Journal of the Asia Pacific Economy

ISSN: 1354-7860 (Print) 1469-9648 (Online) Journal homepage: https://www.tandfonline.com/loi/rjap20

The political economy of foreign investment and

industrial development: the Philippines, Malaysia
and Thailand in comparative perspective

Manuel F. Montes & Jerik Cruz

To cite this article: Manuel F. Montes & Jerik Cruz (2019): The political economy of foreign
investment and industrial development: the Philippines, Malaysia and Thailand in comparative
perspective, Journal of the Asia Pacific Economy, DOI: 10.1080/13547860.2019.1577207

To link to this article: https://doi.org/10.1080/13547860.2019.1577207

Published online: 25 Jun 2019.

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JOURNAL OF THE ASIA PACIFIC ECONOMY
https://doi.org/10.1080/13547860.2019.1577207

The political economy of foreign investment and

industrial development: the Philippines, Malaysia and
Thailand in comparative perspective
Manuel F. Montesa and Jerik Cruzb
a
Senior Advisor for Finance and Development, South Centre, NJ, USA; bDepartment of Economics,
Ateneo de Manila University, Quezon City, Philippines

ABSTRACT KEYWORDS
This article examines the contribution of foreign investment to Investment policy; industrial
industrial development by comparing the Philippine experience policy; foreign direct
with two ASEAN neighbors: Malaysia and Thailand. Instead of view- investment; Philippines;
Malaysia; Thailand
ing a failure to attract foreign investment as a binding develop-
ment constraint, we focus on the appropriateness of such flows for
industrial upgrading. Likewise, we underscore political economy
factors—particularly the presence of effective state interventions
and conducive state-business ties—as prime features of countries
that have leveraged FDI for more successful industrial develop-
ment. Without discounting flaws in these interventions in the cases
of Thailand and Malaysia, we find that such forms of government
involvement have been vital in driving both countries’ strong
investment and industrial growth records relative to that of the
Philippines. Revived industrial policy initiatives in developing Asia
would be well-advised to heed these lessons on investment-related
intervention, so as to reorient their investment policies for max-
imum impact on industrial development in the years ahead.

Introduction
For many in the global development community, an open policy toward foreign
investment has been viewed as a cornerstone of a sound industrialization strategy.
With regards to the Philippines, to take one example, the conventional wisdom has
been that the country’s failures in attracting foreign investment have been a critical
development constraint. Accordingly, government should undertake policy and con-
stitutional reforms to enable greater foreign investment to pour into the economy
(see Chikiamko 2015; Joint Foreign Chambers 2016). Yet, other analyses (e.g. Aky€ uz
2015, Kumar 1998, 2002) suggest that the successful attraction of foreign investment
does not, in itself, guarantee rapid growth and sustained industrial development.
Even as defined and measured in conventional statistical manuals, ‘foreign invest-
ment’ possesses different components with differentiated roles for purposes of

CONTACT Manuel F. Montes montes@southcentre.int; butchmontes@gmail.com South Centre, CP 228, 1211

Geneva 19, Switzerland
ß 2019 Informa UK Limited, trading as Taylor & Francis Group
2 M. MONTES AND J. CRUZ

economic growth and structural change. No less important, such investment can also
have important negative consequences on development efforts—risks which are often
downplayed by proponents of investor-friendly policies.
This article assesses the role of foreign investment on Philippine industrial devel-
opment in the last two decades, in the context of the Philippine development experi-
ence against two of its more economically-successful neighbors: Malaysia and
Thailand. We begin with a conceptual discussion of the impacts of foreign investment
on economic diversification and industrial deepening. Then on the basis of a com-
parative historical review, we propose that political economy and institutional fac-
tors—through the integration of investment policy in broader visions of industrial
development via well-targeted state interventions and conducive state-business ties—
have been decisive features of Thailand and Malaysia’s greater success at obtaining
productive investments and securing more benefits for industrial upgrading. All told,
our analyses point at the need to re-embed investment policy in developing countries
within a wider industrial upgrading effort—focusing less on the sufficiency of invest-
ment levels and more on their appropriateness for industrial development goals. In
this, we highlight the indispensable role of government policy and planning if the
goal is not just to project the image that a ‘country is open for business’, but to
obtain positive spillovers for growth and industrial upgrading.

Can foreign investment be harmful for economic development?

The remarkable economic records of several East and Southeast Asian nations over
the past decades indicate that foreign investment can make major contributions to
growth and industrial development. In much of the economic development literature,
unrestricted foreign investment flows are commonly argued to be beneficial for devel-
oping countries through a variety of channels, ranging from lowering risks to owners
of capital, diffusing best practices in corporate governance, enabling technology and
skills transfer, contributing to corporate tax revenues, and promoting competition in
domestic input markets (Loungani and Assaf 2001). Moreover, as various studies
have noted, Southeast Asia’s most impressive economic performers from the late
1960s onwards—Singapore, Malaysia, and Thailand—have also been among the most
outward-looking and open economies in the region, and have been highly reliant on
inward foreign investment as a means of realizing their industrial development goals
(Hill 2014; Kasahara 2013).
But does the salience of foreign investment in such countries’ growth mean that
foreign investment per se is beneficial to economic development and industrial deep-
ening? To begin with, much empirical evidence on the relationship between foreign
investment, growth, and industrial development remains inconclusive, with a major
1996 survey of the literature asserting that, ‘The relationship between an LDC’s [least
developed country] stock of foreign investment and its subsequent economic growth
is a matter on which we totally lack trustworthy conclusions’ (Caves 1996; Aky€ uz
2015). In part, this ambiguity on the impacts of FDI stresses the importance of
unpacking the sectoral composition of foreign investment, and examining their differ-
ential effects on distinct industries and host–country conditions. To better assess the
 JOURNAL OF THE ASIA PACIFIC ECONOMY 3

contribution of foreign investment to the recent industrial development of the

Philippines, Thailand and Malaysia, it is thus vital to understand the actual roles
associated with foreign investment, as well as their impacts on overall economic per-
formance. The analysis must begin by differentiating between the two major types of
foreign investment under standard IMF and OECD definitions: foreign direct invest-
ment and portfolio flows.

