Non-Equity Modes of Operation in ASEAN PAPER 7

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Promoting new forms of trade between
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For inquiries, contact ASEAN-Japan Centre(ASEAN Promotion Centre on Trade, Investment and Tourism)
1F, Shin Onarimon Bldg., 6-17-19, Shimbashi,
Minato-ku, Tokyo 105-0004 Japan
Phone/Fax: +81-3-5402-8002/8003 (Planning & Coordination)+81-3-5402-8004/8005 (Trade)+81-3-5402-8006/8007 (Investment)+81-3-5402-8008/8009 (Tourism & Exchange)+81-3-5402-8118/8003 (PR)e-mail address: toiawase_ga@asean.or.jp
https://www.asean.or.jp

Copyright © ASEAN Promotion Centre on Trade, Investment and Tourism.
All Rights Reserved.
Paper 7 / March 2018 / Non-Equity Modes of Operation in ASEAN: The Philippines
Promoting new forms of trade between Japan and ASEAN

Non-Equity Modes of Operation in ASEAN PAPER 7
Promoting new forms of trade between
Japan and ASEAN

M A R C H

2018

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NOTESThe terms country and/or economy as used in this study also refer, as appropriate, to territories orareas; the designations employed and the presentation of the material do not imply the expressionof any opinion whatsoever on the part of the ASEAN-Japan Centre concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers orboundaries.

The following symbols have been used in the tables:• Two dots (..) indicate that data are not available or are not separately reported.
• A dash (-) indicates that the item is equal to zero or its value is negligible.
• Use of a dash (-) between dates representing years, e.g., 2015–2016, signifies the full period
involved, including the beginning and end years.
Reference to “dollars” ($) means United States dollars, unless otherwise indicated.

There are 10 papers in total. The other nine papers will be produced subsequently.
Paper 1. Brunei Darussalam
Paper 2. Cambodia
Paper 3. Indonesia
Paper 4. Lao People’s Democratic Republic
Paper 5. Malaysia
Paper 6. Myanmar
Paper 7. Philippines
Paper 8. Singapore
Paper 9. Thailand
Paper 10. Viet Nam

Prepared by Chie Iguchi (Keio University, Japan) and the trade staff members of the ASEAN–
Japan Centre (AJC) under the direction of Masataka Fujita (AJC). Errors and omissions are
only those of the authors and should not be attributed to the respective organizations.

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CONTENTS
1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Characteristics of non-equity modalities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Scale and scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 NEMs by modality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8(1) Outsourcing: IT-BPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8(2) Subcontracting: Furniture industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14(3) Franchising: Convenience stores. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16(4) Management contract: Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3. Opportunities and Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4. Policy Implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.1 Enhancing capacities of local firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.2 Mainstreaming sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.3 Improving institutional setting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5. Postscript . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.1 Positioning of NEM in the Philippines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.2 Importance of FDI as well as NEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

5.3 Concluding remarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  41
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Annex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

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KEY MESSAGES• The volume of non-equity mode (NEM) production and exports has been increasing in thePhilippines, reaching an estimated $40 billion and $32 billion, respectively, in 2016. NEMs were
estimated to account for 43 per cent of total exports.
• Philippine firms are involved in various types of NEMs, including subcontracting, management
contracts, and franchising. The use of NEMs varies by industry.
• Information technology and business process outsourcing (IT-BPO) is a good example ofoutsourcing (subcontracting) and is one of the best-performing and best employment-generating
activities in the Philippines. It is also the top growth industry in the Philippines, with $25 billion
sales in 2016 and an 8 per cent share of GDP. As it is hard to forecast demand, IT-BPO firms tend
to be required to build their capacity without exact knowledge of the size of NEM operations with
future customers.
• The Philippine furniture-making industry, which boasts world-famous designers and has morethan 5.4 million people in the supply chain, is another example of subcontracting and an export-led
growth industry. Furniture exports grew from $218 million in 2012 to $354 million in 2016. Althoughvarious support programs make Philippine products even more competitive in the international
market, local furniture firms build part of their competitiveness from NEM customers outside thecountry.
• About 30 per cent of total retail sales are contributed by franchisee retail from foreign transnational
corporations (TNCs). Among others, convenience stores are an expanding franchise business. In
2016, leading convenience store operator Philippine Seven Corp. reached total revenues of $652
million and had total assets of $248 million.
• International hotels operate in the Philippines through either management contracts or franchise
agreements, or on long-term leased land on which hotels are built with equity investments. The
inward FDI policy does not allow foreigners to own private land.
• Foreign TNCs outsource a part or the whole of any goods or services or even part of their global
value chains (GVCs) to the country when localization is a low priority.
• As TNCs can easily terminate contracts, a long-term relationship is not established, particularly
when the quality of services or goods does not meet TNCs’ standards and local firms in othercountries are more competitive.
• NEMs may play a role in alleviating the potential risks associated with the externally dependent
economic characteristics of the Philippines, and are critical for further economic development.
• When selecting NEMs as an economic growth strategy, consideration of the development of thelocal community, including NEM local firms and NEM local employees, is important.
• There are two directions of policy implications associated with NEMs. One direction is to create
local employment through NEMs and the other is to promote NEM policies. These two directions
should be pursued through an appropriate institutional framework. NEM-oriented policies also
help break overdependence on overseas remittances.

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1. INTRODUCTION
Trade is not always undertaken between independent firms. Both arm’s-length and non-arm’s-length
trade exist, and in the latter trade may also take place between foreign companies and local firms
without an equity relationship, with the local firms controlled by the foreign ones. In the Philippines,
this non-equity mode (NEM) of trade is spreading in the form of international subcontracting in
manufacturing industries for automobiles, electronics and garments, among others; contract
farming in agriculture, as in banana plantations and food processing; international franchisingin fast food and retail (including convenience) stores; variations of build-own-operate-transfer
arrangements and other concessions in infrastructure projects; and management contracts (e.g.
in international hotel chains).1 Recently, information technology and business process outsourcing(IT-BPO) and information technology and business process management (IT-BPM) have become top
exporting businesses, typically undertaken through contractual agreements with foreign entities.
This paper examines the case of the Philippines within the overall framework of the ASEAN-Japan
Centre (AJC) NEM project (box 1).
In the Philippines, the 36th largest economy in the world and the 3rd largest in ASEAN (after Indonesia
and Thailand), NEMs in all three sectors – primary, manufacturing and services – have been
contributing significantly to economic development. In manufacturing, for example, the electronics
industry plays a pivotal role, accounting for 47 per cent of exports, with 258 companies exporting
over $1 million each in 2014. This industry comprises semiconductor manufacturing services2 (73per cent) and electronics manufacturing services3 (27 per cent). Major global semiconductor players
such as Samsung (Republic of Korea), Texas Instruments (United States), Toshiba (Japan), NXP(Netherlands), and STMicroelectronics (Switzerland), have production bases in the Philippines, andtheir foreign affiliates are engaged in transactions not only with their parent firms but also with NEM
partners in and out of the country. Integrated Microelectronics Inc. (IMI), based in the Philippines, isthe 6th largest global provider of electronics manufacturing services to the automotive industry, anda major NEM supplier for Bosch (Germany), the world’s largest supplier of automotive components.
IMI provides Bosch with automotive, industrial and consumer electronic products.
As an example of services, which has become the strongest and fastest-growing sector of thePhilippine economy,4 IT-BPO/BPM is one of the best-performing and best-employment-generating
industries in the country, generating $25 billion in revenues. The Philippines attracts not only
foreign direct investment (FDI) by major IT-BPO/BPM transnational companies (TNCs), including
call centres,5 but also NEMs for international production. Another example is that in matching with
consumer lifestyles, with the growth in convenience stores and restaurant chains, foreign companies
enter through franchising: for example, 7-Eleven, the largest convenience store in the world, as wellas in the Philippines, plans to have 10,000 stores in the country by 2023.6 These industry examples
show that NEMs are integrated into economic development and daily life in the Philippines (table 1).

1

2

3
4
5

6

There are also many types of NEMs of business activities among local companies. As this paper highlights NEMs
in the context of international trade, it does not address the case of NEMs among local companies.
Semiconductor manufacturing services include companies manufacturing integrated circuits, transistors, diodes,
resistors, capacitors, coils, transformers, printed circuit boards and other components.
Source: SEIPI (Semiconductor and Electronics Industries in the Philippines Foundation, Inc.).
Its gross value added contribution share reached 57 per cent in 2014 (www.industry.gov.ph/category/services).
According to the Central Bank of the Philippines, the export share of call centres in the IT-BPO industry reachedover 53 per cent in 2013.
Business Mirror, 30 July 2015. As of 2016, there are 1,995 7-Eleven outlets in the Philippines (7-Eleven 2016 annual
report).

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P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A NThis study is structured as follows. The next section explains the characteristics and scope of NEMs
by type and introduces particular types that have distinguishing characteristics in the Philippines.
Section 3 provides a picture of opportunities and challenges in the selected industries and analyzes
the implications of NEMs for the economy. The last section makes suggestions about policy
implications.

Box 1. The NEM project of the ASEAN-Japan Centre
Arm’s-length relationships and equity holding are not the only means of exerting control overglobal value chains (GVCs). Companies also enter into contractual relationships with otherindependent firms. Such trade is gaining importance as the system of global production becomes
more integrated and value chains form. This is an area in which lack of knowledge and a huge
gap in research exist in ASEAN. An overall analytical framework is needed in order to assess
development impacts and make it possible to propose a policy framework for dealing with thesetransactions.
The fundamental difference from normal trade is that non-equity forms of operations relate to acontractual partnership between private parties. The role of the state in relation to this partnershipis limited to setting the framework conditions within which the private parties can freely negotiate
the terms of their cooperation. By understanding this phenomenon better, including its scale andscope, and filling in a policy analysis gap, the AJC can provide each ASEAN country government
with policies to consider in order to fully benefit from these new forms of trade, as well as frominvestment.
In order to understand better the scale and scope of non-equity involvement in major industrial
sectors, a case study approach is also employed whenever appropriate. The reasons for taking
this approach are two-fold: (1) balance-of-payments and supplementary statistics do not provide
the details necessary to accurately measure cross-border non-equity participation; and (2) the
relevant microdata are fragmented and disconnected. As much as possible, each case study
builds on existing research and statistics.
New opportunities are opening up for ASEAN countries through the international innovation
networks of transnational corporations (TNCs). Although attracting foreign direct investment(FDI) and encouraging foreign TNCs to establish affiliates remain important options for ASEAN
countries, governments also need to review current regulatory regimes in the context of theseinternational innovation networks. A key objective of this study is to make recommendations on
which policies (investment and industrial) governments need to consider in order to fully benefit
from emerging opportunities in NEMs.

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3Table 1. D escription of selected non-equity modalities, including examplesof typical industries, in the Philippines
Modality
Subcontracting

Description(in the international context)

Typical industries

Company examples

Agreement whereby a TNC contracts
out to a host-country firm one or more
aspects of product design, processingor manufacturing; includes contract
manufacturing and design, andoutsourcing in the case of services orbusiness processes

Electronics

IMI

Garments

LHK Creation

Automotive

Yazaki Torres

BPO

Accenture, JPMorgan
Chase

Contract farming/
contract mining

Agreement between a TNC buyer
and host-country farmers or miners(including government representatives)that establishes conditions for the
production and marketing of farm andmining products

Agriculture

Dole, Del Monte,
Chiquita, Sumifru

LicensingContractual relationship in which a TNC(licensor) grants to a host-country firm
(licensee) the right to use intellectual
property (e.g. copyrights, trademarks,
patents, industrial design rights, trade
secrets) in exchange for a payment(royalty); includes brand licensing,product licensing and process licensing(cross-licensing, intra-firm licensing)

Pharmaceuticals

Cathay Drug

Consumer goods

Click! Licensing Asia

Electronics

Dae Kyung Philippines

Contractual relationship in which a TNC(franchisor) permits a host-country firm
(franchisee) to run a specified businessmodelled on a system developed by the
franchisor in exchange for a fee

Retail7-11, McDonalds

Education

Canadian Tourism &Hospitality InstituteManagement
contracts

Agreement under which operational
control of an asset in a host country isvested in a TNC contractor that manages
the asset in return for a fee

Tourism and hospitality S&P, SM Hotels

Other

Concessions, lease agreements, buildoperate-transfer arrangements andthe like, in the context of public-private
partnerships

Infrastructure

Franchising

Source: AJC.

