The Society of Honor by Joe America

By Karl Garcia

---

Investment decisions, especially foreign direct investment (FDI), are influenced by a complex mix of economic fundamentals, governance quality, and domestic policy environments. While factors like tax rates and infrastructure clearly matter, predictability and credibility of policy commitments are often decisive in long-term investor decision-making. When governments alter rules mid-course—whether by withdrawing incentives, renegotiating terms, or reinterpreting commitments—such actions can materially affect investor confidence and economic outcomes.

This essay analyzes how policy inconsistency and mid-stream rule changes impact investor confidence, with a focus on the Philippines, drawing on empirical investment trends, institutional assessments, and broader international precedents.

---

1. Investment Trends in Context: The Philippines

Fluctuating Investment Approvals and Commitments

In recent years, the Philippines has experienced significant fluctuations in foreign investment commitments. Preliminary data showed that approved foreign investment commitments fell sharply—by 39% in 2024 compared with 2023—as investors adopted a more cautious stance amid changing global and domestic conditions.

Domestic investment approvals also saw volatility. The Board of Investments (BOI), responsible for approving investment pledges, recorded a notable decline in year-on-year approvals in 2025, reflecting both procedural delays and slower approval inter-agency coordination.

Divergent Signals: Strong Approvals versus Execution

Meanwhile, broader metrics suggest a longer-term upward trend in investment approvals, with the Department of Trade and Industry noting a 71% surge in approved investments from 2022 to 2024—largely driven by renewable energy and infrastructure projects.

This dual picture—strong headline approvals co-existing with sharper drop-offs in specific periods—reveals heterogeneous investor sentiment: approvals continue, but timing and certainty have become more unpredictable.

---

2. Why Policy Consistency Matters More Than Incentives

Predictability as a Core Component of Investment Climate

International bodies and investment analysts emphasize that investor decisions are not driven by incentives alone, but by policy reliability and regulatory consistency. This includes clear legal frameworks, timely approvals, and consistent enforcement of contractual commitments. An OECD review advocated for alignment of investment policy frameworks with global standards to reduce uncertainty and enhance predictability.

A U.S. government investment climate report specifically praised the Philippine Economic Zone Authority (PEZA) for transparency and streamlined services—a rare example of regulatory predictability contributing positively to the investment environment.

Investment Conditions Beyond Taxes

Policy inconsistency often intertwines with broader governance challenges. Analyses point to persistent systemic issues—such as corruption, judicial inefficiency, and regulatory unpredictability—as structural obstacles for foreign investors.

These governance factors affect investor decisions because they alter the risk profile of doing business. Even when incentives exist, unexpected changes to rules or interpretations undermine trust in the overall governance system.

---

3. The Problem of “Changing Rules Mid-Game”

Policy changes after commitments are made are especially damaging because they affect investor expectations and sunk cost calculations. Investors base decisions not just on current rules, but on how reliably those rules will be upheld over time.

Empirical and International Examples

The international experience illustrates this principle well. In the renewable energy sector, Spain’s retroactive cuts to feed-in tariffs—which had been guaranteed at the time of investment—triggered arbitration claims and investor losses, because the changes undermined the basis on which projects were financed.

This phenomenon is not confined to one sector: across multiple industries, retroactive policy changes undermine long-term contracts and expectations, leading capital to gravitate toward jurisdictions with more stable regulatory environments.

---

4. Domestic Policy Shifts and Investor Interpretation

In the Philippine context, government reforms like the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act aim to simplify incentives and provide clarity over tax treatments, which should enhance competitiveness.

Likewise, institutional innovations such as “Green Lanes” for strategic investments seek to streamline permits and approvals across agencies to reduce bureaucratic delays—another response to investor concerns about procedural unpredictability.

However, the value of these reforms is moderated when contemporaneous reports show investment pledges declining or when past commitments come under question, as in the case of automotive industry incentives and inter-agency coordination issues that delayed project approvals.

---

5. Credibility, Governance Reform, and Long-Term Growth

Macro-Institutional Implications

Institutions like the International Monetary Fund note that structural and governance reforms—including those that improve regulatory predictability—would significantly bolster investor confidence and potential growth.

This assessment underscores a core insight: policy consistency and governance quality are integral to the investment climate. Without these, even well-designed incentive regimes may fail to attract or retain sustained investment.

Beyond Headlines: Real Investor Behavior

Investor behavior reflects not just incentives but risk-adjusted expectations. Even if large pledges or headline approvals make economic news, many firms take a cautious approach, considering the risk of regulatory or procedural reversals before finalizing investment flows.

This dynamic is why metrics like FDI inflow stability, contract enforcement reliability, and regulatory consistency matter more than isolated investment announcements.

---

Concluding Synthesis

Investment flows are shaped by a complex interplay of economic, institutional, and governance factors. In the context of countries like the Philippines:

• Policy predictability and institutional credibility are foundational to investor confidence.
• Mid-course changes to rules or commitments have a disproportionate negative impact on investor risk perceptions.
• Reforms that enhance clarity, streamline approvals, and align with global best practices can improve competitiveness.
• Structural governance issues—such as corruption and regulatory inconsistency—remain key barriers that cannot be solved by incentives alone.

Ultimately, sustainable investor confidence depends less on the generosity of incentives and more on the reliability, coherence, and transparency of the policy environment over time.