The Philippines is considered one of the most promising economies in Asia. According to the World Bank, the country is said to be recovering, with an average growth of 5.6 percent in 2023. While this prediction is coming from the COVID-19 pandemic and will surely need to be adjusted, the development of the Philippine economy should still be promising.
Beyond the reach of simple policies and regular laws, however, are the provisions of the 1987 Constitution. To understand the reasoning for the strict rules on foreign ownership in the Philippine Constitution, it is helpful to discuss historical circumstances.
Created in a time fresh from political unrest, the new constitution included protectionist policies because the previous dictatorial government was believed to be too close to foreign interests, among other reasons. In the modern world, where more open national economies are beneficial, those provisions have somewhat backfired. So, if the Philippines desires to continue its impressive growth and outperform its competition, those protectionist provisions need a serious second look. Unfortunately, this is not as easy as it sounds, because the challenge of actually amending and revising the 1987 Constitution is a hurdle the government has yet to overcome due to its legally confusing wording. The effects of those decisions are a discussion for another article, but fast forward to today, it is believed by some economists that the Philippines lags behind its peers because of the strict protectionism.
To remedy the problem and invite foreign investments despite the constitutional restrictions, the Philippines enacted Republic Act No. 7042, or “The Foreign Investments Act of 1991” (FIA). Under this legislation, the government made clear its policy to “attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and governments” within the limitations and to the extent allowed by the 1987 Constitution.
So can a non-citizen of the Philippines open a business in the country? Is 100% foreign ownership even allowed? It is important to clarify the type of business a prospective foreign investor wishes to operate or invest in, but the answer is yes, 100% foreign ownership is still possible, provided such a prospective business is an Export Enterprise or a Domestic Market Enterprise that is engaged in or is prospectively going to operate a business activity that is not on the Foreign Investment Negative List. An Export Enterprise is defined in the FIA as a manufacturer, processor, or service (including tourism) enterprise that must export at least 60% of its output or as a trader that acquires or purchases products domestically and then exports 60% of such purchases. A Domestic Market Enterprise is an enterprise that produces goods for sale or renders services to the domestic market entirely. If it exports a portion of its output and fails to export at least 60% of such goods or services, it will fall under the definition of a Domestic Market Enterprise.
This brings us to the Foreign Investment Negative List (or Negative List for short), an enumeration of businesses and activities published by the government as directed by the FIA, specifically to limit foreign ownership. The Negative List is regularly changed and revised, and the latest version is Executive Order No. 175 (Twelfth Regular Foreign Investment Negative List).
The Foreign Investment Negative List
The current Negative List can be divided into two distinct categories. List A enumerates the activities with foreign ownership limitations by reason of constitutional limitation and by specific laws. List B restricts foreign ownership by reasons of Security, Defense, Risks to Health and Morals, and to protect small and medium-sized enterprises. A third category, which is supposed to limit foreign ownership in industries or activities that depend on the capacity of existing local businesses, has normally been omitted, as this involves the filing of the necessary petitions by an interested person and the evaluations by the concerned government agency.
The list is available on the Official Gazette of the Philippines website for our readers’ reference.
In conclusion, the Philippines offers significant opportunities for foreign investors, mainly through mechanisms like the Foreign Investments Act of 1991 (FIA). While constitutional restrictions on foreign ownership remain challenging, the FIA and the regularly updated Foreign Investment Negative List provide a clear framework for navigating these limitations. Understanding the distinctions between Export Enterprises and Domestic Market Enterprises and staying informed about the current Negative List are crucial steps for prospective foreign investors. Until the restrictive provisions of the 1987 Constitution are amended, these guidelines serve as a comprehensive resource for non-Philippine citizens looking to invest in the country.