UP School of Economics

Institute of Economic Development and Research

SCHOOL OF ECONOMICS

University of the Philippines

(Also Manufacturing Study Paper 'No.4)

now produced in the Philippines.

/"

*Most of the computational burden in this study fell on Mrs. Bella C. Dominguez and Miss Rosalia S. Tubel) research assistants in my manufacturing study. A faculty research grant from the Rockefeller Foundation) which is administered by the U.P. Economics Project) facilitated this study as with some more papers on Philippine manufacturing which are forthcoming. I am alone responsible for any errors of analysis or interpretation.

lSee my "Industrial Policy and the Development of Manu- facturing in the Philippines)" Institute of Economic Development and Research, Discussion Paper 65-1, January 5, 1965; see also Frank H. Golay, The Philippines: Pvblic Policy and National

Economic Development (New York, Cornell university Press) 1961), esp. Chapter 11.

due to new and necessary industries, little work has been done to differentiate the "favored" industries against those which were not explicitly granted any tax exemption. This paper in- tends to survey this unknown gap in our knowledge about manufac-

The only published studies which make mention of rates of return in manufacturing are those of David C. Cole2 and Richard W. Hooley.3 A yet unpublished study of Encarnacion and

lished papers covering rates of return are also in existence, but none of these have the scope of the present study.4

My alm in this paper is simple. No attempt is made to derive an explanatory equation for profit rates. Most of the profit rates in manufacturing might be better explained by

'institutional

setups created especially by economic policy

~

2The Growth and Financing of Manufacturing in the Philippines, 1948-1958 ( Quezon City, Institute of Economic Development and Research, 1962).

. (3

Saving in the Philippines (Quezon City, Institute of Economic Development and Research, 1963).

4The World Bank in its still unpublished reports have made studies of Philippine manufacturing. So has the Program

Implementation Agency.

highly favorable conditions for profitability in given manufac- turing establishments.

My method is confined to an examination of average rates

the ron-tax-exempt. Then some "tax-exempt" large firms are paired against particular industry groups of new and necessary

SMoreover, the results of Encarnacion and Hooley are not very encouraging respecting the fitting of an equation.

Op. cit.

classified as tax-exempt in my disaggregation are predominantly non-tax-exempt in the sense that they had more traditional non- tax-exempt lines of activity. Another point that may be stressed here is that many tax-exempt product classes were awarded to already well-established firms.

my colleague) Richard W. Hooley. These data are a byproduct of his research work on savings and flow-of-funds.6

~he

recent data collected yearly in the DE Business Review7 on 100 large corporations in the Philippines have also provided the list of firms which are large by relative standards. Quite a number of concerns listed in this group of corporations in the Philip- pines are engaged in tax-exempt product lines.

6The external economies provided by having different active research activities in a research institute are best exemplified by whatever gains in insight that this paper is able to obtain from an equally busy colleague. This gesture of Dr. Hooley is scholarly chivalry of the highest order.

7"The One Hundred Largest Commercial and Industrial

/

Corporations in the Philippines in 1962," DE Business Review)

~/

vol. 5) no. 3 (December 1963), pp. 16-22.

- 5 -

~

The data are temporal cross-sections. ~ey run from 1957 to

196£]

^{The data are from individual firms, but an attempt to}

aggregate them into ISle 2-digit industry groups has been done by Hooley. My role was to break down these firms into groups with

exemption. This list was provided by the Technical Staff of the Department of Finance. To conceal the firm identities, all the reports within an industry class were aggregated by taking averages.

The data used in the first part of this study are prof~, sale3, and stock~9~der's equity.

i.e., after taxes. Sales are also

Profits are defined here as ~,

~

net. LStockholder's equity includes paid-in capital, earned surplus reserves and interest for all classes of shareholder~ When we go to industry product line rates of return data at the end of this paper, a further

The findings reported here should be approached with caution. To the extent that they tend to enlighten us on the

entering each group varied. Some of this variation in number of firm~ happened by chance. In some cases, the number of

as in tobacco; and in other industries, in favor of the tax- '-- ^.

industry group aggregation, the firms may be non-comparable.

