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Why investors prefer Vietnam over the Philippines

Something that Singapore, Malaysia, Thailand, and lately, Vietnam, have in common is that they all adopted the tried and proven Asian formula for economic development. Each pursued rapid industrialization by attracting foreign capital, by building their manufacturing competencies, and by exporting their way to prosperity. Within a generation, these countries have become high or upper-middle income economies.

Even latecomer Vietnam is poised to overtake the Philippines in per capita income by year end.

A fundamental requirement to industrialize is a business environment conducive to doing business. What investors look at when evaluating a country to invest in are: the costs of doing business, the quality of the workforce, the workforce’s aptitude for innovation, the level of infrastructure development, the strength of government institutions, the quality of life and the security situation against crime and terrorism.

As you will see in the following comparison, conditions in the Philippines are far less favorable than they are in Vietnam. It comes as no surprise that the Philippines now trails its neighbor despite them having joined the development race only 35 years ago. Records from 2010 to 2019 show that Vietnam bagged $112 billion worth of foreign direct investments while the Philippines attracted just $57 billion. Last year, Vietnam’s merchandise exports topped $300 million while the Philippine’s generated an anemic $70 million.

On the back of our consumption-lead economy, the Philippines managed to eke-out growth of 4.6% per year since 1986. In contrast, Vietnam grew by 6.5% per year, turbo-charged by industrialization.

It’s unfortunate that none of our leaders, from Erap to Duterte, made an earnest commitment to industrialize the nation. Even today, our manufacturing base remains dangerously thin, our volume of exports are significantly lower than our ever-increasing imports, agricultural output is at subsistence level, and our service industry is generally driven by low-value services (eg. call centers).

A recent report by the ADB reveals that the Philippines is capable of competently producing some 500 products, most of which are food items. For context, most Asian economies can competently produce 1,500 to 2,000 products.

Rather than developing our manufacturing competencies, past and present governments have led us to import everything we need, from rice to footwear, household appliances to heavy equipment. If not for the $33 billion in OFW remittances and $30 billion in IT-BPO earnings, the country would drown in a gaping current account deficit.

A comparison of business conditions in Vietnam and the Philippines shows why foreign investors prefer to build their factories in the socialist republic rather than in our democracy.

On business cost, corporate income tax in Vietnam is at 20% for large corporations and 10% for MSME’s while it is 32% in the Philippines (25% if and when the CREATE law is passed); Vietnam grants a four year income tax holiday, followed by a 50% discount from the 5th to the 9th year. The Philippines grants four to eight years of income tax holidays but investors must pay 5% of gross income earned (or equivalent to 12% corporate income tax); electricity cost is at  $.08 per kwh in Vietnam while it is $.12 per kwh in the Philippines; shipping cost of a 40-foot container to the US is $1,500 in Vietnam while it is $1,792 in the Philippines.

As for the workforce, the Vietnamese government invests $670 per student on education while the Philippines spends $455; the Vietnamese spend 5.53% of GDP on healthcare while the Philippines spends 4.45%; there are only 10 paid holidays in Vietnam compared to 21 days in the Philippines; and the average Vietnamese has a higher aptitude for technological and business skills compared to the average Filipino.

The World Economic Forum puts Vietnam at 77th place out of 141 countries in quality of infrastructure. The Philippines is at 96th place. Vietnam is at 39th place in efficiency of logistics while the Philippines is at 60th place. The Philippines lags in rail connectivity, road connectivity, traffic congestion and power supply. As far as the digital backbone goes, Vietnam has more than 90,000 cell sites while the Philippines has 17,850. The Philippines spend about 5% of GDP on infrastructure while Vietnam has recently accelerated theirs to 8%.

The World Intellectual Property Organization puts Vietnam at 42nd place out of 129 countries in terms of innovation aptitude while the Philippines is at 54th place; Vietnam is at 41st place in ICT adoption while the Philippines is at a lowly 88th place. Vietnam spends more on research and development than the Philippines.

As for the strength of institutions, the Philippine trails Vietnam in graft and corruption, policy stability and government responsiveness. The Philippines also rates lower in ease of doing business, starting a business, acquiring credit, and enforcing contracts.

The Expat Insider deems Vietnam the 42nd best place for expats. The Philippines is at 56th place. Being prone to natural disasters weighed down the Philippine’s ranking.

Despite the Duterte administration’s rhetoric on law and order, the World Economic Forum ranks the security situation in the Philippines at an alarming 129th place out of 141 nations. Vietnam is at 61st place. As for terrorist threats, the Philippines is the ninth most vulnerable in the world. Vietnam is the 97th most vulnerable. There are eight murders in the Philippines for every 100,000 people while there are only two in Vietnam.

It is painfully obvious that our leaders do not consider the pursuit of foreign investors a high priority.

Not only is it apparent in our policies, it is also palpable in the actuations of the President himself. We still recall how in 2016, President Duterte went on a rampage against the American government and corporations. This spooked potential IT-BPO investors, the majority of whom took their business to India. Malacañang’s reckless rant curtailed the otherwise spectacular growth of the IT-BPO industry, which now grows at single digit rates compared to 15% to 17% in previous years.

Exacerbating matters is the move of the Department of Finance to upwardly adjust income tax rates of export oriented companies in PEZA zones. Although the unratified CREATE Law ensures a status quo of tax incentives for up to nine years, the move has created policy uncertainty.

Until the Philippines gets its priorities in order, until it institutes critical reforms to make our environment more conducive for businesses, and until it adopts a policy of rapid industrialization, the country will continue to be left behind by our neighbors.

We hope that the next batch of leaders in 2022 does better than their predecessors.

 

Andrew J. Masigan is an economist

andrew_rs6@yahoo.com

Twitter @aj_masigan

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