[FEATURE] Policy Overreach and the Risks to FDI and SMEs

The Philippines is at a pivotal juncture in shaping its economic and labor policies.

Micro, small, and medium enterprises, which account for the majority of registered Philippine businesses, may bear the heaviest burden under proposed labor mandates.

Two proposals now under legislative deliberations — the mandatory 14th-month pay bill and the abolition of the Regional Tripartite Wages and Productivity Boards (RTWPBs) — reflect a wider struggle between social protection for workers and the need to preserve the country’s competitiveness in attracting foreign direct investment (FDI) and sustaining the viability of small and medium enterprises (SMEs).

The Employers Confederation of the Philippines (ECOP), joined by leading industry groups, recently submitted position papers opposing both measures.

Their arguments deserve serious attention, not out of reflexive resistance to worker-friendly reforms, but because of their long-term implications for the investment climate and the survival of SMEs that form the backbone of the domestic economy.

The weight of a mandated 14th-month Pay

The proposed 14th-Month Pay Law is framed as a logical extension of the Labor Code’s 13th-month pay requirement, aimed at enhancing worker welfare. However, ECOP and allied business groups warn that it would effectively raise labor costs by 8.3 percent across the board.

For large corporations with healthy balance sheets, this may be manageable, even routine. Many have already institutionalized bonuses that go beyond a 14th-month.

But the reality is that 99.5 percent of all Philippine enterprises are micro, small, or medium. Micro enterprises alone make up over 90 percent of the total, and many struggle each year to meet the existing 13th-month requirement.

For these smaller players, a mandatory additional month of pay risks pushing fragile cash flows over the edge.

Even with provisions for exemptions, ECOP argues that the process is often too bureaucratic and short in duration, discouraging small businesses from applying. The result is a blanket burden that hits the smallest employers the hardest.

From an FDI standpoint, higher mandatory labor costs can dull the Philippines’ comparative advantage in the region. Investors often benchmark labor competitiveness against ASEAN neighbors such as Vietnam, Cambodia, and Indonesia.

These economies maintain lower wage floors and have been magnets for manufacturing investment. Adding new rigidities to the Philippine labor market may push capital inflows away at a time when FDI has already shown weakness.

In 2023, net inflows declined to $8.9 billion, followed by a marginal 0.1 percent increase in 2024.

In the first five months of 2025, inflows slipped 26.9 percent year-on-year. For a country in need of fresh capital to spur growth, this is hardly the time to introduce additional cost pressures.

Preserving the role of RTWPBs

Equally contentious is the proposal to abolish the RTWPBs and move toward a uniform national wage. ECOP contends that this would be a step backward from the nuanced system established by the Wage Rationalization Act of 1989.

By design, the RTWPBs calibrate wage adjustments based on local socio-economic realities. This has allowed poorer regions to catch up gradually without shocking SMEs into closure or sparking runaway inflation.

The boards’ tripartite composition of labor, employer, and government representatives provides a mechanism for dialogue, consensus, and evidence-based decision-making.

Abolishing them, business groups argue, would eliminate the only venue where regionally grounded voices can temper wage policies.

The regional approach also serves an important developmental function: it incentivizes investments outside Metro Manila by aligning labor costs with local market conditions.

Uniform national wages could have the unintended consequence of discouraging firms from setting up operations in the countryside, accelerating urban migration, and weakening regional growth.

From the perspective of foreign investors, the loss of a predictable, consultative wage-setting mechanism could add uncertainty and raise the cost of doing business in the Philippines.

Striking the balance

Worker welfare and business viability are not mutually exclusive. In fact, sustainable FDI depends on a stable labor environment where workers are treated fairly and businesses are profitable.

Investors look not only at wage levels but also at predictability of policy, transparency in regulation, and the ability of enterprises to adapt to economic shocks.

The Philippines cannot afford to undermine its attractiveness just as competition for capital in Southeast Asia intensifies. Vietnam, for example, continues to post double-digit growth in FDI inflows, fueled by a mix of lower costs, targeted incentives, and labor market flexibility.

Cambodia and Myanmar, despite governance challenges, remain appealing to labor-intensive industries because of their wage competitiveness. In contrast, Philippine minimum wages are already among the highest in the region.

Foreign investors weigh labor costs when deciding where to deploy capital. Proposed wage reforms could affect the Philippines’ competitiveness in Southeast Asia.

Layering additional mandates risks tilting the balance further against the country.

For SMEs, which generate 63 percent of employment and 40 percent of GDP, the challenge is existential. These enterprises often operate on thin margins and limited credit lines. Forcing them to absorb sudden cost increases could lead to closures or informalization, eroding both job security and tax revenues.

A way forward

There is no denying the intent behind the 14th-month pay bill and calls to reform wage-setting structures: to uplift Filipino workers and reduce inequality. The question is whether these policies are the right tools at the right time.

Alternatives exist that may deliver the same objectives with less collateral damage. These include targeted subsidies for transport and food, stronger social safety nets, and investments in upskilling programs that qualify workers for higher-paying jobs.

For wage-setting, strengthening the RTWPBs rather than abolishing them may be the wiser course.

Enhancing transparency, shortening decision timelines, and expanding consultation can improve outcomes without discarding a system that has served the country for over three decades.

As policymakers deliberate, the bigger picture must remain in focus. The Philippines’ ability to attract FDI and sustain SME growth is inseparable from its social contract with labor.

Getting that balance wrong could stall the country’s economic momentum. Getting it right could secure its place as a competitive and inclusive economy in ASEAN. #GSU