Factors Affecting Inward Foreign Direct Investment in the Philippines

UST COLLEGE OF COMMERCE & BUSINESS ADMINISTRATION PAGE i

Factors Affecting Inward Foreign Direct Investment in the

Philippines

A Thesis Presented to the

College of Commerce

University of Santo Tomas

In Partial fulfillment

of the Requirements for the Degree

Bachelor of Science in Business Administration, Major in Business Economics

By

Anna Ruby G. Colozo

Mary Jane V. Tarectecan

October 2010

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CERTIFICATE OF ORIGINALITY

We hereby declare that this submission is our own work and that, to the best of our

knowledge and belief, it contains no material previously published or written by

another person nor materials which to a substantial extent has been accepted for the

award of any other degree or diploma of a university or other institute of higher

learning, except where due acknowledgement is made in the text

We also declare that the intellectual content of this thesis is the product of our own

work, even though we may have received assistance from others on style, presentation

and language expression.

COLOZO, ANNA RUBY G.

TARECTECAN, MARY JANE V.

October 2010

UST COLLEGE OF COMMERCE & BUSINESS ADMINISTRATION PAGE iii

APPROVAL SHEET

The Thesis entitled

“FACTORS AFFECTING INWARD FOREIGN DIRECT INVESTMENT IN

THE PHILIPPINES”

prepared and submitted by Anna Ruby G. Colozo and Mary Jane V. Tarectecan of 4E2

has been approved in partial fulfillment of the requirements in Economics Research II

(ECO 32).

Rosemary P. Dinio, Ph.D.

Thesis Adviser

Approved by the Thesis Committee with a Final Grade of on October, 2010.

Asst. Dean, Mary Hildence Baluyot

Thesis Examiner Mr. Charles Fajardo, MSc PEMF

Thesis Examiner

Alma Aileen L. Almario-Miguel

Chair, Economics Department

Prof. Ma. Socorro P. Calara, Ph.D.

Dean, College of Commerce and Business Administration

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Acknowledgement

First and foremost, we thank our almighty God for the inspiration and wisdom

that guided us in every stage of our study. We are grateful to our respective parents,

Jose Montimer Colozo and Filipinas Colozo, and Fortunato Tarectecan and Meriam

Tarectecan, for their support and encouragement to work hard to finish our college

education.

To our respective siblings Allejo Colozo and Audrey Mae Tarectecan we say

thank you for adding fun to what otherwise were very stressful days for us while doing

our research.

Our thanks also go to the personnel of various government agencies for granting

us access to their data and helping us identify and locate their sources.

Finally, we cannot thank enough our thesis advisers, Dr. Jodylyn M. Quijano–

Arsenio and Dr. Rosemary P. Dinio for their academic guidance and assistance in the

conduct of our study. Together, we also want to thank all our professors especially Mr.

Ronald Paguta, Mr. Ronaldo Cabauatan, Mr. Francis Ian Quesada, Ms. Karren Grace

Valdez, Mr. Charles Fajardo, Ms. Marie Antoinette Rosete, Asst. Dean Mary Hildence

M. Baluyot and Asst. Prof. Alma Aileen Almario-Miguel, without which we could not

have completed our research project and paper on time. Furthermore we would like to

thank our guidance counselors Ms. Monica Sophia De Leon and Ms. Christine Quita.

We want to state, however, that any errors or shortcomings of this study are our

sole responsibility.

On a personal note, Anna Ruby also wants to dedicate this paper to her

grandfather, Santiago Colozo, who passed away on the same day we successfully

defended our thesis proposal, as well as to her aunt, Purificacion Colozo and her uncle,

Wilfredo Colozo and family for their untiring support

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TABLE OF CONTENTS

Title Page

Title Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Certificate of Originality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

Approval Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

List of Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii

List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viii

Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

CHAPTER 1 INTRODUCTION

Background of the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Objectives of the Study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Significance of the Study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Scope and Limitations of the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Definition of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

CHAPTER 2 LITERATURE REVIEW

Related Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Related Literature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Synthesis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

CHAPTER 3 RESEARCH METHODS

Theoretical Framework. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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Conceptual Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Statistical and Mathematical Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

CHAPTER 4 RESULTS AND DISCUSSIONS

Data Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Data Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS

Summary of Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

BIBLIOGRAPHY

Appendix A. General Reference Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Appendix B. Regression Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Appendix C. Indices Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Appendix D. Curriculum Vitae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

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LIST OF ACRONYMS

BOI – Board of Investment

CDC – Clark Development Corporation

CIA World Factbook - Central

Intelligence Agency Factbook

CPI – Corruption Perception Index

CR – Crime Rate

DMR – Democracy Rate

ESI – Environmental Stability Index

EXR – Exchange Rate

FH – Freedom House

HDI – Human Development Index

IFR – Inflation Rate

Inward FDI – Inward Foreign Direct

Investment

KWH – Kilowatt / Hour

LR – Simple Literacy Rate

MNC – Multinational Corporation

NSCB – National Statistical

Coordination Board

NSO – National Statistics Office

PEZA – Philippines Economic Zone

Authority

PHP per USD – Philippines Peso per

US Dollars

PNP – Philippine National Police

Real GDP – Real Gross Domestic

Product

SBMA – Subic Bay Metropolitan

Authority

TFP – Total Factor Production

TI – Transparency Index

TOPSIS – Techniques for Orderly

Preference by Similarity to Ideal

Solution

UNCTAD – United Nation Conference

on Trade and Development

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LIST OF TABLES

Table 1. Selected Economic Variables

Table 2. Selected Political Variables

Table 3. Selected Social Variables

Table 4. Regression Results for

Economic Factor

Table 5. Regression Results for

Political Factor

Table 6. Regression Results for Social

Factor

Table 7. Regression Results Including

All Factors

LIST OF FIGURES

Figure 1. Determinants of Inward FDI

Figure 2. Porter‟s Diamond of

National Advantage

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Factors Affecting Inward Foreign Direct Investment in the Philippines

Abstract

The study aims to identify how to increase Philippines‟ Inward Foreign Direct

Investment (FDI) by using three factor categories: economic, political and social. To

measure each factors, the researchers used variables to pinpoint which has the greatest

impact among the three where the government should focus. Variables under each factor

are Real Gross Domestic Product, Inflation Rate and Exchange Rate, Corruption

Perception Index, Democracy Rate, Crime Rate and Simple Literacy Rate. After

conducting appropriate tests and adjustments to examine the significance of each

variable to the dependent variable inward FDI; results shows that all variables under

economic, political and social are significant to the dependent variable inward FDI.

Based on the test conducted, social factors obtained the highest R-squared which proved

that Philippines‟ social factors are more important to foreign investors‟ decision. Strict

implementations of laws and by giving much attention to education as the primary

component of a better economy are some of the researchers‟ recommendation to

improve the countries social issues.

Keywords: Inward Foreign Direct Investment, Real Gross Domestic Product,

Inflation Rate and Exchange Rate, Corruption Perception Index, Democracy Rate,

Crime Rate, Simple Literacy Rate


1. Introduction

Inward Foreign Direct Investment (FDI) has been significant in promoting

productivity and growth of its recipients. A recent study by Contessi and Weinberger

(2009) discussed the effects of inward FDI into host country‟s productivity and growth.

On their study, they cited literature which dated back to 1978 stating that: “technology

from investor countries was transferred to host country through investment agreements

that allows the host country to be more productive and profitable,”- this proved that even

before, FDI has been considered as an opportunity to every host country to empower its

economy. In Haskel et al.‟s study (2005), they measured productivity spillover from FDI

to domestic firms. Using data from United Kingdom‟s manufacturing sector with

variables such as domestic plant-level output, domestic plant level input, domestic total-

factor production (TFP) and inward FDI, findings showed that there was a significant

positive correlation between the variables. A study done by Buckley et al. (2006)

employed data from China‟s electronic industry for 41 sub-sectors for years 1996, 1998,

2000 and 2001. Using a small panel of China‟s electronics industry sub-sector found

partial support for the view that inward FDI has promoted overall productivity growth

over the period 1996-2001 but this also showed a decline spillover benefits to China‟s

domestic industry over the period. Furthermore, a study conducted by Wang et al.

(2007) examined the relationship between inward FDI and export performance in China.

The study focused on three major variables which are FDI, exports and exchange rate.

Results indicate that FDI promotes exports by foreign and also domestically owned

firms with strongest effect on labor intensive industries. Inward Foreign Direct

Investment (FDI) has been extensively distinguished as one of the major motivating

force behind industrial promotion and economic progress in developing countries in

Asia. This made FDI a very interesting topic due also to the fact that it has been an

important part of globalization in the recent years (Haskel et al., 2005). Furthermore, the

National Statistical Coordination Board (NSCB) recognized that inward FDI has become


a focal point of competition among countries.

