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The Philippines

Executive Summary

The Philippines remains committed to improving its overall investment climate and recovering from the COVID-19 pandemic. Sovereign credit ratings remain at investment grade based on the country’s historically sound macroeconomic fundamentals, but one credit rating agency has updated its ratings with a negative outlook indicating a possible downgrade within the next year due to increasing public debt and inflationary pressures on the economy. Foreign direct investment (FDI) inflows rebounded to USD 10.5 billion, up 54 percent from USD 6.8 billion in 2020 and surpassing the previous high of USD 10.3 billion in 2017, according to the Bangko Sentral ng Pilipinas (the Philippine Central Bank). While 2021 was a record year for inward FDI, since 2010 the Philippines has lagged behind regional peers in the Association of Southeast Asian Nations (ASEAN) in attracting foreign investment. The Philippines ranked sixth out of ten ASEAN economies for total FDI inflows in 2020, and last among ASEAN-5 economies (which include Indonesia, Malaysia, the Philippines, Singapore, and Thailand) in cumulative FDI inflows from 2010-2020, according to World Bank data. The majority of FDI equity investments in 2021 targeted the manufacturing, energy, financial services, and real estate sectors. (https://www.bsp.gov.ph/SitePages/MediaAndResearch/MediaDisp.aspx?ItemId=6189)

Poor infrastructure, high power costs, slow broadband connections, regulatory inconsistencies, and corruption are major disincentives to investment. The Philippines’ complex, slow, and sometimes corrupt judicial system inhibits the timely and fair resolution of commercial disputes. Traffic in major cities and congestion in the ports remain barriers to doing business. The Philippines made progress in addressing foreign ownership limitations that has constrained investment in many sectors, through legislation such as the amendments to the Public Services Act, the Retail Trade Liberalization Act, and Foreign Investment Act, that were signed into law in 2022.

Amendments to the Public Services Act open previously closed sectors of the economy to 100 percent foreign investment. The amended law maintains foreign ownership restrictions in six “public utilities:” (1) distribution of electricity, (2) transmission of electricity, (3) petroleum and petroleum products pipeline transmission systems, (4) water pipeline distribution systems, (5) seaports, and (6) public utility vehicles. The newly approved Retail Trade Liberalization Act aims to boost foreign direct investment in the retail sector by reducing the minimum per-store investment requirement for foreign-owned retail trade businesses from USD 830,000 to USD 200,000. It will also reduce the quantity of locally manufactured products foreign-owned stores are required to carry. The Foreign Investment Act will ease restrictions on foreigners practicing their professions in the Philippines and grant them access to investment areas that were previously reserved for Philippine nationals, particularly in the education, technology, and retail sectors.

In addition, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act signed in March 2021 reduced the corporate income tax from ASEAN’s highest rate of 30 percent to 25 percent for large firms, and 20 percent for small firms. The rate for large firms will be gradually lowered to 20 percent by 2025. CREATE could attract new business investment, although some foreign investors have concerns about the phase-out of their incentive benefits, which are replaced by the performance-based and time-bound nature of the incentives scheme adopted in the measure.

While the Philippine bureaucracy can be slow and opaque in its processes, the business environment is notably better within the special economic zones, particularly those available for export businesses operated by the Philippine Economic Zone Authority (PEZA), known for its regulatory transparency, no red-tape policy, and one-stop shop services for investors. Finally, the Philippines’ infrastructure spending under the Duterte Administration’s “Build, Build, Build” infrastructure program is estimated to have exceeded USD100 billion over the 2017-2022 period.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 117 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 51 of 132 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 5,199 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2020 USD3,430 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

State-owned enterprises, known in the Philippines as government-owned and controlled corporations (GOCC), are predominantly in the finance, power, transport, infrastructure, communications, land and water resources, social services, housing, and support services sectors. The Governance Commission for GOCC (GCG) further reduced the number of GOCCs to 118 in 2020 (excluding water districts), from 133 the prior year; a list is available on their website (https://gcg.gov.ph). The government corporate sector has combined assets of USD 150 billion and liability of USD 103 billion (or net assets/equity worth about USD 46 billion) as of end-2020. Using adjusted comprehensive income (i.e., without subsidies, unrealized gains, etc.), the GOCC sector’s income declined by 55 percent to USD 1.1 billion in 2020, the lowest since 2015. GOCCs are required to remit at least 50 percent of their annual net earnings (e.g., cash, stock, or property dividends) to the national government. Competition-related concerns, arising from conflicting mandates for selected GOCCs, exist in the transportation sector. For example, both the Philippine Ports Authority and the Civil Aviation Authority of the Philippines have both commercial and regulatory mandates.