Not all foreign investment is created equal

In the International Monetary Fund (2009) manual, ‘foreign direct investment’ (FDI)
refers to a financial transaction with the objective of establishing a ‘lasting interest’ in a
resident enterprise through the purchase of an ownership share in an enterprise that is
resident in one economy by a resident in another economy. According to IMF statis-
tical conventions, the purchase of only ten percent or higher of voting shares in an
enterprise is considered a direct investment; anything below this is classified as a port-
folio investment. Subsequent to this initial investment, retained earnings of the resident
enterprise and loans by the nonresident to that enterprise are also counted as dir-
ect investment.
On the other hand, portfolio investments occur through the purchase by nonresi-
dents of asset positions in the domestic equity and bond markets, bank deposits by
nonresidents, and the purchase of less than 10% of the stock of an existing enterprise.
Yet this actual definition of FDI is completely at variance with the popular imagin-
ation that foreign investment involves the arrival of a big multinational company to
set up a new factory, hire labor, and introduce new technology in the domestic econ-
omy, injecting a new stimulus to domestic activity. In itself, the IMF definition gives
no guarantee that majority of investments officially measured as FDI will fulfill such
expectations. A new 10% ownership stake in an enterprise, while associable with the
inflow of hard currency, cannot be automatically linked with new economic activities
or new employment.
Unsurprisingly, research suggests that the image of investors ‘pumping in’ money
into an economy through foreign investment is overdrawn. In the case of US overseas
investors, the overwhelming percentage of measured direct investment flows has been
in the form of retained earnings (Feldstein 1994), which is not new money coming in
from external sources but money earned in the domestic economy itself. In 2008,
60% of outward FDI stock for affiliates of US nonbank corporations came from
retained earnings (United Nations Conference on Trade and Development: WIR
2013). If other investors are like US investors, then it appears that FDI is less about
attracting new investment from outside, and more about foreign investors sharing in,
by means of retained earnings, in national economic growth. This conflicts with the
view that more FDI is indispensable for restarting growth or that it causes higher
economic growth.
‘Foreign investment’ has three domestic destinations: (1) so-called ‘greenfield’
investment associated with the establishment of new plants and facilities; (2) reinvest-
ment or additional investment/capacity in prior foreign investment vehicles and
enterprises; and (3) cross-border mergers and acquisitions (M&A). Of these three
4 M. MONTES AND J. CRUZ

channels, only greenfield investments have a firm and consistent connection with
capital formation; on the other hand, whether reinvestments and M&As change the
scale of operations are highly contingent on subsequent decisions by investors. While
oftentimes celebrated for its associated FDI inflows, for instance, an acquisition of a
local firm by a foreign one need not necessarily result in a change in the scale, prod-
uctivity and/or technological sophistication of operations.

Impact of foreign investment on the balance of payments

For developing countries, foreign investment is often looked upon as an unqualified
boon to the domestic balance-of-payments (BoP) situation. However, with regards to
alleviating trade deficits, activities associated with both greenfield investments and
reinvestments in existing enterprises have been found to have greater dependence on
imported equipment and imported intermediate inputs compared to domestic enter-
prises (see Koopman et al. 2012, for example). Certainly, domestic purchases by for-
eign investors (e.g. land assets, labor, local input) constitute positive inflows, and
investors could also be paying tariffs on their imports. Nonetheless, the main point is
that the reported scale of the positive foreign exchange impact of foreign investment
tends to be significantly overstated.
In addition, it is a logical presumption that the investment by nonresidents will
eventually be repatriated back or transferred to other investment destinations. In this
regard, research by Aky€ uz (2015) (see Table 1), has found that from 2000 to 2013,

Table 1. Net FDI transfers, 2000–2013 (ratio of cumulative profit payments to cumulative
FDI inflows).
Ranking Country Ratio
1 Algeria 3.09
2 Nigeria 2.09
3 Malaysia 1.73
4 Thailand 1.54
5 Singapore 1.43
6 Libya 1.38
7 Cote d’Ivoire 1.31
8 Peru 1.21
9 South Africa 1.20
10 Congo, Republic of 1.17
11 Philippines 1.07
12 Indonesia 1.06
13 Chile 1.06
14 Russian Federation 0.99
15 Tunisia 0.95
16 Sudan 0.92
17 Argentina 0.90
18 Korea 0.88
19 Colombia 0.83
20 Zambia 0.73
21 China 0.52
22 India 0.49
23 Brazil 0.43
24 Mexico 0.40
25 Kenya 0.39
26 Egypt 0.39
27 Turkey 0.18
Source: Aky€uz (2015).
 JOURNAL OF THE ASIA PACIFIC ECONOMY 5

outflows of repatriations largely exceeded the inflow of new foreign investment

among the ASEAN-5—particularly among Malaysia, Thailand and Singapore, which
are each considered successful investment attractors. Where the ratio in Table 1 is
greater than one, then outflows exceed inflows in the period 2000 to 2013 by the
amount exceeding one. For Malaysia, for example, with a ratio of 1.73, inflows for
the period exceeded outflows by 73%. Among such countries, these processes ultim-
ately translate into growing pressure for government to get on a treadmill of attract-
ing new foreign investment at the same scale year-in and year-out, so as to avoid the
negative impacts of repatriations. For this, policymakers must continually improve
the attractiveness of their economies to foreign investors by engineering structural
changes and upgrading their domestic capabilities over time.
With regard to the capital account, foreign investment in the form of portfolio
flows have meant a constant netting ‘game,’ of inflows versus outflows in every
period. Portfolio flows are well-known to be subject to ‘mood swings,’ particularly
during crisis situations. Similarly, they are especially susceptible to the actions of
wealthy residents. In turn, such dynamics are reflective of how net portfolio flows
remain hostage to differential interest rates and expected changes in exchange rates
among major financial markets. These external events, which developing country
authorities have very limited ability to influence, tend to conform to the domestic
political cycles of national authorities of developed countries1 . Amidst such risks,
positive impacts from foreign investments in domestic capital markets are by no
means guaranteed.

Effect on industrial spillovers

Under certain conditions, greenfield investment and reinvestments can contribute to
additional productive capacity, and expansions in demand for domestic goods and
services. Along the same vein, they can be linked to technological change and man-
agerial improvements, as well as heightened stimulation of domestic business invest-
ment. Yet for foreign investment to catalyze such benefits, complementary public
interventions have historically been of vital importance, whether in the form of
domestic content and sourcing requirements, or technology transfer conditions.
Past research suggests that domestic content requirements have had a positive
impact on the host economies for foreign investment. With regards to export per-
formance, in a study of 74 countries over the 1982—1994 period for United States
and Japanese FDI, Kumar (1998, 2002) found export performance requirements to be
effective in increasing the export-orientation of foreign affiliates. Likewise, the wide-
spread use of performance requirements by high-income economies attests to their
importance in ensuring that investor operations serve to advance local indus-
trial goals2.
By comparison, evidence from a variety of studies (Aky€ uz 2006; Morrissey and
Udomkerdmongkol 2012; Farla et al. 2013; Agosin and Machado 2005) indicates that
the presence of foreign investment, on its own, only has a neutral or a mixed impact
on domestic investment activities. Indeed, for most countries, foreign investment only
constitutes at most 7—10% of total investment (Montes and Alicando 1989). In such
6 M. MONTES AND J. CRUZ

contexts, what fundamentally matters is the extent to which foreign investment stim-
ulates domestic investment—an effect which is better guaranteed if host governments
are able or willing to promote this outcome by means of domestic policy
interventions.
Unfortunately, international investment agreements, such as the Trade Related
Investment Measures (TRIMs) of the World Trade Organization, have dramatically
curtailed the policy space of developing countries to put in place requirements over
local content and local sourcing3, as well as foreign exchange conditions which limit
the import levels of foreign enterprises to their export earnings. Equally significant,
many developing countries have been compelled to sign bilateral investment treaties
with FDI home countries, which contain protection clauses prohibiting governments
from imposing conditions to employ nationals for management. Owing to these con-
straints, developing country authorities must either leave to fate the possibility of
positive spillovers from foreign investors, subsidize them more generously than
national firms, or undertake far more indirect investment promotion efforts to
encourage foreign investors to increase their sourcing locally.