All the above studies are about the effect of FDI and therefore the researchers

are both aware of the positive upshot of inward FDI on host countries. After identifying

all these benefits, the main concern is how to attract foreign investors into the country.

Through the years, there are also studies conducted to identify the determinants of

inward FDI for different countries and in different fields. One of these was the study

conducted by Gao (2000) entitled “Ethnic Chinese Networks and International

Investment Evidence from Inward FDI in China,” which examined the role of business

and social networks in international investment by examining the effects of social

Chinese networks on FDI in China. This study focused on the social factors which bring

inward FDI into China. Using social factors such as size of the home and host country,

trade cost, relative capital and skilled labor endowments and income level of each

country issues as variables; the paper presented evidence that FDI in China is positively

related to the population share of ethnic Chinese in the source country. Furthermore,

Karimi et al. (2010) stated that FDI is a major means to development with an open and

effective international economic system. This led them to study on location decision for

FDI in ASEAN countries. This study used TOPSIS method to evaluate and rank the

most attractive location influencing for FDI according to the determinant of inward FDI.

TOPSIS or Technique for Order Preference by Similarity to Ideal Solution was

developed by Hwang and Yoon on the year 1981. It was based on the concept that the

selected best alternative should have the shortest distance from the ideal solution while

having farthest distance from the negative-ideal solution using geometrical sense.

Mathematical simplicity and flexibility in the definition of choice set is its main

advantage. The study considered ten key determinants for FDI to flow. The researchers

indentified these ten key determinants and grouped these under three categories, namely

economic, political and social. GDP per capita, share of exports in GDP, telephone

mainlines (per 1,000 people), Electricity production (KWH) per capita and Overall

Index of Economic Freedom will fall under economic. Human Development Index

(HDI), Environment Stability Index (ESI), and school enrollment (tertiary, % gross) are

then under social factor. While, rate of GDP growth over the previous 15years, average


FDI flows over the previous 10 years will be classified under political because it

considered time where it varies among the political factors. The empirical result

identified Singapore as the most attractive among the ASEAN countries while Lao PDR

on the last and ninth place. On the fifth place was the Philippines.

This study concentrates on the Philippine‟s inward FDI. Inward foreign direct

investment (FDI) is known as the long term participation by a foreign direct investor

(either individual or company) by providing capital to the host country. Foreign

ownership can be of factories, mines, assets and the like. Most of the countries consider

inward FDI as a measure of upward economic globalization; as stated by Rodriguez and

Pallas (2008) – “foreign direct investment (FDI) has been instrumental in shaping the

dynamics of the globalization process within different economies.” National Statistics

Coordination Board (NSCB) finds its roots from the realization of the resource and

technology difference among countries. The Philippines has four investment promotion

agencies which serves as the think tank in establishing suitable policies and promoting

competitive investment conditions to attract foreign direct investments namely the Board

of Investment (BOI), Philippine Economic Zone Authority (PEZA), Clark Development

Corporation (CDC), and Subic Bay Metropolitan Authority (SBMA). These are agencies

that the economy counts on in terms of additional capital from foreign investors to

compliment domestic investment and in turn can expand national income and national

savings for economic development. Latest statistics show that as of 2009, NSCB-

IACFDIS recorded a total 121,815.9 million pesos of total approved foreign direct

investment. From this total, more than fifty percent or 103,421.3 million pesos was

collected by Philippine Economic Zone Authority (PEZA) alone. The top three foreign

direct investor countries were Japan with 70,737.1 million pesos, USA with 12,947.1

million pesos and Korea with 9,632.6 million pesos. Most of these investments were in

the manufacturing sector which has 70.71 percent share, while the other two major

destinations of investments are finance and real estate sector with 13.49 percent and

around 8.94 percent for the service sector which includes hotel and restaurant, computer

software development, health care programs, renting and leasing of water sport


equipment, training services, college education and other services. Furthermore, latest

World Investment Report released by United Nations Conference on Trade and

Development (UNCTAD) reported around 67,594.4 million pesos total inward FDI flow

for the Philippines on 2008 with 6.2 as percentage of gross fixed capital formation. Also

on the same year, UNCTAD‟s recorded inward FDI stocks amounted to about 954,770.9

million pesos with 12.7 as percentage of gross domestic product. Furthermore, in 2009,

UNCTAD released its World Investment Report covering worldwide statistics about

economic development. The world‟s leading recipients of inward FDI are United States,

France, China, United Kingdom, Russian Federation, Spain, Hong Kong, Belgium,

Australia and Brazil respectively. Among the developing countries, the top recipients are

Russia, Brazil, India, Mexico and Nigeria. In addition, Central Intelligence Agency

Factbook, also known as CIA World Factbook, of United States released its 2009

ranking of countries receiving inward FDI which ranked Philippines at 63rd

among 151

countries.

After enumerating the extent of influence of the determinants, the main focus of

this study is to identify how to increase those above mentioned inward foreign direct

investments by identifying which strongly pull foreign investments into the Philippines.

Given three factor categories: economic, political and social which were based on a

theory by John Dunning entitled OLI Paradigm – The Eclectic Theory. OLI stands for

Owner advantages, Location advantages and Internalization advantages. Under local

advantage where economic advantage, political advantage and social advantage; the

researchers want to identify which among the three greatly affects the foreign investors‟

decision to invest in the Philippines. The researchers identify sub-determinants under

each category. Gross Domestic Product (GDP), Exchange Rate and Inflation Rate are

identified under economic advantage which was defined by Dunning as the quantities

and qualities of the factor of production. Whereas under political advantage, which

Dunning identified as the common and specific government policies that influence

inward FDI flows, are Corruption and Democracy which are the most commonly used

determinants by other past studies; these two political variables will be measured using


indices. Lastly, under social advantage are Crime Rate and Literacy Rate are the most

popular determinants of inward FDI; these are examples of what Dunning called as

general attitude towards foreigners. This study aims to help the government identify to

which advantage to focus to help attract foreign investors. It is the government that has

the key in increasing investors‟ preference by improving the factors or advantages for

inward FDI attraction. A theory entitled Porter‟s Diamond of National Advantage,

discussed the role of government in the development of its country‟s advantage.

According to the theory, government must persuade companies to boost their

performance, invigorate early demand for advance products, concentrate on specialized

factor formation and encourage local rivalry through partial direct cooperation and

enforcing antitrust regulations. The paper proceeds as follows: Section 1 states the

introduction for the study, discussing all recent statistics and its economic significance.

Section 2 discusses all the variables that were used in the study together with the

appropriate supporting data from the literature review. Section 3 provides the

methodology with the study‟s conceptual frame work, supporting theories and laws, and

the regression model. While Section 4 enumerates all the data that were collected from

different government agencies and indexes together with the regression results. Lastly,

Section 5 states the researchers‟ conclusions and pertinent recommendations for further

study.

2. Literature Review

2.1 Inward FDI

Foreign direct investment (FDI) plays an important role in promoting economic

growth through increasing trade, advancing a country‟s technological level, enhancing

institutional development, improving managerial skills, and elevating the education and

financial systems to face the new challenges brought by globalization (Borenzstein, De

Gregorio, & Lee, 1998; Klein, Aaron, & Hadjimichael, 2003). The effect of foreign

direct investment (FDI) on growth has been debated extensively in the economic


literature. The rising interest in this area of research also coincides with the shift in

emphasis among policymakers towards attracting more FDI inflows in recent years

(Baharumshah A. et al, 2010). In addition, this may result to stronger ties between

developed and developing countries that could yield cost advantages in the form of

advanced technology transfers resulting into positive externalities. Furthermore, FDI can

have other beneficial effects on the host nation; it may facilitate the extraction and

distribution of raw materials produced in the host country by improving the network of

transport and communication like what multinationals does when constructing ports for

faster transportation. Also, FDI can beneficially affect the productive efficiency of

domestic enterprises. Local firms have an opportunity to improve their efficiency by

learning and interacting with foreign firms. It can also raise the quality of domestic

human capital and improve the know-how and managerial skills of local firms (Bengoa

and Sanchez, 2003). FDI can accelerate the transition process by forming a basis for

more effective corporate governance and by promoting enterprise restructuring (Bevan

and Estrin, 2004). Countries can have different variables that could attract Inward

Foreign Direct Investment to their country an example is the study of Reiter and

Steensma (2010) which argued that FDI inward flows are more positively related to

human development when FDI policy strategically controls foreign investment by

limiting the economic sectors open to foreign investment or by discriminating against

foreign investors in favor of domestic ones.

