Beyond UMIC: The struggle to make the Philippines more attractive to foreign investors
EM - News Moderator 
By Beatriz Marie D. Cruz, Senior Reporter
THE PHILIPPINES is pinning its hopes on its new upper middle-income status and solid fundamentals to position itself as a major investment and supply chain hub in Southeast Asia.
However, with growing competition from regional peers, the Philippines must look beyond well-intentioned reforms and directly confront persistent bottlenecks, such as corruption, regulatory uncertainty, and high energy costs, to win foreign capital.
Trade Secretary Maria Cristina A. Roque said attempts to attract foreign capital hinge on positioning the Philippines as the region’s premier hub for globally competitive, innovative, and sustainability-driven industries.
“Through a strategic convergence of policy reforms, investment incentives, strategic partnerships, and regional leadership, the government is positioning the country to move up global value chains and emerge as the preferred ASEAN (Association of Southeast Asian Nations) destination for high-tech investments,” she said in an e-mail to BusinessWorld.
The ambitions align with the Philippines’ recent upgrade to upper-middle income status, the Department of Trade and Industry (DTI) said.
“This upgraded classification is set to strengthen the country’s credit profile, boost investor confidence and signal to global enterprises that the Philippines is stable and primed for manufacturing, innovation and regional expansion,” it said in July.
The Philippines was reclassified as an upper-middle income country (UMIC) by the World Bank this year, after it posted a gross national income (GNI) per capita of $4,850 in 2025 — falling within the lender’s $4,636 to $14,375 GNI per capita range for UMIC status.
The Philippines had been stuck in the lower-middle income bracket since the World Bank began tracking the metric in 1987.
The Board of Investments said the higher income classification, coupled with the Philippines’ strategic location and human capital, makes it a unique investment destination in Southeast Asia.
“While other UMIC peers compete on scale, manufacturing depth or income levels, the Philippines stands out as ASEAN’s growth story powered by a young, English-speaking workforce, a large and expanding consumer market, and its geostrategic location,” it said in an e-mailed reply to questions.
Compared with its UMIC peers in the region, the BoI said the Philippines “benefits from a balanced growth model anchored by domestic consumption, services exports and manufacturing expansion in future-ready industries.”
The World Bank reported that Malaysia ($12,380), Thailand ($7,690), Indonesia ($5,120), and Vietnam ($4,970) are also UMICs, while Singapore ($81,760) is a high-income country.
Philippine foreign direct investment (FDI) inflows hit medium-term lows last year and with Southeast Asian economies growing, how can the country better position itself as the region’s preferred investment destination?
The Bangko Sentral ng Pilipinas (BSP) reported that FDI net inflows slumped to a five-year low of $7.791 billion in 2025, the worst since the pandemic. The 2025 total also marked a 17.1% drop from 2024, the BSP said.
Reaching UMIC boosts the Philippines’ economic credibility, but it won’t instantly guarantee new capital, according to Marco de la Rosa, Kearney senior partner, Philippines country head and APAC Communications, Media & Technology lead.
“Upper-middle income status gives the Philippines a seat at the table, but it doesn’t automatically make us more competitive,” he said in an e-mail interview.
While the milestone signals readiness to global markets, Mr. de la Rosa said the key challenge is ensuring economic progress also translates to everyday gains for the population.
“We’re only at the lower end of the upper-middle income range, so there’s still significant room to grow,” he noted.
“More importantly, higher national income doesn’t automatically mean every Filipino is better off,” Mr. de la Rosa added.
As an UMIC, the Philippines can position itself as a strategic partner for European companies seeking to further expand in Southeast Asia, the European Chamber of Commerce of the Philippines (ECCP) said.
“Investors will view this milestone not only as a recognition of past progress, but also as a call to sustain reform momentum,” the ECCP said in an e-mail.
“The Philippines’ new status as an upper-middle income country is overall a positive signal to global investors, reflecting the country’s economic progress and strong potential as a destination for investments,” Johan Lennefalk, Trade Commissioner of Sweden to the Philippines, said in an interview.
To attract investors, the government is building on its incentives and investment promotion efforts, Ms. Roque said.
In particular, the DTI is leveraging its Strategic Investment Priority Plan, which expanded fiscal incentives for cutting-edge technologies.
These include artificial intelligence (AI) and data science, quantum technologies, cybersecurity, electric vehicles (EVs), and energy technologies like hydrogen and nuclear.
She noted the targeted investment missions, the “green lane” for strategic projects, and its ASEAN chairmanship would help pitch the Philippines to foreign investors.
Ms. Roque also cited the government’s reforms for targeted industries that would help attract investment in high-value manufacturing.
These include the Electric Vehicle Incentive Strategy, which seeks to incentivize the domestic production of EVs, and the Semiconductor and Electronics Industry Roadmap, which targets $110 billion in chip-related exports by 2030.
Other priority sectors include information technology-business process management, smart agriculture, critical minerals, and renewable energy, the DTI said.
FALLING BEHIND
While the economic fundamentals fiscal incentives, and targeted reforms are falling into place, it continues to lag its regional and peers in attracting global capital.
The Philippines ranked 18th out of 25 markets in Kearney’s 2026 FDI Confidence Index, making it among the lower priorities for global investors.
Within ASEAN, the Philippines lagged Thailand (6th), Malaysia (7th), Indonesia (13th) and Vietnam (16th).
The index, which came out earlier this year, noted that investors are aware of the Philippines’ long-term potential, talent, and natural resources. However, it remains weak in infrastructure, governance, and ease of doing business, Mr. de la Rosa said.
The United Nations Conference on Trade and Development (UNCTAD) 2026 World Investment Report indicated that Philippine FDI inflows stood at $9 billion in 2025, trailing ASEAN markets like Singapore ($150.9 billion), Indonesia ($21.44 billion), Vietnam ($20.35 billion), Thailand ($19.1 billion), and Malaysia ($15.39 billion).