Effect on macroeconomic performance

In terms of the macroeconomic performance, unregulated portfolio flows have had
significant and adverse consequences. Recently, the IMF itself has gone so far as to
associate open capital accounts to the inability of economies to achieve ‘durable
expansion’ (Ostry et al. 2016, 38–41), reflecting a growing consensus that high
domestic interest rates, the channeling of finance to financial investment instead of
real investment, and volatile exchange rates can have a negative impact on domestic
investment. Under open capital accounts, domestic lenders for real sector projects
will tend to impose higher loan rates to account for foreign exchange risks and
opportunity costs; likewise, exchange rate markets can be easily upturned by mood
changes among investors seeking the best returns worldwide on a short-term basis
(Montes 2013, 2016). In fact, the Asian financial crisis of 1997—98 prefigured many
of these issues (Montes 1997).
Instead, for foreign investment to have positive impact on aggregate investment, it
must not undermine a conducive domestic investment environment. Among the basic
requirements of such an environment are reasonable interest rates for financing
domestic investment and stable exchange rates, especially for domestic companies
with ambitions to participate in the world market, but also for typical domestic firms
seeking to increase the processing of domestic commodities.

Impact on structural change

The latest fashion with regard to foreign investment policy concerns the rise of global
value chains (GVCs)4, which developing countries are encouraged by the OECD, the
WTO, and the World Bank to participate in. Not unlike past trade liberalization
measures endorsed by these institutions, developing economies are advised to engage
in GVCs by (1) liberalizing imports, (2) extending foreign investor protections, (3)
 JOURNAL OF THE ASIA PACIFIC ECONOMY 7

liberalizing services sectors, (3) eschewing investment measures, (4) renouncing infant
industry protections, (5) accepting international obligations on international sectoral
liberalization, and (6) embarking on trade facilitation measures.
But while usually presented as truly new trade phenomenon, GVCs can be seen as
existing even in the era of global colonialism, in which raw materials were sent to the
mother country for industrial processing. The key difference now is that product-
and company-specific manufacturing activities can be located outside of the home
country of the lead GVC firm, because of the possibility of relocating operations else-
where. For this reason, developing countries are being encouraged to try capturing
lower value-added segments of this production process to generate domestic employ-
ment. At the same time, however, participation in such GVCs are not necessarily
consistent with increasing local productivity and diversifying domestic production,
since lead firms in GVCs assiduously keep their processes and technology secret.
When they find the cost of domestic production becoming prohibitive, they have
been known to move their operations to other locations.
Economy-wide analyses have affirmed such trends: as Montes and Lunenborg
(2016) show in their survey of various cross-national GVC studies, participation in
GVCs has often failed to deliver promised dividends for developing countries,
whether by encouraging domestic production to shift to lower value-added GVC
exports, by alleviating balance-of-payments difficulties because of imported inputs,
and by facilitating the transition of countries into a ‘middle income trap’ of being
sources of well-educated, flexible but low-cost labor. According to a cross-country
study by Milberg and Winkler (2010), a common result of countries’ integration into
GVCs has instead been a ‘disproportionately small rise in value-added, implying min-
imal economic upgrading.’
This is not to say that participation in GVCs cannot be beneficial for developing
economies, yet the findings from these studies emphasize that strategic planning by
governments to upgrade their production capabilities, as well as intensive negotiations
with GVCs (to ensure that investors’ entry generates positive spillovers) will be indis-
pensable for realizing envisioned benefits. Yet for such purposes, well-known indus-
trial policy tools—including performance requirements, government procurement
policy, infant industry protections, and other measures—may be more appropriate for
achieving upgrading objectives.

The Philippines, Thai and Malaysian investment records in

comparative context
The discussion above has offered a conceptual appraisal of the role of FDI in govern-
ments’ efforts to promote macroeconomic stability, industrial deepening, and struc-
tural change—but how do these arguments shed light on the investment and
industrial development records of the Philippines, Thailand and Malaysia over the
past two decades? In this respect, Figures 1–4 juxtapose comparative information on
all three countries in three critical areas: their overall levels of inbound foreign invest-
ment, the relative size of their industrial sectors (in terms of its share of GDP and
share of employment), and the value of greenfield investments within them.
8 M. MONTES AND J. CRUZ

Figure 1. Malaysia, Philippine, Thailand FDI stock as % of GDP, 1980–2015. Source: World
Development Indicators

Figure 2. Malaysia, Philippine, Thailand industry, value-added as a% of GDP, 1990 to 2014. Source:
World Development Indicators

As the figures demonstrate, the investment records of the Philippines, Thailand,

and Malaysia have been distinguished by major differences, with Malaysia mainly
leading the three nations in terms of investment, the Philippines falling behind and
Thailand boasting initially-low but rapidly improving investment levels over the years.
Particularly striking has been Thailand’s performance in terms of FDI: from levels
even below that of the Philippines (FDI share: 3.9% vs. 3.0% of GDP in 1980), the
country has since overtaken the Philippines, and has, based on UNCTAD indicators,
surpassed Malaysia in terms of total FDI as of 2015 (FDI: 44.4% vs. 39.7%).
 JOURNAL OF THE ASIA PACIFIC ECONOMY 9

Figure 3. Malaysia, Philippine, Thailand employment share of industry, 1990–2013. Source: World
Development Indicators

Figure 4. Malaysia, Philippine, Thailand value of announced greenfield investments (in USD),
2003–2015. Source: United Nations Conference on Trade and Development

