INTERNATIONAL BUSINESS MANAGEMENT
LESSON 8:
CONCEPTUAL DISCUSSION ON\FOREIGN DIRECTINVESTMENTS (FDI)
The Foreign Investments Information System (FIIS) was
started in 1991 as a project 1/ to develop an integrated approach
for generating and reporting foreign direct investments (FDI) in
the Philippines. Statistics on FDIs are being reported/generated
by a number of agencies, all of which carry out functions
relating to monitoring, management and/or promoting of
foreign investments. This has resulted in inconsistent data
because of the differences in definitions and reporting periods
adopted by different concerned agencies. To address this
problem, the National Statistical Coordination Board (NSCB)
created an ad hoc Inter-Agency Group to develop and imple-
ment the FIIS.
In July 1996, the First Report of the FIIS Study was presented
and published. The FIIS Study initially made use of available
annual administrative data for 1991 and 1992 on investments to
operationalize concepts and methodologies for developing
foreign direct investments statistics in the Philippine context.
Thus, the Report contained the results of the 1991-1992
estimates of stock of FDI, and the concepts, methodology,
data system and institutional support needed to implement the
FIIS.
Based on the recommendations of the FIIS Study, the Inter-
Agency Committee on Foreign Direct Investments Statistics
(IAC-FDIS) was formally created in September 1996 by the
NSCB through NSCB Memorandum Order No. 1-96 to
rationalize and integrate foreign investments data in all aspects
including collection, processing and dissemination. The IAC-
FDIS is now composed of the NSCB as Chairman, the Board
of Investments (BOI) as Co-Chairman, the Bangko Sentral ng
Pilipinas (BSP), the Securities and Exchange Commission
(SEC), the Bureau of Trade Regulation & Consumer Protection
(BTRCP), the Philippine Economic Zone Authority (PEZA),
the Subic Bay Metropolitan Authority (SBMA), the Clark
Development Corporation (CDC), the National Economic and
Development Authority (NEDA) and the National Statistics
Office (NSO).
All the member agencies of the IAC-FDIS will jointly imple-
ment the institutionalization of the FIIS. The IAC-FDIS is
currently implementing the second component of the FIIS
which is the Consolidated Quarterly Reporting System (CQRS).
The other two components are the Register and the Annual
Reporting System which were implemented during the initial
study. These three components will later be integrated to form
the FIIS. The CQRS will operationalize the integration of the
monthly/quarterly data on foreign investment reported by the
various concerned agencies. This will put in place the integrated
and uniform approach of reporting quarterly FDI statistics.
Upon approval by the IAC-FDIS, the report shall be released to
the President sixty days after the reference quarter.
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11.625.1
1. One of the objectives of the FIIS is to develop a system that
is comparable internationally. As such, the Philippine FIIS is
adopting the International Monetary Fund (IMF) concept of
Foreign Direct Investments as described in the Fifth Edition
of the Balance of Payments (BOP) Manual, in all of its
components, i.e., the Register, the Annual FDI Reporting
System and the Consolidated Quarterly Reporting System.
Foreign Direct Investments (FDI) as defined in the BOP
Manual, are investments made to acquire a lasting interest by
a resident entity in one economy in an enterprise resident in
another economy. The purpose of the investor is to have a
significant influence, an effective voice in the management of
the enterprise. To operationalize this definition, the FIIS
followed the benchmark definition of the Organization for
Economic Cooperation and Development (OECD) which
considers as direct investment enterprise an incorporated or
unincorporated enterprise in which a direct investor who is
resident in another economy owns ten percent or more of
the ordinary shares or voting power (for incorporated
enterprise) or the equivalent (for an unincorporated
enterprise). The ten percent cut-off in equity is used to
distinguish between direct and portfolio investments, which
is not covered by the FIIS at present.
2. Since the Philippines is more of a recipient of foreign
investments, the FIIS covers only inward foreign direct
investments. Specifically, this includes foreign direct
investments in Philippine corporations, partnerships and
single proprietorships.
3. Foreign direct investment flows refer to the new or additional
investments paid by a foreign entity to a resident enterprise
in another country during the period. In the case of the
Philippines, this covers: capital or equity contributions/
remittances from abroad, reinvested earnings, technical fees
and royalties converted to equity, bonds and other debts
converted to equity and imports converted to equity.
Specifically, the CQRS will report on approved FDI flows,
registered FDI flows and the balance of payments (BOP)
FDI flows.
