; multinational companies want quality and consistency, and cost effectiveness is more significant than cost reduction.
According to a BusinessMirror Editorial piece, Vietnam consistently shows the lowest productivity levels in Asia. In fact, their productivity is less than 50% of the Philippine rate. In addition, the Filipino labor force is predominantly English-speaking, which can be critical to establishing a global business.
The Philippines is clearly gaining economic momentum. Amidst the government’s plans for long-term, massive infrastructure development; the growing volume of trainable English-speaking workers; and, the promise of increased productivity that’s crucial to market share expansion, now is the optimal time to invest in the Philippines. Setting up business operations in ASEAN is a smart move, but setting up in the Philippines is a smarter way to do it.