Developments with regard to the country’s industrial performance were somewhat

comparable, with the size of Thailand’s industrial sector for the most part occupying
a middling position between that of Malaysia and the Philippines. Both in terms of
GDP and employment share, Malaysian industry experienced strong growth in the
1990s followed by a slowdown relative to other sectors over the 2000s, while that of
the Philippines’ generally remained immobile throughout the same period (employ-
ment) or shrunk slightly (share of GDP).
This has not meant that Thailand’s investment record has not experienced short-
comings: as will be discussed in more detail in the next section, acute problems have
10 M. MONTES AND J. CRUZ

often been observed in FDI contributions in Thailand to technological deepening and

transfer, and other spillover effects (Felker 2003). Furthermore, as already hinted by
the industry share and employment data, even while sustaining advances in the
growth of its industrial sector after 1997, one might also note that these same advan-
ces for Thailand have proven far more muted than what the corresponding rise in
FDI levels might suggest. For instance, Thai industry value-added declined from a
peak of 40.0% in 2010 to only at 36.9% of GDP as of 2014—a period during which
FDI levels were still rising significantly. Similarly, even while Thailand has recently
surpassed Malaysia in terms of FDI levels, its record in securing greenfield investment
has still lagged behind that of Malaysia throughout the 2000s and 2010s5, indicating
the latter country’s continued advantages in attracting quality investment6. As it
stands, these patterns suggest that robust foreign investment inflows are not automat-
ically associated with technological upgrading as well as higher investment in fixed
assets, both of which are vital for industrial growth.
But these trends in Thailand serve to further highlight the even paltrier contribu-
tion of foreign investment to developments in the Philippine economy, which has
proven unsuccessful at drawing greenfield investment and at fostering overall growth
in the industrial sector from 1990 onwards. Not only has the Philippines been the
least effective at securing greenfield investment among all three countries, having
secured only a total of $83-billion in such investments over the period (versus
Malaysia’s $145-billion and Thailand’s $107-billion), the performance of its industrial
sector has fared even less well than what its limited FDI gains would seem to indi-
cate. Though its FDI level rose from 7% in 1990 to 20% of GDP in 2015, its indus-
trial employment share increased by less than a percentage point (15.0% to 15.9%),
even as the contribution of industry value-added to GDP instead declined from
34.5% in 1990 to 31.4% in 2014. That industry should stagnate even amidst overall
increasing FDI suggests, at minimum, that other factors have been more decisive in
affecting the industrial growth of the Philippines over the past three decades.

From market-oriented policy to idiosyncratic intervention: Why

the divergence?
What accounts for these diverging outcomes? A comparative review of the Philippines’,
Malaysia’s, and Thailand’s investment policy regimes attests to the significance of polit-
ical economy factors—including differences in the dynamics of state intervention—in
shaping their distinct investment records. Indeed, while all three countries transitioned
from import-substituting to export-oriented industrialization (EOI); have promoted
greater liberalization in their investment policies; and have relied strongly on the use of
special economic zones and fiscal incentives as FDI attraction tools, subtle yet crucial
differences in their investment governance processes have remained.

‘Market’-oriented investment policy in the Philippines

In this regard, since the late-1980s, the Philippines has been noteworthy in terms of
the thoroughness with which it has pursued a pro-liberalization policy agenda, and
with which it has reined in the strategic role of government in advancing industrial
 JOURNAL OF THE ASIA PACIFIC ECONOMY 11

growth. If the regime of Ferdinand Marcos had earlier witnessed steps towards adopt-
ing EOI, it was only after the end of the dictatorship that a wholesale break from
state-endorsed import substitution industrialization (ISI) occurred. While often
viewed as the Philippines’ first law for promoting EOI, the 1967 Investment
Incentives Act in reality distinguished different varieties of government support for
‘preferred areas’—meant for Filipino investors meeting demand from domestic mar-
kets—, and ‘pioneer areas’ open for the participation of foreign capital, while featur-
ing technology transfer, credit conditions, local content requirement, and eventual
majority ownership clauses in favor of Filipino firms. This distinction—enabling the
parallel pursuit of ISI and EOI strategies—was to last well until the last years of the
Marcos regime, having been reaffirmed by the passage of the Omnibus Investment
Code of 1981 (Raquiza 2012).
With the advent of the country’s worst post-war recession in 1983, and the over-
throw of the Marcos government in 1986, however, state intervention to prop domes-
tic industry soon became viewed as epitomizing the cronyism and rent-seeking of the
Marcos years. Based on the dominant economic discourse of the time, not only did
Marcos’ industrial policies result in tremendous wastage and mismanagement of the
country’s economic resources; it discouraged the formation of backward linkages,
penalized exports, and artificially cheapened capital among domestic industries
(Medalla 1998). Reinforced by the pro-liberalization bent of leading Philippine econo-
mists at the time, this justified a systematic break with Marcos era interventionism,
supplanting extensive involvement in the economy for a market-oriented agenda, as
well as greater reliance on foreign investment amidst diminished commercial finance
and foreign aid in the 1980s (Aldaba 2013; Action for Economic Reforms 2014).
While protection for key domestic sectors persisted in the 1987 Constitution (e.g.
real estate, utilities, etc.), state monopolies in key sectors (e.g. fertilizer, sugar) were
dismantled, and programmatic state support to domestic industries (e.g. Marcos’ 11
major ISI projects in intermediate goods production) were abandoned as a result of
arguably the most ambitious liberalization effort in the Asia-Pacific region at the time
(Bello et al. 2014; Llanto and Ortiz 2015). In major investment policies that were
legislated during the administrations of Corazon Aquino and Fidel Ramos in the
1990s—such as the Omnibus Investment Code of 1987 (amended in 1995) and the
Foreign Investment Act of 1991 (amended in 1996)—the distinction between
‘preferred’ and ‘pioneer’ investment areas was rendered insignificant, as part of
attempts to promote neutrality in the treatment of investment (Raquiza 2012).
Moreover, these and other laws have significantly expanded the scope for participa-
tion by foreign firms in the economy: for instance, the Foreign Investment Act of
1991 and its amendment in 1996, allowed for full foreign participation in practically
all areas except for those contained in a Foreign Investment Negative List (Bello
et al. 2014)7.
No less significant, the Philippine government retooled its free trade zone and fis-
cal incentive programs from serving general industrial export promotion to FDI
attraction purposes. Thus, in 1995, the Philippine government legislated the Special
Economic Zone Act (R.A. 7916), making the country the first in the world to allow
the creation of privately-built and administered SEZ’s as separate customs and
12 M. MONTES AND J. CRUZ

investment-friendly territories; similarly, autonomous Freeport authorities, most sig-