Private and state-owned enterprises generally compete equally. The Government Service Insurance System (GSIS) is the only agency, with limited exceptions, allowed to provide coverage for the government’s insurance risks and interests, including those in build-operate-transfer (BOT) projects and privatized government corporations. Since the national government acts as the main guarantor of loans, stakeholders report GOCCs often have an advantage in obtaining financing from government financial institutions and private banks. Most GOCCs are not statutorily independent, thus could potentially be subject to political interference.

8. Responsible Business Conduct

Responsible Business Conduct (RBC) is regularly practiced in the Philippines, although no domestic laws require it. The Philippine Tax Code provides RBC-related incentives to corporations, such as tax exemptions and deductions. Various non-government organizations and business associations also promote RBC. The Philippine Business for Social Progress (PBSP) is the largest corporate-led social development foundation involved in advocating corporate citizenship practice in the Philippines. U.S. companies report strong and favorable responses to RBC programs among employees and within local communities.

9. Corruption

Corruption is a pervasive and long-standing problem in both the public and private sectors. The country’s ranking in Transparency International’s 2021 Corruption Perceptions Index declined to the 117th spot (out of 180), its worst score in nine years. The 2021 ranking was also dragged down by the government’s poor response to COVID-19, with Transparency International characterizing it as abusive enforcement of laws and accusing the government of major human rights and media freedom violations. Various organizations, including the World Economic Forum, have cited corruption among the top problematic factors for doing business in the Philippines. The Bureau of Customs is still considered to be one of the most corrupt agencies in the country.

The Philippine Development Plan 2017-2022 outlines strategies to reduce corruption by streamlining government transactions, modernizing regulatory processes, and establishing mechanisms for citizens to report complaints. A front-line desk in the Office of the President, the Presidential Complaint Center, or PCC (https://op-proper.gov.ph/contact-us/ ), receives and acts on corruption complaints from the general public. The PCC can be reached through its complaint hotline, text services (SMS), and social media sites.

The Philippine Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for Public Officials all aim to combat corruption and related anti-competitive business practices. The Office of the Ombudsman investigates and prosecutes cases of alleged graft and corruption involving public officials. Cases against high-ranking officials are brought before a special anti-corruption court, the Sandiganbayan, while cases against low-ranking officials are filed before regional trial courts.

The Office of the President can directly investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations. Soliciting, accepting, and/or offering/giving a bribe are criminal offenses punishable by imprisonment, a fine, and/or disqualification from public office or business dealings with the government. Government anti-corruption agencies routinely investigate public officials, but convictions by courts are limited, often appealed, and can be overturned. Recent positive steps include the creation of an investors’ desk at the office of the ombuds Office, and corporate governance reforms of the Securities and Exchange Commission.

10. Political and Security Environment

Terrorist groups and criminal gangs operate around the country. The Department of State publishes a consular information sheet and advises all Americans living in or visiting the Philippines to review the information periodically. A travel advisory is in place for those U.S. citizens considering travel to the Philippines.

Terrorist groups, including the Islamic State East Asia (IS-EA) and its affiliate Abu Sayyaf Group (ASG), the Maute Group, Ansar al-Khalifa Philippines (AKP), the communist insurgent group the New People’s Army, and elements of the Bangsamoro Islamic Freedom Fighters (BIFF), periodically attack civilian targets, kidnap civilians – including foreigners – for ransom, and engage in armed attacks against government security forces. These groups have mostly carried out their activities in the western and central regions of Mindanao, including the Sulu Archipelago and Sulu Sea. Groups affiliated with IS-EA continued efforts to recover from battlefield losses, recruiting and training new members, and staging suicide bombings and attacks with improvised explosive devices (IEDs) and small arms that targeted security forces and civilians.