Amelia U. Santos-Paulino, Investment Research Section Chief at UNCTAD’s Division on Investment and Enterprise, said regulatory and administrative constraints could affect investor confidence in the Philippines despite its higher income status.
“While important policy reforms have been introduced and streamlined (transparency) and investment facilitation measures put in place (e.g. single investment window and one-stop shop), businesses may still face lengthy investment-business permitting processes, from overlapping regulatory requirements,” she said in e-mailed reply to questions.
Ms. Paulino cited the need to address congestion in transport and logistics networks, which increase operating costs, delay production, and reduce supply chain reliability. Limitations in digital infrastructure and connectivity can also constrain the development of higher-value services and knowledge-intensive industries, including AI, digital deployment and data analytics development, she added.
According to business groups, the country’s potential to become ASEAN’s preferred investment destination is hindered by governance issues, regulatory uncertainties, slowed infrastructure spending, high power costs, and logistical bottlenecks.
The ECCP also noted that European firms have become more deliberate when investing.
“European investors will continue to compare the Philippines not only with its own past performance, but also with peer economies in ASEAN that may offer faster processes, stronger infrastructure, more predictable regulation, and more integrated supply chains,” the ECCP said.
It noted that European investors are concerned about red tape, permit delays, and inconsistent implementation of rules across the range of national agencies and local government units.
Investors are also burdened by regulatory uncertainty, tax policy and administration concerns, infrastructure gaps, high energy costs, customs and trade facilitation concerns, and skills mismatches, the ECCP said.
British Chamber of Commerce of the Philippines Executive Vice Chairman Chris Nelson said UMIC status is a “good sign” for UK investors. It also reinforces the country as “a core market” in the region.
“But we need to keep that momentum going forward by reducing red tape and pushing for reforms to strengthen digital payments and open financing,” he said via telephone.
While liberalizing foreign investment laws helped attract FDI, unresolved corruption issues linked to the government’s flood control scandal continues to dampen investor confidence, according to John Paolo R. Rivera, senior research fellow at the Philippine Institute for Development Studies (PIDS).
“We’re making significant developmental strides after enacting liberalization laws. But we also have to work on projecting an image that the ecosystem we have in the Philippines is actually worth the entry,” he said in a video interview.
Reforms to reduce dependence on imported oil should also be a key strategy, Mr. Rivera said, noting how the Middle East conflict showed how external energy shocks can disrupt businesses and industry.
UNCTAD’s Ms. Paulino said the Philippines should further embed itself in production and supply chain networks within ASEAN and other regional value chains, including the 15-member Regional Comprehensive Economic Partnership (RCEP).
“The Philippines could consider positioning itself as a key node connecting regional production networks, digital trade, business services, and innovation ecosystems within ASEAN and RCEP,” she said.
ADVANTAGES
Analysts said the Philippines has the fundamentals to become a regional investment hub, if it is supported by ease of doing business and regulatory certainty.
Kearney’s Mr. de la Rosa said the Philippines’ young, English-speaking workforce remains a key driver of foreign investment.
“As many of Asia’s largest economies face aging populations, the Philippines has a longer runway for workforce growth and domestic consumption,” he said.
Mr. Lennefalk said that Swedish investors have cited the country’s talent pool, strong consumer market, and infrastructure opportunities.
The Philippines has been pursuing multi-country partnerships to help build transport, energy and digital infrastructure that align with its development goals.
These include the Luzon Economic Corridor — backed by 11 partner countries — that seeks to boost logistics, rail freight, clean energy, and semiconductor infrastructure throughout key growth areas like Manila, Subic, Clark, and Batangas.
The Philippines’ participation in the Washington-led Pax Silica bloc is also expected to draw investment in semiconductors, battery technology, and AI manufacturing.
However, the government has yet to fully address criticism that Pax Silica-related developments may compromise environmental protections, deplete natural resources, and be inimical to the national interest.
The Philippine Economic Zone Authority (PEZA) said its economic zones (ecozones) are well-positioned to streamline foreign locators’ operations. Ecozones provide investment facilitation, fiscal incentives, customs support, infrastructure, utilities, and a talent pool that’s investment ready, it said.
PEZA cited the need to develop more investment-ready and specialized ecozones outside traditional industrial centers, while ensuring they are connected to ports, airports, and reliable power and digital infrastructure, it said.
“The country should avoid competing with Vietnam, Indonesia, Malaysia, or Thailand solely through lower labor costs, cheaper industrial land, or the size of its domestic market. Our differentiation must be based on the quality and reliability of the investor experience and the strength of the ecosystem surrounding each investment,” PEZA said in e-mailed reply to questions.
The agency expects future ecozones to focus on strategic industries like semiconductors, EVs, aerospace, medical technologies, green industries, advanced logistics, and other AI-enabled services.
PEZA said it is working to reduce logistics and operating costs, improve trade facilitation, expand access to international markets, upskill the workforce, and improving government agencies’ interoperability.
Its priorities also include boosting digitalization, expediting permitting, making regulations more predictable, strengthening intellectual-property protections, and establishing training programs to help support locator requirements, PEZA added.
“The Philippines doesn’t need to compete on scale alone. It should compete where it can be distinctive,” Mr. de la Rosa said.
“But those opportunities depend on faster execution and a more predictable investment environment. That’s ultimately what will separate the Philippines from its regional peers,” he added.
Ultimately, the Philippines’ bid to become ASEAN’s preferred investment hub and while being an UMIC will be measured by its ability to generate better-paying jobs, lower food and energy costs, and strengthen purchasing power, PIDS’ Mr. Rivera said.