nificantly within former US military bases, have been created over thousands of hec-
tares of land within the county, with the capacity not only to extend investment
incentives but also legal powers to plan, manage, develop and regulate the special
jurisdictions allotted to them within their enabling laws. Arguably the most important
achievement of this economic zone program for the industrial sector has been the
rise of the Philippines as an assembler of semi-conductors and other electronics prod-
ucts, which has accounted for more than half of all commodity exports since 2010
(Aldaba 2013; Bello et al. 2014).
Yet as the Philippine post-dictatorship experience demonstrates, the abandonment
of public sector-led efforts for steering industrial development has failed to produce
advances comparable to those of Thailand and Malaysia. As already pointed out in
Figures 1–4, such market-oriented reforms have been unsuccessful at securing antici-
pated FDI relative to the country’s peers, even while posing tremendous fiscal lea-
kages to the Philippine government. For one, constraints in the country’s provision of
critical inputs for investors such as infrastructure and logistics, industrial peace, buoy-
ant consumer markets, and stable and noncorrupt governance have served to dissuade
increases in FDI (Aldaba 2006). In addition, Philippine policy studies have shown
that more than half of fiscal incentives offered to investors have been functionally
‘redundant’—that is, that investors availing of such incentives would have continued
their investments even without them (Renato 2006).
Even what limited FDI the Philippine government has secured has apparently
failed to translate into a deepening of the country’s industrial base. While investment
liberalization has paved way for growth in electronics exports, the country’s position
in electronics GVCs has mainly been confined to low value-added activities such as
semiconductor assembly, packaging and testing. Partly because of the concentration
of electronics FDI in SEZs and partly because of sparsity of local suppliers, backward
linkages of the sector have been feeble, and have not significantly heightened of the
country’s industrial capacities (Usui 2012). Even more broadly, amidst trends of
industrial malaise typified by low manufacturing growth, low job generation, and the
weakening of domestic sub-sectors (e.g. manufacturing SMEs), the diversity of coun-
try’s export base deteriorated relative to its pre- liberalization level—with three-
fourths (76%) of exports being concentrated in only three sectors in 2008: electronics,
garments and textiles, and machinery and transport equipment (Aldaba 2013).
None less than the Asian Development Bank has noted that since 1995 the number
of products in which the Philippines has had comparative advantage has declined,
whereas Malaysia and Thailand witnessed increases: while the number of products in
which Thailand was estimated to have comparative advantage rose from 159 to 186
in the said period, and Malaysia from 79 to 119, that in the Philippines decreased
from 134 to 110 (Usui 2012). Parallel to this, the export basket of the former two
countries has become more diversified compared to the Philippines’. According to
the Observatory of Economic Complexity, roughly 77% Malaysia’s export basket
in 2016 was spread across the four product sectors of electronics and machinery,
mineral products, animal and vegetable bi-products, and plastics and rubbers; while
75% of Thailand’s spanned six sectors, including electronics and machinery,
 JOURNAL OF THE ASIA PACIFIC ECONOMY 13

transportation, plastics and rubbers, foodstuffs, precious metals, and chemical prod-
ucts (OEC 2016).
Not only, in other words, has the pursuit of investment liberalization, and the con-
traction of state support for industry, failed to promote much appreciable expansion
of the Philippine industrial sector. In certain respects, it effectively locked-in much of
the country’s industrial activities in lower-value, labor-intensive segments of global
production networks, while failing to address the diminishing diversity of the coun-
try’s export base. In the case of the Philippines, it would seem, faith-based policy in
liberalization and minimal government intervention has largely served to reinforce
much of the country’s post-dictatorship industrial stagnation.

Idiosyncratic intervention in Malaysia

A comparison with Malaysia—the most successful of the three countries in attracting
greenfield investment, and into the 2000s, the most industrialized among them—is
instructive. Like the Philippines in the late 1960s and 1970s, Malaysia has had signifi-
cant experience in pursuing both ISI and EOI in tandem, and with significant levels
of government involvement. As several studies on Malaysia’s political economy have
observed, the country’s highly-successful EOI program, launched through the
Investment Incentives Act of 1968, hinged upon the state-driven provision of free
trade zones, infrastructure, incentives, and other supportive interventions (Jomo and
Wee 2014), even while earlier ISI interventions were sustained through high tariff
protection for local firms as well as the adoption of the New Economic Policy (NEP)
in 1971 (Rasiah and Shari 2001), which sought to significantly expand Malay partici-
pation in domestic industry and the economy in general8.
Yet Malaysia’s subsequent efforts to move up the industrial and technological lad-
der reveal a degree of state intervention that, even amidst considerable investment
liberalization, has gone far beyond the Philippine approach. With the ascent of
Mahathir Mohammed to the Malaysian Prime Ministership in 1981, strategic policy
initiatives in Malaysia towards advancing intermediate and heavy industrialization in
the mode of East Asian ‘tiger economies’ such as South Korea took shape, with the
Proton car project being the single most famous large-scale industrial project. While
saddled with historic levels of cronyism (between Mathathir’s regime and well-con-
nected Malay businessmen), and hampered by high-profile losses and failures (e.g.
Perwaja Steel), the dirigiste drive by Mahathir’s ‘Look East’ policy nonetheless resulted
in the creation of closer state-private sector ties, the accumulation of bargaining
experience over technical upgrading, and the rationalization of industrial policy-mak-
ing capacities that would continue to be harnessed as the country liberalized invest-
ment following 1985 (Khoo 2012).
Faced with an unprecedented mid-1980s recession, the Mahathir government
quickly reduced barriers in the investment policy regime—initially for foreign capital,
but afterwards for domestic enterprises, especially ethnic Chinese businesses.
Epitomized through the enactment of the 1986 Promotions of Investments Act, the
government shifted to an FDI-led industrial strategy, alongside the privatization of
formerly state-owned enterprises, of which there were more than 200 such projects in
14 M. MONTES AND J. CRUZ