GMR Infrastructure

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2. CHARACTERISTICS OF NON-EQUITYMODALITIES
2.1 Scale and scope
According to the central bank, Bangko Sentral ng Pilipinas (BSP), in 2016 the country’s total external
trade in goods and in services reached some $121 billion and $55 billion, respectively.7 Although
the balance on goods has had deficits throughout the recent past, the service trade balance hasregistered a growing surplus. In particular, the contribution of the IT-BPO/BPM industry has been
forecast to overtake even the income remittances from overseas Filipino workers (OFWs) in the next
few years.8 In this respect, the first research question is the extent of the sales volume of NEMs aswell as the trade they generate and how significant NEMs are in total exports.
UNCTAD estimated global NEM production at over $2 trillion of sales in 2010 (UNCTAD 2011).9
However, it noted that the analysis of NEMs is complex as “the web of directly owned, partiallyowned, contract-based and arm’s-length forms of international operation of TNCs is tangled, andsome of the distinctions between the different modes are blurred” (p. 130). Thus, the analysis islimited to a number of industries in which NEMs are especially important. Looking at various tradedata, it can be seen that the growth of world trade has stagnated since 2008. In 2016, trade in goods
declined by 0.2 per cent from the previous year to $15.9 trillion, only a $0.8 trillion increase from2010 at current prices.10 In this context, NEM export activity in the Philippines in 2016 was estimatedat $19.4 billion in the goods sector alone, whereas total exports of goods reached $42.7 billion. The
amount of NEM activity jumps if services trade is considered. For example, IT-BPO, the top growthindustry in the Philippines, had $25 billion sales in 2016 and an 8 per cent share of GDP. Total NEM
exports of goods and services reached at least $32 billion in 2016, and NEMs accounted for 43 percent of total exports. Table 2 summarizes NEM operations in selected main industries.
In each sector, NEM exports are substantial. In the primary sector, banana production and export
is a good example of contract farming and growing11 that is operated and managed by cooperatives
and banana exporters affiliated with major food companies such as Dole, Chiquita, Del Monte and
Sumifru. Fresh banana is a major agricultural export of the country; Japan is the largest export
destination, receiving products worth $231 million or 37 per cent of all banana exports in 2016.12
Coconut oil is another major agricultural export.
In the secondary sector, the electronics and electrical industry has been playing a major role indriving Philippine exports and FDI. A top dollar earner of the country, the industry accounted formore than 30 per cent of all FDI and for 51 per cent of total exports from the Philippines, at $29
billion in 2016. As of March 2014, there were 447 registered electronics companies, the majorityof which are foreign companies from Japan, the Republic of Korea, and the United States. Thosecompanies, plus the Philippine global player IMI, are providers of either electronics manufacturing

7

8

9

10
11

12

Goods exports: $42.7 billion; goods imports: $78.2 billion; services exports: $31.2 billion; services imports: $24.2(BSP 2016).
Comment by an executive officer of the Information Technology and Business Process Association of thePhilippines (IBPAP).
Contract manufacturing and services outsourcing accounted for $1.1–1.3 trillion, franchising $330–350 billion,
licensing $340–360 billion, and management contracts about $100 billion (UNCTAD 2011).
IMF, “Trade of Goods, Selected Indicators” (source: International Financial Statistics).
Contract growing is a contract between a plantation company and a cooperative, typically called a “Banana
Production and Purchase Agreement”.
ITC Trade Map.

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5services or original design manufacturing (ODM). Whereas electronics manufacturing services
companies produce electronic parts or devices to order and do not make products under their own
brand, ODM companies design, manufacture and supply clients’ products under the clients’ brands.
Both types of companies are in NEMs as long as they have orders from other companies with which
they do not have equity relations.
The furniture industry, another in the secondary sector, churns out products by world-famous
designers and is also an export-led growth industry. Exports accounted for 26 per cent of furnitureproduction in 2012 and grew at an annual rate of 15 per cent from 2009 to 2013.13 The majorityof exporting furniture manufacturers are able to comply with individual orders and inquiries fromforeign companies and supply products to them through original equipment manufacturing (OEM).
As for the tertiary sector, various services are growing rapidly. The share in GDP of this sector alone
reached 57 per cent in 2014, with an average growth rate of 6.3 per cent from 2000 to 2014. Among
convenience stores that are growing rapidly in urban areas, replacing local shops and stores, Sarisari is a well-developed example of store franchising. 7-Eleven, the largest international chain of
convenience stores, has 1,995 stores in the Philippines: 985, or 49 per cent of them, are franchised
stores whose owners pay franchise fees and marketing fees to the Philippine Seven Corporation,
which in turn makes payments to the parent company in Japan.
IT-BPO is one of the most dynamic industries in terms of revenues and employment. The industry
has attracted TNCs such as Accenture, JPMorgan Chase, IBM and HSBC to operate in the country
and has helped create 1.146 million jobs, equivalent to 5 per cent of all service jobs in the Philippines.
The IT and Business Process Association of the Philippines (IBPAP) estimates that the value of sales
in this industry will overtake that of remittances from OFWs in 2018 and become a top revenue
generator for the economy by 2022.
According to a World Travel & Tourism Council report, the direct contribution of travel and tourism
to GDP was $12 billion, or 4.2 per cent of the total in 2014. The industry also generated 11.1 per centof total employment, or $4.232 million in that year. Within the industry’s contribution, hotels – andinternational hotel chains in particular – can best contribute to NEM operations through contract
management.

13

Department of Trade and Industry (DTI) Philippines, “Directory of Philippine Exporters” (2014).

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Table 2. N
 EM operations in major sectors, 2016
SectorPrimary

Secondary

Industry(representative
example)BananaElectronics

Furniture

Productor services

Cavendish Cultivars

Semiconductor manufacturingservices; electronics
manufacturing services

Rattan and wicker furniture; wood,
metal, bamboo, etc.

Number ofcompanies[NEM-related,
estimation]

166(2013 business census) [40]447(2014 business census:
Japanese, Korean, and U.S. firms
are majority) [312]2,600 registered manufacturers(2014 Export Marketing Bureau,
Department of Trade and Industry)[100]

Major companies(local partner/
main franchisee)

Dole (Stanfilco),
Chiquita (TADECO),
Del Monte (Delinanas
Development Corp),
Sumifru AgriNurture

IMI,
lonics SIIX,
Tsukiden Fujitsu Ten

Most companies are small andmedium enterprises

Estimated
export volume,
total (Estimatedvolume by NEMs)$618.8 million($433.2 million)$29.41 billion($18.23 billion)$354 million for furniture($247 million)

NEM

Contract farming/growing(cooperatives)

Subcontracting

Subcontracting

Estimated NEM
employment

32,500(Total Cavendish banana
cultivation with 45,255 workers
in 2013 census)

280,636(direct employment in 2014
census)1,900,000(direct and indirect employment)

Average export
growth

28.5% for fresh bananas
from 2009 to 2013

5.80%
from 2009 to 201314.88% for furniture and furnishingfrom 2009 to 2013Market and/or
trade scale

95% of total banana demand
from the Asian market

Japan (19%)
United States (14%)
41% of total exports

United States (62%)
Japan (6%)
United Kingdom (4%)
Italy (2%)
Australia (2%)

Product orservice scope

Bananas generated value added
estimated at $347 million,
corresponding to 40.6% of theentire agriculture sector in 2013

Anticipated gains driven bycomponents, electronic dataprocessing, telecommunications,cybersecurity, and self-driving
cars

Local OEM and ODM companies
can do business with TNCs

Source: AJC.
Note: 2016 data unless otherwise noted. Selected industries only.
a7-Eleven Philippines 2016 Annual Report: does not include non-branded CVS, generic CVS, and 24-hour hybrid grocery CVS.
bEuromonitor 2016.

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7Tertiary
Convenience stores

IT-BPO

HotelsSmall retail groceries;
snack foods; confectionery;
soft drinks; tobacco

Contact centre; transcription
animation software development;
other BPOs

Welcome, comfort, quality,
trust and safety services

3,152a[1,150]1,456(2012 Census) [800]3577(2014 Census)(12.7% of hotel and restaurant
establishments) [120]Six big names:
7-Eleven (Philippines Seven Co),
Mercury Drug,
Ministop,
FamilyMart,
San Miguel Food,
Alfamart

Accenture
Convergys PHL
JPMorganChase24/7 Customer PHN

Novotel (S&P Inc.)
Conrad (SM Hotel)
Radisson (SM Hotel)
Raffles (Ayala Land)($9.2 million for license
fees to TNCs)$25 billion revenue($12 billion)$3.8 billion market sizeb($554 million)

Franchising, licensing

Sub-contracting

Licensing, management contract

30,0001,146,000(5% of total service employment)

90,00013.0% for convenience storesfrom 2014 to 2015

14.7% for IT-BPO
from 2014 to 2016

20% for internal tourism expenditurefrom 2012 to 2016

United States (50%)
Japan (20%)
Indonesia (2%)
Rest owned by Philippine firms

IT: global sourcing 60%
BPM: global sourcing 50%

25% growth in market size
from 2012 to 2016

More convenience stores to open:
7-Eleven plans 2,000 in 2017;
Lawson had 26 outlets as of 2017and plans 500 by 2020

Rapid shift to higher-value work
Locational expansion outside Metro
ManilaMore international hotel chains haveroom to enter local resorts

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2.2 NEMs by modality
Many foreign firms and TNCs do business with local partners through NEMs in various industries.
Their type of involvement in NEMs and their contribution to the Philippine economy vary by modality
and industry. In this section, modalities such as outsourcing, subcontracting, franchising andmanagement contracts are examined by highlighting particular industries that rely on them.

(1) Outsourcing: IT-BPO
The Philippine IT-BPO/BPM industry (box 2) has become one of the best-performing and bestemployment-generating activities in recent years. Industrial developments in voice-based services(call centres) as well as continuing improvements in non-voice and complex, knowledge-based
process outsourcing show the promising growth trajectory of the industry.

Box 2. Definition of segmentation of the IT-BPO/BPM industry
According to statistics from Bangko Sentral Ng Pilipinas, the IT-BPO/BPM industry includes
contact centres, transcription, animation and software development, among other activities. The
Philippines Software Industry Association (PSIA) also categorizes this industry into production
segments. Each segment has its related business association to help in the development of thewhole industry:• Voice BPO, including customer services and customer care services (Call Center Association of
the Philippines, Global In-House Centre Council)• Software development (IT outsourcing) including software development and design and related
services (PSIA)• Knowledge process outsourcing (non-voice BPO) including human resource management,
financial and accounting services, and procurement purchasing (IBPAP and Global In-House
Centre Council)• Health care information management services (Healthcare Information Management
Association of the Philippines)• Creative process including animation (Animation Council of the Philippines, Inc.)• Game development (Game Developers Association of the Philippines)• Engineering services (Institute of Computer Engineers of the Philippines)

The industry employs 1.146 million people, accounting for 5 per cent of all service jobs and 2.8 percent of total employment in 2016 (table 3). In 2016, it had sales revenues of $25 billion, equivalent to14 per cent of services sector GDP and 8 per cent of total GDP (table 4).
In this industry in 2013, contact centres (voice centres) made up 53 per cent of the industry’s exports,
although other segments have been growing. Total exports of the industry in 2013 accounted for
61 per cent of total services exports and 21 per cent of total exports of goods and services fromthe country (table 5). The annual growth rate of the industry from 2005 to 2013 was 37 per cent,more than double that of service exports, at 15 per cent. During the same period, export propensity(exports divided by sales) rose from 70 per cent to 93 per cent. More and more foreign customers
purchase IT-BPO/BPM services from the Philippines, and today most customers are foreigners.

32,31332,63633,56034,08935,061

36,03537,19237,60036,28637,31039,77540,664

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

7,400

6,364

5,987

5,750

5,743

5,530

5,399

5,090

5,047

5,121

4,997

5,024

Total
manufacturing(thousands)

22,893

21,677

20,112

19,50819,764

19,394

18,682

17,92817,01016,654

15,957

15,660Total
services(thousands)

..
..

..
..

..

..

..

..

..

4,164

3,973

3,908

3,732

5,656

4,323

4,482

1,864

Animation

4,206

16,997

11,084

9,131

7,060

4,321

6,621

4,956

1,785

Transcription

..

..

..

82,58364,922

55,46449,516

46,98749,89344,87042,657

17,829Softwaredevelopment

Employment in IT-BPO

20,172

530,882

487,757

433,183

329,597

255,765

212,372

169,748

153,683

96,246

Contact
centres

Source: Bangko Sentral Ng Pilipinas (http://www.bsp.gov.ph/statistics/efs_ext2.asp#ITBPO).

Peopleemployed(thousands)

Year

Total employment by industry

Table 3. I T-BPO/BPM employment by job category, 2005–2016

..

..

..

213,939

196,092

175,761

143,975

131,267

82,89345,99442,267

20,278Other BPOs

1,146,000

1,044,000

958,000

851,782769,932

679,464

536,128444,811355,135

271,556

248,045

138,002

Total IT-BPO
industry

2.8

2.6

2.5

2.3

2.0

1.8

1.4

1.2

1.0

0.8

0.7

0.4

Share of
IT-BPO in total
employment (%)

5.0

4.8

4.7

4.3

3.9

3.5

2.8

2.4

2.0

1.6

1.5

0.8

Share of ITBPO in services
employment (%)

PA P E R 7 T H E P H I L I P P I N E S
9

986

1,455

2,051

2,839

4,207

5,260

6,817

7,587

8,394

..

..

..

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

..

..

..

423

198

122

84

57

34

33

20

8

Transcription

..

..

..

88

80

72

63

52

36

29

26

17

Animation

..

..

..

3,429

2,848

2,469

2,198

1,672

1,413

1,098

707

399

Softwaredevelopment

..

..

..

2,971

2,736

2,594

2,452

2,270

2,004

1,157

697

585

Other BPOs

25,00020,50018,00015,305

13,45012,074

10,058

8,258

6,325

4,368

2,906

1,996

Total IT-BPO
industry

304.900

292.449

284,834

271,836

250,092

224,143

199,591

168,485

173,603

149,360

122,211103,072

GDP ($
million)

181,415

172,434

163,424

156,664

142,352

125,367

110,009

93,01993,53581,327

66,16355,144GDP, services
sector ($ million)

Source: Calculated on the basis of data from the Philippine Statistics Authority (PSA) and Bangko Sentral Ng Pilipinas.

