How does the Philippine ICT industry rate in comparison to other Southeast Asian economies?
Primary Analyst: Brian Cotic
Team Leader: Ma'ailah Blackwood
The Information Communication Technology (ICT) market in Southeast Asia is currently entering what economists are calling a “Golden Age” of tech industry start-ups. Many Asian nations are now turning to the ICT industry as the primary means of growing and modernizing their economies. Countless start-up tech firms have emerged all over Southeast Asia and are drawing billions of dollars in foreign direct investment (FDI) into their nations economies. A great deal of this investment has come from the West, but China has also starting participating in FDI with its neighbouring states. The Philippine tech industry has been singled out as one of the fastest growing ICT markets in Southeast Asia, ripe for foreign investment; however, newly elected President Rodrigo Deuterte’s war on drugs has considerably increased the degree of political risk on the island nation. Considering the volatile new regime, how does the Philippine ICT market rate in comparison to other Southeast Asian ICT markets?
Indonesia
Indonesia has the largest economy in Southeast Asia with a GDP growth rate of 5.3% in 2016. External trade has been a weak point of Indonesia's economy, and domestic consumption has seen a decline over the years. However, the government has significantly increased public spending towards the nation's Internet infrastructure and has adopted a series of new policies aimed at removing barriers to private investment. The Indonesian government has shown a keen interest in jump-starting the nation's ICT industry, which means investors, can look forward to many opportunities in the future.
Singapore
Singapore has a large export market for consumer electronics and information technology. The Government Technology Agency has spent $2.82 billion on the ICT industry in 2016, working closely with ICT companies and improving the nation's Internet infrastructure. Singapore's government has very ambitious plans to make their nation one of the world leaders in ICT.
Hong Kong
Hong Kong is the primary link between Mainland China and the international market. The Hong Kong Innovation and Technology Bureau, founded in 2015, is primarily focused on improving research and development, working closely with universities and the ICT industry. Hong Kong is widely receptive to foreign investment within the ICT industry. However, China has already begun to capitalize on this opportunity, looking to make Hong Kong its IT hub.
Thailand
Thailand has increased government spending on ICT in recent years and represents one of the largest Asian markets for ICT products. However, 2016 has seen only a third of the expected 13% growth in Thailand's ICT industry due to a decrease in total government spending and domestic consumption. Thailand has demonstrated pro-investment government policy and a strong export economy largely founded on consumer electronics. However, the Thai government is notoriously unstable which calls into doubt the reliability of their regulatory environment.
Vietnam
Vietnam presents an excellent opportunity for investment as the nation is still in the long process of transitioning from a centrally planned economy to a free market economy. The government has developed a plan to turn Vietnam's economy into an advanced ICT economy by 2020. The government has also adopted several policies aimed at integrating Vietnam into the global economy. Vietnam has also developed one of the strongest legal frameworks for combating corruption in Asia.
What this means for the Philippines
The Philippine ICT industry has had its share of challenges, most notably poor infrastructure and corruption. However, over the years it has evolved into one of the rising stars of the Southeast Asian ICT market. In May of 2016, the previous Philippine president founded the Department for Information and Communication Technology (DICT) to meet modern demands for ICT development, most notably for faster Internet connections. President Deuterte has continued this theme and has promised to improve the nation's Internet infrastructure, threatening to remove barriers to foreign Internet providers if local companies do not deliver. The Philippines is also the first Asian country to introduce regulations for high-tech transportation firms such as Uber. There are many opportunities for investment in the Philippine ICT Industry; however, rampant corruption as well as incompetent, unpredictable and unstable government severely increases the risk of investing in this nation’s economy. President Deuterte has also begun to alienate the Philippines from the West, seeking stronger political and economic ties with China. The President's inflammatory comments have already caused some western nations to reconsider their economic relations with the Philippines—Belgium, for example, has recently cancelled its trade negotiations with the Deuterte regime.
The Philippine ICT market presents both high risk and potentially high reward for investors. The Department of Information and Communication Technology is committed to growing the ICT industry, working to improve the nation's flawed infrastructure and promoting ICT related skills in the education system. ICT firms can expect to find a large highly trained workforce and ever improving broadband access. While these trends represent a golden opportunity for domestic and foreign investors, the nature of the Philippine government also poses considerable risks to investors who may not be as pronounced in other Southeast Asian countries. A long history of corruption and incompetence within the Philippine government compounded with the instability and unusual nature of the current regime amounts to highly unpredictable government-industry relations. Deuterte unpredictable nature poses a significant risk as it threatens to alienate foreign investors due with his inflammatory anti-West sentiments. Social unrest and a corrupt, incompetent police force also call into question the safety of personnel, property, and other assets in the Philippines.
Nonetheless, investors have several options for mitigating these risks. To ensure a more stable relationship with the Philippine government, foreign investors should consider partnering with local entrepreneurs as oppose to opening a Philippine branch of a foreign company to avoid the risk of Deuterte's anti-West sentiments. As a result of being in the Golden Age of Asian ICT start-ups, there is an abundance of potential local partners to work with in the Philippines. Investors should also seek to maintain a close working relationship with the DICT as an effective means of lobbying the Philippine government. These strategies, however, cannot guarantee the security of investors’ asset. These mitigation strategies can help to avoid risks, but if political risks prove to be unavoidable, investors should have a backup plan to cover their losses. Investors are advised to rely on private security to mitigate the risks of social unrest and police corruption/incompetence. Political risk insurance is also advisable due to the unpredictable nature of the current regime. Investors may consider investing in one of the many other competitive Southeast Asian markets instead to avoid this risk altogether.
In the first two months of 2016, the Philippine economy received $936 billion in FDI, 50.5% higher than the same period last year. However, for these three companies investing in the Philippine ICT industry, there are dozens of firms investing just as heavily in the Singaporean, Thai, and Indonesian ICT industries.