the mid-1990s. In line with this thrust, foreign ownership restrictions were signifi-
cantly relaxed, ethnic equity requirements of the NEP were held ‘in abeyance,’ and a
new bout of ‘pioneer status’ fiscal incentives (Khoo 2012; Jomo and Wee 2014). These
investment reforms met resounding success: coinciding with post-Plaza Accord devel-
opments as well the 1988 withdrawal of privileges for East Asian economies under
the General System of Preferences, Malaysia’s GDP share of FDI stock had doubled
by the onset of the Asian Financial Crisis in 1997.
But instead of exemplifying an unqualified ‘pro-globalization development model,’
as claimed by the World Bank at the time (c.f. Felker 2015), these moves towards
FDI-led growth were also coupled with heterodox strands of intervention. In the
1990s, the Malaysian government adopted various strategic measures to promote
technology upgrading and diffusion—with the active solicitation of investments from
higher-tech regions, the establishment of infrastructure complexes for high-tech
investments, engagement in technology-transfer bargaining with multinationals, and
the establishment of supplier-developer schemes between foreign investors and
screened domestic firms, being among the more visible examples. At the time, the
most prominent among all such initiatives included the establishment of the
Multimedia Super Corridor (a pet project of Mahathir combining publicly-funded
high-tech infrastructure and incentives meant to attract world-class technology-based
investors), as well as the country’s Vendor-Development Program, which broadened
the supplier development arrangements undergirding the Proton car project into
other industrial sectors (Felker 2001). From the standpoint of technological upgrad-
ing, such efforts reaped major dividends: for example, between 1992 and early 1998,
MIDA approved 21 high-technology projects, 15 of which were wholly foreign, worth
around 14-billion Malaysian ringgit (Felker 2001).
The Malaysian experience, in this vein, demonstrates the central role of calibrated
interventions for leveraging foreign investment for industrial priorities. This is not to
say that the strategy has not experienced shortcomings. For one, the Malaysian gov-
ernment’s efforts at diffusing technologies throughout the domestic business sector
have proven less successful than initially envisioned; indeed, inter-ethnic dynamics
between the Malay and ethnic Chinese business communities undermined the effect-
iveness of state-level efforts to foster technology transfer between local suppliers and
international firms (Felker 2003). Akin to tensions during the heavy industrialization
period, government desires to hasten the growth of a Malay business class conflicted
with efforts to improve local content purchasing by foreign companies, by often side-
stepping local ethnic Chinese manufacturers—the largest and most readily-available
pool of eligible suppliers at the time. Not only did this serve to alienate the largest
single fraction of private domestic capital in Malaysia from the state’s endeavors to
form needed technology transfer linkages; it disproportionately heightened the diffi-
culties of foreign investors to find local subcontractors whose products met their
quality requirements (Felker 2001).
Equally important, the eventual occurrence of the Asian Financial Crisis demon-
strated limits to the long-term stability and sustainability of an foreign investment-led
strategy: enabled by partial financial liberalization measures since the late 1980s, the
negative shocks from the crisis were followed by a progressive decline in net FDI
 JOURNAL OF THE ASIA PACIFIC ECONOMY 15

inflows throughout the 2000s, leading to a stagnation of investment and industrializa-

tion in the 1990s. Ironically, political economy scholars have attributed this post-crisis
investment bog to an apparent dearth of effective industrial policies with regards to
domestic capital, and the weakening of economic recovery efforts by the same clien-
telistic dynamics that hampered heavy-ISI and privatization ventures during the
Mahathir period (Jomo and Wee 2014).

Government gatekeeping in Thailand

A comparable trend has been at work in Thailand, which has made the most con-
spicuous advances towards promoting FDI and industrial growth since the 1980s.
Even while the Thai government officially shifted to EOI promotion with the
National Executive Council Announcement No. 227 in 1972, investment governance
processes largely maintained a dualistic policy thrust for both domestic and foreign
capital: parallel to extending incentives, special services and infrastructural facilities
(e.g. industrial zones) for export-oriented foreign investment, import substitution was
maintained for key domestic sectors such as consumer durables and intermediate
goods, where clear restrictions on the economic activities of foreign investors pro-
tected emerging domestic business communities from external competition (Raquiza
2012). In the same vein, as laid down in Thailand’s landmark Alien Business Act of
1972 and Investment Promotion Act of 1977, most production for domestic markets
was reserved for Thai majority-owned or wholly-owned firms (e.g. rice farming and
milling, land trading, fruit farming, pharmaceutical manufacturing, retail trade, etc.),
even while more generous incentives were extended to export-oriented FDI
(Felker 2003).
Far from displacing ISI as an industrial development strategy, the pursuit of EOI
continued to be overlaid by the same policy objectives of promoting the growth of
domestic business elites, as demonstrated by government efforts to promote joint
ventures between foreign and local business actors, as well as local content condition-
alities for foreign business, including in all exporting, wholesale trade, and textile
manufacturing activities. Arguably the single most ambitious initiative in Thailand to
advance EOI and local industrial deepening in tandem came in the form of the coun-
try’s Eastern Seaboard Development Program—a large-scale industrial and seaport
complex to the southeast of Bangkok for use by domestic intermediate industries
such as the petrochemical, cement, and chemical fertilizer sectors, as well as high-
tech multinational export firms in automotives and electronics (Action for Economic
Reforms 2014).
However, in lockstep with balance-of-payments difficulties and in response to
changes in the international economic context (i.e. the Plaza Accord devaluations),
Thailand’s investment policy regime was increasingly liberalized throughout the 1980s
and 1990s, with the Thai government loosening foreign investment restrictions to
enable full foreign ownership of ventures exporting 80% of output as well as those
establishing themselves in more distant regions. Just as striking, in the run-up to
Thailand’s signing the WTO agreement on Trade-Related Investment Measures
(TRIMS), the number of industries for which local sourcing requirements applied for
16 M. MONTES AND J. CRUZ

international investors was scaled down from 18 to four, with the remainder dis-
carded by 2000 in line with WTO deadlines. The Asian Financial Crisis—triggered by
the collapse of the Thai Baht in 1997 and followed by an IMF-steered restructuring
programme—only deepened this shift to a more liberal policy regime. In the wake of
the crisis, the Thai domestic transport, retail trade, and financial and legal services,
among others, were pried open for foreign equity investment; equity limits for exist-
ing and new joint-venture projects in domestic market-oriented projects were waived;
and foreign investors were permitted to own the property linked to their factory
operations, subject to certain conditions (Felker 2003).
But parallel to such moves to open up Thailand’s investment regime, discretionary
controls and recalibrated forms of state intervention have continued to exist—if partly
due to protracted and concerted opposition by the domestic industrial
community9.While it is true that liberalization narrowed Thailand’s dualistic invest-
ment regime over time, succeeding high-level documents such as National
Development Plans (e.g. the Seventh National Development Plan from 1992—1996)
continued to endorse the strengthening of local industries via both ISI and EOI-based
mechanisms, while pro-FDI macroeconomic reforms continued to be implemented
(Raquiza 2012). Even the post-crisis 1999 Foreign Business Act, while opening
numerous sectors for foreign ownership at the behest of the IMF, retained a special
approval procedure of government for foreign investments in sensitive sectors, and
continued to prescribe Thai majority-ownership for a range of industries such as in
media, agriculture, mining, wholesaling and retailing, restaurants and all service busi-
nesses (Ratprasatporn and Thienpreecha 2002). Through such levers, the Thai gov-
ernment retained a strong gatekeeping role in negotiations with prospective foreign
investors, positioning itself to ensure that flows of foreign investment would benefit
the needs of local capital.
But while such idiosyncratic investment governance processes proved vital in
ensuring that FDI advanced the interests of the Thai domestic business community,
the overall record of such interventions remains mixed. On one hand, through
upgraded local content sourcing programs (i.e. the BOI Unit for Industrial Linkage
Development or BUILD, and its National Supplier Development Programme), joint
venture-formation mechanisms, and the proactive efforts of the Thai business com-
munity, the country registered even more prominent gains than Malaysia in promot-
ing local business involvement and linkages in leading export industries (i.e. medium-
technology markets such as mould and die-making and metal parts fabrication). By
1995, a Japanese International Cooperation Agency-led survey identified 402 electrical
and electronics parts suppliers, and 374 auto parts suppliers as operational in
Thailand, the decisive majority of which were either fully Thai-owned or under
majority-Thai JV arrangements. At the same time, local businesses were able to make
major inroads in resource-based agribusiness, textiles and light manufacturing
(Felker 2001).
On the other hand, due to various factors—including the lack of priority given by
government to moving up the technological ladder and promoting industrial upgrad-
ing against other objectives (e.g. spatial decentralization), and perceived security risks
of multinationals’ intellectual property (both due to weaker IPR protections and the
 JOURNAL OF THE ASIA PACIFIC ECONOMY 17