Foreign direct investment (FDI) in the Philippines has increased rapidly since

1993, due to major liberalization of the investment regime but still remains low by

ASEAN standards. The most important sectors for FDI are manufacturing, banking,

infrastructure and public utilities, where reform has been most rapid. In sectors such as

mining and agriculture, where trade and legal reform and implementation are lagging,

FDI flows have been weak. Dominant sources of Philippine FDI are Japan, followed by

the USA while Australia‟s FDI flows to the Philippines are small and volatile, with

strongest growth occurring in the late 1980s and 1994 and 1995. In spite of the Asian

financial market turmoil, 1997 was also a strong year for Australian FDI (Department of


Foreign Affairs and Trade).

In this study the researchers used different issues in the country and the factors

under it that may possibly affect the Inward Foreign Direct Investment into the

Philippines. Real Gross Domestic Product, Inflation Rate and Exchange Rate are the

determinants under Economic issues; which are also known as macroeconomic factors.

Macroeconomic stability as measured by the current account had the most consistent

effect on FDI flows across countries in the region (Montero, 2009). The researchers also

took into account political factors that may affect investors‟ preference for investing; the

variables under it are Corruption Perception Index and Democracy Index. Lastly,

researchers also consider social factors and these are the Crime Rate and Literacy Rate,

the variables of which will be discussed thoroughly on the succeeding part.

2.2. Gross Domestic Product (GDP)

Gross Domestic Product is defined as a weighted average of the output of all

final good. It is the monetary, market value of all final goods and services produced in a

country over a period of a year. The real GDP per capita (corrected for inflation) is

generally used as the core indicator in judging the position of the economy of a country

over time or relative to that of other countries. The GDP is thus implicitly, and often

even explicitly, identified with social welfare – witness the common substituting phrase

“standard of living.” The GDP information for firms, investors and citizens/consumers is

important. One can identify more concrete indications of the influence of GDP

information on economically-relevant decisions. Financial markets are sensitive to

realizations and predictions of GDP growth, which if positive create optimism and if

negative pessimism about the „„economic climate”. Central banks generally formulate

their interest policy on the basis of expectations about growth and inflation. Private

companies regard GDP growth as an important element of the general investment

climate. Even the confidence of consumers, which determines their purchasing behavior,

is influenced by expectations of GDP growth (Van den Bergh, 2009). GDP growth has

also been a variable under economic issues due to the fact that an increase in GDP

together with per capita income, especially in developing countries, fosters poverty

http://www.investorwords.com/2240/Gross_Domestic_Product.html


alleviation. In the study of Bengoa and Robles (2003) they included GDP as variables

that are traditionally considered as influencing FDI. The coefficient of the level of GDP

is positive and significant in all regressions. This result is consistent with the market-size

hypothesis, which means that the GDP greatly affect investor‟s decision in investing to a

country. Also, in the study of Asiedu (2001) she used GDP as a determinant of inward

FDI, the result show that FDI-GDP increases with the degree of openness to

international trade, infrastructure development and the return on capital. On the basis of

this intricate link between FDI and growth/development, the trade regime of Bangladesh

has been intensely liberalized to maintain the streams of investments and finances from

abroad. These reasons also increase the effort of the government to try and make the

country an attractive destination for FDI, which in itself has several benefits (Kabir,

2007). In the study of Hsiao and Hsiao (2006) they explain and justify the choice of the

eight economies composed of developed and developing countries which are Korea,

Taiwan, Singapore, Hong Kong, China, Malaysia, Philippines and Thailand by

examining their historical performance of real GDP per capita from the global economic

perspectives. The eight economies are known for their rapid growth through the

promotion of GDP per capita, exports and encouragement of FDI inflows. The study

proved that with high GDP per capita, countries became more attractive to FDI inflow.

2.3. Exchange Rate

Exchange rate is the price of domestic goods in terms of foreign goods

(Blanchard, 2006). A study in Southeast Asian countries exchange rate affect direct

investment not only from Japan but also from the US, direct investment from Japan into

Southeast Asia has been very sensitive to changes in the yen-dollar exchange rate: dollar

depreciations lead to investment surges from Japan. Moreover, holding constant the

effect of the real exchange rate, direct investment from Japan promotes trade between

Asia and both Japan and the US. Japanese direct investment expands both the export and

import linkages of Southeast Asia (Goldberg L. and Klein M.). On the other hand,

exchange rate in the study of Baek and Okawa (2001), studied the Japanese FDI in

Asian countries which is characterized as export-oriented investment to create a


production site for exporting. When this characteristic of Japanese FDI into Asia is

considered, the investment decision must be based on not only the exchange rates

between the yen and the host countries‟ currencies, but also the exchange rates of the

yen and the Asian currencies against the currency customarily used in international

transactions such as US Dollar currency. In examining the role of exchange rates in

Japanese FDI in Asia, the analysis in this paper thus focused on exchange rates of the

yen against the Asian currencies, of the yen against the US dollar, and of the dollar

against the Asian currencies. Developing economies do not have a sufficiently

developed foreign exchange futures or options market for foreign investors to hedge the

exchange rate risk of their FDIs. It is also unlikely that these developing economies can

promote the development of such markets for FDI in the near future (Yip and Yap,

2006). A study by Brzozowski (2006) found out that nominal exchange rate uncertainty

and volatility may negatively influence the decision to locate investment in transition

and accession countries. Exchange rate volatility affects FDI in two opposite ways: (1) it

depresses investment, because the firm will only invest if the present value of the

expected revenues is higher than the sunken entry cost by an amount equal to the value

of waiting and (2) the opportunity cost of waiting rises with exchange rate volatility and

thus boosts investment. Furthermore, in the study of Kyota and Urata (2004) entitled

“Exchange Rate, Exchange Rate Volatility and Foreign Direct Investment”; results

generally indicate that the depreciation of the host country currency attracts FDI while

large volatility in real exchange rates discourages FDI.

2.4. Inflation Rate

A high rate of inflation is a sign of internal economic instability and of a host

government‟s inability to maintain expedient monetary policy. Where inflation rates are

high, potential direct investors may perceive difficulty even in making short-term

pricing decisions. Inflation also may inhibit export sales from the country, thus making

resource-seeking FDI less attractive. For these reasons, companies may avoid making

investment in countries with high inflation .In the study of Asiedu (2001) she used

inflation rate as one of the determinants of FDI as a measure of the overall economic


stability of the country. Also in the study of Bengoa and Sanchez-Robles (2003) they

cited that high inflation rate jeopardizes competitiveness and hence exports, and may be

a symptom of the existence of distortions in the markets, lack of fiscal discipline or poor

macroeconomic stability as argued by Fischer (1993). Mansoorian and Mohsin (2006)

studied one of the most controversial issues in the 1980‟s and 1990‟s which was the

usefulness of low inflation targets adopted by the central banks of several industrial as

well as developing countries. The presented paper studies the effects of inflation targets

for a small open economy, by working out the effects of changes in inflation targets on

the important macroeconomic variables that could affect the rise or fall of investments

into the country. In addition, in the study of Mallick (2008) he found out that inflation

rates have a significant impact to attract investment towards economic growth. This

suggests a policy of targeting price stability is desirable to achieve a higher rate of

economic growth in emerging markets.

2.5. Corruption

Corruption is the promotion of private gains or selfish interest at the expense of

public interest, against the overall objectives of the government (Mafunisa, 2000). In the

study of Wei and Wu (2001) they used Corruption as one of the determinants of inward

foreign direct investment. Results showed that corruption may affect a country's

composition of capital inflows in a way that makes it more likely to experience a

currency crisis that is triggered by a sudden reversal of international capital flows. They

also found out that tax rate on multinational firms or corruption level in a host country

reduces inward foreign direct investment. They stated that there is no support for the

hypothesis that corruption has a smaller effect on FDI into East Asian, an increase in the

corruption level that of Singapore to that of Mexico is equivalent to raising the tax rate

by over twenty percent. Furthermore, Djankov et al (2002) suggested that stricter

regulation of entry is correlated with more corruption and a larger informal economy

and therefore restrictions on entry may have a negative impact on FDI inflows a country.

