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Japanese Corporations Optimistic over Expansion in ASEAN, Philippines

A recent study conducted by the Japan External Trade Organization (JETRO) shows that the overwhelming majority, seventy-five percent of the 3,471 Japanese firms surveyed, are considering the ASEAN region, including the Philippines, as an investment destination. In mid-year 2013, 700 Japanese firms had set up facilities in various economic zones in the country according to the Philippine Economic Zone Authority (PEZA). Despite some barriers, Japan’s keen interest in the Philippines and its current inclination to engage inexpensive but high-quality services are strong indications that investments will continue to flourish in the Philippines in the coming years.

Historical precedent for Japanese investment in the Philippines

Japan and the Philippines have a long history of economic interaction that began during the American period. The Japanese’s early economic investments were accompanied by large-scale Japanese immigration to the Philippines. Significantly, the investments at that time comprised 35% of the Philippine retail trade in areas such as agricultural holdings, natural resource development, and metals of iron, copper, manganese, and chrome, making Japan the Philippines’ largest trading partner in 1929.

The two countries later committed to an economic partnership agreement that concerned bilateral investment and free trade. This historical relationship between Japan and the Philippines has helped pave the way to current investment relationships.

Japanese government and trade agreement bolster investment in the Philippines

Japan is the Philippines’ number one source of foreign investments by far. A study conducted by JETRO showed that this high level of investment coincided with the order of Japanese Prime Minister Shinzo Abe for Japanese companies to build stronger ties with Indonesia, Malaysia, Singapore, Thailand, Vietnam, and the Philippines.

In 2006, an economic partnership agreement concerning bilateral investment and free trade between Japan and the Philippines, known as the Japan-Philippine Economic Partnership Agreement or JPEPA, was signed by former Philippine President Gloria Macapagal-Arroyo and former Japanese Prime Minister Junichiro Koizumi. Since then, there has been a 60 to 80 percent increase in investments and trade in the Philippines with Japan. The agreement has been even more effective and helpful to the investment relationship between both countries after its ratification in 2008. In order to maintain this progressive state, the Philippines plans on pressing for more Japanese concessions in the agricultural sector and the movement of natural persons.

Philippines has competitive edge over other countries

The Philippines is outpacing other ASEAN nations to create a business environment that attracts neighboring countries such as Japan. Statistics released by JETRO revealed that the Philippines has become an investment magnet to the Japanese community because of its robust economic development and strong economic foundation. The government-related organization, which promotes mutual trade and investment between Japan and other nations, foresaw a slowdown of Japanese investments to competing countries that struggle to provide competitively priced labor to foreign investors. The Philippines, on the other hand, is far better able to meet the labor demands of Japanese investors.

Young, inexpensive, educated workforce is key

In spite of the Philippines having firm economic development and a solid foundation, it still has to improve in some areas where there are hindrances with foreign investors. According to Isamu Wakamatsu, JETRO’s director of the overseas research department (Asia and Oceania), Japanese investors are most discouraged when prevailing wages are too high. But compared to China and India, the Philippines is a more viable location given the availability of a young educated workforce and competitive labor costs that satisfy investor demands. There is room to make improvements in some areas where the Philippines is lacking, such as local procurement of raw materials, but this factor shouldn’t derail investments in the country since Japanese firms have other priorities.

Philippines has technology and resources that other countries lack

Other countries may have an abundance of resources that are essential for investments, but the Philippines offers competitive solutions with most of its inexpensive supplies. Japanese investors would likely turn to other countries where the other countries are more rich in resources. Mainland China, for instance, has technology that makes it attractive for chemical and auto manufacturing. Despite this fact, the Philippines remains strong in other areas such as trading, textile, and metal processing. The country also outpaced China with its lower cost offerings in plastic, banking, energy, and infrastructure trade.

It looks like Japanese investment will continue to expand in the Philippines in the coming years. With the Philippines’ strong historical partnership with Japan, the number of Japanese companies setting up facilities in various economic zones in the country, and the considerations Japan is giving the Philippines despite some shortcomings, the Philippines is sure to become an increasingly lucrative investment destination for other nations to tap. As both the Philippines and Japan seek to further enhance trade and investment ties, the Philippines continues to address critical issues in a way that will lure more investors to the country.

References:

Inquirer”, PH eyes ‘strategic’ relations with Japan, March 20, 2014

Manila Bulletin”, ASEAN gets more Japan investments, March 1, 2014

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