---

Disaggregation at the 3-digit level was not possible simplY

between the industry groups. Since tax-exempt product lines ...--::-:

would normally be of one kind and non-tax-exempt another, they are bound not to fall under a 3-digit disaggregation. At the 2-digit level, firms under the same industry class can be differentiated in terms of having or not having received tax- exemption. In food industries, the comparison of the industries is possibly most ideal. Classed against the new and necessary

tax-exempt firm in the flue-curing product class, we have all the cigars and cigarette factories which are non-tax-exempt. Of course

exempt ~n one sense. The case of industry group 31 (chemicals) is again another reason for caution. Here we have so many of the new pr~duct classes -- the greater variety of industrial products which can duly qualify as "chemicals" -- paints,

also be pointed out that a number of firms classified under very interesting groups -- steel and metallic products -- do not have .their counterparts'of non-tax-exempt firms.

time period is covered by the available data. Ideally, analysis of tax-exempt industries should start with 1946 or 1947, a year

tries. But since little progress in the establishment of tax- exempt firms came about until after 1951, data should at least

However, Hooley's data do not contain firm V

The data covered in the Hooley material are from 1957 to 1962. This is a very interesting period by itself. 1957 marked

decontrol. So, for many of the manufacturing firms highly depen- dent on foreign inputs, hardships were just being presaged by the gradually worsening balance of payments condition for the country.

Then

the years 1960 to 1962 consist of the transition from controls

the data to be presented, rates of return on sales and on equity ,,---

are reported. In another rate of return study, the World Bank8 used the Eer cent rate of value-added minus all wage payments to total fixed assets, the data being derived from the Surveys of

8Report on Philippine Manufacturing, 1962 (unpublished).

The rate of return to equity capital is probably a much better

.

-

^~.-

--

^{-- - -}-~-- -

--- --

-

measure, because the profit rate of an undertaking is often used as a measure of the ~roductivit of the ca ital invested in it. In most of the firms covered, the sales-equity ratio

3. Possible data bias. The only other question that remains is the possibility that data may have certain bias. This almost leads to the question as to how useful firm accounts are for economic analysis. ~ecause capital values do not adjust automatically with price changes, equity capital is probably more

---I

open to errors than sales; but it has been pointed out by many, Cole9 and the World Bank10 among others, that sales tend to get

gap. cit.

lOOp. cit.

technique was used. On the vertical axis, I measured~ll ra~s

~ return to the t~a*x~-de~x~~~.m~p_t__

j_nru ~__

^{t_r_j_e_s and on the ~orizontal}

axis, the rates of return corresponding to the non-tax-exe~t industries._ The position of a point

in

the scatter will there- fore show whether the rate of return for the non-tax-exempt firms is equal to, greater, or less than that of the tax-exempt. For

These lines represent the value of the mean rate of return over the years covered for each industry groups. The point of inter-

variation of the rates of return in the tax-exempt categories is

~>~~....,...~~_.~ ...,'-.._--- --

wider

_{_ ••••••••}

than in the non-tax-exempt.

_{~ ±t0i5~ ••••• WI}

To what extent such variation

(is significant

is a matter I shall turn to elsewhere here .11

Figures 1 to 13, with subscripts ~ and b, depict all these scatters. The numbers appearing after each figure number is the ISle two-digit code.

IlSee below on further statistical analfsis of the data.

l"e - rqle.ofrelurn 0111SQlesorcopifol of f.,y -^eJtfl -/II i"o'usfNe£

r •• - rqle cI"rei",." _ s~ or copilll/ of "01'1-f^01- exeMpT ;"tI"s!N"es

Te

=

^11.77

r.. ='

11.77 S1(

=

^8.1'2.

51'111= '3."

1i=48.05

r

^Wl

= '''.9S'

Srt;

=

1'3.!is

51',,= 7.1'6

o '0 2.0 ~o 40 1)0

Tit

Fi9.1Q.-10- FooD, MANUfACTURED

PERCEWTAGE RETU~N ON SALES

Tn

:Fig. ^{1••-1.0- FooD,} MANUFACl URE D • PERCENTAGE REiURN Olll CAPITAL

1; ⁼

^18.'2

r

_••

=

^2.08

Sre

=

9.70

sr..

