Philippine Companies towards ASEAN Integration 2015

By: GABEJAN, Rose May, BSBA FTM 3-1

Philippines has been constantly one of the countries exhibiting enthusiasm when it
comes to international trade, foreign commitments and investments. It has long
established its connections with other nations as a country rich in natural resources and
of course, human resources. For this reason, with the input of businessman's creative
minds, Filipinos used these resources to established their own businesses which are
not only domestically competitive but could also be internationally competitive.

Last November 2007, the leaders of Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Thailand, and Vietnam, during their 13th Annual
Summit Meeting, signed to establish an ASEAN Economic Community by 2015.
According to the published Asian Integration Blueprint in the ASEAN official website,
the objective of having an ASEAN Economic Community is to create a free flow of
goods, investments, and services or labor among the aforementioned countries.

In fact, Emmanuel Esguerra, Deputy Director General of NEDA, stated that "The
Phlippines is strongly positioned for the ASEAN Economic Community. The country's
economic growth remains robust despite disasters". Moreover, the trade integration
speculates that the Philippines GDP will be 7.5 by the end of 2025 and would also
create 3.1 Million job opportunities starting from 2015-2025 based on the study
conducted by International Labor Organization and Asian Development Bank (as cited
in PHL 'well positioned' for ASEAN Integration, says NEDA Official, 2014). This is a
good indication of growth not only on the government's part, as well as the business
function of our country.

The ASEAN Integration, in its sense, has become an opportunity as well as a

challenge posed for locally established firms to go global. But first, how will these local
companies establish international operations? According to Madura (2010) in his book
entitled Intenational Financial Management, theoretically, there are ways for a company
to go global, these are through International Trade, Licensing, Franchising, Joint
Ventures, Acquisition of Existing Operations, and Establishing Foreign Subsidiaries.

First, the International Trade involves exchange of goods and services from one
country to another. Meanwhile, in Licensing, the parent firm is obligated to provide its
technologies, copyright, and patents. Franchising , on the other hand, obligates a firm
to provide a specialized trade or processing in exchange of periodic fees. While the
Joint Ventures, Acquisiton of Existing Operations, and Establishing Foreign
Subsidiaries directly involve Direct Foreign Investments (Madura, 2010).

There are also several stages to be consider in order for a domestically established
company turn into a MNC. Based on the Product Cycle Theory, the product should be
first offered to the country of its origin, and in this case, the Philippines. Secondly, if it
has saturated in its locality, it will engage in exportation. Meanwhile, if the product has
saturated the market, it will put up a plant so that everything that will be used will tend
to have costs reduction. And finally, it will put up a subsidiary internationally (Madura,
2010).

Of course, a domestic company would not dare to go global without nothing on its
hand. Like a soldier in a war, it wouldn't go on a battlefield withour its armors and
weapons. Basically, it has to consider whether its company is already financially
capable of putting subsidiaries abroad or at least has enough funds to raise its
standards and value among its international competitors. Next is the Company

Management aspect, question is,"Can the company efficiently manage its operations
abroad?". If it cannot addressed the management issues it is facing domestically, how
much more if it is internationally. Third, are the employees internationally competitive?
A company couldn't attain its growth without the efforts of its employees. They are in
fact, the reason why management exist, not to mention that, they have a direct
interaction with the clients and customers of a company. So if they are not
internationally competitive, how could they manage to do their tasks given the different
atmosphere in which they are working. Last, but definitely not the least, is the
technological capacity of the company. The manager should ask himself, if the
technology he had today could compete well with that of other ASEAN countries
technologies? When we say technology, that basically includes the data and computer
systems as well as the machineries and equipments used in manufacturing products, in
case of manufacturing companies, or as a means for effectively servicing its clients
abroad (Srivastana, 2008).