existence of local industrial conglomerates) —much FDI ventures that coalesced

within Thailand have remained confined to lower-value assembly-level activities
(Intarakumnerd and Lecler 2010; Felker 2001). Compared to what Malaysia has been
able to achieve apropos technological upgrading, Thailand’s experience with regards
to FDI-linked industrialization demonstrates the implications of a local business-led
approach to leveraging FDI for national development goals, if with the state kept in
tow as a guarantor of domestic private interest.

Comparing state-business dynamics and relations

Parallel to these state policy interventions in dealing with foreign investment flows,
equally decisive in the huge divergences in investment and industrial development
records of the Philippines, Thailand, and Malaysia have been differing institutional
processes by which the investment policy regimes discussed above were embedded
into their respective governance contexts. Though all three countries undertook simi-
lar approaches in offering differentiated incentives to investors and using special eco-
nomic zones, critical differences in state-business ties and the relational dynamics
these generated resulted in even more dramatic differences in their subsequent invest-
ment performance.
These first of these critical differences have concerned the political economy driv-
ers and dynamics underlying the countries’ evolving investment governance regimes.
In Malaysia, these policies became part of a process of building a domestic, Malay
private sector within its Bumiputera program. In Thailand, investment policies were
sequenced and shaped in line with the emergence of a cohesive domestic private sec-
tor demanding the prioritization of indigenous enterprises in the provision of govern-
ment subsidies. Meanwhile, the Philippines applied a logical and detailed set of
investment policy reforms, drawing on lessons from the successful historical cases
(e.g. Ireland’s special economic zones). However, its patronage-ridden political econ-
omy led to the formation of competing domestic business factions, which became
facilitators and protectors of different foreign investors. Successful foreign investors
risked losing their advantages if their domestic private partners lost political footing
(Montes 2018).
A second crucial difference was that in Malaysia and Thailand, the foreign invest-
ment policies and industrial development programs were also “dissimilarly” institu-
tionalized on the aforementioned political economy drivers and foundations. These
kinds of foundations, however, go beyond the state capacity and “embedded autono-
my” considerations customary to analyses of “developmental states” (Evans 1995). In
the case of Malaysia, investors landed in an economic space already being recast
through a series of master industrial development plans—which provided the context
to their meeting performance requirements imposed by a state that did not have to
referee between competing domestic business factions. Under the master plans,
Malaysia’s domestic industrial advances privileged Malay-related enterprises, though
this same policy thrust also generated incoherencies with industrial goals later on
(Athukorola and Kohpaiboon 2015). In this context, employment performance
requirements10 among others were quite effective in enabling domestic players to
18 M. MONTES AND J. CRUZ

serve as suppliers of basic services and disciplined labor to foreign companies.

Because favored domestic enterprises were at a truly infant stage in Malaysia, it would
have been premature for them to serve as important suppliers to foreign firms in spe-
cial economic zones.
In Thailand, there were no “master plans”; however, the stable industrial develop-
ment program was anchored by the self-interest of domestic conglomerates seeking
to draw on the technological and market inputs of foreign partners, based on lessons
learnt from the ISI period (Rock 2001; Montes 2018). During the ISI period, Thai
conglomerates learned that their profitability in the protected domestic market
depended on access to technology and production techniques that could be acquired
from foreign partners (e.g. Japanese in the textile sector). Unlike Malaysia, Thai par-
ticipation in global value chains has notably expanded beyond the electronics sector,
including recently into automobile parts manufacturing (Athukorola and Kohpaiboon
2015). That there was greater mediation of foreign entry by large indigenous con-
glomerates likely explains this contrast in sectoral “choice.”
By comparison, the Philippines’ industrial plan was only implicitly embodied in
the investment priorities lists of the Board of Investments; there was no long-term
“master plan” and access was contingent on decision processes susceptible to arbitrary
political interference (Monsod 2015). Ultimately, the porousness of the bureaucracy
to rentierist dynamics by competing political-business factions, combined with the
absence of a coherent industrial strategy during the liberalization period, resulted in
major failures in the implementation of investment policies, such as with systematic
provision of ill-justified fiscal incentives to politically-privileged businesses and invest-
ors. By one well-cited estimate, the total amount of public revenues foregone by such
incentives could have exceeded 1% of the Philippines’ GDP in 2004 (Reside 2006).

Conclusion: revisiting the role of the state in investment policy

A common criticism of developing countries that have not sustained their industrial
growth has been their alleged failure at attracting sufficient foreign investment. The
reason for this, the argument goes, is due to their illiberal, restrictive investment gov-
ernance regimes, which have prevented them from leveraging the potential growth
and industrialization dividends of foreign investments.
Yet having assessed the economic and political economy foundations of this prop-
osition in detail, this article has maintained that it is critical to recast the issue of for-
eign investment away from general broadsides against ‘insufficiency’ in investment
attraction towards a more fine-tuned engagement with the ‘appropriateness’ of actual
or potential foreign investment flows. Whether prospective foreign investments com-
prise the right kind of investment for industrial development is a question of utmost
importance: for while it is true that certain kinds of foreign investment can confer
various spillover and industrialization benefits, others can instead foist disproportion-
ate risks and negative impacts on their host economies. Not only, in numerous cases,
are the benefits of foreign investment flows far from guaranteed; as we have pointed
out, they could also erode host countries’ balance of payments situations, and lock-in
their economies into lower-end segments of global production networks. Foreign
 JOURNAL OF THE ASIA PACIFIC ECONOMY 19

