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Duterte, the economy and the elusive Philippines unicorn

Entrepreneurs do not live by GDP growth alone, but by good business conditions

| Philippines
One reason Micab has capital from mostly local sources is limited ambition.

If you want to know how the Philippines is doing, you could pore over reams of data, charts and policy speeches. Or you could just follow the clues offered by ride-hailing app Micab.

Ride-hailing now dominates the business pages thanks to Lyft's initial public offering and Uber's to come. When Micab took to the road in 2012, it was with at the same time as Singapore's Grab, which has since come Southeast Asia's premier unicorn.

Seven years on, the divergence between the two could not be starker. Grab is valued at $14 billion and eyeing a further $2 billion of capital-raising this year. As the Nikkei Asian Review has reported, Manila-based Micab, in epic contrast, hopes to top the $2 million mark in its first funding go-around.

This divergence is really an economic indicator, and one with significance for the broader Southeast Asian region.

On the surface, Philippine growth is firing on most cylinders. The economy is set to grow by about 6.4% this year, roughly the same speed as in 2018. But where the rubber meets the proverbial road, economic speed bumps abound.

The biggest worry is Manila's preference for old-economy growth drivers, not the technology-driven disruption needed to keep pace in the world's most dynamic region. In nearly three years in office, President Rodrigo Duterte has tended to hardware -- better roads, ports and power grids. While those are very important, his team is neglecting economic software -- cutting red tape, strengthening education and training, and catalyzing innovation.

The biggest worry is Duterte's preference for old-economy growth drivers.   © Reuters

Duterte has yet to sign the Innovative Startup Act recently passed by the Congress. The law offers tax breaks, faster business permits and visa approvals, and about $191 million of public venture capital funding. Formalizing it has taken a back seat to Duterte's war on drugs and myriad political squabbles.

That has the Philippines falling even further behind regional peers that are hitting the tech accelerator. Scoring just $28.8 million from venture capitalists in 2018, the Philippines is bottom of the barrel among major Southeast Asian economies. It trailed even Myanmar, which pulled in nearly $33 million.

Bain & Co. predicts Southeast Asia will produce at least ten more unicorns, unlisted companies worth more than $1 billion, by 2024. That means at least ten chances for competing financial centers to host globally-significant IPOs, win gushing coverage on the business news sites and disrupt rigid economies for the better.

Grab is the region's greatest success, but Indonesia has also put some wins on the scoreboard. One is ride-hailing app Go-Jek. Others include booking site Traveloka and e-commerce app Bukalapak.

Southeast Asian unicorns have created $34 billion of public market value since 2012, a statistic that makes Micab both a cautionary tale and a timely case study for the entire region.

Two big factors matter here. One is the level of economic development. The strength of institutions, transparency, creativeness of policies aimed at wooing capital, rule of law and quality of the workforce raise the odds of nurturing the next big thing. So does scale.

Singapore boasts many of the former attributes, while Indonesia's 260 million-person population enjoys a demographic halo. The Philippines, with an English-proficient population of 105 million, should be benefiting from both factors. Instead, it is falling well behind Singapore, Jakarta and other metropolises putting out the welcome mat for entrepreneurs and venture capitalists.

Smaller economies should not give up. Granted, closing the gap will not be easy for Thailand, Malaysia are others. Doing so requires political and economic renaissance all around. Bangkok's newly-elected government, for example, will likely be more concerned with consolidating power than cultivating a Silicon Valley vibe.

Malaysian Prime Minister Mahathir Mohamad, 11 months in office, is preoccupied with cleaning up the previous government's corruption scandals. It leaves little time to raise Malaysia's innovative game for 2024.

Vietnam, meantime, is zooming in the right direction. It is currently Asia's third largest recipient of venture capital investments (the Philippines is seventh). A Bain survey found that 90% of investors rank Communist Vietnam along with capitalist Indonesia as the "hottest" regional market for 2019. The catch, of course, is that officials in Hanoi must ensure that financial reforms keep pace.

How can Southeast Asia's laggards close the unicorn gap? By putting the quality of growth ahead of quantity. There is a strong correlation between countries taking microeconomic steps to ensure that top-line GDP is more widely shared and startup success. It is a metric that can often suggest less corruption and greater efficiency. Not always, given Japan's dearth of unicorns, but in Singapore's case yes.

Ecosystems matter greatly, too, argues Vikas Kaushal, co-founder of a Singapore "poptech" real estate startup. Finding communities of entrepreneurs, Silicon Valley-style, to test ideas, validate business models and plot ways to commercialize them is key. The same goes for finding partners and mentors to brainstorm on market behavior, regulatory hurdles and how to scale a new enterprise.

The Philippines stands out for how many of these dynamics it lacks. Micab's contrast with Grab dramatizes the desire among Philippine policymakers to nurture a thriving tech scene, lest the economy becomes even more of a digital-era laggard.

One reason Micab has capital from mostly local sources, while Grab is backed by the likes of Japan's SoftBank Group, is limited ambition. Like many local entrepreneurs, Micab co-founder and CEO Eddie Ybanez largely set out to solve a domestic problem. Grab set out to become a regional power, and since has.

Thinking bigger and more globally would be easier if the government did its job. Even when Duterte gets around to signing the Innovative Startup Act, its ambitions for a venture capital fund are minuscule. Meanwhile, Manila's investment rules are restrictive and vague. They limit to 40% outside investment in telecom, transport and other key sectors, and they bar any foreign ownership in the mass media.

The Philippines is also running into skilled labor shortages. Rather than starting companies at home, more than 10% of working-age Filipinos take jobs overseas and remit earnings back home. The resulting brain-drain is an added headache for Manila's tech dreams.

There are indeed some promising Philippine startups, including fintech groups Voyager Innovations and Mynt. Yet there also are too many examples of local entrepreneurs moving operations for Singapore's easier business climate. Examples include fintech outfit Lenddo and health tech company mClinica.

With its young, growing population and swelling middle class, the Philippines has the rare advantages in the race to develop unicorns. But these mythical creatures are not found by chance. They must be brought to life and nurtured. Create the right business habitat, bring together the right people and splashy IPOs could drive the Philippines to tech prominence.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia for his Nikkei Asian Review work.

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