Approved foreign direct investments represent the amount of
proposed contribution or share of foreigners to various
projects in the country as approved and registered by the BOI,
the PEZA, the SBMA and the CDC. Approved foreign
investments do not represent actual investments generated but
rather foreign investment commitments which may come in the
near future. This consists of equity, loans and reinvested
earnings. In the operationalization of computing for approved
FDIs as approved and registered with the Investment Promo-
tion Agencies (IPAs), all FDIs including those with less than 10
percent of the ordinary shares are included. The reason is that
approved FDIs as rendered by the IPAs have long lasting
interest unlike portfolio investments.
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 Approved FDIs in the Information and Communication
INTERNATIONAL BUSINESS MANAGEMENT
Technology Sector (ICT) includes investment commitments in
the manufacturing of ICT equipments, spare parts and
accessories including professional, medical and scientific
instruments as well as ICT services e.g., wholesale trade of
computers, electronic parts and equipments; telecommunica-
tions; renting of computers and other office equipments;
computer services and other related activities.
Registered FDIs only represent foreign equity investments or
paid up capital and does not include intercompany loans.
Hence, not all approved FDIs are translated into registered
FDIs since the former consist of intercompany loans and
reinvested earnings. In addition, capital inflows from approved
FDIs are spread or expected to be fully implemented after five
years or more, based on the experience of investment promo-
tion agencies.
On the other hand, the BOP FDIs cover cash and non-cash
transactions on foreign direct investment flows that are coursed
through the banking system. Machinery, equipment and
reinvested earnings, which are not cash transactions are included
if data are available.
Methodology and Sources of Data
The NSCB as the agency that coordinates all statistical matters in
government has been tasked by the IAC-FDIS with the
preparation of the CQRS. The CQRS covers actual and
approved foreign direct investments.
1. The investment promotion agencies generate data on foreign
investments monthly. These agencies show “project cost” in
reflecting approved or committed investments. For purposes
of the CQRS, the term approved investments is adopted.
Not all of approved investments will materialize during the
period. There is a gestation period between approval and
actual investments.
To arrive at total approved investments, the reported project
costs of BOI, PEZA, SBMA and CDC are summed up for
the quarter.
2. Total balance of payments foreign direct investments is
obtained from the Balance of Payments (BOP) tables
compiled monthly by the BSP. The BOP provides the data
framework on all external transactions of the national
economy, in which FDI is one item. Conceptually, the FDI
flows in the BOP are consistent with the IMF definition.
Hence, these are taken as the global total of foreign
investments inflow on a quarterly basis.
3. The SEC and BTRCP also report monthly foreign capital
investments. SEC comes up with data on investments and
number of non-FIA registered FDI corporations (foreign
ownership is less than 40 percent) and FIA-registered
corporations (40 percent and over foreign ownership), by
country of investor and by industry. In the SEC, foreign
investments refer to the foreign equity (paid-up) capital of
the non-FIA and FIA registered corporations. It should be
noted, however, that registration with SEC and BTRCP does
not translate into actual flows as captured by the BOP of the
BSP.
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34
Hence, what are not reported at present are additional
investments of existing FDI enterprises. SEC covers only
that portion of existing FDI enterprises that apply for
additional authorized capitalization.
4. The International Operations Department (IOD) of the BSP
registers foreign direct investments in cash or in kind in any
enterprise organized or existing under the laws of the
Philippines. Registration of foreign investments with BSP is
not mandatory but it gives foreign investors the authority to
source foreign exchange from the local banking system to
service capital repatriation and cash dividends/profits and
other earnings accruing to BSP-registered investments. As
there is currently no mandatory period within which to
register these investments, there is a time lag between the
registration with the BSP and the inflow of the investment
funds or in the case of investment in kind, the receipt by
investee firm of said investment. In some cases, this time lag
could be a year or longer.
6. Total approved investments include all Filipino and foreign
investments which has been granted approval by the
promotion agencies, i.e., BOI, PEZA, CDC and SBMA.
7. Due to the cut-off periods on data processing adopted in the
preparation of this report, revisions for the immediately
preceding quarters may be done in each issue.
Foreign Direct Investments,
Multinational Enterprises and
Development
One of the most visible indications of the increasing global
integration of the world economy over the past decade or so
has been the phenomenal growth of foreign direct investment
flows and the expansion of cross-border activities of multina-
tional enterprises. FDI inflows are considered as channels of
entrepreneurship, technology, management skills, and of
resources that are scarce in developing countries. Hence, they
could help their host countries in their industrialization.
Besides, they could assist developing countries’ manufactured
exports expansion by providing access to their marketing
networks and by locating export-platform production facilities
in the host countries. However, FDI inflows have been
distributed across countries in a highly asymmetric manner and
the poorest countries have been neglected in their distribution.
