Foreign direct investments (FDI) flowed inward on a net basis in December 2024, totaling USD110 million, representing a stark 85.2 percent decline from USD743 million from a year earlier. The Bangko Sentral ng Pilipinas (BSP) traced the drop primarily to increased debt repayments by resident corporations to foreign investors, which caused a shift in FDI composition.
Debt instruments saw net outflows of USD19 million in December, reversing from net inflows of USD618 million a year prior. While nonresidents’ equity capital investments increased by 58 percent, reaching USD49 million, reinvestment of earnings fell by 14.7D to US$80 million.
In terms of geographic sources, equity capital placements were mainly from Singapore, Japan, the United States, and South Korea, and directed primarily towards sectors such as information and communication, manufacturing, financial services, construction, and real estate.
Despite the December decline, FDI net inflows for 2024 remained stable, totaling USD8.9 billion, reflecting the country’s resilience in attracting foreign investments despite global challenges.
Historically, the Philippines attract lower levels of FDI compared to its ASEAN counterparts. Studies suggest this is due to factors such as political instability, infrastructural limitations, and a relatively higher cost of labor compared to neighboring countries. However, more recent data indicates an upward trend in FDI, largely driven by reforms in the business environment, including tax incentives and the opening up of certain sectors to foreign ownership.
Research on the Philippines often points to the need for further liberalization and regulatory improvements to boost FDI. For instance, restrictions on foreign ownership in certain industries and the relatively high cost of doing business have been identified as major barriers. However, reforms such as the 2020 Public Service Act (allowing 100 percent foreign ownership in public utilities) and the 2021 amendments to the Foreign Investment Act have been seen as positive moves toward increasing FDI.
In terms of sectoral preferences, the Philippines tends to attract FDI in the services sector, particularly in business process outsourcing (BPO), which has become a major contributor to its FDI inflows. However, sectors like manufacturing and infrastructure are less developed compared to ASEAN counterparts.
The Philippines faces several challenges in attracting FDI, including inadequate infrastructure, regulatory complexity, and a relatively higher cost of doing business. While recent reforms have addressed some issues, the country still lags behind in attracting FDI compared to its ASEAN neighbors.
While FDI inflows have been relatively low, studies show that they have positively impacted the Philippines’ services sector, particularly in IT-BPO. However, the manufacturing sector has not benefited as much in comparison to other ASEAN countries.
In summary, while the Philippines has made strides in attracting FDI, it still faces several challenges compared to ASEAN countries like Thailand, Vietnam, and Malaysia. Thailand and Malaysia benefit from stronger infrastructure, political stability, and diversified industrial bases. Vietnam, in recent years, has emerged as a strong FDI destination due to its competitive advantages in labor costs and a strategic focus on manufacturing and global trade integration. The Philippines is improving its investment climate through reforms, but more work is needed to catch up with its neighbors in attracting foreign investment in high-value industries.