He also found out that the American investors averse to corruption in host countries, but

not necessarily more so than average OECD investors this is in spite of the U.S Foreign

http://www.elsevier.com/locate/econbaseMansoorian


Corrupt Practices Act of 1977. Also, corruption at the level of powers to be plays a

major role; this is the reason why laws so often exist only on paper. An example was

corruption in Russia which exists both on federal and local level. Some studies show

that countries with higher corruption level have a lower ratio of both total and private

investment to GDP. Furthermore, Corruption has been one of the foremost challenges

faced by less developed countries (Quah, 2003; Rahman, 1986; Pei, 1999; Rose and

Ackerman, 1999; Hamilton and Hart, 2001; Bhargava and Bolongaita, 2004; Yang,

2004; Samajdar and Ko, 2010). Corruption can lead to low administrative efficiency,

poor governance structure and underdevelopment of the economy making it an

international issue. International organizations have recognized that corruption explains

the failure of foreign direct investment and foreign aid programs (Samajdar and Ko,

2010). Corruption lowers investment and employment growth, though these effects are

smaller and not always statistically significant. Their study also finds that the reported

levels of corruption and bureaucratic interference are positively correlated at the firm

level, which casts serious doubts on various theories that postulate that corruption may

increase efficiency by allowing firms to circumvent government regulations (Gaviria,

2002). In the study of Blackburn et al (2010) corruption may arise due to the opportunity

for bureaucrats to embezzle public funds, an opportunity that is made more attractive by

financial liberalization which at the same time raises efficiency in capital production.

The main results is summarized as follows: (1)corruption is always bad for economic

development, but its effect is worse if the economy is open than if it is closed; (2)the

incidence of corruption may itself be affected by both the development and openness of

the economy; (3) financial liberalization is good for development when governance is

good, but maybe bad for development when governance is bad; and (4)corruption and

poverty may coexist as permanent, rather than just transitory, fixtures of an economy. In

addition, low administrative efficiency, poor governance structure, political instability,

and underdevelopment of the economy all have corruption as one of their causes.

Corruption is also an international issue. International organizations have recognized

that corruption explains the failure of foreign direct investment and foreign aid

programs. (Ko and Samajdar, 2010)


2.6. Democracy

On the democracy level, many view globalization as the simultaneous expansion

of free markets proxied by the growth of cross-border trade and investment and the

institutions of political democracy (de Soysa 2003, Held and McGrew 2000, Li and

Resnick 2003, Milner and Kubota 2005, Simmons and Elkins 2004). The successful

consolidation of democracy requires meeting the economic expectations of people, a

task that becomes increasingly dependent upon opening up to trade and international

sources of capital and technology (Bhagwati 2004). The researchers found out that

expanding the sample and transforming the dependent variable yield consistent support

for the view that democracy actually increases FDI. Moreover, a study by Jakobsen and

De Soysa (2006) stated that democracy‟s negative effect becomes positive and

significant when the inward FDI is logged. These results also withstand several tests of

sensitivity; initial findings do not suggest a trade-off between democracy and FDI. In

contrary, in the study of Li and Resnick (2003) they show that when property rights

protection, which is positively associated with democracy, is controlled, developing

country democracies are punished by manufacturing companies because remaining

features of democracy pose unfavorable conditions for these companies. Several studies

argue that higher levels of democracy increase foreign and domestic investment because

democracy provides checks and balances on the executive and strengthens the rule of

law, thus reducing the potential for arbitrary government intervention in the affairs of

MNCs (Henisz 2000, Jensen 2003, Olson 1993, Ramamurti and Doh 2004).

Furthermore, according to the study conducted by Tavares and Wacziarg (2001),

democracy needs a functioning state and a state bureaucracy considered useable by the

new democratic government, to protect the rights of citizens and deliver the services that

citizen‟s demand. In addition, another study by Papaioannou and Siourounis (2007)

stated that a democratic government needs to be able to exercise its claim to the

monopoly of the legitimate use of force it would have to tax compulsorily. For this it

needs a functioning state and a state bureaucracy usable by the new democratic

government. Initial income, investment rates, population growth rates, measures of


human capital and a host of other economic policy variables thought to affect growth

such as the share of government consumption expenditures in GDP, openness to trade,

and the inflation rate. The major finding of this literature is that democracy has a small

and statistically insignificant effect on growth.

2.7. Crime Rate

Crime rate is the count of crimes compiled to assess the effectiveness of a crime

control policy and the impact of the policy on the risk of crime victimization. It also

conditions business activities in many ways; generally, it increases the risks for

investment because of possible attacks, intimidation and the destruction of property.

Crime and the control of a part of the legal economy have been well documented in

judiciary inquests and are the subjects of much research (La Spina and Lo Forte, 2006).

In the study of Gaviria (2002), results show that crime has a similar effect on the

economic outcomes of firms, which also affect the firm's decision for investing it is also

noticed even after taking into account firm and country characteristics. He found out that

besides corruption, crime is also a factor that substantially reduce sales growth and it is

positively correlated at the firm level. Overall, the results of the paper suggest that crime

substantially reduce firm competitiveness and is unlikely to have any positive effects.

Crimes/total population is a "gross" rate; it includes both children and adults. According

to Gregory Brock, FDI will increase substantially with lower crime levels. Based upon

the outcome of his research, he argued that crime is one of the important FDI factors.

According to his Gross FDI Regression Results Table, crime is ranked in the one of the

first places as far as Russia is concerned (Eliassov, 2002). Crime and violence also

lowers investment and employment growth and as a result may lowers the city growth

rate (da Mata et al, 2007)

2.8. Literacy Rate

Literacy rate, is defined as the percentage of the population 15 years and older

who can read and write. It is also considered as a factor determining Human Capital. It


has been argued that developing countries might enhance their attractiveness as

locations for FDI by pursuing policies that raise the level of local skills and build up

human resource capabilities (Paloni A. et al, 2001). It is the quality of the labor force, its

accumulated experience and human capital, its education system, and so on, that

determines an economy‟s ability to create new ideas and adapt old ones (Den Berg V,

2001). Consequently, improvements in education and human capital are essential for

absorbing and adapting foreign technology, and to generate sustainable long run growth.

Along with international trade, the most important vehicle for international technology

transfer is foreign direct investment (Blomstrom and Kokko, 2003). In the study of

Anwar (2008) foreign investment has been long regarded as the main driver of

Singapore‟s manufacturing sector growth. In his study, human capital is a factor of

attracting inward FDI to Singapore wherein human capital is defined as the literate

people who can work. Furthermore, in the study of Reiter and Steensma (2010) they

stated that the FDI inflow continues into areas where the state focused to the

improvement in their human development which is described as the basic skill of a

person, significant both absolutely and relative to other countries

3. Research Method

This study attempts to identify which among the three factors: economic, social

and political, strongly affect inward Foreign Direct Investment in the Philippines. This

section presents the paper‟s conceptual and theoretical framework together with the

appropriate theories; it also discusses the secondary data to be used and the regression

model.

The conceptual framework shows how the explanatory variables affect the

dependent variable through the a priori conditions that the researchers hypothesized and

various theories that supports it. In this case, there will be three sets of conceptual

framework representing the three factors that attract inward FDI. The entire three


conceptual frameworks will have the same dependent variable which is Inward FDI.

Under economic factors, inward FDI will be determined by the constructed explanatory

variables: Gross Domestic Product (GDP), Exchange Rate and Inflation Rate. Political

factors on the other hand will use Corruption and Democracy as the determinants of

inward FDI. Lastly, social factors include Crime Rate and Literacy Rate as independent

variables.

3.1. Conceptual Frameworks

Figure 1: Determinants of Inward FDI

Figure 1: Determinants of Inward FDI

Figure 1 presents the factors affecting Inward Foreign Direct Investment. Only

inward FDI is the variable to be regressed and all the rest are the regressors. Inward FDI

Economic Determinants

Real Gross

Domestic Product

( + )

Exchange Rate

( + )

Inflation Rate

( - )

Political Determinants

Corruption

Perception Index

( - )

Democracy Index

( + )

Social Determinants

Crime Rate

( - )

Simple Literacy

Rate

( + )

AApppprroovveedd IInnwwaarrdd FFDDII

GGrroowwtthh RRaattee


is commonly known as the investment of foreign capital into local sources. It is the

participation of the source country to its host country, which not only includes capital

but also expertise and technology. For this study, the researchers will focus primarily to

approved inward FDI which are indicators of how good a prevailing investment climate

and foreign investors' confidence in the country. Since the study aims to identify which

among the three factors greatly affect inward FDI, growth rates of approved inward FDI

are more appropriate to identify the impact of the proposed independent variables to the

dependent variable. The same explanation will hold for the rest of the dependent

variables which will be measured using growth rates. Under economic factor, Gross

Domestic Product or GDP is generally defined as the total monetary value of all goods

and services that a country produced for a given period and within the country‟s borders.