The focus of RIS research in this area is on the prospects for
developing countries in benefiting from FDI inflows. Quantita-
tive studies are being conducted to analyse the factors that
determine the magnitudes of the FDI inflows and their
developmental impact. These could serve as inputs for policy
making
A Strategic Approach to Strengthening the International
Competitiveness in Knowledge-based Industries: Role of
FDI Inflows, Outward Investments, and Enterprise Level
Technological Effort in Promotion of India’s Knowledge
Intensive Exports
The growth rate of India’s exports in US$ terms declined from
15.7 per cent averaged during the 1992/3 to 1995/6 period to
just 2.0 per cent during the late 1990s. This stagnation in India’s
exports has been attributed to, among other factors, her
inability to diversify her export structure in favour of fast
11.625.1
moving and high value adding technology intensive products.
This project seeks to analyze the relative roles of affiliation with
MNEs and FDI, own technological effort and outward
investments of national enterprises in promotion of knowl-
edge intensive exports in India with a view to draw strategic
policy lessons. This project has been launched in May 2001 with
financial support and collaboration of the Department of
Scientific and Industrial Research (DSIR), Government of
India. It will be completed in 20 months. During the period
under review, the database for the quantitative analysis has been
prepared. Various sources of enterprise level data on perfor-
mance, foreign collaboration, outward investments have been
tapped in different Ministries, RBI as well as private data
suppliers like CMIE. A complete profile of outward invest-
ments made by Indian enterprises was compiled from various
sources and was integrated with the data set containing other
firm characteristics. The panel data set prepared contains
information on different parameters of enterprise performance
and other characteristics for the period 1989 to 2000 for 4442
firms in 30 broad industry groups. This panel data set will be
used for simulating the patterns of export competitiveness and
its determinants.
The quantitative analysis of determinants of export competi-
tiveness will be completed and reported in the RIS Discussion
Papers and presented at a discussion meeting. Following this
case, studies of five industries based on fieldwork will be
launched in the second phase of the project. The field studies
will be conducted with the help of external consultants.
Fuels 32.11%
Telecommunications 17.83%
Transportation Inds 6.85%
Service sector 6.32%
Metallurgical Inds 6.00%
Electrical Equipment 5.14%
Food Processing Inds 4.49%
Hotel & Tourism 1.89%
Others 19.27%
Foreword
1.In recognition of the important role of Foreign Direct
Investment (FDI) in the accelerated economic growth of the
country, Government of India Initiated a slew of economic
and financial reforms in 1991. India is now Ushering in the
second-generation reforms aimed at further and faster
Integration of Indian economy with the global economy. As
a result of the Various policy initiatives taken, India has been
rapidly changing from a Restrictive regime to a liberal one,
and FDI is encouraged in almost all the Economic activities
under the automatic route.
2. Over the years, FDI inflow in the country is increasing.
However, India has tremendous potential for absorbing
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11.625.1
greater flow of FDI in the Coming years. Serious efforts are
INTERNATIONAL BUSINESS MANAGEMENT
being made to attract greater inflow of FDI in the country by
taking several actions both on policy and Implementation
front. Since the last publication of the Manual in November
2002, Foreign Investment Promotion Board has been
shifted to Department of Economic Affairs, Ministry of
Finance and Company Affairs. However, the subject relating
to FDI Policy and its promotion and Facilitation as also
promotion and facilitation of investment by Non- Resident
Indians (NRIs) and Overseas Corporate Bodies) will
Continue to be handled by this Department. Further,
application form Required for Carry on Business (COB)
License has been revised. These Changes have been
incorporated in this issue of the Manual. In Annexure- IV
of this Manual, a guideline regarding print media has been
also Elaborated. To make the Manual more user-friendly,
some new additions Have been made such as write-up on
Department’s website, online Chat and Bulletin Board
facilities, brief details of clearances/approvals required,
Agencies concerned and their website address and Frequently
Asked Questions. As the main emphasis of the Manual is to
facilitate more FDI in India, from this issue the name of the
Manual has been also changed.
3. An essential requirement of the foreign investing community
in Making their investment decision is availability of timely
and reliable Information about the policies and procedures
governing FDI in India. This Publication is a part of our
endeavor to apprise the investing community of our policy
measures and the opportunities available for investment in
India.
4. We hope that this Manual will be found useful by the
investing Community. We welcome suggestions for its
improvement.
Questions for Discussion
Q1) Why do countries go in for attracting foreign direct
investments
Q2) What are the cost benefits associated with the inflow of
foreign direct investments
Q3) What are the relevant considerations the countries must
take into account before going for FDI Proposals
Q4) What have been the reasons due to which the FDI into
India is less than FDI to China
Q5) What steps have been taken by India in it’s latest New
Economic Policy (2002 – 2007) to more of FDI into
various sectors
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