Foreign Direct Investment in the Philippines: A Reassessment

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Recognizing the importance of an outward-oriented policy approach, countries such as Malaysia, Indonesia, Thailand and the Philippines have liberalized their regulation on foreign direst investment by introducing various guarantees and incentives. The Philippines, however, lagged behind its neighbors. This study identifies the factors that may explain why the Philippines has failed to capture its share of FDIs. Analysis indicates that our trade policy being strongly for import substitution has contributed to the rather unimpressive direct investments. The high level of protection in the manufacturing industry though inappropriate has encouraged the setting-up of local production that resulted to resource misallocation and loss of consumer welfare. In fact, FDI flows in the country have been concentrated in the following highly protected industries: chemicals, processed food, transport equipment, machinery and appliances, textiles and garments, basic metal products and petroleum and coal. Regression results support a positive relationship between FDI and the level of protection, stock of public investment real gross domestic product and real effective exchange rate.