The general formula for GDP is the sum of consumption, investment and government

spending together with the net export/import. Real GDP growth rate will be used for this

study for its characteristic of being adjusted for inflation. Real values always convey a

magnitude obtainable at some point in time relative to a magnitude obtainable at some

other point in time. Real GDP has a positive effect on inward FDI because if real GDP

increases, it means that the country has an effective labor performance. Exchange Rate

was defined by Kipici and Kesriyeli, on their study about exchange rate in Turkey, as

the calculated exchange rate that takes into account the inflation differentials between

the two countries. This is a strong indicator of competitiveness in attracting inward

foreign direct investment. For this study, Philippine Peso per US Dollar (Php per USD)

exchange rate in terms annual average computed from its monthly average will be used

due to the fact that the U.S. dollar is the currency that most of the countries used

in international transactions and is one of the world's reserve currencies. In

addition, several countries use it as their official currency, and in many others it is

the “de facto currency” or the unit of money that is not legal tender in a country but is

treated as such by most of the population. Exchange rate could have a positive effect on

inward FDI based on the study conducted by Zeng (2009) which compared the

determinants of FDI in China and India. Zeng also used Inflation rate as one determinant

of inward FDI with a negative a priori condition which means that it is inversely related

http://en.wikipedia.org/wiki/International_trade

http://en.wikipedia.org/wiki/Reserve_currency

http://en.wikipedia.org/wiki/Dollarization

http://en.wikipedia.org/wiki/De_facto_currency


to inward FDI. Inflation rate is the increase in price of goods and services which weigh

the value of a country‟s currency. Corruption under political factors is defined as the

abuse of public official for private gain. The common corruption measure was the

Corruption Perception Index which also defined corruption as the “abuse of entrusted

power for private gain.” Corruption Perception Index (CPI) has been used by many

researchers in their studies. Some of them even studied its significance like that of Ko

and Samajdar (2010) which test the reliability and validity of various indexes which

include CPI of Transparency International (TI). They found out that reliability of

international corruption indexes has improved over the years. But there are still

shortcomings by some corruption indexes which might affect the results of the study. In

relation, they stated that this can be avoided by paying more attention towards

minimizing the impact of measurement errors through rigorous data screening and

choosing a reliable international corruption index. On the same study, the researchers

enumerated features of CPI: (1) it uses a variety of sources to measure general public

sector corruption, (2) many sources used to construct CPI are designed for assessing

country risk and competitiveness, which is somewhat related to business decision

making, which make it more reliable in this study about inward FDI, (3) it encompasses

the evaluative perception of anti-corruption efforts since most sources used in CPI

define corruption in general terms. Another study that used CPI was the research done

by Akoto and Roubaud (2010) which also studied the reliability of corruption indexes.

They defined CPI as one of the oldest and best known measurements of corruption

which made it the producers of benchmark corruption indicators. Furthermore, a study

entitled “Human Development and Foreign Direct Investment in Developing Countries:

The Influence of FDI Policy and Corruption” by Reiter (2010) proved that corruptions

lowered FDI inflow by using CPI as a proxy for level of corruption in each country.

With this definition, a negative a priori was used to state its relationship to inward FDI, a

corrupt government will not likely to attract foreign investors. On the other hand,

Democracy is defined as the state of government where the people held the supreme

power. Jakobsen and Soysa (2006) stated that democracy could actually increase inward

FDI giving it a positive a priori. Crime Rate, as one of the social determinants of inward


FDI, was defined by Gillado and Tan-Cruz (2004) on their study about “Panel Data

Estimation of Crime Rates in the Philippines,” as the disturbance of men‟s living. With

this definition, the researchers strongly agreed that this factor will have a negative effect

on attracting inward FDI. When it comes to literacy rate, in plain definition, is the ability

to read and write making it as one positive determinant of inward FDI. The United

Nations Education, Scientific and Cultural Organization (UNESCO) define literacy as

“the ability to identify, understand, interpret, compute, create, communicate and use

printed and written materials.” It includes continuous learning enable humans to achieve

their goals and fully develop their knowledge. National Statistics Office (NSO)

identifies literacy rates in two form which are Simple and Functional. Simple Literacy

Rate or Basic Literacy Rate is defined as the ability to read and write with understanding

simple messages in any language or dialect. On the other hand, Functional Literacy Rate

represents a significant higher level literacy which includes not only reading and writing

skills but also numerical skills. In this study, the researchers will use simple literacy rate

for simplicity.

3.2. Supporting Theories/Laws/Principles

There are two theories that the researchers introduced in the previous part of this

paper, namely OLI Paradigm – The Eclectic Theory and the Porter‟s Diamond of

National Advantage. This part will discuss these two theories comprehensively. OLI

Paradigm – The Eclectic Theory, as was introduce on the previous chapter, was evolved

by John Dunning. It was termed as “eclectic” because OLI Paradigm is a combination of

three various theories on FDI. Ownership Advantages is intangible and transferable

through countries at low cost. This stated that the success of a foreign firm in another

country depends on the advantage that vanquishes the costs of operating in the host

country. Location Advantages are also called “Country Specific Advantages,” these are

the basis in identifying which will become the host countries of the investors. And lastly,

Internalization Advantages which is the using of host countries “market failures” to take

advantage of profit. By identifying the deficiency of the host country and employing

investors‟ resources to take advantage. On the other hand, another theory by Michael E.


Porter entitled “Porter‟s Diamond of National Advantage” was defined as one of the

classical theories of international trade. This theory stated that factor endowments of a

country must have comparative advantage. These advantages are not limited to those

that the country inherited but can also be new advanced factor endowments that the

country created like skilled labor, technology government support and even culture. This

is directly related to the nature of inward FDI in a way that it promotes economic

progress and motivates industrial promotion as well as heightens economic

globalization. Porter‟s Diamond of National Advantage was also named after its

illustration which was shown below:

Figure 2: Porter‟s Diamond of National Advantage

Factor conditions are factors created by the country itself such as skilled

resources. Demand conditions are competitive advantage arising from a larger demand

in the local than in the foreign market, more demand in local market may lead to

national advantage. The third point is Related and Supporting Industries, which is the

competitiveness of the local industry to enjoy more cost effective innovation inputs. And

for the last point, Firm Strategy, Structure and Rivalry, this states that the local condition

affect firms strategy. These strategies and structures facilitate in identifying in which

type of industry a nation will do extremely well. As a whole, the Porter‟s Diamond of

National Advantage portrays that the effect of one point will extremely depend on the

others.

Related and

Supporting

Industries

Demand

Condition

Factor

Condition

Firm Strategy,

Structure and

Rivalry


3.3. Regression Model

The study is an identification of which among economic, political and social

factor have the greatest impact on Inward Foreign Direct Investment. This study used

Simple Linear Regression Technique for each factor (economic, political and social) and

Multiple Linear Regression Technique that combines the entire three factors. Both used

Natural Logarithmic/Ordinary Least Square Method which estimates the trend for

inward FDI over the period 1995 to 2009. The regression model to be included in this

study will be four sets: one economic determinant, one political determinant, one social

determinants and another regression which combines all the independent variables from

all three determinants.

First Regression Model (Economic Determinants of Inward FDI)

YFDI = β0 + β1GDP + β2EXR - β3IFR + ε

Second Regression Model (Political Determinants of Inward FDI)

YFDI = β0 - β1CPI + β2DMR + ε

Third Regression Model (Social Determinants of Inward FDI)

YFDI = β0 - β1CR + β2LR + ε

Forth Regression Model (Combination of all Factors)

YFDI = β0 + β1GDP + β2EXR - β3IFR - β1CPI + β2DMR - β1CR + β3LR + ε

Where:

YFDI = Approved Inward FDI Growth Rate

β0 = Constant Term

β1GDP = Real GDP Growth Rate

β2EXR = Exchange Rate


β3IFR = Inflation Rate

β1CPI = Corruption Perception Index

β2DMR = Democracy Index

β1CR = Crime Rate

β3LR = Simple Literacy Rate

ε = error term

The researchers‟ hypothesis for this study follows that for the economic factors,

only inflation rate has a negative effect on inward FDI and all the rest are positively

related to the dependent variable. These are secondary variables that are readily

available at our local government agencies that coordinate all statistical information that

are relevant to the countries performance and status which are National Statistical

Coordination Board (NSCB) and National Statistics Office or NSO and at our local

central bank referred as “Banko Sentral ng Pilipinas.” While among the political factors,

the researchers hypothesized that corruption is a negative determinant of inward FDI

while democracy is considered as good indicator for investors. These political

determinants can also be obtained by using secondary data. Corruption can be measured

by using Corruption Perception Index (CPI), published annually by Transparency

International (TI) which is an international non-governmental organization combating

corruption and for public awareness since it was established 15 years ago. They defined

corruption as “the abuse of public office for private gain.” Corruption Perception Index

measures the perceived level of public sector corruption in 180 countries including the

Philippines. It is a “survey of surveys,” according to TI, which is based on 13 different

experts and business surveys from business people and country risk analyst, both

residents and non-residents and nationals and expatriates. It rates countries from 1-10; a

lower score means higher (perceived) corruption. On the other hand, democracy rate will

be measured by using the average of Degree of Civil Liberties and Political Rights

which rate countries between 1-7, where 1 signifies “most free” and obviously 7 as

“least free”. This is part of the published annual “Freedom in the World Report” to

measure democracy since 1973 by Freedom House; an international non-governmental


organization based in Washington D.C. The organization was known as “a clear voice

for democracy and freedom around the world,” it conducts researches on democracy,

political freedom and human rights. The researchers‟ hypothesis for social factor follows

that crime rate has a negative a priori condition and the other posses positive a priori.