The Philippines’ most significant human rights problems are killings allegedly undertaken by vigilantes, security forces, and insurgents; cases of apparent governmental disregard for human rights and due process; official corruption; shrinking civic spaces; and a weak and overburdened criminal justice system notable for slow court procedures, weak prosecutions, and poor cooperation between police and investigators. In 2021, the Philippines continued to see red-tagging (the act of labelling, branding, naming, and accusing individuals or organizations of being left-leaning, subversives, communists, or terrorists that is used as a strategy by state agents against those perceived to be “threats” or “enemies of the State”), arrests, and killings of human rights defenders and members of the media.

President Duterte’s administration continued its nationwide campaign against illegal drugs, led primarily by the Philippine National Police (PNP) and the Philippine Drug Enforcement Agency (PDEA), which continues to receive worldwide attention for its harsh tactics. In 2021, the government retained its renewed focus on antiterrorism with a particular emphasis on communist insurgents. In addition to Philippine military and police actions against the insurgents, the Philippine government also pressured political groups and activists – accusing them of links to the NPA, often without evidence. The Anti-Terrorism Act of 2020, signed into law on July 3, intends to prevent, prohibit, and penalize terrorism in the country, although critics question whether law enforcement and prosecutors might be able to use the law to punish political opponents and endanger human rights. Following the passage of the Antiterrorism Act of 2020, various human rights groups and private individuals filed petitions questioning the constitutionality of the act. On December 9, the Supreme Court announced its ruling that only two specific provisions of the bill were unconstitutional: first, making dissent or protest a crime if such act had an intent to cause harm; and second, allowing the Anti-terrorism Council to designate someone a terrorist based solely off UN Security Council designation. The petitioners and other human rights groups said, however, that the ruling against the two provisions still does not provide protection to the Filipino people.

The upcoming May 2022 elections could impact the political and security environment in the country, given the Philippines’ history of election-related violence. The Philippine police and military keep a close watch on certain areas they classify as “election hotspots.”

11. Labor Policies and Practices

Managers of U.S. companies in the Philippines report that local labor costs are relatively low and workers are highly motivated, with generally strong English language skills. As of December 2021, the Philippine labor force reached 49.5 million workers, with an employment rate of 93.4 percent and an unemployment rate of 6.6 percent. These figures include employment in the informal sector and do not capture the substantial rates of underemployment in the country. Youths between the ages of 15 and 24 made up more than 28.9 percent of the unemployed. More than half of all employment was in the services sector, with 56.6 percent. Agriculture and industry sectors constitute 25.6 percent and 17.8 percent, respectively.

Compensation packages in the Philippines tend to be comparable with those in neighboring countries. Regional Wage and Productivity Boards meet periodically in each of the country’s 16 administrative regions to determine minimum wages. The non-agricultural daily minimum wage in Metro Manila is approximately USD 10, although some private sector workers receive less. Most regions set their minimum wage significantly lower than Metro Manila. Violation of minimum wage standards is common, especially non-payment of social security contributions, bonuses, and overtime. Philippine law also provides for a comprehensive set of occupational safety and health standards. The Department of Labor and Employment (DOLE) has responsibility for safety inspection, but a shortage of inspectors has made enforcement difficult.

The Philippine Constitution enshrines the right of workers to form and join trade unions. The trend among firms using temporary contract labor to lower employment costs continues despite government efforts to regulate the practice. The DOLE Secretary has the authority to end strikes and mandate a settlement between parties in cases involving national interest. DOLE amended its rules concerning disputes in 2013, specifying industries vital to national interest: hospitals, the electric power industry, water supply services (excluding small bottle suppliers), air traffic control, and other industries as recommended by the National Tripartite Industrial Peace Council (NTIPC). Economic zones often offer on-site labor centers to assist investors with recruitment. Although labor laws apply equally to economic zones, unions have noted some difficulty organizing inside the zones.

The Philippines is signatory to all International Labor Organization (ILO) core conventions but has faced challenges with enforcement. Unions allege that companies or local officials use illegal tactics to prevent workers from organizing. The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities. Meanwhile, the NTIPC monitors the application of international labor standards.

Reports of forced labor in the Philippines continue, particularly in connection with human trafficking in the commercial sex, domestic service, agriculture, and fishing industries, as well as online sexual exploitation of children.

14. Contact for More Information

John Avrett, Economic Officer
U.S. Embassy Manila
1201 Roxas Boulevard, Manila, Philippines
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov 

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