Contact
centresYear

Table 4. I T-BPO/BPM sales by job category, 2005–2015

8.1

7.0

6.3

5.6

5.3

5.3

5.0

4.9

3.6

2.9

2.3

1.9

Share of IT-BPO in
total GDP (%)

13.7

11.8

11.0

9.7

9.4

9.6

9.1

8.8

6.7

5.3

4.3

3.6

Share of IT-BPO
in services sector (%)

10

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32,562

33,772

41,79846,30447,73343,22754,55357,154

66,823

67,847

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

23,33520,43918,87817,782

14,084

13,054

13,501

11,064

8,610

6,743

Exports ofservices

7,578

7,061

6,165

5,125

3,938

2,489

1,732

1,329

949

561

Contact
centres

421

198

121

74

54

23

25

18

8

4

Transcription

74

69

59

53

45

34

26

22

11

7

Animation

3,221

2,612

2,380

1,927

1,552

1,148

851

454

159

98

Softwaredevelopment

2,878

2,561

2,431

2,287

2,126

1,592

854

461

258

216

Other
BPOs

14,174

12,503

11,159

9,469

7,717

5,288

3,489

2,288

1,387

888

Total
industry

IT-BPO category exports

60.7%

61.1%

59.1%

53.2%

54.7%

40.5%

25.8%

20.6%

16.1%

13.1%

Share of IT-BPO exports
to total services exports
(%)

20.8%

18.7%

19.5%

17.3%

17.8%

11.0%

7.5%

5.4%

4.1%

2.7%

Share of IT-BPO exports
to total exports of goods
and services (%)

Source: Bangko Sentral Ng Pilipinas (http://www.bsp.gov.ph/statistics/efs_ext2.asp#ITBPO), Euromonitor International from national statistics, Organization for Economic Co-operation
and Development, International Monetary Fund and International Financial Statistics (IFS).

Exports ofgoods andservicesYear

Total exports

Table 5. I T-BPO/BPM exports by job category, 2004–2013 ($ million and per cent)

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12IT-BPO/BPM businesses are undertaken through outsourcing. Outsourcing refers to the contractingout of a business function to an external provider. It involves an exchange of goods or services forpayment. It is different from offshoring, particularly when it is used abroad. Captive offshoring refers
to the relocation of a business function from one country to another within a TNC, typically from theparent company to a foreign affiliate. Client firms or user firms offshore a variety of businesses,
such as call centres, data entry, engineering, software development, game application development
and research and development (R&D) to local firms (offshore outsourcing) or foreign subsidiaries ina host country (captive offshoring) (figure 1).

Figure 1. Outsourcing and offshoring by type

Mode

Home

Location

AbroadInternal(equity)

Domestic
operation

Captive
offshoring

External(non-equity)

Outsourcing

Offshoreoutsourcing

Control

Source: AJC.

In order to gain direct insight into strategic operations by outsourcing to the IT-BPO/BPM industry in
the Philippines, seven firms were interviewed in Manila in November 2016 (box 3).
Each segment of the IT-BPO/BPM industry has grown over time. Call (contact) centres are by far
the largest segment in this industry and contribute the most to the economy in terms of sales,
employment and exports (tables 2–4). Working for call centres does not require high educational
levels: jobs are offered to applicants who are at least 18 years old (box 3) and have typing skills, therequired level of English grammar skills, and communications and listening skills, depending on thejobs. Types of jobs include voice services and chat services, in which the entry barrier for unskilled
young workers is very low. Some of these workers, however, have moved up the value chain fromvoice to non-voice centres through the receipt of technical assistance from client firms. In the nonvoice centres, some firms have moved up the ladder that requires higher knowledge and skills.
The IT-BPO/BPM industry faces two inter-related problems: one related to standardized services
and the other related to technological upgrading. Traditionally, Philippine IT-BPO customers –particularly in voice, non-voice, and management process outsourcing – have trained their employees
because standardized skills are required. In-house training provided good results for employees;
however, employees who have acquired higher skills as a result of in-house training have tended
to leave for other firms. At a United States IT-BPO company that was interviewed for this study, thenon-voice centre segment has a rather high turnover ratio (40 to 45 per cent every year, some years
even 70 per cent). Thus, even though companies have been significantly investing in training, thereturn on the investment is limited.

PA P E R 7 T H E P H I L I P P I N E S

13Box 3. Main findings of seven case studies of IT-BPO firms in the Philippines
The case studies looked at two firms in game development, one in animation and game development,
two in voice BPO, one in non-voice and knowledge BPO, and one in logistics.
Game development firms:
Dynamic segment attracting younger generation
Two Filipino companies that develop games for smartphones, social media and games linking withsome TNCs’ products sold in customers’ countries (United States, Singapore, Hong Kong (China),
Malaysia, and the United Kingdom). They are small and medium enterprises (SMEs) employing
fewer than 60 people (firm A has 55 staff members, 80 per cent of them male, and firm B has 30
staff members, 90 per cent of them male) and work on a project basis, depending on customer’s
requests.
Animation and game development firm:
Capability of locally embedded design skills
A Filipino company that has 200 employees and contracts for producing animation and developing
games from animation series. The firm undertakes offshore outsourcing work from the UnitedStates, Japan, Canada and Poland.
Voice BPO firms:
Technology transfer and capability of locally embedded communication skills
Owned by TNCs – one from the United States and the other from Japan – with customers locatedmainly in the home countries. On recruiting their staff at call centres, neither firm requires any
minimum education level if the applicant is at least 18 years old. The United States subsidiarycompany has more than 5,000 employees in eight call centres, and the Japanese subsidiarycompany has 200 employees, with 30 per cent of the staff engaged in software development.
Non-voice and knowledge BPO firm:
Upgraded its functioning to higher level
A Filipino-owned company, started from a voice call centre in 1996, which has shifted to providing
software suites, core software modules, software libraries and knowledge process outsourcing,
and to developing systems for health solutions and for reducing carbon emissions. Its clients arein the United States and Australia for health solutions and in Hong Kong (China), Africa and Europe
for software development.
Logistics operation support firm:
Technology transfer from headquarters
A German subsidiary logistics company that has played a key role in the central operation systemof logistics in the Philippines since 2013, with 120 employees. The firm acts as a regional centre
in the Asia Pacific, supporting the work of customer support, R&D, custom reporting and data
management in North America and Europe.

The IT-BPO/BPM industry faces two inter-related problems: one related to standardized services
and the other related to technological upgrading. Traditionally, Philippine IT-BPO customers –particularly in voice, non-voice, and management process outsourcing – have trained their employees
because standardized skills are required. In-house training provided good results for employees;
however, employees who have acquired higher skills as a result of in-house training have tended
to leave for other firms. At a United States IT-BPO company that was interviewed for this study, thenon-voice centre segment has a rather high turnover ratio (40 to 45 per cent every year, some years
even 70 per cent). Thus, even though companies have been significantly investing in training, thereturn on the investment is limited.

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From a technological point of view, this industry requires continuous investment. Companies in thePhilippines try to differentiate themselves by providing advanced IT technologies to attract overseas
customers. For example, in order to develop software or animation, massive amounts of data need tobe synchronized with customers outside the Philippines. In order to have a strong IT infrastructure,
further investment is required. Some companies in the Philippines meet these needs so that they candifferentiate themselves from their competitors, even outside the Philippines (e.g. India and Viet Nam).
IT-BPO/BPM firms have voice or non-voice centres in different large cities. This is partially because
customers outside the Philippines want to minimize the risks associated with concentrated locations
and partially because firms in the IT-BPO/BPM industry want to secure employees, as turnoverratios for some segments are relatively high. As a result, about 70 per cent of firms in the IT-BPO/
BPM industry are located in the Metro Manila area, including Makati, Ortigas and Bonifacio Global
City; 11 per cent in Metro Cebu; and 19 per cent in other cities, such as Metro Clark and Metro
Bacolod. Consequently, employment in the IT-BPO/BPM industry is growing in these locations andIT infrastructure is improving, through the establishment of voice or non-voice centres.
Since locational distribution tends to be beneficial for rural areas, the Department of Science andTechnology – Information and Communications Technology Office (DOST-ICTO) and the IBPAP
initiated a partnership project with 10 cities14 in 2015–2016, to secure the telecommunication
facilities and infrastructure needed to set up voice and non-voice centres. This project will benefit
both IT-BPO/BPM companies and these provincial towns and cities through the lower cost of doing
business outside Metro Manila and through the creation of jobs and investment opportunities.

(2) Subcontracting: Furniture industry
Subcontracting is spread throughout various industries, in particular in the manufacturing ofclothing, electrical and electronic devices, and furniture. Unlike in other countries, in the Philippines,
furniture stands out as the industry most reliant on subcontracting when dealing with international
businesses. The furniture industry is known for its global design innovations. Production of furniturethrough contract agreements is also growing in the Philippines and abroad; products are used forhotels, resorts and entertainment facilities (Board of Investment 2015). In the furniture industry, a
local operation or activity is not usually owned by a foreign TNC. Their operations or activities are
owned and managed by local firms, including micro, small and medium-sized enterprises (MSMEs).
They are typically bound by NEMs.
In the furniture industry, MSMEs account for about 98 per cent of all firms, providing 123,000 direct
workers and 2.1 million indirect workers nationwide and 5.4 million persons in the supply chains in2013 (Board of Investment 2015). The three major furniture production areas are in Metro Manila,
Pampanga and Cebu. Metro Manila and nearby peripheral cities in Calabarzon specialize in furniture
made from wood and from mixed materials. Pampanga is associated with hand-carved wood, wicker
and iron products, whereas Cebu, which once was the heart of rattan furniture making in the country,
is known today for its fine wood furniture work (Board of Investment 2015).
Woodcraft and furniture is ranked the fourth largest export industry in the Philippines, accounting
for about 5 per cent of total exports; the industry’s overall exports in 2016 were $3 billion (figure 2).
The industry aims to grow its business overseas through a niche marketing strategy to boost sales
at least 10 per cent every year, by sustainably producing sophisticated, sturdy and environmentallyfriendly products.15

14

15

Namely Baguio City, Cagayan de Oro City, Dagupan City, Dasmarinas City, Dumaguete City, Lipa City, Malolos City,
Naga City, Sta. Rosa City, Taytay and Rizal.
In the Philippine Exporters Confederation Inc. (PHILEXPORT) News and Features, March 24, 2017.

PA P E R 7 T H E P H I L I P P I N E S

15Figure 2. Philippines woodcrafts and furniture exports, 2012–2016(F.O.B. $ million and per cent)

%
4 000

7
5.9

3 500
3 000

4.5

3 337

5.4

5.3

3 333

2 500
2 000

3 127

5.2

6
5

2 978

4
2 339

3

1 500

2

1 000

1

500

0

0
2012

2013

Export amount

2014

2015

2016

Share in all commodity exports

Source: AJC based on PSA data, 2012–2017.

For this industry, three firms were interviewed, dealing with home decoration, lighting and furnitureaccessories; Christmas decorations; and ethnic Moroccan lighting, abaca lighting and baskets,
respectively.16
Since firms in the industry are MSMEs and have many contracting workers outside the company,
potential backward linkages with these contracting workers contribute to employment creation andto capacity building in the industry through learning from OEM or ODM manufacturing.
As for job creation, as a result of having OEM and/or ODM agreements with customers outside
the country, the number of new jobs, particularly through contracting with local MSMEs, has been
increasing, judging from the interview data. Given that the industry comprises essentially MSMEs,
having OEM or ODM contracts with customers outside the country will contribute to employment in
MSMEs in the Philippines.
MSMEs in the furniture industry are often located in rural areas. Priority sectors are selected on thebasis of the localization of industry road maps and consultation with the Department of Trade andIndustry – Board of Investment (DTI-BOI) in each region. As a result, furniture was selected as one ofthe priority sectors in the regions of Cagayan Valley, Central Luzon and Central Visayas. Developing
the furniture industry will help in the development of these rural regions.
From the interviews, it appears that local furniture firms have learned a lot from NEM customers
outside the country. Local firms started by receiving orders from customers and have developed

16

All firms are Philippine-owned local companies that have customers outside the country, including in Japan.

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to become ODM so that they can present new designs or new products to customers on the basisof the capacity of local firms. Local firms agreed that they learned different stages of design,
manufacturing and finishing processes of production through having contracts with customers.
NEMs in the furniture industry can help local firms build their capabilities.
The NEM in the furniture industry is governed by foreign customers, in particular for design andmanufacturing processes. As local firms have been upgrading their quality of design over the years,
the relationship between local firms and foreign customers has been shifting upward in the value
chain. As a result, local firms can become ODM firms, a step up from OEM firms.
Operations in the furniture industry are integrated with TNCs’ activities since local firms’ customers
tend to be TNCs that export the finished products to customers in other countries. Thus, criticalfactors for TNCs engaged in NEMs with local firms are the availability of wood materials, flexible
workers in MSMEs under contracting arrangements with local firms, and engineers and designers
in local firms.
TNCs have already been utilizing NEMs with local firms in the industry. Since local firms’ design
capabilities and the flexible arrangement of local value chains have developed as a result of linkages
with foreign TNCs, TNCs will continue to utilize the current modalities. This reinforcing relationshipbetween foreign NEM firms and local subcontractors will further strengthen export capabilities andcontribute to the growth of the country’s exports.

