The Foreign Direct Investment (FDI) landscape in the Philippines is characterized by persistent challenges in attracting capital relative to its regional peers.
FDI inflow has been subject to considerable volatility, as evidenced by recent figures from the Bangko Sentral ng Pilipinas (BSP), showing that net FDI sank 40.5% year-on-year in August 2025 to $0.5 billion, primarily driven by a steep decline in debt instruments. Cumulatively, FDI net inflows declined by 22.5% in the first eight months of 2025, falling to $5.2 billion.
Investments flowing into the country primarily originated from Japan, the United States, Singapore, and South Korea, with the manufacturing sector attracting the largest share, followed by wholesale and retail trade, and real estate.
The primary obstacle preventing the Philippines from securing a dominant position in the ASEAN region, having consistently ranked 4th or 5th in total FDI inflows per decade since the 1990s and never having secured the top rank, stems from its restrictive regulatory environment and structural economic weaknesses.
The country has been identified as the most restrictive among the ASEAN-5 in FDI regulation, ranking third most restrictive globally in 2020, with the main constraint coming in the form of equity restrictions which limit the degree of foreign ownership in domestic companies. These restrictions historically led to import substituting FDI, meaning foreign investors were motivated to enter primarily to access the domestic market which was shielded by an effective protection system, a rationale that does not align with the contemporary demand for globally integrated, export-oriented production.
Beyond formal ownership limits, foreign firms routinely encounter significant procedural friction during establishment and operation, i.e. “bureaucratic red tape.” Nearly all respondents (94 out of 98) in a pilot business climate survey highlighted the substantial time spent in securing necessary business permits as a major issue, along with concerns about redundant processes and corruption in government agencies.
The necessity for the government to effectively enforce contracts is also recognized as a key area needing improvement.
These issues compound the high operational costs faced by businesses, including high costs for land lease/rent and utilities (water, electricity, and internet connection), which erode profitability and deter stable, long-term investments.
Furthermore, difficulties persist in employing workers with appropriate skills, indicating that the current labor pool often lacks the specialized capabilities required by modern multinational corporations, contributing to challenges in talent retention.
Even after foreign firms establish a presence, maximizing the benefits of FDI is often curtailed by the weak linkage capacity of the domestic economy. While FDI can positively impact domestic firms through horizontal (same-sector) and forward (supplier to customer) spillover effects, research consistently demonstrates that the impact of backward spillover effects (domestic firms supplying inputs to MNC customers) is negative and significant.
This failure to integrate is rooted in the weak competitiveness and low absorptive capacity of domestic firms, which are unable to assimilate the technology or compete against more efficient foreign firms.
This problem is structurally reinforced by complex regulations within economic zones, where the movement of goods between MNCs inside the zones and domestic firms outside the zones is often treated as foreign trade subject to customs and taxes, creating administrative barriers that discourage foreign locators from sourcing inputs domestically.
Despite these pervasive constraints, specific policy tools and intrinsic economic characteristics remain powerful attractions.
Foremost among these are fiscal incentives, such as tax breaks and income tax holidays, which are the most frequently cited factors influencing investment decisions. The importance of Special Economic Zones (SEZs) cannot be overstated, as firms primarily choose locations inside these zones, which offer preferential tax rates and streamlined procedures.
Furthermore, factors indicative of a stable, predictable business environment also drive inflows: the presence of Double Taxation Treaties (DTTs) correlates positively and significantly with FDI because they mitigate the risk of being taxed twice, and a stronger perception of government corruption control and greater quality of human capital are statistically significant determinants of increased investment.
The underlying size of the domestic market (GDP) also continues to hold appeal for investors.
Ultimately, FDI is proven to be an important vehicle for sustained economic growth, provided there is sufficient absorptive capacity fostered through increases in domestic private investment and crucial infrastructure development. The challenge for the Philippines remains translating recent high-level liberalization efforts, such as the amendment of the Foreign Investment Act, into tangible improvements in the operational environment—specifically by tackling regulatory inefficiencies and structural cost issues—to secure the stable, long-term capital flows essential for sustained national development.
Sources:
Agbola, Frank. (2007). Foreign Direct Investment and Economic Growth: Some Empirical Evidence from the Philippines. Paper written for the 36th Australian Conference of Economists, 24-26 September 2007, Hotel Grand Chanellor, Hobart, Tasmania.
Aldaba, Rafaelita M. (2022, August). FDI Spillover Effects: Evidence from the Philippines (ERIA Discussion Paper Series No. 437). Aldaba, Rafaelita M. and Angel Derrickvhel Quejada. Economic Research Institute for ASEAN and East Asia (ERIA).
Alburo, Florian A. (n.d.). FOREIGN DIRECT INVESTMENT IN THE PHILIPPINES AMIDST CRISIS AND A NEW GLOBAL ENVIRONMENT (PIDS Policy Paper 98-15). Available at: https://pidswebs.pids.gov.ph/CDN/PUBLICATIONS/tapspp9815.pdf
Bangko Sentral ng Pilipinas. (2025). Philippines Foreign Direct Investment.
Lacaza, Rutcher M. (2023, July). Impact of Regulatory Barriers on Inward FDI In the ASEAN-5: An Augmented Gravity Model Approach (CPBRD Discussion Paper Issue no. 1). Congressional Policy and Budget Research Department, House of Representatives.
Parcon-Santos, Hazel C. (2011). Trade and Investment in the Philippines. De La Salle University Animo Repository.
Romarate, Marie Edelweiss G., Ferdinand S. Co, and Hazel C. Parcon-Santos. (2024, March 18). Perception of business climate in the Philippines: Results from the pilot “Philippine Business Climate Survey” (Bangko Sentral ng Pilipinas Research Blog).
Available at: https://www.bsp.gov.ph/Lists/Research%20Blog/Attachments/9/Bangko%20Sentral%20ng%20Pilipinas%20Research%20Blog.pdf
Valenton, Karol Joseph S. and Florinda G. Vigonte. (n.d.). Foreign Direct Investments and Market Competition in the Philippines.
