For many years, the Philippines had some of the most restrictive trading regulations for foreign companies. The Public Service Act (PSA), which had been in effect since 1935, was one such law. The old PSA limited foreign ownership of service sectors such as transportation and telecommunications to 40%.
Other laws, such as the Foreign Investment Act (FIA) and the Retail Trade Liberation Act, involved overwhelming bureaucracy and almost insurmountable red tape, which created difficult barriers for the Philippines startups seeking foreign investment. Companies in the country were also not allowed to be wholly owned by foreigners, which meant that business owners from outside the archipelago had to form local partnerships or offer franchises to operate there.
President Rodrigo Duterte recently signed new laws into effect, making it easier for Venture Capitalists (VCs) and other foreign investors to invest in the country’s shipping, telecommunications, railways, and airlines, as well as opening the door for foreign retailers to enter the market. The previous regulations primarily restricted foreign investment to agriculture, construction and manufacturing sectors. Renewable energy, tourism and outsourcing of services were also robust sectors for previous Filipino VC trends.
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With the new laws loosening cap levels and removing restrictions on full foreign ownership of companies, the VC trends in the Philippines appear to be changing. Now that investors can move into other, frequently more lucrative sectors, the country has the potential to attract more foreign capital and rapidly grow its economy.
Why now?
Before COVID-19 brought everything to a halt, the Philippines was on track to become one of the region’s most stable and prosperous economies. They had capitalised on the global demand for lower-cost labour and provided Business Process Outsourcing (BPOs) to a large portion of the world. The combination of a competitively priced workforce and the development of some sustainable growth structures allowed it to surge forward and take its place among Southeast Asia’s other growing and developing economies.
During this time, the government still maintained the 40% cap on foreign investment in infrastructure projects and imposed strict regulations for businesses seeking to establish a presence in the country. Despite strict investment rules, the country received over $8.7 billion USD in 2019. When the global health crisis hit, it had a huge impact on direct foreign investment, which dropped to $6.5 billion USD by the end of 2020.
As the pandemic unfurled, it became clear that the country’s stance on foreign funding would have to be reconsidered in order to return to or even sustain pre-COVID levels of economic development. Last year saw the economy begin to show signs of recovery, with the fourth quarter showing a 7.7% growth in GDP. While growth will slow down in the first quarter of 2022, increased investment will continue apace, putting the Philippines in second place in Southeast Asia for growth this year.
The law changes were necessary to help sustain the growth projections and return the economy to a more stable ground following the pandemic.
What has changed?
The most significant changes to foreign investment laws are evident in the PSA and the FIA legislation. Investors can now wholly own companies, including those in the previously restricted industries such as transportation and telecommunications. These changes are significant as they allow foreign companies to establish micro, small and medium-sized enterprises (MSME).
The expected influx of new transportation and telecommunication services will provide much-needed competition, and startups will no longer be required to hire a local to set up the business. With the ability to invest in a broader range of industries and fully own companies in the country, the VC trends in the Philippines are bound to shift.
Some sectors, such as essential services like electricity, water, fuel and seaports, will continue to be subject to the foreign equity cap as the government is unwilling to relinquish control over those industries. However, the Philippines startups that have been seeking funding from foreign sources now have a chance to seek out investors and offer more attractive packages with less red tape and restrictions. This newfound freedom allows many companies, particularly those in the technology sector, to entice angel investors and VCs to enter the startup landscape, thereby increasing the potential for significant economic growth.
As the Filipino VC trends evolve in the coming months and years, the country will have the opportunity to tap into the region’s already growing flow of investment. With these new, less restrictive business requirements in place, the Philippines becomes an infinitely more attractive offer for those looking to get in on the ground level of innovative Southeast Asian companies. The timing of these changes in investment policy is ideal as global investors begin to dust off the economic turmoil of the past two years and look ahead to the next potential hotspots.