(3) Franchising: Convenience stores
There are a number of types of franchising agreements between foreign firms or TNCs and local firms,
depending on the TNC’s strategy or TNC-specific decisions. The Philippine Franchise Association(PFA), which represents most franchising firms in the Philippine market, has categorized its member
firms into three areas: foods, services and retail. Since operations in the retail industry typicallyoccur under franchising agreements, many fashion brands and convenience stores are members of
the association. Those in the foods category include restaurants, fast foods and bakeries (about 40
per cent); those in the services category include wellness centres, beauty salons, spas, hotels andsenior care (in the aging population) (about 30 per cent); and those in retail include clothes (fashion)
stores and convenience stores (about 30 per cent). Member firms have 1,500 brands: in the foods
category there are 675, in services 375, and in retail 450. By national origin, 1,020 brands are Filipino
and 480 are foreign, with United States franchises accounting for 60 per cent of foreign brands and40 per cent of foreign food franchises.
TNCs do not always use franchising agreements to run stores or shops in foreign markets. They
enter the Philippines to control management and operation of stores through equity holdings.
Japan’s Fast Retailing (UNIQLO) is one example: it owns 75 per cent of UNIQLO jointly with SM
Retail Inc., which owns the remaining 25 per cent. As of 2016, UNIQLO directly operates 35 storesin the country with 1,400 employees. All stores are directly operated, so this arrangement is notconsidered to be a NEM (figure 3).

PA P E R 7 T H E P H I L I P P I N E S

17Figure 3. Direct operation by TNC through equity modality(Case of UNIQLO)Home country:
Japan

In a host country
Directly operating store
Directly operating store

Parent firm

Subsidiary

FDI

Directly operating store
Directoperation

Directly operating store
Directly operating store

Source: AJC.
Note: Red colour indicates an equity relationship.

TNCs may have direct franchise agreements with local firms (figure 4). However, as it is hard tocontrol management and operation, it is rare to see this type of agreement.

Figure 4. Direct franchise agreement(Case of Beard Papa’s)

Home country:
Japan

In a host country

Parent firm
franchisor

Franchisee

Sub Franchisee

Franchisee

Sub Franchisee

Franchisee
Directfranchiseagreement

Source: AJC.
Note: Blue colour indicates a NEM relationship.

Franchisee
Franchisee

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In many countries as well as in the Philippines, a hybrid type of franchising is used most often. In
such cases, franchise agreements entail the establishment of a master franchise firm in a hostcountry. This master franchise firm can be a local partner with no equity relationship (thus, a NEM
partner) with foreign TNCs (figure 5) or a local partner with an equity relationship with foreign TNCs
(either a joint venture with a local partner firm (see box 4 for the case of Family Mart) or a subsidiarythat is 100 per cent owned by a TNC (figure 6)).
When foreign TNCs have direct franchise agreements with a local firm, this firm becomes a masterfranchise (figure 5). A master franchisee takes care of franchise agreements with unit franchiseesin the country. Karada Factory, a Japanese chiropractic clinic chain, is an example of this case. It
has a franchise agreement with CWC (Createch Wellness Corporation, which is owned by TechnolaxHD), which operates 14 franchise stores with 150 employees as of March 2017. This TNC does nothave to invest at all, and the quality of operation or control depends on the local partner (masterfranchisee). Nevertheless, the parent firm in Japan usually supports the master franchisee fully
until the opening of the first store. Once the first store is opened, support tends to become limited.
Thus, with this type of arrangement, it might be difficult for TNCs to control and operate franchises
as they wish. As the master franchisee is not an affiliate of the TNC, it is not easy to send expatriates
to a host country.

Figure 5. Master franchise agreement with direct franchisees(Case of KARADA factory)

Home country:
Japan

In a host country
Unit Franchise
Unit Franchise
Partnerfirm MasterFranchise

Parent firm
franchisor
Directfranchiseagreement

Unit FranchiseFranchiseagreement

Unit Franchise
Unit Franchise

Source: AJC.
Note: Blue colour indicates to NEM relationship.

Another hybrid of NEMs and FDI is the case in which a master franchisee is a joint venture with a
TNC and a local partner firm. In this case, the foreign TNCs can have influences on local operationand management, though there are always risks associated with operations since the masterfranchise is jointly owned. When TNCs and local partners jointly manage their local franchisingagreement, TNCs typically send expatriates to the joint venture firm. Family Mart in the Philippines
is an example (box 4).

PA P E R 7 T H E P H I L I P P I N E S

19Box 4. Family Mart’s franchising system (continued)
A Japanese convenience store chain, Family Mart established Family Mart Philippines in November
2012. As of March 2017, it has 90 stores, of which 30 per cent are under franchise agreement
and 70 per cent are owned by a joint venture. Box figure 4.1 illustrates Family Mart’s franchise
agreements in the Philippines.
In the Philippines, Family Mart has a joint venture with a local firm called SIAL (50 per centowned by Ayala Land and 50 per cent owned by Stores Specialties, Inc.), which acts as themaster franchisee. Its business model started from FDI, followed by operating directly owned
stores and franchise stores. This franchising style is in contrast to the one in Malaysia, in whicha local firm has an area franchising agreement directly with Family Mart Japan and acts as amaster franchisee so that it can create or find local franchisees (box figure 4.2). This Malaysianmodel is operated as a pure franchising agreement with no equity involved, as opposed to thePhilippine case, in which NEM arrangements come into play only after the main joint venture isestablished through investment.

Box figure 4.1. Franchising agreements of Family Mart in the Philippines

Home country:
Japan

In the Philippines

JV agreement

Family Mart

38%
Investment

ITOCHUcorporation
2%
Investment

Direct operation
Investment

50% Ayalaland
50% Store Specialties
Inc. (Rustan group)

Directly
operating
70% of90 stores

FM Directly operating store
FM Directly operating store

60%
Investment

FM Directly operating store
FM Unit FranchiseJV (from 2012)
120 employees

Franchise right

FM Directly operating store

FM Unit Franchise

Revenue

Dividend

Source: Based on interviews with a manager of Family Mart in the Philippines.
Note: Red colour indicates an equity relationship, and blue indicates a NEM relationship.

Franchise fee

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20

Box 4. Family Mart’s franchising system (concluded)

Box figure 4.2. Franchising agreements of Family Mart in Malaysia

Home country:
Japan

In Malaysia

FM Unit Franchise
Family Mart

FM Unit Franchise

MasterFranchiseFranchiseagreement

FM Unit Franchise
FM Unit Franchise
FM Unit Franchise

Area
Franchise

FM Unit FranchiseFranchise rightFranchise fee

Source: AJC, based on interviews with a manager of Family Mart in the Malaysia.

In a host country, foreign TNCs establish a 100 per cent owned master franchisee that in turn has afranchise agreement with local unit franchisees, as in the case of KUMON (figure 6). In this situation,
foreign TNCs can control management and operation over the entire franchise system. Access tolocal tacit knowledge or the local network is different whether the master franchise is wholly owned
or jointly owned: the wholly foreign-owned master franchisee can directly support unit franchisees
and can also have sub-franchise agreements under the unit franchisee agreement.
Whatever the franchise agreement is, local franchisees have to pay franchise fees to use
the franchisor’s brand name. In addition, they have to pay marketing fees for promotion andadvertisement in the Philippines. In order for franchisees to operate under the brand name, theyneed to pay both fees, called “loyalty fees”, once they receive revenues. It is estimated that the lowest
fees are 2 to 3 per cent but that usually fees are much higher, in most sectors. For the food andretail industries, loyalty fees of 3 per cent to 8 per cent are the norm, whereas in services industries
including wellness centres, beauty salons, spas, hotels and senior care, loyalty fees run between
5 per cent and 20 per cent. In 2015, franchisees in the Philippines paid $613 million and received$11 million in royalty and licensing fees.17
With 450 brands, the retail industry is not only one of the main categories of the PFA but also an
important part of the Philippines services industry, which accounts for about 33 per cent of exports

17

Data on royalty and licensing fees were obtained from AJC, “Promoting Services Trade in ASEAN – Paper 2: Tradein Research and Development Services”, February 2017, pp. 34–35.

PA P E R 7 T H E P H I L I P P I N E S

21from the services sector. Sales of retail industries were $36.3 billion in 2016, equivalent to 13 per centof GDP. According to the BOI’s data, about half of total retail sales are concentrated in the Manila
Metropolitan Area. Employment in the industry is more than 5 million. About 30 per cent of total retailsales come from franchisee retail from foreign TNCs, and more than 124,000 franchisees employ
about 1.1 million people (Philippines Retailers Association). In the retail industry, the dominant four
players are SM Group, Ayala Corporation, Robinson’s and Rustan’s Group.
Although the industry is growing rapidly thanks to the advent of franchisee retailers, in rural areas,
where about 51 per cent of the population lives, traditional retail outlets are still preferred. With
modern retailing now making up about 30 per cent of the industry (Li 2016), the dominant retailers,such as SM Retail, Puregold and Robinson’s, have made extraordinary progress in transforming thecountry’s retail style.18

Figure 6. Master franchise agreement with a fully owned foreign subsidiary(Case of KUMON Philippines)

Home country:
Japan

In a host country
Unit Franchise
Unit Franchise

Parent firm
Franchisor

100% owned
Subsidiary
FDI

Unit FranchiseFranchiseagreement

Unit Franchise
Unit Franchise

Source: AJC.
Note: Red colour indicates an equity relationship, and blue indicates a NEM relationship.

Within the grocery sector, the convenience store style has become popular, with more than 3,100
stores in the country (table 6). SM Investments Corporations owns 100 per cent of SM Retail Inc.,
which has 100 per cent of Save More (grocery stores). JG Summit Holdings, Inc., has 100 per centof Robinson’s Retail. As mentioned earlier, 7-Eleven is the largest convenience store chain (box 5).
Mini Stop, the second largest, which is owned by AEON and Mitsubishi Corporation, had 499 stores in2016. Ayala Corporation owns Philippine Family Mart CVS Inc., which has been invested in by Itochu
Corporation (2.55 per cent), Family Mart in Japan (37.45 per cent) and Ayala Holding companies(which is owned 50 per cent by Rustan’s and 50 per cent by Ayala Land) for 60 per cent. It had
100 stores as of December 2016.

18

SM Retail, for instance, opened 99 stores in various formats in 2015, with grocery retail sales of $2.7 billion, while
Puregold generated $2.1 billion in sales and Robinson’s Retail generated $1 billion.

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22

Table 6. C onvenience stores and their market shares in the Philippines,
as of 31 December 2016
Store name

Number of stores

Market share (%)

7-Eleven

1,995

63.29

Ministop

499

15.83

Alfamart

130

4.12

Mercury Drug (operating 24 hours)

111

3.52

Davao Central Convenience Store

107

3.39

FamilyMart

100

3.17

San Miguel Food Avenue

58

1.84

i-Mart

39

1.24

HB1

29

0.92

Lawson27

0.86

Munsterific

25

0.79

Quixmart24

0.76

Circle K

8

0.25

Total

3,152

Approximately 100

Source: 7-Eleven Annual Report 2016.
Note: Does not include data on non-branded or generic CVS and 24-hour hybrid grocery-CVS.

Banks in the Philippines can finance up to 60 per cent of capital for franchising operations in the retailindustry. Therefore, it is relatively easy for the retailing industry to set up franchising agreementswith foreign TNCs. However, if TNC retailers establish stores in the country, they need to have paid-up
capital of $2.5 million or more, or if the parent company has a net worth of more than $200 million,a minimum investment of $830,000 per store is required. As a result, the country has experienced
growth in organized and large retailers, namely, the growth of franchisee retail (30 per cent of total
retail sales) and thus the entry of many foreign brands in the market (e.g. Forever 21, Uniqlo, Apple& Bee). The development of the retail industry is also helped by the growth in awareness of global
brands among all young employees and OFWs.
As one of the drivers of industrial development, franchising offers some benefits for both local
firms that can be franchisees and TNCs that can be franchisors. In developing countries such as
the Philippines, income gaps19 between rich and poor are huge, as are knowledge gaps. Once a
local firm becomes a franchisee, it can obtain benefits such as gaining know-how from foreign
TNCs through a master franchisee, receiving support from a master franchisee, paying taxes, using
international accounting standards and getting access to the market. As a result, MSMEs can growfaster. In the Philippines, there are many different types of franchise businesses, down to very small
businesses such as sugarcane juice stands or ice cream stands in shopping malls. These small
franchise businesses can be accessed by lower-income businesspeople. As for the TNC side, it ismuch faster and costs less to expand foreign brands in a host country.

19

According to the PSA, the average annual income of a Filipino family in 2012 was $5,727. The income of the families
in the richest decile is 10 times that of those in the poorest decile.