Philippine established companies should not only be after the profits and income
which they could get through the ASEAN integration. They should also consider the two
main risks that they will be taking and in this case, the Foreign Exchange risk and the
Political risks. Foreign exchange risk occurs when the value of investment fluctuates
due to varying exchange rates in different countries. Such that, if the amount of the
home currency appreciates against the foreign, then it would lead to income gains and
vice versa. The second one is the Political risks. This type of risk occurs because of the
laws and policies being implemented in the foreign country where MNC will put up a
subsidiary. This may include trade barriers such as high tariffs and low quotas that may
affect the MNCs value of investment. Although the ASEAN Economic Community would
create free flow of trade, the changing laws governing the subsidiaries' country can still
influence the MNCs income and business transactions abroad (Sargeant, n.d).

These risks, particularly, the Exchange risks, can also be mitigated through hedging
techniques such as Futures, Forwards and Options. Furthermore, the Political risks can
be lessen through securing political risk insurances to protect one's investment
(Sargeant, n.d).

Siddaiah (n.d), in his book entitled International Financial Management, stated some
of the ways to effectively manage a MNCs cash. Cash is considered as the most liquid
asset of a company. It consists of Demand Depositis and currency which the company
owns. However, too much cash is not also good since these cash remains as idle funds
but could be use in case if transaction needs, opportunity needs and contingency
needs. Cash Management techniques involves Float, Cash Collection, Cash
Disbursement, Netting and Centralized Cash Management.

The float involves money from delayed payments of cheques issued by the firm or
delay in cheque collection issued by other entities in favor of the MNC. Secondly, Cash
Collection is about maximizing of cash production that includes Cash Disbursement,
particularly the Zero Balance which eliminates the need to estimate and maintain the
cash balance of each disbursement account. Moreover, the Electronic Fund Transfer
System, where the magnetic tapes record all cash transactions to be cleared directly to
automated clearing houses. In this note, the Society for Worldwide Intebank Financial
Telecommunications (SWIFT), provides a well established and efficient network to
support international electric funds transfer. Meanwhile, Netting process involves the
process of reducing the cash transactions between the parent firm and its' affiliates.
Under Netting is the Bilateral and Multilateral Netting. The first refers to the net amount
due in each pair of affiliates and between the affiliates of the parent firm while the latter
states that each affiliate nets all receipts against all of its payments and then transforms

and receives the balance. Thus, Multilateral Netting reduces currency conversion costs.
Last, but not the least, is the Centralized Cash Management, a technique in which the
cash of the entire MNC is on a centralized cash depository that, in turn, reduces the
burden on subsidiary cash Management allowing affiliates to focus on its operations
(Siddaiah, n.d).
Since transfers of funds among parent and subsidiaries is necessary, Correspondent
Banking is of a great help among MNCs. Correspondent Banking is an international
banking where most major banks maintain banking relationships with local banks in the
market area in which they wish to do business. Its basic services include accepting
drafts, honoring letters of credit, furnishing credit information, and collecting and
disbursing international funds in the international money market. Thus, Correspondent
Banking is essential in paying and collecting international funds between various
entities (Kidwell, 2006).

Competition is what makes the companies strive for success. The ASEAN
Integration towards the end of 2015 should be seen as an opportunity for locally
established company to expose themselves to the international world of business. It
may be a challenge posed to local companies, but these challenges, if these
companies take it as an opportunity, could not only help their company in the long run,
but will also help the nation achieve economic stabilty that is competitive among
economic and financial fluctuations it may face.

Prof. Antonio E. Casurao

Faculty of Finance
Pamantasan ng Lungsod ng Maynila

Sources:

David S. Kidwell. Financial Institutions, Markets, and Money. 2006.

Thummuluri Siddaiah. International Financial Management. n.d

Jeff A. Madura. Intenational Financial Management, 10th ed. 2007

http://www.asean.org/communities/asean-economic-community

http://www.asean.org/resources/publications/asean-publications/item/asean-economiccommunity-handbook-for-business-2012

http://www.gmanetwork.com/news/story/382813/economy/business/phl-well-positionedfor-asean-integration-says-neda-official

http://www.academia.edu/1441351/CHALLENGES_FOR_ESTABLISHING_FOREIGN_
MULTINATIONAL_COMPANIES_IN_WESTERN_MARKET

http://www.businessdictionary.com/article/583/impact-of-globalization-on-smallbusinesses/

http://www.forbes.com/sites/theyec/2013/10/08/five-steps-to-expand-your-businessglobally/