With a booming population and a growing middle class – driven largely by the robust growth of the business-process outsourcing sector and remittances from overseas Filipino workers – the Philippines has become Asia’s rising star and a new market ripe with opportunities for Canadian companies.
The Philippines is one of Asia’s fastest- growing economies. The GDP is expected to remain fairly resilient and to grow by more than 6.5 per cent in 2016, according to Bloomberg News.
This country is home to more than 100 million people. The economy is benefitting from a strong demographic dividend, as the median age of the population is only 23, largely English-speaking and highly trainable.
The Philippines buys more than $569 million in Canadian merchandise each year. Sectors that present the strongest potential to Canada include agri-food, frozen meat, ICT, infrastructure and aerospace.
Want to know how to succeed in this relatively unexplored market? Start with these experts:
“…this market is becoming more and more appealing for companies that want to explore the region.”
Why should Canadian companies consider doing business in the Philippines?
The Philippines has a lot of opportunities. It’s been the darling of the region over the last three or four years, with a growth rate of six to seven per cent. The country’s former president, Benigno Aquino, has successfully instituted a number of economic reforms and made progress in combatting corruption, although there’s still a lot of work to be done in this area. The reforms are expected to be sustained under the administration of President Duterte, whose main priority is to reduce crime and expedite infrastructure development.
How are foreign companies typically approaching this market?
Most foreign companies choose to leverage Singapore as the hub. In some cases, they may also have a small representative office in the Philippines. Working with good local partners is a key to success in the Philippines, especially with the influential local Filipino families that dominate the business landscape of the country. There are still areas of concern, as corruption is still prevalent and restrictions of ownership by foreign companies still exist in certain sectors. Territorial disputes with China, especially in the South China Sea, may hamper foreign direct investments.
What are some of the primary upsides for Canadian companies, and which sectors are responding?
ICT companies are increasingly paying attention to the Philippines, largely because of its excellent reputation in business process outsourcing services. Civil infrastructure development, such as the construction of toll roads, expressways, airports, and power generation and distribution, also present ample opportunities for Canadian companies. Another major plus for the Philippines is that English is widely spoken, so language is not a barrier for Canadian companies.
“Many companies are reaching a point where there’s a lot of succession change happening, with third-generation family members now in charge of the company.”
What’s the business landscape like in the Philippines?
Most businesses in the Philippines are family owned. Many companies are reaching a point where there’s a lot of succession change happening, with third-generation family members now in charge of the company. These younger leaders are mostly educated abroad and tend to be highly influenced by western ideas.
What does this mean for Canadian businesses?
There’s an interesting dynamic in these family-owned businesses that foreign companies don't always understand. The Philippines is a society that respects its elders. So the current generation might theoretically be in charge, but if their father or uncle disagrees with a strategy they would probably back away from it. This means that even if you're talking to the CEO, the older gentleman who might sit in meetings and is not as well dressed as everyone else in the room might be the guy making the ultimate decision.
Any other family or cultural dynamics to consider?
Philippine businesses are so dominated by families, and you might have different factions within families that don't always get along. There’s a danger you might be excluded from certain business opportunities because one faction finds out you're partners with the faction they don't get along with. It’s not like you can go in and be a neutral vendor and sell to everybody; you are sometimes choosing alliances as much as you are choosing partners and customers.
“Canadian companies who come to the Philippines should take comfort in the fact that business practices here are essentially driven by North American and European practices.”
Can you describe the labour market in the Philippines?
One can characterize the Philippines as a rich source of managerial and executive talent. At this level, candidates are very well educated. English is a widely spoken business language in this country, so fluency is not an issue. Compensation packages follow those of multinational companies, which are quite prevalent here. Canadian companies who come to the Philippines should take comfort in the fact that business practices here are essentially driven by North American and European practices.
Are there areas or sectors where qualified personnel are harder to find?
The manufacturing industry, in general, has fewer talented staff, because in the past two years, a lot of manufacturing operations were integrated within ASEAN and relocated to a central location such as Malaysia or Thailand, or even China. But now we see a phenomenon where Japanese companies are starting to come back to the Philippines and set up operations. This means manufacturing talent will be built up over time as Japanese and other western companies set up shop here in the Philippines.
Are there any restrictions that apply to Canadian companies wanting to bring a Canadian worker to oversee operations in the Philippines?
There are no restrictions in the Philippines, because there are a lot of opportunities here. Unlike in Singapore, where there’s a concern that foreign workers are taking the jobs of the locals, in the Philippines we welcome talent who can contribute and bring new ideas.