PA P E R 7 T H E P H I L I P P I N E S

23Box 5. The largest convenience store in the Philippines: 7-Eleven
Philippine Seven Corporation, with a total revenue of $652 million and total assets of $248 million
as of 31 December 2016,a is headquartered in Mandaluyong City, Philippines. It is an affiliate ofPresident Chain Store (Labuan) Holdings Ltd. (Malaysia), which is owned 100 per cent by President
Chain Store Corporation (Taiwan Province of China). President Chain Store (Labuan) Holdings
Ltd. owns 56.59 per cent of Philippine Seven Corporation in the Philippines and 100 per centof Convenience Distribution Inc. in the Philippines (box figure 5.1). This company’s case clearly
demonstrates its good brand image, which results in more unit franchises or even sub-franchises
in the country.

Box figure 5.1. Conglomerate map and structure of Philippine 7-Eleven

President Chain Store,
Corporation (PCS)[100% own PSC]

President Chain (BVI),
Holding Limited[Subsidiary of PCS]

PCS (Labuan) Holdings,
Limited[100% own CD]

F1 Franchise

Philippine Seven Corporation

F2 FranchiseCompany owned store
Convenience
Distribution(CD) Inc.
Franchise rightStore Sites
Holding Inc.

Franchise fee

Source: 7-Eleven Philippines.
Note: [Equity ratio].

The company engages in retailing, merchandising, buying, selling, marketing, importing, exporting,franchising, acquiring, holding, distributing, warehousing, trading, exchanging and dealing
in various grocery items, dry goods, food or foodstuff, beverages, drinks and other consumer
products and services for residents, commuters, students and other urban shoppers. It also offers
bill payment services; phone and call cards; and 7-Connect, a service that enables customers to
pay utility bills and pay for selected online purchases with cash through 7-Eleven stores.

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24

Box 5. The largest convenience store in the Philippines: 7-Eleven (continued)
Philippine Seven Corporation started business in the Philippines in 1982. The company wasallowed to have units through franchising agreements with 7-Eleven, Inc. (United States) in 1998.
As of December 31, 2016, it operated 1,995 stores comprising 869 franchise stores under FC1,
in which the shopkeeper owns the store or a lessee or the store property; 235 franchise stores
under FC2, in which the shopkeeper is an employee of 7-Eleven or some other company; and 891
company-owned stores. As of the end of 2016, there were 238 stores in the Visayas, consistingof 137 in Cebu, 50 in Negros, 38 in Iloilo, 8 in Aklan, 3 in Capiz and 2 in Antique. There were
101 stores in Mindanao, consisting of 74 in Davao, 19 in Cagayan de Oro, 3 in Bukidnon and 5 inGeneral Santos City.
In 1991, 7-Eleven, Inc. became a wholly owned company of 7-Eleven Japan, under Seven &i Holdings (box figure 5.3).

Box figure 5.2. The company structure of 7-Eleven, Inc.

Area Licensees
Beijing/Tianjin

MexicoNorwaySouth Korea

Malaysia

SwedenThailandPhilippines

Denmark

TaiwanSingapore

Australia

7-Eleven, Inc
Area licensor foroverseas (except
Japan) operators

China(CHINA) INVESTMENT
Master licensor in China

Area license(some areas)

VietnamArea Licensees

SEVEN-Eleven

Subsidiaries

UAE

USA

(Guangdong,Hong Kong,
Macau)

ChengduEquity-method affiliates
Royalty fee

Source: 7&I Holdings Company Profile.

Shandong

affiliates

Shanghai

ChongqingPA P E R 7 T H E P H I L I P P I N E S

25Box 5. The largest convenience store in the Philippines: 7-Eleven (concluded)

Box figure 5.3. The company structure of Seven & i Holdings
As of February, 2016

Seven & i Holdings
Seven-Eleven Japan[100.0%]SEJ Asset
Management& Investment[100.0%]Seven-Eleven
Hawaii[100.0%]Seven-Eleven(China) Investment[100.0%]7-Eleven, Inc.
[100.0%]Seven-Eleven Beijing[65.0%]

Philippine Seven
Corporation

Seven-Eleven Tianjin[100.0%]Seven-Eleven Chengdu[100.0%]Source: 7&I Holdings Company Profile.
Note: [Equity ratio].
aFull foreign participation is allowed for foreign retail trade enterprises (a) if they have paid-up capital of $2.5 million or more,
provided that the investment for establishing a store is not less than $830,000; or (b) if they specialize in high-end or luxury
products, provided that the paid-up capital per store is not less than $250,000 (Tenth Regular Foreign Investment Negative List).

In terms of job creation, employment in the industry is more than 5 million (BOI data). Each newunit of a convenience store chain employs four or five people. Franchising agreements in the retailindustry can contribute to capacity building in MSMEs and in employees.
Since unit franchise stores usually learn the know-how from master franchisees or parent TNCs,
NEMs occur at all stages of a GVC. The 7-Eleven case (see box 5) shows that the master franchisehas to have all elements in its value chains that are needed for the retail stores’ business model. In
the retail industry, know-how about the business model or store operation, inventory management
or brand image, and management are transferred from the TNC through franchising agreements(or a wholly foreign-owned subsidiary or a joint venture as the master franchisee). This transfer
can be considered part of the investment. Once a store is opened, as a result of daily operations
and activities within a store, flows of goods and services become trade activities. When they are
directed abroad, they are exports. International payments and receipts of royalty fees and transfer of
productive resources all relate to trade.
According to the PFA, franchising businesses have a long history in the country. For Filipinos who
would like to have some kind of business (e.g. sugarcane juice stands), it is easier to start a businesswith a franchise agreement than to invest in a new business model. TNCs can choose NEMs to enter
the country without having equity investments or can choose to enter a joint venture on a masterfranchise, if TNCs can find good local partners.

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26(4) Management contract: Hotels
International hotels operate in many countries including the Philippines, and these are operated
by different types of contracts and different types of entry modes (table 7). As the inward FDI policyin the Philippines does not allow foreigners to own private land, international hotels operate either
through NEMs – in other words, a management contract or franchise agreement – or on long-termleased land on which hotels can be built with equity investments.

Table 7. H
 otel operations in the Philippines, by type
FDI

Management contract

Franchise agreement

Ownership of theland and hotel

Owns hotels

Without ownershipWithout ownershipManagement
control

Direct control

Direct leadershipby expatriates fromthe headquarters

Management training
by the manuals

Contract fees

Not applicable

Higher
(10% or more of profit)

Lower(below 10% of profit)

Scale and speedof the hotel chain

Slow, smaller-scale

Faster, medium-scale

Very fast, larger-scale

Hotel categories

first stage of hotel chain,
5 star hotel,
independent type hotel

4 star class

3 star class

Source: Shinomiya (2016).

The Philippines is one of the ASEAN member countries that attracts tourists from all over the world.
Market demand for hotels has been increasing continuously in the past decades (figure 7).

Figure 7. Market size of hotel industry in the Philippines, 2001–2016
Unit: US M$
5 000
4 000
3 000
2 000
1 000

Source: Euromonitor, from trade sources and national statistics.

16
20

15
20

14
20

13
20

12
20

11
20

10
20

09
20

08
20

07
20

06
20

05
20

04
20

03
20

02
20

20

01

0

PA P E R 7 T H E P H I L I P P I N E S

27Table 8 shows the number of accredited hotels and the number of employees in the different regions.

Table 8. N umber of accommodation establishments by region in 2014 and numberof accredited hotels and employees by region in 2016
2014

2016

Accomodation Establishments

Accredited Hotels

RegionNumberNumberNo. of Employees

Cordillia Administrative Region (CAR)

349

45

751

National Capital Region (NCR)

405

92

18 084

Region I (Ilocos Region)

656

25

657

Region II (Cagayan Valley)

322

19

504

Region III (Central Luzon)

672

27

1 585

Region IV - A (Calabarzon)

424

23

1 174

Region IV - B (Mimaropa)

898

17

773

Zegion V (Bicol Region)

518

8

477

Region VI (Western Visayas)

892

30

1 288

Region VII (Central Visayas)

1 291

45

4 844

Region VIII (Eastern Visayas)

480

1

59

Region IX (Zamboanga Peninsula)

347

19

1 062

Region X (Northern Mindanao)

554

17

1 108

Region XI (Davao Region)

477

25

1 328

Region XII (Soccsksargen)

386

12

633

13 3598370

Region XIII (Caraga)
Source: Philippine Franchise Association.

Most of the top-ranked hotels in the country are known for operating world-wide. Table 9 lists thehotel brands with the top market shares in the Philippines. For example, Shangri-la Hotels, operating
four hotels and resorts, had a 6.6 per cent share of the Phillipine market in 2014. Four hotel groups
with top market shares in the Philippines, namely Shangri-La, Marriott, Mandarin Oriental, and New
World, are owned by foreign investors (table 10).
The Hyatt Group operates NEM hotels. In June 2014, Hyatt Hotels Corporation and Melco Crown
Resorts Corporation in the Philippines announced an agreement to build a Hyatt hotel, and Melco
Crown Resorts Corporation has entered into a management agreement for the operation of Hyatt
City of Dreams Manila. For this agreement, the foreign investor side (Hyatt Hotels Corporation) wants
the hotel to represent an important milestone in their effort to build brand loyalty in locations where
their guests travel frequently. As for the local firm (Melco Crown Resorts Corporation), the strong
Hyatt brand name and the hotel’s ideal location will attract both business and leisure travellers aswell as meeting and incentive groups from across the region.20

20“Hyatt Announces Plan for Hyatt City of Dreams Manila in the Philippines” (http://newsroom.hyatt.com).

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28

Table 9. M arket share of hotels by brand in the Philippines, 2006–2014 (Per cent)Hotel Brand

Company name

2006

2007

2008

2009

2010

2011

2012

2013

2014

Shangri-La

Shangri-La Hotel &Resort Inc

5.1

5.2

5.0

5.3

6.2

6.2

6.2

6.3

6.6

Waterfront

Waterfront
Philippines Inc

1.7

1.6

1.6

1.5

1.7

1.7

1.7

1.6

1.4

PeninsulaHong Kong &Shanghai Hotels Ltd

1.2

1.2

1.2

1.0

1.1

1.0

1.0

1.0

0.9

MarriottMarriottInternational Inc

0.9

0.8

0.8

0.8

0.9

0.8

0.7

0.7

0.7

Mandarin
Oriental

Mandarin Oriental
Hotel Group

1.0

0.9

0.8

0.6

0.7

0.6

0.6

0.6

0.4

Hyatt

Hyatt Hotels Corp

0.6

0.6

0.6

0.5

0.5

0.5

0.5

0.5

0.5

Herald Suites

Nipad Inc

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

SofitelAccorHotels Group

1.6

1.5

1.5

1.3

1.4

1.3

1.2

1.2

1.1

OthersOthers

87.8

88.0

88.5

88.9

87.4

87.7

87.8

88.1

88.3

Source: Euromonitor, from trade sources and national statistics.

Two conglomerates in the Philippines, SM Group and Ayala Group, have several international hotels
that, like Hyatt, use local companies for NEM operations of international hotels, although those
hotels are not ranked at the top of the market. SM Prime Holdings21 owns and operates four hotels:
Radisson Blu Hotel, Park Inn Clark, Park Inn Davao and Conrad Manila. Radisson Blu Hotel isoperated and owned by Carlson Rezidor Hotel Group, which does not have any subsidiaries in thePhilippines. SM Investment Corporation has a management (franchising) agreement to operate thehotel. Ayala Land operates two hotels which are also from international hotel groups: Raffles Makati
and Marriott Cebu.
The hotel industry links with many other industries such as online booking services,
restaurant services, food and beverage services, linen services and furniture and decorationindustries, as well as transport services and tourism businesses. These linkages willcontribute to employment creation and the development of related industries in the country.22
The tourism industry is one of the priority sectors in many regions: Ilocos, Mimaropa, Western
Visayas, Central Visayas, Northern Mindanao, the Davao region, and the Soccsksargen and Cordillera
administrative regions. The locations of hotels are partially concentrated in the central Manila area,
but they are also dispersed in the different tourism regions. Thanks to the development of tourism,
the hotel industry is contributing to employment and rural development because of the industry’s
labour intensiveness and community-based activities.

21
22

SM Prime Holdings, owned 49.6 per cent by SM Investments Corporation and 4.4 per cent by Hanry Sy.
According to the PSC (2014), 416,942 people were engaged in “Accommodation and Food Service Activities” andtotal income reached $8.9 billion. The breakdown of the employment is as follows: accommodation activities(91,843); restaurants and mobile food service (290,535); event catering and other food service (7,791); andbeverage-serving activities (26,773).

PA P E R 7 T H E P H I L I P P I N E S

29Table 10. F oreign investors that own hotels in the Philippines
Hotel Brand

Company that owns the brandin the Philippines

Share (%)

Foreign investors

Makati Shangri-La Hotel & Resort, Inc.

100

Shangri-La Asia Ltd. (NBB: SHAL Y)

Edsa Shangri-La Hotel & Resort, Inc.

100

Shangri-La Asia Ltd. (NBB: SHAL Y)

Mactan Shangri-La Hotel & Resort, Inc.

100

Shangri-La Asia Ltd. (NBB: SHAL Y)

Boracay Shangri-La Hotel & Resort, Inc.

100

Shangri-La Asia Ltd. (NBB: SHAL Y)

Waterfront Mactan Casino Hotel,
Incorporated

100

Waterfront Philippines Inc

Waterfront Cebu City Casino Hotel,
Incorporated

100

Waterfront Philippines Inc

..

