Computerworld Philippines :: Technopreneurship View Points

Peer Perspective. IT Leadership. Business Results

Memo to President Aquino

By Peter S. Cohan
September 1, 2010

In his innaugural address, Benigno Aquino III promised to fight corruption and pledged to bring a new era of good governance, reforms and a bureaucracy that will lessen the burden on the average Pinoy. Sounds good, but how?

As an American who has only visited Manila twice, I can hardly begin to suggest how Aquino might achieve these lofty goals. But based on the research I’ve done for my latest book, co-authored with Professor Srini Rangan, Capital Rising, I can point out that the challenges he faces have been tackled by other countries.

The first point to make is that one way to lift up the Phillipines is to attract global capital flows. Some $709 billion in global capital is expected to find its way into emerging markets such as China, India, and Brazil in 2010.

And while some might view such capital flows as threatening, they are intended to achieve a simple purpose – generate an attractive return for investors seeking to meet their obligations to people expecting to receive a pension when they retire.

But as I know well – most recently from presenting to an audience of chief investment officers (CIOs) for such pension funds in New York a few months ago – these capital providers are keenly focused on risk these days. They realize that they won’t be able to achieve their 8% return goals unless they take some risks – particularly given that the risk free rate is close to zero – so they need a way to figure out which risks they can manage and which they can’t stomach.

ATTRACTING GLOBAL CAPITAL FLOWS

I was pleased to watch the CIOs’ eyes light up when I presented them a framework for assessing such risks. This framework is called the Capital Receptivity Index (CRI) and there is no space here to get into all its details. But the CRI could help Aquino to attract more global capital flows to the Philippines.

The CRI measures how receptive a country is to global capital flows. It provides specific measures of four factors that a capital provider considers when seeking out a new country in which to invest. These four factors are what my co-author and I call a country’s Entrepreneurial Ecosystem (EE). Transparent and efficient financial markets, reliable and effective corporate governance systems, human capital development systems that promote needed skills while developing what the New York Times’ Thomas Friedman calls “high IQ risk takers,” and clear and supportive intellectual property (IP) protection laws constitute the four elements of a high quality EE that attracts capital. The CRI measures how well a country manages its EE. A country that does well on these four elements earns a high CRI and a country with a high CRI is likely to attract global capital flows.

Although the Philippines lags its neighbors in the race for capital, its human capital advantages led to a 26.2% boost in the Philippines’ net foreign direct investments (FDI) in 2009 to $1.9 billion. Net equity capital in 2009 rose an even more impressive 50% to
$1.8 billion thanks to foreign investors.

So why should the Philippines boost its CRI? A higher CRI would attract capital to finance the growth of new companies and to expand existing companies. Such expansion would create new jobs and raise boost tax revenues.

Unlocking those capital flows would force the Philippines to advance solutions to some of the very issues that top President Aquino’s agenda – governance and corruption. Given Aquino’s mention of these issues, I’d expect corporate governance and financial markets to be two areas of potential improvement for the Philippines’ EE.

OPPORTUNITIES FOR THE PHILIPPINES

When it comes to the EE’s human capital element the Philippines has advantages over many of its Asian neighbors. And U.S. companies, particularly law and accounting firms, perceive advantages in outsourcing research work to the Philippines because many workers speak English well, appreciate American culture, and accept relatively low pay.

Although these advantages attracted FDI to the Philippines, that $1.9 billion represents a tiny 0.3% of the emerging market global capital pie. Moreover, President Aquino’s agenda suggests potential for improvement. A place to start would be to calculate the Philippines’ CRI to identify the specific governance areas that would yield the biggest improvements for capital providers.

Such governance fixes would help President Aquino achieve his political agenda and boost the flow of capital into the Philippines – creating more start-ups, expanding existing businesses, and putting more people to work.

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