Both crime rate and literacy rate are available using local statistical agencies that gather

information for our country like that of economic factors. Crime rates are provided by

our local police department or the Philippine National Police (PNP) which is a collection

of recorded crime per 100,000 populations. For simple literacy rate, National Statistical

Office (NSO) publishes rates every ten years and recently for five years. All these

independent variables are tested against the dependent variable inward FDI. Data for

inward FDI are secondary data annually published and collected by NSBC from BOI,

PEZA, CDC and SBMA; our countries investment promotion agencies.

4. Results and Discussions

This section enumerates all the data that were collected from different

government agencies and indexes mentioned on the previous section. Figures showing

the results from the test conducted are also enumerated. Appropriate tests and

adjustments were conducted to examine the significance of each variable to the

dependent variable inward FDI. A priory relationship that was stated on the conceptual

framework is also tested to check if accurate. The main objective of the study is to

identify which among the three factors affect inward FDI which will be the major

purpose of the tests conducted. Three tables were provided to separate data of the each

factor variables. The first table provided data on the economic variables followed by

political variables and lastly by social variables.

Table 1. Selected Economic Variables

OBSERVATIONS

INWARD FDI

GROWTH RATE

(APPROVED)

GDP

GROWTH

RATE (REAL)

EXCHANGE

RATE (PESO per

US DOLLAR)

INFLATION

RATE


1995 -23.30 4.70 25.71 6.70

1996 -47.30 5.80 26.22 7.50

1997 131.64 5.20 29.47 5.60

1998 192.10 -0.60 40.89 9.30

1999 -37.79 3.40 39.09 5.90

2000 -24.70 6.00 44.19 4.00

2001 -22.32 1.80 50.99 6.80

2002 -26.25 4.40 51.60 3.00

2003 -26.14 4.90 54.20 3.50

2004 411.30 6.40 56.04 6.00

2005 -44.91 5.00 55.09 7.70

2006 73.14 5.40 51.31 6.20

2007 29.75 7.20 46.15 2.80

2008 -15.12 4.64 44.47 9.30

2009 -33.33 0.90 47.64 3.20

Sources: NSCB and BSP

Table 2. Selected Political Variables

OBSERVATIONS

INWARD FDI

GROWTH RATE

(APPROVED)

CORRUPTION

PERCEPTION

INDEX

DEMOCRACY

RATE

1995 -23.30 2.77 3

1996 -47.30 2.69 2.5

1997 131.64 3.05 2.5

1998 192.10 3.30 2.5

1999 -37.79 3.60 2.5

2000 -24.70 2.80 2.5

2001 -22.32 2.90 2.5

2002 -26.25 2.60 2.5

2003 -26.14 2.50 2.5

2004 411.30 2.60 2.5

2005 -44.91 2.50 3

2006 73.14 2.50 3

2007 29.75 2.50 3.5

2008 -15.12 2.30 3.5

2009 -33.33 2.40 3.5


Source: NSCB, Transparency International (TI) and Freedom House (FH)

Table 3. Selected Social Variables

OBSERVATIONS

INWARD FDI

GROWTH RATE

(APPROVED)

CRIME RATE

(per 100,000

population)

LITERACY

RATE

(for every 5years)

1995 -23.30 115 93.90

1996 -47.30 110 93.90

1997 131.64 99 93.90

1998 192.10 98 93.90

1999 -37.79 108 93.90

2000 -24.70 105 93.90

2001 -22.32 101 93.40

2002 -26.25 112 93.40

2003 -26.14 103 93.40

2004

411.30

93

93.40

2005 -44.91 91 93.40

2006 73.14 82 93.40

2007 29.75 49.20 93.40

2008 -15.12 88.37 93.40

2009 -33.33 144.74 93.40

Sources: NSCB, PNP and NSO

Tables 1 to 3 show the tabulation of data collected and computed for each factor

variables that was significant for the study. Approved FDI values are provided in million

pesos originally therefore the researchers computed for its annual growth rate: [(FV–

PV)/PV]*100. Democracy rate was computed as the average of Civil Liberties and

Political Rights that was provided by Freedom House (FH) as a measurement of

Democracy. Since data for literacy rate were not published annually and only two

figures were obtained for 15 years, data were stretched for six years for the first figure

and nine years for the last figure in order to complete the years covered. The rest of the

data hold the way they were attained with no particular calculation made.


Table 4. Regression Results for Economic Factor

Dependent Variable: FDI(-7) Method: Least Squares Date: 10/13/10 Time: 02:29 Sample(adjusted): 2004 2009 Included observations: 6 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C 1252.288 262.5171 4.770310 0.0412 GDP(-9) 32.33387 9.575187 3.376839 0.0776 EXR(-4) -20.06232 4.437796 -4.520785 0.0456 IFR(-5) -62.72523 16.11975 -3.891203 0.0601

R-squared 0.939620 Mean dependent var 35.44667 Adjusted R-squared 0.849049 S.D. dependent var 99.91809 S.E. of regression 38.82061 Akaike info criterion 10.39050 Sum squared resid 3014.079 Schwarz criterion 10.25167 Log likelihood -27.17150 F-statistic 10.37443 Durbin-Watson stat 2.791713 Prob(F-statistic) 0.089189

Table 4 shows the results of the regression analysis done with various estimation

techniques and adjustments used for each variable. These results are essential in order to

know if the independent variables are significant to the dependent variable inward FDI

and to test the hypothesis stated by the researcher of the possible effect of each

independent variable to inward FDI. Impact of each factor can also be measured. Same

explanation will hold for the following four tables. Regression result for the economic

factors shows that the probability of the regression equation for each variable is less than

the 10% level of significance which means that all the three variables strongly influence

the inward FDI. Also, a Durbin-Watson Statistic of 2.79 which indicates that

autocorrelation doesn‟t exist. R-squared of 93.96%, accompanied by 84.90% adjusted R-

squared measures the success of the regression in predicting the values of the variables

within the sample, it states the impact of the dependent variables to inward FDI.

Table 5. Regression Results for Political Factor




C -2957.014 344.7866 -8.576358 0.0001 CPI(-4) 201.1948 46.68692 4.309448 0.0035

DMR(-4) 955.1088 108.0629 8.838450 0.0000


Table 5 shows the regression results for political factors. Probability of the

regression equation for Corruption Perception and Democracy Rate are less than the

10% level of significance; this signifies that inward FDI is highly dependent. A Durbin-

Watson Statistic of 2.19 which is .19 higher than the 2.0 level of autocorrelation together

with R-squared and adjusted R-squared as high as 91.95% and 89.66% respectively that

shows that all the dependent variables succeed in identifying the change in the

dependent variable.

Table 6. Regression Results for Social Factor

Dependent Variable: FDI Method: Least Squares Date: 10/13/10 Time: 02:38 Sample(adjusted): 2004 2009 Included observations: 6 after adjusting endpoints


C -92001.77 7680.211 -11.97907 0.0013 CR(-9) -7.960263 2.620806 -3.037334 0.0560 LR(-4) 993.9138 84.16011 11.80980 0.0013


Table 6 shows the regression results for social factors. Probability of the

regression equation for each variable is less than the 10% level of significance; this

proved that each dependent variable inward FDI is highly dependent to Crime Rate and

Literacy Rate. A Durbin-Watson Statistic of 2.79 also proved that autocorrelation does

not exist. A very high R-squared of 98.42% and adjusted R-squared of 97.38% means


that crime rate and literacy rate strongly affect inward FDI.