..

..

Marriott International Hotels, Inc.
(Philippines Branch)

100

Marriott International, Inc. (NMS:MAR)

Porto Bello Cove Hotel Corporation

100

Marriott International, Inc. (NMS:MAR)

Renaissance Hotels International
Corporation Limited (Philippines
Branch)100

Marriott International, Inc. (NMS:MAR)

Mandarin
Oriental

Manila Mandarin Hotel Incorporated

96.20

Mandarin Oriental International Ltd.
(LON: MDO)

Hyatt

Hyatt of Philippines Limited

100

Hyatt Hotels Corp (NYS: H) Hong Kong

HeraldSuites..

..

..

Sofitel

..

..

..

CTF Hotel & Entertainment, Inc.

51

International Entertainment Corp

CTF Properties (Philippines), Inc.

51

International Entertainment Corp

Marina Square Properties, Inc.

51

International Entertainment Corp

NCHI

51

International Entertainment Corp

Shangri-La

Waterfront

Peninsula

Marriott

New World

Source: Euromonitor, from trade sources and national statistics.

One of the most critical factors influencing TNCs to choose NEMs in the Philippines is local regulation,
which favours NEMs over FDI. Hotel management or operations are prime cases as they relate toland and estate development. In the global hotel industry, the Philippines ranked 20th in market sizein 2016, while Thailand and Malaysia ranked 12th and 16th, respectively (Euromonitor). Thus, TNCs
are interested in expanding into the country as a tourist destination. Since the hotel industry in thePhilippines has the potential to grow further, TNCs will continue to utilize NEM operations.

30

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3. OPPORTUNITIES AND CHALLENGES
This section provides an analysis of opportunities and challenges faced by the Philippines in promoting
and utilizing NEMs. By establishing NEM agreements with TNCs, each industry can benefit from anumber of opportunities. However, there are also challenges for local firms, particularly because of
the characteristics of NEMs.
Ownership/non-ownership. If business activities are not owned by TNCs, it is easier for TNCs toenter the market through NEMs. If TNCs can find local firms that can offer services instead of
their own affiliates, TNCs can contract with local firms without owning an affiliate in a host country.
This is one of the advantages of having a NEM for TNCs in a host country. Therefore, there arepotential opportunities for local firms in the IT-BPO/BPM, furniture, hotel and retail industries aswell as other industries to have contract agreements with TNCs. Although such opportunities canbe viewed as attractive by local firms, local firms need to have a minimum level of management
skills, including autonomy and initiative, technological skills and capacity, as TNC support is limited.
In addition, TNCs’ decision making for selecting local partners and terminating contracts with themis volatile, as the contract agreements are not guaranteed for long terms and can be terminatedanytime. One of the characteristics of NEMs is that demand for the particular products or services
comes from outside the country and is not predictable. Since demand cannot be controlled, local
firms are required to build capacity without exact knowledge of the size of NEM operations withpotential customers.
Relationships between NEMs and industries. Particular modalities are in fact linked to particularindustries in the Philippines. For the IT-BPO/BPM industry there is a range of modalities. There
are TNC-owned subsidiaries in the Philippines that have contract agreements with customer firms
outside the country. These subsidiaries create offshore outsourcing with the TNC’s vendors. This
type of modality creates opportunities for local employees to be integrated into the subsidiaries’
business activities; however, it does not provide opportunities for capacity building for local firms. If
local IT-BPO firms have contract agreements with TNCs, that creates offshore outsourcing (figure1). Through this modality, local firms have potential opportunities to receive orders from customer
TNCs located outside the country. TNC affiliates also have a modality through captive offshoring,which is done through FDI (non-NEM). Clearly, in the IT-BPO/BPM industry, particular modalities arelinked to TNCs’ strategies in their home countries.
Different types of modalities are also linked to the hotel industry and retail industry. For the retailindustry, one case is that TNCs implement FDI, followed by NEMs. The other case is that local
firms (master franchisees) make franchise agreements directly with a TNC in its home country. The
activities of the unit franchise look very similar in both cases, but there are significant differencesin terms of impact on local franchisees. The degree of direct participation by the foreign parent inlocal franchisees is minimal for NEMs. As in the hotel industry, management contracts or franchise
agreements are the typical modalities engaged in by TNCs in the Philippines, though there are also
hotels that are owned and managed directly by foreign hoteliers.
Ownership and control. One of the salient features of a NEM is that foreign firms and TNCs do
not directly own the business activities of local firms but have indirect control of them. Local firms
are not controlled through TNCs’ equity. There are a number of challenges for local firms, as thecontracts between local firms and TNCs can easily be jeopardized. For instance, when local firms do
not meet the quality of goods or services required by TNCs, TNCs can easily terminate their contract.
If the demand of the TNC shifts to a new position, and local firms do not have the capacity to meetthe new demands, then TNCs can easily terminate their contracts and move to another country.

PA P E R 7 T H E P H I L I P P I N E S

31Figure 8. Opportunities for NEM in the Philippines

Local companies/
Local employees

Agreements between
TNCs and local firms
exist through NEM
Opportunities

TNCs

Challenges

Outsourcing: IT-BPO/BPM industry

Job creation

Competition among ASEAN
Member States
Business model is basedon TNC’s side

NEMs in the Philippines

Franchising: Convenience stores, retail industry

Management know-how transfer
Job creation

Need localization(takes longer)

Management contract: Hotel industry
Management know-how transfer
Training by TNC, no requirement
for localization

Substantial investment
is required from locals

Subcontracting agreement: Furniture industry
Subcontracting withlocal employees
Access to foreign markets

Source: AJC.
Note: Major industries only.

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In the cases above, if TNCs own firms (or affiliates) in the country, TNCs directly control their activities.
TNCs will make efforts to control quality by, for example, further investing in human resources or
equipment for improving quality. TNCs will change their overall strategies so that the positioning of
the activities in the Philippines can meet possible new demand, if there is a shift. This is related to
the fact that TNCs are utilizing the local firms via NEM for their strategy – and that choice of modality
reflects in part the stages of GVCs in which TNCs operate.
Under NEMs, local firms will have many opportunities for new businesses, sales growth, job
creation and income growth. In order to sustain local firms’ operations or activities without direct
support from TNCs, local firms should create their own business activities. Whether local firms canstrategically utilize TNCs by linking with them or build the capacity to do so remain the challenges
for local firms.

Localization strategies. TNCs operate globally and local firms’ operations or activities constitute partof their GVCs, whether they are undertaken by captive offshoring (i.e. FDI) or offshore outsourcing(i.e. NEMs). If local firms need to implement localization strategies to meet TNCs’ demands, local
firms will have initiatives for the operation, which in turn will create more opportunities. In the
IT-BPO/BPM industry, firm operations or activities in the Philippines do not need to implement a
localization strategy. What local firms do is to meet the requirements of or order from TNCs, which
is one of the characteristics of outsourcing. However, the initiatives that local firms can take arelimited, and they will face challenges if any negative factors arise on the TNCs’ side.
In industries with franchising agreements, operations or activities – for example, in the retail industry– require a localization strategy, whereas that is not necessarily required in the hotel industry. In
the retail industry, the final customers are mainly in the Philippines and demand is also within the
country. Therefore, TNCs need a localization strategy to meet local customers’ demand. In the hotelindustry, TNCs’ operations and activities in the Philippines are standardized and basically the sameas other countries. In the furniture industry, as in the IT-BPO/BPM industry, firms with operations or
activities in the Philippines do not need to implement a localization strategy. In any case,, in order
to avoid any negative effects from the foreign client firms, local firms should make efforts to build
their production capacity.
Foreign TNCs can outsource a part or the whole of any goods or services, or even part of their
GVCs to the country since localization is a low priority as they are not physically present in the local
economy. However, it is also true that TNCs may terminate their agreement with contracting firms,
which results in costs to them as well as the local economy. Local firms’ operations or activities
require a localization strategy, but TNCs also need their own localization strategies, even in NEM
operations. Local NEM firms are equally as important as their own affiliates in the formation of
GVCs. Local firms should take initiatives independently from TNCs to integrate their operations andactivities into TNCs’ overall production networks and into GVCs.

Opportunities and challenges for local firms through NEMs. The issues faced by Philippine firms
range from those related to agreement of the NEM to those related to industry characteristics and
TNC strategies. Both opportunities and challenges can be found in each category of the issues,
which are grouped into (1) continuity issues, (2) NEMs’ typical issues, (3) capacity-building issues and(4) local firms’ initiatives and local embeddedness issues (table 11). If local firms can strategicallyutilize TNCs’ know-how and technological skills by linking with them, they can build capacities todeal with the challenges and even expand their businesses by using the TNCs’ networks.

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Table 11. O pportunities and challenges for local firms engaged in NEM
Opportunities

Typicalindustries
concerned

Challenges

Continuity (footlooseness) problems
Easier to find TNC partners both inand outside the country through,for example, matching events(since TNCs do not directly invest
in the business).

IT-BPO/BPM
Furniture

Easy for TNC to terminate the contract and long-term
relationship is not guaranteed, if quality of services orgoods do not meet TNC’s standard and if local firms inother countries are more competitive (e.g. competitors in
the IT-BPO/BPM industry exist in India and Viet Nam).

IT-BPO/BPM
Furniture
Hotel

Demand and markets are outside the country (e.g.
customers of the IT-BPO/BPM industry, hotel industry
and industries that use subcontracting to produce
products such as furniture).
Demand by TNCs may change depending on the interestand taste of their clients (e.g. changes in trends fortourism destinations, furniture and home decoration
tastes.)

IT-BPO/BPM
Furniture
Hotel
RetailNot easy for local firms to build further capacity apartfrom receiving orders from customers as they receive only
relevant know-how at best (e.g. upgrading value chain
activities through their own efforts is not easy).

NEM’s characteristic issues
Easier to enter a new market or
new area even when demand is
not present in the country. Skills,
talents or resources that areavailable but not required in the
country can be usefully utilized
outside the country.
Capacity-building issues
Easier for local employees towork in business activities in the
IT-BPO/BPM industry and thefurniture industry because of their
low skill requirements at the entry
level.

Initiatives and local embeddedness issues
Local firms adapt to foreign design
and management and do not needto think about local values and alocalization strategy (that is, it isquicker for local firms to make aprofit by using a TNC’s businessmodel).

IT/BPO
Furniture
Hotel

Local firms may lose their initiative, creativity andtraditional values, apart from designing for limited
products in the furniture industry (e.g. local firms
may follow TNCs’ business models in the IT-BPO/
BPM industry and hotel industry, as they do not need to
implement a localization strategy).

Initiatives and local embeddedness issues
Local firms and franchisees
need to be localized, so it takes
a longer time for local firms to
make profits. Therefore, they needinitiatives for their operations
or activities leading to theembeddedness.
Source: AJC.

RetailFast foodConvenience
storesIn the short term, franchisees or local firms may facedifficulties in adopting TNCs’ original strategies tolocalize taste and need to learn through experience
before they become part of the community (e.g. in theretail industry, franchisees need to localize the strategy
to meet local customers’ demand, of which TNCs are notaware).

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4. POLICY IMPLICATIONSASEAN countries as a whole have been attracting FDI inflows for the past decade, though FDI to
ASEAN countries has slowed for the past few years, as it has in other countries.23 In order to deal
with the risks associated with inter-ASEAN relationships the Philippine government needs to aim
at developing the economy, to enhance opportunities at the local level rather than developing an
externally dependent economy. The government has already implemented tremendous efforts tofurther develop industries such as IT-BPO/BPM, hotel and retail through strengthening knowledge
and industry-specific business associations. In addition to current policies that focus on developing
potential employees through education and training, the challenges that local firms will face inthe medium to long run centre on developing local firms’ overall capabilities and mainstreaming
sustainable development in NEM operations, which might be helpful in becoming an economy inwhich people see opportunities at the local level.

4.1 Enhancing capacities of local firms
Local firms’ capabilities in both technological and management skills should be enhanced so thatthey can meet TNCs’ current and potential demand. Once these necessary capabilities have been
attained, firms can have more initiative or autonomy in their operations; they can find potential
customers through networks; and independently from TNCs in terms of autonomy or initiatives, they
can then create their own business activities in the long run.
In order to enhance local firms’ overall capabilities, the government needs to provide support at twolevels – the individual firm level and the industry level.
At the individual firm level, the government needs to support the following efforts:• Implementing continuous internal training for employees within local firms. Local firms need totrain employees for higher job skills. Judging from the results of the interviews done for this study,
not all local firms implement continuous or regular training because of the costs incurred. Direct
or indirect financial supports for training would help local firms focus on internal training tailoredto the needs of the firms themselves or focused on demand from their client TNCs.
• Establishing a learning centre where local firms can learn about NEM operations or activities. Local
firms need to be aware of the changes and future demand in their industries rather than focusing
only on current operations. The government can support this learning by being a facilitator thatconnects individual firms with potential customers. The centre would cover all aspects of NEM informing, executing and evaluating contracts, as well as operating.
• Creating a conducive environment for local firms, to facilitate their globalization and localization
strategies. To meet current and potential demand by TNCs and to integrate with TNCs’ current
and potential GVCs, local firms need to be familiar with TNCs’ changing strategies. Each firmneeds to learn about their customers’ strategies. The government can offer support for different

23

BRIC countries (Brazil, Russian Federation, India, China) experienced a 4.16 per cent decline (2015) following
2.61 per cent growth (2014). Mercosur countries experienced a 1.47 per cent decline (2015), following 15.96 percent growth (2014) after a 30.78 per cent decline (2013). Middle Eastern and North African countries experienced a0.61 per cent growth (2015) following a 16.24 per cent decline (2014). Sub-Saharan African countries experienced
a 12.92 per cent decline (2015), following 20.04 per cent growth (2014), and a previous 0.19 per cent decline (2013)(UNCTAD STAT).