investment does not necessarily ease foreign exchange constraints even in the short-
term and could be a persistent source of macroeconomic stresses.
But just attracting the right kind of foreign investment is by no means enough. As
our discussion of the Philippine, Malaysian and Thai investment experiences shows,
the presence of timely, appropriate, and effective state interventions, undergirded by
conducive state-business relations, has been a prime distinguishing feature between
those countries that have been able to harness FDI for more successful industrial
growth and upgrading. Just as it was the Philippines—which had turned away from
strategic state interventions towards a heavily market-oriented investment policy
regime—which had manifested the worst post-1980’s record in investment attraction
and industrial growth, so too was it in countries with sustained forms of government
involvement that better performance in upgrading (Malaysia) and industrial sector
expansion and linkage-development (Thailand) was demonstrated. If the Philippine
investment experience reveals the pitfalls of a scattershot-liberalization investment
policy agenda, Malaysia and Thailand’s economic records attest to the centrality of
appropriate government interventions, and in fostering a climate of sustained, coher-
ent collective action between government and the private sector, in effectively leverag-
ing FDI for local industrial development, technological upgrading and job creation.
Amidst recent policy debates in the Philippines on the rationalization of fiscal
incentives, both the Malaysian and Thai cases also indicate the importance of re-
embedding investment policy within the goals and policy vision set by a country’s
long-term industrial strategy. While incentives regimes throughout the whole of
Southeast Asia have been significantly liberalized since the 1990s, both Thailand and
Malaysia have stood out as countries which have effectively harnessed fiscal incentives
as a policy instrument to deepen linkages between multinational companies and local
SMEs, and strengthening skills and capacity among local enterprises (Felker 2001;
Christiansen and Thomsen 2005; OECD 2018). Compared to tendencies among
Philippine investment promotion agencies to grant incentives in “ad-hoc”, even
“indiscriminate”, fashion (Felker 2003), linkage formation and industrial upgrading
programs in both countries connected the granting of specialized tax deductions for
support to local firms, even as their general incentives schemes have been among the
most sophisticated at targeting incentives towards specific activities (e.g. local sourc-
ing, employment, R&D). They have also tended to employ cost-based, performance-
oriented tax incentives (e.g. tax credits), which are less likely to be redundant than
profit-based ones (e.g. tax holidays) (OECD 2018). Without overlooking weaknesses
in these countries’ industrial development strategies, such experiences point to the
scope for strengthening the coherence of the investment and industrial policy regimes
of countries similar to the Philippines11.
In the light of widespread claims that developing countries’ attraction of foreign
investment (and thus establishing liberal, investor-friendly policy regimes) are of
absolute necessity to their future economic development, what these each of these
cases highlight is the crucial need to revisit the role of the state in investment policy.
Not all foreign investment is likely to support domestic industrial upgrading, and
even when those benefits exist, strategic interventions remain necessary for attracting
the right kind of foreign investment, and harnessing the potential of such investment
20 M. MONTES AND J. CRUZ

for long-term inclusive, industry-led growth. Revived industrial policy initiatives in

countries like the Philippines would be well-advised to heed to these lessons on
investment-related intervention from Thailand and Malaysia, so as to reform their
investment policies and programs for maximum impact on industrial development in
the years ahead. A new industrial policy for today’s fast-changing economies will
require nothing less than a new investment policy for the 21st century.

Notes
1. At the same time, the aggregate impacts of net flows are also influenced by the specific
source of the funds; in this regard, it has been demonstrated that pension funds
withdrew at a smaller scale than private equity funds during the taper tantrum; see
Montes (2014) for the example of the feasibility of funding infrastructure projects in
developing countries using foreign portfolio financing.
2. For example, the United States imposed a 75% local content requirement on the Toyota
Camry, the UK required 90 per cent local content on the Nissan Primera, and Italy
imposed a 75% local content requirement on the Mitsubishi Pajero (Mohamadieh and
Montes 2015, 55).
3. This has even been while, under the WTO, developed countries have been able to use
exemptions under research and development grounds. Unfortunately, developing
countries do not have as much technological development activities to be able to use
these exemptions.
4. In GVCs, fragmented production globally organized by lead firms provides the possibility
that countries will be able to hop on and participate in an international production
process. Coordinated by multinational companies acting as “lead firms,” as much as 80%
of world trade occurs within GVCs.
5. As various analysts have pointed out, much of Thailand’s initial surge in FDI post-1997
can be attributed to the fire-sale of the assets and equity of otherwise healthy domestic
companies as a result of IMF-sponsored post-crisis adjustment and liberalization
programs (Athukorala 2003).
6. While not exhibited above, the trends in greenfield investment presented in Figure 4
persist when expressed as a share of GDP, with Malaysia generally having the highest
relative level of greenfield investments, followed by Thailand, and then the Philippines.
Only in 2009 is there a slight difference in the order of the countries’ relative levels of
greenfield investments, with the Philippines narrowly outstripping Malaysia in that year.
7. The Foreign Investment Negative list is periodically reviewed by the National Economic
Development Authority, and is regularly revised by means of Executive Orders of the
Philippine President. As of October 29, 2018, E.O. No. 65 series of 2018, the negative list
completely barred foreign participation in the following areas: mass media; practice of
professions; retail trade enterprises; cooperatives; private security; small-scale mining;
utilization of marine resources; ownership/operation/management of cockpits;
manufacture/repair/stockpiling/distribution of nuclear weapons; manufacture/repair/
stockpiling/distribution of biological, chemical, and radiological weapons; manufacture of
firecrackers and other pyrotechnic devices.
8. For example, in tune with the fulfillment of NEP objectives of fostering an inter-ethnic
redistribution of wealth, the Malaysian government established a comprehensive
industrial licensing system (via the 1975 Industrial Coordination Act), while imposing
requirements for equity sharing and employment in order to favor economically-
disadvantaged ethnic Malays (Felker 2003).
9. Indeed, since the establishment of the Joint Public-Private Sector Consultative Committee
in 1981, Thai economic elites have exercised a growing policy influence vis-a-vis state
bureaucrats at every imminent threat to their business interests, often compelling
 JOURNAL OF THE ASIA PACIFIC ECONOMY 21

numerous concessions from government over the design and implementation of pro-
liberalization measures (Raquiza 2012).
10. See Chapter IV of UNCTAD (2003) in pp. 147–196, a chapter based on a background
paper by Lim and Imm (2002).
11. For more specific policy and institutional reform lessons for the Philippines, readers are
encouraged to contact the authors to view a working draft of the paper “Foreign
Investment and Philippine Development: A Political Economy Approach to Investment
Governance” (Forthcoming).

Acknowledgments
This work was done under the “Bugkos: Putting Equitable Development at the Center of the
Asian Century” Program, funded by the Emerging Inter-Disciplinary Research Program
(OVPAA-EIDR-06-27) of the University of the Philippines.

Acknowledgments
Manuel F. Montes, Senior Advisor on Finance and Development at the South Centre, was
Chief of Development Strategies, United Nations Department of Economic and Social Affairs
(UNDESA) until 2012. He had been Senior Fellow and Coordinator for economics studies at
the East-West Centre in Honolulu, 1989–1999 and before that Associate Professor at the
School of Economics, University of the Philippines. His obtained his PhD in Economics from
Stanford University.
Jerik Cruz is a lecturer at the Ateneo de Manila University’s Department of Economics, and
an economist at the Ateneo School of Government’s Policy Center. His research focuses on
the political economy of development, public finance, and economic geography.

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