Table 7. Regression Results Combining All Factors



C -190352.7 4793.683 -39.70907 0.0160 GDP(-6) 161.9663 5.352350 30.26078 0.0210 EXR(-5) 73.94133 2.023218 36.54640 0.0174 IFR(-6) 334.9028 9.138010 36.64942 0.0174 CPI(-4) 270.8479 18.89484 14.33449 0.0443

DMR(-4) -556.1974 32.01971 -17.37047 0.0366

CR(-4)

-17.90032

0.829758

-21.57294

0.0295 LR(-1) 2001.464 50.25988 39.82231 0.0160


After isolating the effect of each factor category individually to the dependent

variable, the researchers also showed the effect of these independent variables as a

whole. By regressing all dependent variables against inward FDI, presented in table 7,

the researchers proved that all independent variables are significant to inward FDI by

having less that 10% level of significance. Durbin Watson Statistics of as high as 2.50

were also obtained together with a near perfect 99.95% R-squared and adjusted R-

squared of 99.61%.

5. Conclusions and Recommendations

The study focuses on identifying how to increase Philippines‟ Inward Foreign

Direct Investment (Inward FDI) by identifying the effect of three main factors:

economic, political and social. Among the three factors, the researchers also aim to

identify which among the three strongly pull foreign investments into the Philippines


that caused the drastic up and down peak in each year. By pinpointing which factor have

the greatest impact on Inward Foreign Direct Investment; unwanted negative peaks can

be prevented. The study used secondary data to identify the pattern and trend of the each

variable through its annual data statistics. Economic factors are Philippines‟ real GDP,

annual monthly average of peso to dollar exchange rate and inflation rate. Political

factors are Corruption Perception Index (CPI) and Democracy Rate. While social factors

focused on the countries crime rate and simple literacy rate; all data are from 1995-2009

which is 15 years.

Based on the results of the regression analysis done together with various

estimation techniques and adjustments used for each variable presented in Tables 4 to 7;

the researchers proved that all variables under economic, political and social including

the combined regression are significant to the dependent variable inward FDI. Also, for

all the factors, the researchers obtained a very high Durbin Watson Statistics which

proves that there was no autocorrelation among the independent variables; this means

that an event at one point doesn‟t affect the succeeding events. Furthermore, R-squared

that almost reaches 100% which means that all the three factors have a very high impact

on Philippines‟ inward FDI. By looking at the R-squared of each factor: economic -

93.96%, political – 91.96% and social – 98.43%, including the overall R-squared of the

combined regression which is 99.95%; the researchers met their primary objective which

was identifying which among the three factors strongly affects inward FDI. Based on the

figures above, a notable 98.43% r-squared was obtained for social factors compared to

93.96% economic factors and the lowest 91.96% for economic factors which proved that

Philippines‟ social factors are more important to foreign investors‟ decision.

Furthermore, the R-squared obtained in the combined regression is 99.95% which verify

that all the dependent variables are highly significant to the dependent variable

Observing each variables coefficient, the researchers‟ hypothesis about the effect

of each independent variable to the dependent variable is either rejected or accepted.

Under economic factors, only inflation rate was assumed to have a negative effect on


inward FDI and the rest were positively related. Based on its coefficient, the hypothesis

about exchange rate was rejected which gave exchange rate a negative effect on inward

FDI like the independent variable inflation rate. In the study of Blonigen (2006), he

found out that a depreciation of the host country‟s currency also reduces the amount of

foreign currency and in relation also reduces the return on investment. Political variables

both had positive coefficients which led to the acceptance of the hypothesis about

democracy rate having negative effect on inward FDI. In contrast, the opposite happened

to corruption perception which assumed to be negatively related to inward FDI therefore

rejecting the hypothesis. This result can be supplemented by the study of Al-Sadig

(2009) entitled; “The Effect of Corruption on FDI Inflows,” which state that although

corruption is generally a bad indicator for a possible investment transaction in some

countries; there are also positive effect. He stated that corruption can take in many

forms; one example is paying bribes to government official to get “favors” such as fast

approval of permits and other licenses. Although paying this additional “below-the-

table” charge could entail additional cost, it doesn‟t matter to the investors considering

that this will help them for faster profit earning once the investment is approved. On the

other hand, the hypothesis on democracy rate having positive effect to inward FDI was

rejected on the forth regression which combine all the dependent variables together. The

researchers conclude that investors might prefer less democratic country because the

more the people the host country is in control, the less likely that they can penetrate the

local market and furthermore the more difficult to handle workers. As to the social

factors, both hypotheses for each variable are accepted. Crime rate which was assumed

to have a negative effect on inward FDI obtained a negative coefficient while literacy

rate on the other hand obtained a positive coefficient in connection to the hypothesis that

literacy rate is positively related to inward FDI. The above results showed significant

relation to the study which could help government to know where or on what sector or

issues should they focus to increase the country‟s inward foreign direct investment.

Based on the findings of the study, the researchers strongly recommend that the

government, especially the country‟s promotional agencies, should focus on improving


social factors like crime rate and literacy rate. Political leaders should focus on strict

implementation of laws. Punishments should be implemented fairly and justly without

giving weight to those inferior ones. Government should give much attention to

education which as we all know is the primary component for a better economy.

Education itself is another form of investment for each individual that in the long run

serves as country‟s asset. The researchers are well aware of the study‟s short comings

due to many constraints that were encountered especially on time and resources. Future

study‟s must expand the variables and even use some other factors that might affect the

investors‟ decision. A study which has more observations, especially on political factors,

could help improve this study and additional factor like environmental issues that were

not tackled.


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BIBLIOGRAPHY


Appendix A. General Reference Table

OBS

FDI

(DV)

GDP

(IV)

EXR

(IV)

IFR

(IV)

CPI

(IV)

DMR

(IV)

CR

(IV)

LR

(IV)

1995 -23.3 4.7 25.71 6.7 2.77 3 115 93.9

1996 -47.3 5.8 26.22 7.5 2.69 2.5 110 93.9

1997 131.64 5.2 29.47 5.6 3.05 2.5 99 93.9

1998 192.1 -0.6 40.89 9.3 3.3 2.5 98 93.9

1999 -37.79 3.4 39.09 5.9 3.6 2.5 108 93.9

2000 -24.7 6 44.19 4 2.8 2.5 105 93.9

2001 -22.32 1.8 50.99 6.8 2.9 2.5 101 93.4

2002 -26.25 4.4 51.6 3 2.6 2.5 112 93.4

2003 -26.14 4.9 54.2 3.5 2.5 2.5 103 93.4

2004 411.3 6.4 56.04 6 2.6 2.5 93 93.4

2005 -44.91 5 55.09 7.7 2.5 3 91 93.4

2006 73.14 5.4 51.31 6.2 2.5 3 82 93.4

2007 29.75 7.2 46.15 2.8 2.5 3.5 49.2 93.4

2008 -15.12 4.64 44.47 9.3 2.3 3.5 88.37 93.4

2009 -33.33 0.9 47.64 3.2 2.4 3.5 144.74 93.4

Sources: NSCB, PNP, BSP, NSO, TI and FH


Appendix B. Regression Results

Regression Results for Economic Factor



C 1252.288 262.5171 4.770310 0.0412 GDP(-9) 32.33387 9.575187 3.376839 0.0776 EXR(-4) -20.06232 4.437796 -4.520785 0.0456 IFR(-5) -62.72523 16.11975 -3.891203 0.0601


Regression Results for Political Factor



C -2957.014 344.7866 -8.576358 0.0001 CPI(-4) 201.1948 46.68692 4.309448 0.0035

DMR(-4) 955.1088 108.0629 8.838450 0.0000


Regression Results for Social Factor

Dependent Variable: FDI Method: Least Squares Date: 10/13/10 Time: 02:38 Sample(adjusted): 2004 2009 Included observations: 6 after adjusting endpoints


C -92001.77 7680.211 -11.97907 0.0013


CR(-9)

-7.960263

2.620806

-3.037334

0.0560

LR(-4) 993.9138 84.16011 11.80980 0.0013


Regression Results Including All Factors



C -190352.7 4793.683 -39.70907 0.0160 GDP(-6) 161.9663 5.352350 30.26078 0.0210 EXR(-5) 73.94133 2.023218 36.54640 0.0174 IFR(-6) 334.9028 9.138010 36.64942 0.0174 CPI(-4) 270.8479 18.89484 14.33449 0.0443

DMR(-4) -556.1974 32.01971 -17.37047 0.0366 CR(-4) -17.90032 0.829758 -21.57294 0.0295 LR(-1) 2001.464 50.25988 39.82231 0.0160