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35types of strategies, introducing good practices in different industries at the individual level, rather
than simply offering support for an industry as a whole.
At the industry level, industrial or business associations and the government can work toward thefollowing goals:• Creating an environment for competition and cooperation between local firms. Local firms need toensure continuity in their operations or activities by enhancing their capabilities, as they compete
among themselves. Local competition implies that a number of firms will become competitive
enough to become TNCs’ partners or vendors. The government could help create a better
environment for firms to compete against each other and cooperate with each other so that NEM
industries as a whole become more competitive.
• Promoting local firms to a higher position in GVCs. Shifts in demand by TNCs and changes in TNCs’
GVCs in the Philippines derive mostly from TNCs’ requests for cost reduction. If each local firm can
upgrade its value added activity, they can attain higher levels of value chains, both horizontally andvertically. The government can promote local firms’ capabilities explicitly by supporting innovationand technical upgrading. Only then may such firms partner with foreign TNCs in NEM operations.
• Putting an innovation policy in place for local firms to encourage and protect technologies theyneed in order to operate under NEMs. Competition to become a TNCs’ NEM partner is high. For
example, in the IT-BPO/BPM industry there are competitors in India or Vietnam that offer services
with lower prices. Particularly if the services offered by local firms are standardized and are notrequired to be localized, competition will be much more severe. An innovation policy is requiredin any event as the Philippines will eventually face a middle-income trap like those that otheradvanced ASEAN member states have faced or are facing. Innovations flourish only when they areprotected by proper intellectual property rights. Such protection is still at a premature stage in thisrespect, as the country is classified as “transition from stage 1 to stage 2” level (the second lowest
in terms of development stage), according to the World Economic Forum’s Global CompetitivenessIndex 2016–2017. In addition, on the innovation and sophistication factors the country is ranked
53rd with a score of 3.76.24• Protecting local employees from unreasonable conditions. There are some benefits to being
employed by NEM firms. For example, among the IT-BPO/BPM firms surveyed for this study there
is no minimum educational level and educational background is not assessed, as long as employees
are over 18 years old and willing to take the firms’ internal training. There are opportunities for
those who did not finish their school or college to work for the industry. It is an attractive industry
to work for; however, it is also important to note that the turnover ratio can be high.25 IT-BPO-BPM
employees have to work for different markets, which are usually in different time zones. For example,
the first shift starts at 9 pm for the United States market, takes a break at 1 am, and continues
working for another four hours. Because firms in the IT-BPO/BPM industry in the Philippines areopen 24 hours a day, to meet demand from different regions, employees may need to work very
different hours from their family members. In addition, the industry is dynamic; employees need tolearn new things for new products or services by attending regular internal training. Although firms
make efforts to offer various engagement activities for employees,26 the turnover ratio remains

24

25

26

Singapore is ranked 12th and has a score of 5.25. Malaysia is ranked 20th with a score of 4.94. Thailand is ranked 47thand has a score of 3.85. Viet Nam is ranked 84th and has a score of 3.47 (World Competitiveness Report).
Firms in the survey responded that the turnover ratio is low for game developers, but high for workers in animationand call centres (voice). The average turnover ratio was 40–45 per cent and the highest was 70 per cent.
At a corporate level, there are sports festivals, some parties and a summer event for all employees. One firm also
hosts various activities such as a Halloween party at the team level. To keep employees motivated, firms offer
incentive programs for attendance or performance. They also offer incentive programs for periods when many
employees do not come to work, e.g. after a longer holiday.

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notable. In addition, local employees need to be protected by some labour policy for the industry, as
current working environments or conditions do not necessarily meet global standards.

4.2 Mainstreaming sustainable development
As local NEM firms and their foreign clients have no equity relationship, the normal TNC governanceof foreign affiliates in host countries is sometimes almost absent. In the IT-BPO/BPM industry, firms
surveyed for this study mentioned that they follow their customers’ compliance level and guidance,and not their local firm’s standard. Clients from the United States and Europe, and recently fromJapan, have increased the monitoring of human rights in suppliers outside their own countries
and presented their own guidance, based on international guidelines. In the furniture industry,
subcontracted workers of local NEM firms are a part of foreign clients’ supplier networks; however,clients have no direct contact with these subcontracting workers. Even though some foreign clients
have implemented corporate social responsibility principles at local NEM firms, these principles
are not necessarily conveyed to subcontractors. The Philippine government does not have its own
compliance standards, but it cannot rely only on foreign clients’ home-country compliance leveland guidance. The foreign clients of NEM firms have their own compliance standards. The business
community needs to have guiding principles such as the UN guiding principles on business andhuman rights. According to the UN’s guidance,27 human rights due diligence “should cover adverse
human rights impacts that the business enterprise may cause or contribute to through its own
activities, or which may be directly linked to its operations, products or services by its business
relationship” (p. 17).

4.3 Improving institutional setting
In the Philippines, unlike other ASEAN member countries, total imports exceed total exports, andthis trade deficit has been increasing continuously.28 However, the current account balance of thePhilippines has been continuously in surplus for the last 10 years,29 as the trade deficit has been
offset by overseas remittance inflows30 – a unique characteristic of the Philippines. Lower FDI levels
is another characteristic: FDI flows into the Philippines in 2016 were one half to one third of the
FDI stock in neighbouring countries such as Malaysia, Thailand and Viet Nam. Since sources of
FDI inflows for these neighbouring countries are from manufacturing industries, there is a positive
relationship between FDI inflows and the percentage of GDP contributed by the manufacturingsector.31 Although the manufacturing sector (industrial sector) accounted for a share of 31 per centof GDP in 2015, only 16 per cent of total employment is in this sector. This also shows that overall
growth in the manufacturing sector has continued to be limited. Most of the decline in agriculture

27

28

29

30

31

United Nations (2011), “Guiding Principles on Business and Human Rights: Implementing the United Nations‘Protect, Respect and Remedy’ Framework”, by the United Nations Human Rights Office of the High Commissioner.
New York and Geneva.
In 2016, the Philippines recorded a trade deficit of $28.5 billion, while Thailand had a trade surplus of $61.3 billion
and Malaysia $17.5 billion (IMF).
In 2016, the current account balance of the Philippines rose to $3.1 billion, while Thailand reduced the balance to$45.9 billion and Malaysia to $4.7 billion (IMF).
In 2016, the Philippines recorded remittance inflows of $29.1 billion, while Thailand had $5.3 billion and Malaysia$1.7 billion (World Bank, Migration and Remittances Statistics).
For instance, manufacturing industries in the Philippines accounts for 31 per cent of total GDP whereas Malaysia(36 per cent), Thailand (36 per cent), Indonesia (40 per cent) and Vietnam (33 per cent) have higher ratios (World
Bank, 2015).

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37and manufacturing as a share of GDP and of employment has been absorbed by the expansion of theservices sector, such as in the IT-BPO/BPM, hotel and tourism, and retail industries.
Two directions of policy implications emerge from these characteristics. The first is the creation of
local employment. Continuous growth of remittance inflows from OFWs is one of the government’s
strategies, partly to alleviate a high unemployment rate. Recent trends show that industries suchas the IT-BPO/BPM industry may be able to absorb current OFWs. If OFWs could work locally, theeconomy would not have to rely on remittance inflows to offset the trade deficit. However, in orderto achieve this shift, the government needs to help respond to the industry’s dynamic changes,
including replacement of some low value added tasks in call centres by machines or by suppliers
outside the country. It seems that although having NEM foreign clients is beneficial for society andthe economy for a while, having contracts is not enough to ensure economic and social improvement
over time. Developing human capital is crucial to moving into higher value added activities in NEM
operations. Policies in areas such as education, training, workforce development and capacity
development of local NEM firms are therefore important. The IT-BOP/BPM industry is dynamically
evolving as the business environment has been changing so rapidly. NEM firms should be agile,niche-specific and capable of handling tasks under this environment.
The second direction is promoting NEM policy as well as FDI policy. In addition to the current
industrial policy encouraging FDI in manufacturing, the government could pursue industrial policy
to encourage NEM agreements with foreign NEM clients. The country’s current FDI is lower thanthat of neighbouring ASEAN countries. However, some service industries under NEMs are more
attractive for foreign NEM clients than for neighbouring countries. Competitive advantages can befound in the areas of good design, communication in English and a business culture in which thefranchising business has a long history in diversified industries. TNC clients look for opportunities
to have NEM agreements in the country. NEMs offer the potential of contributing to economic andindustrial development, improving the trade balance with smaller remittance inflows, and creating
employment. To realize this potential, policies are important in areas such as implementing humanrights guidelines, compliance and governance guidelines in all suppliers (including subcontracting
MSMEs with local NEM firms) under NEM agreements. These two directions can be considered as
the main government strategies for the sustainable development of the Philippines.

•••
Within the overall policy framework of NEMs articulated above, the government may want to evaluate
the state of NEM or NEM-like operations in the country. Assuming that there is no such evaluation
methodology currently, the AJC proposes the following checklist (table 12). This proposal is basedon the corporate code of conduct of the Tokyo Chamber of Commerce and Industry. It provides somehints for the government to use to check on whether NEM agreements and operations comply with acertain level of international standards from the viewpoints of foreign NEM clients, local NEM firms,
local NEM firms’ sub-contracting firms and local employment standards.

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Table 12. C hecklist for NEM agreements and operations to maximize benefits
from and minimize costs with NEM (continued)
NEM policy of
the Philippine
government

Compliancewith laws

Whether there is an agreement on contract performance
Whether there is an agreement on contract terms (duration)
Whether there is an agreement on contract terminationand its process
Whether there is an agreement on contract arrangement(additional contracts) and its process

Respect for humanrightsWhether there are rules on non-discrimination
Whether there are rules on basic human rights
Whether there are rules on harassment(power balance between NEM local firms and TNC)

Environmental
consideration

Whether there are guidelines on air pollution by local NEM firms
Whether there are guidelines on water contamination
by local NEM firms
Whether there are guidelines on environmental friendly goods
or services by local NEM firms

Workenvironment

Whether there are employment rules (laws) on age under
the NEM agreement
Whether there are employment rules (laws) on gender under
the NEM agreement
Whether there are guidelines on a safe and pleasant work
environment for local NEM firms
Whether there are employment rules (laws) on working
environments under the NEM agreement
Whether there are employment rules (laws) on working
conditions under the NEM agreement
Whether there are employment rules (laws) on working
hours under the NEM agreement
Whether there are employment rules (laws) on taking holidays
under the NEM agreement
Whether there are employment rules (laws) on treatmentof absence under the NEM agreement
Whether there are employment rules (laws) on maternity-related
leave under the NEM agreement
Whether there are guidelines on provision of support systemof childcare and nursing care
Whether there are employment rules (laws) on terminating
employment contracts under the NEM agreement

For local firms’
development

Whether there is a program through local NEM firms canimprove their technology/capacity
Whether there is a program through which local NEM firms'
employees can learn
Whether there is a program through which local NEM firms cangain an understanding of NEM policy
Whether there is a program through which local NEM firms cangain an understanding of the business environment of the industry

Subcontractors/
suppliers

Whether there are guidelines for similar NEM policy for local
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39Table 12. C hecklist for NEM agreements and operations to maximize benefits
from and minimize costs with NEM (concluded)
For TNCs,
required by
the Philippine
government

Earning the trustof customers andconsumers

Whether there are guidelines for TNCs to provide correct
information on their products or services

Mutual growth withpartner companies

Whether there are guidelines for TNCs to respect free andfair trading rules
Whether there are guidelines for TNCs to provide relevant
information required for trading
Whether there are guidelines for TNCs to develop relationships
based on trust with local NEM firms

Coexistence with local Whether there are guidelines for TNCs to establish andcommunities
maintain a good relationship with local communities where
local NEM firms are locatedSource: Adopted from “Corporate Code of Conduct, the Third edition” by the Tokyo Chamber of Commerce and Industry(2013).

5. POSTSCRIPT
Dialogue at the 2017 seminar, “Changing Trade and Investment Landscape in ASEAN and thePhilippines”, between the Secretary General of the AJC, commenters, and presenters32 confirmed(1) the positioning of NEM in the Philippines and (2) the importance of NEM as well as FDI. Following
our policy recommendation in this country report, we would like to summarize our concluding
remarks at the seminar.