=. ^1.00

1:=_I/.

1"=

\II

sr~=

Sr", :=.

29.17 rHo 15.23 8.83

!So

Y"

Fiq. 24-22- ToBACC,OPRODUCTS PERCENTAGE RETUIHJ ON SALES

r", FIg. 21,-22-TOBACCO PRODUCTS

PERCEN TAGE RETURN OloJCAPITAL

10.07

r" =

^9.09

Sr"

=

^7·81

~r••

=

^3.4'

r&::: 17.94

r..:::

2.7.35 Sl"'t::: 14.52

S1"••:=' 14.59

-'---'

80 100

l';, Fiq. 3••.- 23-TEXTILES

PERCENTAGE I(ETURN ON SALES·

Fig. 3.-23-TEXTILfiS PERCENTAGE ~ETUr<N OloJ CAPITAL

If -

^!'Wle. of^rofqrlJ

0"

S"/.~.or cDpir./ of ^{f';x -} (l)(eJoo"f i"th,~r,.;LS T•• - rtlle 01'ren,r;, (PI,.lIlu orcD,,;;"/of mm-1-11-flJ<eWll'f i"tlusrf'l&

reo

^so 8.81 ~ ^'00 T=e 17.0&

",0 ^{2.8/ 80} 1'••= ^7·51

STt.= 5".48 STe

=

^5'.00

S1'••= ^.54-

.>

S 1"",= 1.<4\

60

40

60

r..

Fi9. 4a,-24-^{FOOTWfAR, OTIIER}WEARING APPA1EL ~ MADE-UP1EXlILE Gool)$

PERCEWTA,e RETURt/ O~ SALES

-r. ~

e

Fig.4~-l"-FOoTWEAR, 011lER WfAR.ING APPAREL ~ MAPE-uP TUTILE ,000S

PERcENTAGE RHUIUI ON CAPI TAL

-r.=_eo 'T--=

•••

STe

=

srl'!=

~ ^\

I.'21

r.=

_8.58

••

L'33 80

r=

lit

".ss

'.00

S-r.=

_{. e 18.1"}

3." ⁶⁰

sr"=

^13.~3

40

11>

•

'51-10

Fi'l_ 5&-2&- WOOl)

4

^{CORk PRODUCTS}

PERCENTAGE RETURN ONSALES •

Fiq. 5,,-25-WOOD ¢CORKPRoOUCT5

PERCENTAGE ~ETURNON CAPITAL

~ ^So

1t

^\00

/1=.247 ^{~- ~-}

^\9.17

'40 1'••- '.5+ Bo T= 1(,.89

••

Sr•.

=

^{9.11 ST'&= 14.73}

10 51'••

=

7.'2 ⁶⁶ S-r••

=

^17.'38

~o ^4(.0

10 20

10 10 Jo 40 50

T••

Fig. 'Q.-27- PAPER

4

^{PAPU PROPUCTS}

'Uc.EWTA&e RETURN a4 5ALE$

4c> 60 86 '00

1'111

Fig. '10-17- PAPER ( PAPER PROI)UC.TS J)ERC£NTAGE RE1'URN ON CAVITAL

Te - f'Qle of return Ohsoles or co~tfol 0110)1:- e)(eW1j>t ihrlvsfrl€s

Y•• - role 01returl1 01'1 .s••.la or caplfa/ of non- !-Q)/:- eysWlpf incl(Jsfri~

re- ⁵⁰

r.=

e 4.68

<40 =f.=

.,

!).~3

S

1'(.

=

^1.73

30

Sr.,=

^'2..00

o 10 :zo 30 40 .50

Y", F!g_ 7⁴-2B- PRINTED

<

PUBLISHED MATERIALS

~ ALLIED PRoDU<:.TS PERCENTAGE RE1URN ON SALES

7"e ¹⁰⁰

80

(;0

40

20

0

Fig.