Appendix C. Indices Methodology

I. CORRUPTION PERCEPTION INDEX SOURCES

Source Name Who was

Surveyed? Subject asked Coverage

1

Asian

Development

Bank (ADB)

Country

Performance

Assessment

Ratings

Country teams,

experts inside

and

outside the

bank

Corruption, conflicts

of interest,

diversion of funds as

well as

anticorruption

efforts and

achievements

29

countries

(eligible

for ADF

funding)

2

African

Development

Bank (AFDB)

Country Policy

and Institutional

Assessments

Country teams,

experts inside

and outside

the bank


of interest, diversion

of funds as well as

anti-corruption

efforts and

achievements

52

countries

3

Bertelsmann

Foundation

(BTI)

Bertelsmann

Transformation

Index

Network of

local

correspondents

and experts

inside and

outside the

organization

The government‟s

capacity to

punish and contain

corruption

125 less

developed

and

transition

countries

4

World Bank -

IDA and IBRD

(CPIA)

Country Policy

and Institutional

Assessment

Country teams,

experts inside

and

outside the

bank


of interest, diversion

of funds as well as

anti-corruption

efforts and

achievements

75

countries

(eligible

for IDA

funding)

5

Economist

Intelligence Unit

(EIU)

Country Risk

Service and

Country

Forecast

Expert staff

assessment

The misuse of

public office

for private (or

political

party) gain

170

countries

6 Freedom House

(FH)

Nations in

Transit

Assessment by

experts

originating or

resident in the

respective

country.

Extent of corruption

as practiced in

governments,

as perceived by the

public and as

reported in the

media, as well as the

implementation

of anticorruption

initiatives

29

countries /

territories

7 Global Insight

(GI)

Country Risk

Ratings

Expert staff

assessment

The likelihood of

encountering corrupt

officials, ranging

from petty

bureaucratic

203

countries


corruption to grand

political

corruption

8 & 9

IMD

International,

Switzerland,

World

Competitiveness

Center

IMD World

Competitivenes

s Yearbook

Executives in

top and middle

management;

domestic and

international

companies

Category

Institutional

Framework - State

Efficiency: “Bribing

and corruption

exist/do not exist”

55

countries

(both)

10

Merchant

International

Group

(MIG)

Grey Area

Dynamics

Expert staff

and network of

local

correspondents

Corruption, ranging

from bribery of

government

ministers to

inducements

payable to the

“humblest

clerk”

155

countries

11 & 12 Political &

Economic Risk

Consultancy

(PERC)

Asian

Intelligence

Newsletter

Expatriate

business

executives

How serious do you

consider the

problem of

corruption to be in

the public

sector?

15

countries

(both)

13

World

Economic

Forum (WEF)

Global

Competitivenes

s Report

Senior

business

leaders;

domestic and

international

companies

Undocumented extra

payments or bribes

connected

with 1) exports and

imports, 2) public

utilities, 3)

tax collection, 4)

public contracts and

5) judicial

decisions are

common/never

occur

131

countries


II. DEMOCRACY INDEX QUESTIONNAIRE

POLITICAL RIGHTS CHECKLIST

A. ELECTORAL PROCESS

1. Is the head of government or other chief national authority elected through free and fair elections?

2. Are the national legislative representatives elected through free and fair elections?

3. Are the electoral laws and framework fair?

B. POLITICAL PLURALISM AND PARTICIPATION

1. Do the people have the right to organize in different political parties or other competitive political

groupings of their choice, and is the system open to the rise and fall of these competing parties or

groupings?

2. Is there a significant opposition vote and a realistic possibility for the opposition to increase its support

or gain power through elections?

3. Are the people‟s political choices free from domination by the military, foreign powers, totalitarian

parties, religious hierarchies, economic oligarchies, or any other powerful group?

4. Do cultural, ethnic, religious, or other minority groups have full political rights and electoral

opportunities?

C. FUNCTIONING OF GOVERNMENT

1. Do the freely elected head of government and national legislative representatives determine the policies

of the government?

2. Is the government free from pervasive corruption? 3. Is the government accountable to the electorate

between elections, and does it operate with openness and transparency?

ADDITIONAL DISCRETIONARY POLITICAL RIGHTS QUESTIONS

1. For traditional monarchies that have no parties or electoral process, does the system provide for genuine,

meaningful consultation with the people, encourage public discussion of policy choices, and allow the right

to petition the ruler?

2. Is the government or occupying power deliberately changing the ethnic composition of a country or

territory so as to destroy a culture or tip the political balance in favor of another group?

CIVIL LIBERTIES CHECKLIST

D. FREEDOM OF EXPRESSION AND BELIEF


1. Are there free and independent media and other forms of cultural expression? (Note: In cases where the

media are state-controlled but offer pluralistic points of view, the survey gives the system credit.)

2. Are religious institutions and communities free to practice their faith and express themselves in public

and private?

3. Is there academic freedom, and is the educational system free of extensive political indoctrination?

4. Is there open and free private discussion?

E. ASSOCIATIONAL AND ORGANIZATIONAL RIGHTS 1. Is there freedom of assembly,

demonstration, and open public discussion? 2. Is there freedom for nongovernmental organizations? (Note:

This includes civic organizations, interest groups, foundations, etc.)

3. Are there free trade unions and peasant organizations or equivalents, and is there effective collective

bargaining? Are there free professional and other private organizations?

F. RULE OF LAW

1. Is there an independent judiciary?

2. Does the rule of law prevail in civil and criminal matters? Are police under direct civilian control?

3. Is there protection from political terror, unjustified imprisonment, exile, or torture, whether by groups

that support or oppose the system? Is there freedom from war and insurgencies? 4. Do laws, policies, and

practices guarantee equal treatment of various segments of the population?

G. PERSONAL AUTONOMY AND INDIVIDUAL RIGHTS 1. Do citizens enjoy freedom of travel or

choice of residence, employment, or institution of higher education?

2. Do citizens have the right to own property and establish private businesses? Is private business activity

unduly influenced by government officials, the security forces, political parties/organizations, or organized

crime?

3. Are there personal social freedoms, including gender equality, choice of marriage partners, and size of

family? 4. Is there equality of opportunity and the absence of economic exploitation?


Appendix D. Curriculum Vitae


Name: Anna Ruby G. Colozo

Birthday: October 20, 1990

Birthplace: Mandaluyong City

Contact Number: 09155473904 / 6287341 / 6428375

Educational Attainment:

School Year Graduated

Elementary Ususan Elementary School 2003

High School Pateros Catholic School 2007

College University of Santo Tomas Present

Conference Attended:

Conquering the Crisis : Through Resource Management and Allocation

Possibilities

– Philippine Stock Exchange

– University of Santo Tomas – September 25, 2009

Global Financial Crisis - Effects on Philippines Society : Lessons Going

Forward

– Banko Sentral ng Pilipinas

– University of Santo Tomas – September 19, 2009

Development Planning: A Case of Health Policy Development

– Ms. Rhodora Tiongson

– Thomasian Global Trade Expo (SMX) – October 16, 2010

Membership in Academic and Non-Academic Organization:

Students in Free Enterprise (UST), Member – 2010 to present

Economics Society (UST), Member - June 2009 to present

Junior Philippine Economics Society, Member – June 2009 to present

Students in Free Enterprise (UST), Junior Apprentice - June 2008 to 2010

Precom Society (UST), Member - June 2007- March 2009

Scarlet Commerce Unit, Member – June 2007 - March 2008

Red Cross Youth Council, Member – June 2007 - March 2008


Name: Mary Jane Tarectecan

Birthday: May 23, 1990

Birthplace: MCU Hospital

Contact Number: 09151275324

Educational Attainment:

School Year Graduated

Elementary Daanghari Adventist

Elementary School

2001

High School St. James Academy

La Purisima Conception

Academy

2003

2006

College University of Santo Tomas Present

Conference Attended:

Philippine Stock Exchange Seminar

Bangko Sentral ng Pilipinas Seminar; Global Financial Crisis: Effects on

Philippine Society, Lessons Going Forward

Development Planning: A Case of Health Policy Development

Membership in Academic and Non-Academic Organization:

Member, Rotaract Society (2009-2010)

Member, Economics Society (2009-2010)

Literacy Training Service (2008-2009)

Member, St. James Academy Red Cross Youth Council (RCYC) Club (2001-

2002)

Member, La Purisima Concepcion Academy Glee Club (2002-2006)

Honor Student, Daanghari Adventist Elementary School (1996-2001)

Factors Affecting Inward Foreign Direct Investment in the Philippines

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