5.1 Positioning of NEM in the Philippines
In the Philippines, the use of NEMs is a phenomenon widely seen in the country but usually classified
as global strategic partnerships (GSP) or global strategic alliances (GSA). The volume of NEM
production and exports in the Philippines has been increasing, to reach an estimated $40 billion and$32 billion, respectively, in 2016. NEMs were estimated to account for 42 per cent of exports in 2016.
We have looked at four major industries that use NEMs, namely, the IT-BPO/BPM industry, furnitureindustry, retail industry and hotel industry. However, from the Philippines’ perspective, the agriculture
sector is also considered very important for NEMs. Some agricultural products are exported to be
sold in supermarkets such as Tesco (United Kingdom) as a private brand, which are also examplesof NEM. In the ASEAN Economic Community, ASEAN countries have a characteristic “single market
and single production” base, of which the seaweed, tuna and coconut industries are considered asclear examples in the Philippines. These industries are very important because the participants arefrom SMEs and MSMEs. For example, a conglomerate company requires 2,000 ha to organize 2,000
farmers. This is the challenge for the Philippines, as in order to have more employment impact

32

The Secretary General of ASEAN-Japan Centre is Masataka Fujita. Commenters were Senen M. Perlada, Director,
Export Marketing Bureau, DTI, and Dr. Ramon L. Clarete, Professor, University of the Philippines. Presenterswere Dr. Chie Iguchi, Associate Professor, Keio University, and Penny S. Bongato, Executive Director for Talent
Development, IBPAP. The seminar was held at Makati Diamond Residences in Makati City, Metro Manila, on 29
September 2017.

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through the use of NEMs for exporting agricultural products, government supports for facilitating
and organizing cooperatives are necessary.
Philippine exports of goods and services account for about 38 per cent of GDP. Services are
particularly important, driven by the IT-BPO industry. That industry is a key export sector andconsidered a champion for NEMs in the Philippine Export Development Plan 2018 to 2022. In thecase of franchising and licensing, industries such as furniture, retail and hotel are considered
under-achievers. The Philippines is particularly promoting franchising in ASEAN, since the country
is the one of the best resources for franchising and can be a platform for ASEAN if TNCs come to
the Philippines.
The current situation in the Philippines can be described as a hybrid. Before 1996, the functioning of
the entire value chain of a firm was taken care of and organized by the firm, from the first step to thefinal product. Due to cost reductions in trade and through the use of information and communication
technology, various stages of the value chain are now handled by various firms, in GVCs. The
industries in the Philippines that are involved in GVCs are human resource driven or resource cost
driven, rather than technology driven.
In the case of the IT-BPO industry, the Philippines’ comparative advantage is in human resources
as well. The IT-BPO industry has slightly different characteristics than the other three industries
since the industry uses both NEMs and FDI. Through FDI, TNCs have generated a lot of innovation
and brought artificial intelligence to the Philippines. The limitation on growth in the Philippines
is the ability to hire qualified people, which foreign clients need. Therefore, if local NEM partners
can improve skills in technologies, that would generate more NEM clients in the country. So, thePhilippines needs to improve its skills, its human resources, and its abilities to address the needsof the future now.
In this report, hotel management was included as an example of NEM operations. Hotels areusually assets of TNCs, and Filipino partners do not own them. The Philippines can provide welltrained human resources; however, hotel management services, which is the core of the business,is protected by certain brand-name TNCs that have hotel management know-how. The industry isimportant for the Philippines, and the government should continue to promote this particular groupof activities.

5.2 Importance of FDI as well as NEM
The executive director for talent development of the IBPAP stressed that NEM contracts between
SMEs and TNCs are significant in the IT-BPO industry. However, they also are highly volatile andcould move to another country tomorrow, as discussed in the report. A professor from the Universityof the Philippines also stressed that the country still needs FDI, which can be expected to generate
external spillovers into the country, since the Philippines does not have basic capabilities as anindustrial country. As a development strategy, the Philippines cannot focus only on NEMs as anindustrial development policy since they are more risky for sustaining long-term development of theeconomy. To really grow the economy, the Philippines needs continuous FDI in the manufacturingsector and other industrial sectors in addition to NEMs.
As Philippine firms move up the value chain, they require technology and capital. The more FDI there
is, the more relaxed will be the country’s capital constraints. NEMs are not a substitute for FDI, but
it is important to consider NEM as a complement FDI.

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41

5.3 Concluding remarks
According to the professor’s comments, there are 1.5 million Filipinos looking for jobs each year.
Among them, 250,000 people will go abroad as OFWs. Another 250,000 go into formal sectors
including the IT-BPO/BPM industry. The rest either remain unemployed or enter formal but lowvalue sectors. The Philippines need to develop a structure for more long-term employment. One
source could be subcontracting employment in the furniture industry, and potentially in agriculture
as well, but the most developed source is the IT-BPO/BPM industry. NEMs can help with the current
employment problem, but more industries and sectors need to be involved in these arrangements.
The DTI sees NEM as very important, and considers that the government cannot attract only foreign
investors for FDI. There are risks for companies as well as many opportunities. This is a reality thegovernment has to be aware of and has to monitor. In the report, there are many ways in which
Philippines companies can get involved in NEM. The DTI appreciates policy recommendations andwill look at the recommendations for how they can improve participation in GVCs.
Although NEMs are similar to GSP or GSA, they do not replicate GSP or GSA. They go beyond what
the Department has learned about strategic alliances in the sense that the companies are more
involved, and at the same time NEMs provide local companies, including SMEs and MSMEs, more
opportunities. TNCs are moving toward that particular mode. Thus, TNCs can provide a lot ofopportunities, yet also brings costs or challenges.
As mentioned during the dialogue, some agricultural producers operate under NEM arrangements
and they are very important for SMEs and MSMEs, as the influence of NEMs in the production
process can extend to the household level. Some agricultural production does not need equity, justa contract for exporting. The Philippines has been playing an expanding role in global trade and haslearned how to be part of global trade, and has a coordination role in several production activities
in several countries. It is important to consider whether there are policies in areas such as humanrights, compliance and governance for all suppliers (including subcontracting MSMEs with local
NEM firms) like those in table 12 for SMEs and MSMEs that are involved with GVCs through NEMs.
From the dialogue at the seminar, it is clear that the Philippine government recognizes the importanceof NEMs and looks for measures to facilitate or promote NEMs, particularly in franchise licensing(the “under achiever”) as well as in IT-BPO (a champion).
Upgrading levels of technologies and skills is equally important for moving up in GVCs. Local
capacity building is critical for all industries, whether human resource driven or technology driven.
For NEMs, rather than receiving orders from TNCs, local NEM firms need to build their own capacity
and technologies, to make their own learning systems. This can apply to all NEMs. However, it is
not easy to achieve in isolation – or by local MSMEs or SMEs. Learning systems supported by thegovernment are necessary in all the sectors involving NEMs, including agriculture. As a result ofsuch support, local firms would have more initiative to move up the ladder of GVCs in the services
sector.
It was also mentioned during the dialogue that there is no doubt that for the next five to ten years,
the Philippines will see progress as a result of this phenomena of NEMs and that the Philippines is
promoting participation in GVCs through NEMs. Participants noted that they were impressed to see
how industries in the Philippines are involved in NEM.

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PA P E R 7 T H E P H I L I P P I N E S

43REFERENCES
Bureau of Labor and Employment Statistics (2011–2013). LABSTAT Updates, Various issues.
Gereffi, G., and Asian Development Bank (2002). The international competitiveness of Asian
economies in the apparel commodity chain. Manila: Asian Development Bank.
Gereffi, G., and Fernandez-Stark, K. (2010). Offshore Services Value Chain: Developing Countries andthe Crisis. In O. Cattaneo, G. Gereffi, and C. Starits (eds.), Global Value Chains in a Postcrisis
World – A Development Perspective. Washington, D.C.: World Bank, pp. 335–372.
Hirakawa, H., Takahashi, N., Maquito, F. C., and Tokumaru, N. (2016). Innovative ICT Industrial
Architecture in East Asia. Tokyo: Springer Japan.
Hyatt Hotels Corporation. Hyatt announces plan for Hyatt City of Dreams Manila in the Philippines.
Press release.
Li, J (2016). The Philippines: A rising star in Asian retailing. Philippines Retailing, 3rd Quarter, 7.
Mitra, R. M. (2013). Leveraging service sector growth in the Philippines. ADB Economics Working
Paper Series No. 366. Manila.
Pasadilla, G. (ed.) (2008). The Global Challenge in Services Trade: a Look at Philippine Competitiveness.
Manila: Philippine Institute for Development Studies.
Ravallion, M., and Chen., S. (2008). The Developing World is Poorer than We Thought but No Less
Successful in the Fight Against Poverty. World Bank Policy Research Working Paper No. 4703,
World Bank, Washington, DC.
7-Eleven (Philippines) (2016). Annual Report.
Shinomiya, Yukiko四宮由紀子. (2016). 日本ホテル企業の国際発展とアジア回帰の軌跡；過去50年間の国際企業行動の変化に関する考察. アジア経営研究, 22, 3-15.
UNCTAD. (2001). World Investment Report 2001: Promoting Linkages. New York and Geneva: United
Nations.
UNCTAD. (2011). World Investment Report 2011: Non-Equity Modes of International Production andDevelopment. New York and Geneva: United Nations.
UNCTAD. (2013). World Investment Report 2013: Global Value Chains, Investment and Trade forDevelopment. New York and Geneva: United Nations.
Data:
Bangko Sentral Ng Pilipinas http://www.bsp.gov.ph/. Retrieved 1 February 2017.
DTI & BOI. (2017). Securing The Furniture of Philippines Industries.
Retrieved from http://industry.gov.ph/industry/furniture/
Euromonitor International, Passport GMD Academic. Retrieved 1 February 2017.
IBPAP. http://www.ibpap.org/. Retrieved 1 February 2017.
IMF. http://www.imf.org/en/data. Retrieved 1 February 2017.
PRA. http://www.philretailers.com/. Retrieved 1 February 2017.
PSA. http://psa.gov.ph/. Retrieved 1 February 2017.
PSIA. http://psia.org.ph/. Retrieved 1 February 2017.
UNCTAD. http://unctad.org/en/Pages/statistics.aspx. Retrieved 1 February 2017.
UNCTAD STAT. http://unctadstat.unctad.org. Retrieved 1 July 2017.

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ANNEX
Changing Trade and Investment Landscapein ASEAN and the Philippines
Makati City, Philippines 29 September 2017

TIME

ACTIVITY

08:30 – 09:00

Registration

09:00 – 09:10

OPENING REMARKS
Undersecretary Nora K. Terrado
Department of Trade and Industry

Part I: Non-Equity Mode of International Trade
09:10 – 09:30

INTRODUCTORY REMARKS ON NON-EQUITY MODE OF INTERNATIONAL TRADE
Secretary General Masataka Fujita
ASEAN-Japan Centre

09:30 – 09:50

CURRENT SITUATION OF NEM IN THE PHILIPPINES
Ms. Penny S. Bongato
Executive Director for Talent Development
IT and Business Process Association of the Philippines

09:50 – 10:20

REPORT OF THE PHILIPPINE COUNTRY PAPER
Dr. Chie Iguchi
Associate Professor of International Business
Keio University

10:20 – 10:40

Open Forum

10:40 – 10:55

Coffee Break

10:55 – 12:00

INTERACTIVE DIALOGUE

Facilitator:
		

Secretary General Masataka Fujita
ASEAN-Japan Centre

Commentors: Mr. Senen M. Perlada
		
Director, Export Marketing Bureau		Department of Trade and Industry
		
Dr. Ramon L. Clarete		Professor, School of Economics
		
University of the Philippines
		
		
		

Dr. Chie Iguchi
Associate Professor of International Business
Keio University

PA P E R 7 T H E P H I L I P P I N E S

45

		
		
		
		

Ms. Penny S. Bongato
Executive Director for Talent Development
IT and Business Process Associationof the Philippines

				

Mr. Yasushi Ishida
Master of Ceremonies

12:00 – 13:30

Lunch

Part II: Global Value Chains in ASEAN
13:30 – 14:10

GLOBAL VALUE CHAINS IN ASEAN: A REGIONAL PERSPECTIVE
Secretary General Masataka Fujita
ASEAN-Japan Centre

14:10 – 14:30

COMMENTS
Dr. Josef T. Yap
Professor, School of Economics
University of the Philippines

14:30 – 14:40

Coffee Break

14:40 – 15:20

GLOBAL VALUE CHAINS IN ASEAN: THE PHILIPPINES
Secretary General Masataka Fujita
ASEAN-Japan Centre

15:20 – 15:40

COMMENTS
Dr. Francis Mark A. Quimba
Research Fellow
Philippine Institute of Development Studies

15:40 – 16:00

INTERACTIVE DIALOGUE AND OPEN FORUM

Facilitator:
		

Secretary General Masataka Fujita
ASEAN-Japan Centre

Commentors: H.E. WIN NAING
		
Ambassador Extraordinary and Plenipotentiary		Embassy of the Republic of the Union of Myanmar		
Ms. Jenni McEwin
		First Secretary, Economic Section		Australian Embassy in the Philippines		Dr. Josef T. Yap
		Professor, School of Economics
		
University of the Philippines
		Dr. Francis Mark A. Quimba
		
Research Fellow
		Philippine Institute of Development Studies
16:10 – 16:30

SUMMARY AND CLOSING REMARKS
Secretary General Masataka Fujita
ASEAN-Japan Centre
Dr. Yuka Kubota
Master of Ceremonies

ASEAN Promotion Centre on Trade, Investment and Tourism
https://www.asean.or.jp/en