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Establishing a Filipino Startup: The Ins and Outs

Greg de la Cruz works in the tech industry and is the author of two published titles on Amazon.

An aerial view of Cebu I.T. Park, one of the top information technology and business process outsourcing destinations in the Philippines.

An aerial view of Cebu I.T. Park, one of the top information technology and business process outsourcing destinations in the Philippines.

Is there even a startup scene in the Philippines?

Ever since China made special economic zones popular in attracting investment during the 80's and 90's, the rest of the world has followed suit. Establishing fiscal incentives for businesses has been proven to create a friendly, more risk-appetitey climate for multinationals and startups alike.

By far the best the Philippines has come to creating a business environment conducive to startups, has been establishing through law these special economic zones spread all over the country. And while it's debatable on how equitable and inclusive this spread is, a simple online search for the list of economic zones managed by the Philippine Economic Zone Authority (PEZA) suggests that a majority of these economic zones are located in the northern part of the country. The south's playing catch-up, and whether it will ever be able to catch up hinges on how effective the congressmen from the south lobby for more of these zones to be established there.

Economic zones in the Philppines are regulated by the PEZA, and if you're a PEZA-registered company and situated at an economic zone accredited by PEZA, you get a lot of tax breaks and incentives. You get an income tax holiday for the first five years of operations, your sales get zero-rated on VAT, and much more. Some recent pronouncements by the national government as well as the implementation of the new tax reform law currently have local businessmen anxious, as these new regulations will slowly wipe out PEZA-related benefits. These businessmen are worried that foreign investors will notice these new regulations and dump their business elsewhere, for example to India.

But as of this writing, business is still booming under these special economic zones. And if you're someone looking to establish a startup in the Philippines, I encourage you to not look north. Instead, look south. For example, Cebu has two of the largest economic zones in the country, the Cebu Business Park and the Cebu I.T. Park. The Cebu I.T. Park for one is a hub for various tech-related startups, and both aforementioned parks are home to the call centers of big American tech companies (Amazon, Netflix, Google, etc.).

There is still so much future potential for launching Filipino startups. And I'm not talking about startups with foreign-based counterparts. There is still so much potential for Filipino homegrown startup businesses. As internet speed and infrastructure improve, the time might just come for the Filipino scene to catch up to what India's doing. India may already have their own versions of Silicon Valley up there—and it's unfortunate that the Philippines is still playing catchup—but hanks to foreign tech companies outsourcing in the Philippines over the years, the skill level has continued to improve. The Filipinos have more than just their customer-handling skills to boast - there's already a lot of software/hardware development going on; there is web development, high-level management, professional service, and much more.

The In's

With the influx of foreign investments that has had tremendous growth post-recession era, there are obvious reasons why the Philippines is a great destination for startups. I'll go ahead and discuss three of them.

Low Labor Cost. I'm not sure if this is the number one metric that investors see when they look at hot business destinations on a global scale, but the Philippines has one of the lowest labor costs in the globe. According to various sources, the median salary in the Philippines is at 17,000 USD. India's is about 21,000 USD. And compare these with the United States' which is at 56,000 USD. And 17,000 USD for the Philippines is highly optimistic - usually only managerial employees get to taste this annual salary bracket. The Philippines may have a minimum wage in place that's reviewed every few weeks or months, but this minimum wage is very much on the low side. The minimum wage in the United States is around 7 USD per hour (and this is for cheaper cities/states) while the Philppines currently has a minimum wage of 1.50 USD per hour (and this is for the expensive cities. Some cities have less than 1 USD per hour as minimum wage). Think about it - you can hire 5 to 7 people in the Philippines to do the work of one person in the United States. Which do you think is the more productive strategy? Especially when you're hiring for customer service - 7 call center agents are better than just one.

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Cheap Real Estate. Because of the low labor cost in the Philippines, it almost follows that real estate in the country would be cheap. And that's the situation in the country - commercial space costs a lot less than it does in foreign countries. It currently costs an average of 0.85 USD per square foot per month to rent commercial space in the United States. Compare that to about 0.40 USD to rent commercial space in the Philippines - renting space in the Philippines costs half as much! The data may vary per region, but you get so much cheap space if you rent at the special economic zones. The administration costs are also dramatically lower, again because of cheap Filipino salaries. The Philippines might just be the perfect market for a lean startup experiment (read Eric Ries book here) because a significant amount of the population is made up of millennials, plus the cost to rent space is cheap.

Skilled and talented people. Filipinos are not just known for a good command of the English language, coupled with a naturally hospitable personality. Recently, with tech companies from the United States outsourcing sectors of their business in the Philippines, these skilled and talented people appear out of nowhere. Sure, the country's educational system is still catching up to the rest of the world, but because there was an explosion of the Internet cafe scene back in the early 2000s, suddenly these computer-savvy Filipinos (with or without formal education) emerge. Perhaps we have the computer gaming scene too thank for this emergence - but it's definitely more than just that. Filipinos with engineering and I.T. degrees are inclined to get into the technology business.

The Out's

There are also obvious reasons why foreign investors are staying away from the Philippines as a business startup scene. Let's discuss three popular ones.

Slow Internet Connection. This problem seems to exist perpetually for the Philippines, and there are no signs that it will ever go away soon. Even when the rest of the world will switch to 5G - the Philippines will probably be behind that too. It's easy to blame the Filipino internet providers, who've targeted the mobile consumer more than the business consumer. But it goes deeper than that. The Philippines is behind on telecommunications infrastructure. It's behind on infrastructure, in general. Maybe the big picture reason for this is political instability (no President can hold office for more than 6 years) and another angle could be because the Philippines is a hotspot for natural disasters and terrorism. Whatever the actual reason, slow internet can't be blamed on the ISPs alone.

Infrastructure Can't Catch Up. As I've mentioned above, the Philippines is behind on infrastructure, period. In some Filipino cities, it takes years to erect a simple two-storey building. Budget for bridges often takes a couple years to get approved (these are just anecdotes, but if you ask any Filipino, they'll probably even think it takes three years to get a bridge budget approved).These are just a few examples of how slow the public infrastructure process takes for the Philippines. Maybe the solution for all this is legal reform, or better execution - it remains debatable to this day.

Government Centralization. Now this is one issue that thankfully, the current administration has worked to resolve. Even before the start of the current president's term, he was already advocating for a federal government. A federal government theoretically removes centralization and imperialism and encourages stronger autonomy. While this seems optimistic, it remains to be seen whether the Filipinos can execute the transition to a federal government efficienly and effectively. The problem is not just because of the several dialects that exist. I believe the problem lies at the heart of Hispanic culture being embedded in Filipino culture. I'll try to mean this in a good way, but because of the 300 plus years that the Spanish have ruled over the country, some values have mixed into Filipino culture. And one of those undesirable values is discrimination against the poor by the rich 'Kastila.' It's not just Tagalog versus Bisaya - it's definitely rich versus poor. Some northern-based Filipinos look at the Southern-based ones as poor and uneducated. And if you want an easy example, watch a live stream of an NBA basketball game hosted by a Filipino - you'll notice early enough that this discrimination I'm talking about trickles down even to that level.

And so I go back to the issue of centralization - I see this again, as rich versus poor. North versus south. The current president is from the South. Now he lives in the north. A lot of Senators are from the north. The President's office is in the north. Most of the GDP is from the north.

This is why, if you're a celebrity investor from shark tank and a Filipino startup will pitch an investment, you'll just have to say, 'I'm out.'

© 2020 Greg de la Cruz

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