“Manufacturers and companies in the renewable energy sector could be entitled to tax incentives. Mining operations are subject to nationality restrictions, requiring at least 60 per cent Filipino ownership.”
From a regulatory and legal point of view, what do Canadian companies need to know about doing business here?
The Philippines is a party to several treaties, including a tax treaty that applies to Canadian suppliers that want to sell goods to the Philippines. There are special laws for investors depending on the type of activity they plan to engage in. Manufacturers and companies in the renewable energy sector could be entitled to tax incentives. Mining operations are generally subject to nationality restrictions, requiring at least 60 per cent Filipino ownership.
Canadian investors should be mindful of the Philippine Competition Act and its implementing rules and regulations, which were recently promulgated and are primarily implemented by the Philippine Competition Commission. Depending on several factors, such as whether the value of the transaction exceeds PHP1 billion and the percentage of shares in a Philippine company that will be acquired, a merger or acquisition transaction involving the Philippines may be a covered transaction under the Act, and the parties may have to comply with the compulsory notification requirements prior to completion of the transaction.]
Foreign companies typically set up a subsidiary, branch or representative office here. What are the main requirements for these entities?
Setting up a subsidiary requires at least five individuals to act as incorporators, with at least three who are Philippine residents. The corporate secretary has to be Filipino, and at least three board members have to be Philippine residents. A branch may be easier to set up because you just need a resident agent in the Philippines who can receive notices, summonses and other communications on behalf of the company. Generally, the minimum required capital for a subsidiary or branch of a foreign corporation that will primarily sell goods or services within the Philippines is US$200,000. Registering a representative office requires initial capital of only US$30,000. However, the activities of a representative office are limited to general marketing and information dissemination, and liaising with customers.
What land or property ownership rules apply to Canadian companies that want to set up operations here?
Canadian companies cannot purchase private land in the Philippines as land ownership is restricted to Philippine nationals. However, foreign companies can buy other real property such as buildings and lease private land for up to 25 years, renewable for another 25 years. Foreign investors, such as those interested in setting up a manufacturing facility, may also be allowed a 75-year lease of private land pursuant to the Investors’ Lease Act.
“The Philippines is ranked 151st out of 199 countries on the 2016 TRACE Matrix, which measures business bribery risk by country.”
How would you characterize the risk of corruption in your region?
Corruption in the Philippines is widespread and deeply ingrained, cutting across all levels of society. Typically, industries most at risk involve public procurement or a heavy burden of regulation, e.g., construction and engineering, extractive industries, power generation, telecommunications, and transportation and logistics.
The Philippines is ranked 151st out of 199 countries on the 2016 TRACE Matrix, which measures business bribery risk by country. With an overall risk score of 71, the Philippines represents a high level of risk, particularly because of a high risk of intensive interaction with the government, high regulatory burden and a high expectation of bribes.
How do these risks affect Canadian businesses?
Foreign companies are most vulnerable when dealing with customs and tax authorities, securing local government permits/licenses, bidding for public sector contracts and availing themselves of government investment incentives.
Given the massive and complex bureaucracy, Canadian companies might decide to resort to facilitation payments – which are prohibited under local law. These “grease payments” are both difficult to define and impossible to control.
Companies should also manage their third party risk. It bears stressing that the company may be liable for illegal actions taken by intermediaries (brokers, advisors, consultants) to secure business.
How can Canadian businesses guard against these corruptive practices?
First, report any requests for bribes. The recently-elected President ran and won on a campaign against corruption and criminality.
Second, companies should come into the Philippines armed with a robust compliance program and the resolve to implement it. The program should include:
- Management commitment and an anti-corruption policy;
- Internal controls to detect and prevent bribery;
- Continuous training of employees and third parties;
- Risk-based due diligence and ongoing monitoring of third parties.
Finally, foreign companies should work only with reputable business partners. They should carefully vet their intermediaries, and require evidence of a compliance program and completion of anti-bribery training. Working with TRACE Certified companies can provide foreign companies with the assurance that the entity has completed a rigorous due diligence process based on international standards.
Companies may wish to refer to TRACEpublic, the first global register of beneficial ownership information, which allows companies to share and search for beneficial ownership information at no cost. The database supports the efforts of companies seeking to conduct business ethically.
In addition, the Canadian Trade Commissioner Service in the Philippines offers assistance to Canadian companies operating there.