Te

=

^14.13

r.. =

^1'2..9\

STe.= 538

Sr•.

=

^5".\0

40 60 90 100

7'••

7b-28-P~IUTED ~ PUSUSED MATE-RIALS

~ ALLIED PRODUc.-rS

PE'1CEIJTACoE RfTURN ON CAPITAL

~ ^&:0

:r.

^{=: 18.58} 're. ¹⁰⁰ _TQ": 40.13

40 fit

=

'1.'" 80 r\ll= 10.11

Sl'c= ^'3.87

~ re.=

^8.ob

30 Sr\ll= .83 60 $1'10= 4.90

1'e

^.so _~ ¹⁰⁰

.b6 ~='l7.90

40 r.=_{•• 10.32 80}

r",=

^15".5/

S~= ^.60

s

^1'11.= \3.45

30 ST ••

=

^{4.24 60} Sr",= 15:'2."-

2D 40

"0

10

•

o 10:Z0 30 40 lio

r.,

F1.9_ Bc1- 30- RU BBER PRODU CTS PERCENTAGE RETURN aISALES

FIg. 9o..-31-C~EMICAL'; ~CIlEMICAL PRODUc.TS PERCENTAGE RETURN ON SALES

Fig_ 8,,-30- RU8BER P~ODUCTS PERCENTAGE RETURN 0'"' CAPITAL

Fig- gb-31-(IIEM\CALS~CIlEMICAL PRODUCTS PERCH)TA&E RETURN ON CAPITAL

Te - rafe of re.lur'1 on sales or CDI'ifol 01 -lax-exelHpf. imlusfnits T•• - rQfe of refurn 0" .sQ/~ or c_l',"fol 01'nOl't- I-x- ^€XOl+Jpl- ;"tlq.strillS

Te- ¹⁰⁰

r.= _3.'5l

r.=

e•• 14.49 8<>

S

re

=

^2.83

S^T••::: 3.74- '0

40

r~=

^8.30

r.. =

23.33

STe== 5.47

Sr•.= ^7.94

o '0 30 40 /Jo

~

Fig. IO••.-33-I/ON-METALLIC MINERAL PRODUCTS EXCEPT PRODUCTS OFPfT£oLEUM ~ coAL

PrRCEtJTAGE RETURN ow SALES

r"

'Fig. 101.-33-NOO-MfTALLlC MINERAL PRODUCTS

E)'CEPT PRODUCTS of PETROLEUM ~ coAL PE£CEtJTAGE £E1URW ON CADITAL

rQ, ^I

r=

_e ^{5"59 r~:::12.83}

f= 8.77 80 r= 18.09

'"

^••

sr

e'::. _{2.83 ST}e= 7.48

Sr••

=

^.92

'"

^{Sr",= 2.64-}

40

~

20 30 40 60

rl1

11Q.- :>G-MACHINERY, EXCEPT ELECTRICAL PE RCENTAGE RETURN ON SALES

o 40 40 60 80 100

T.,

Fig. 111.-'3G-MACHINER'(, EXCEPT ELECTIi(ICAL PERCEUIAGE RETUIW O~ CAPITAL

Te ^So

40

3D

'Z..

'0

0

Fi".

Te:= 3.92

r",= 8.61

STe= 1.73

STI1

=

^1.41

Te= 28.88

r

..,

=

¹⁹

.

STe

-=

11.49 ST.,= 4.58

, ' I I

20 30 •••• !So

T••

12",- 38-TRAtJ5POIl.TAlIoW EQUIPMEtJT PERCENTAGE I?ETURN ON SALES

'00

T•.•

'F'9. 11.1o.-"3l;'-TRANSPORTATION EGlU1PMEtJi PERCe:IJTAGE RETURN ON C.APITAL

Te - rQ-teof returll/ 0.., sales or cap//al of .fax -e.xe_pf ind~slrieJ

T'", - rQ/~ 01' r.,rkr#1 0" saks or co!'ilq/ of non- ^rllY- e>te_pl ina"qsfrie,s

r,=

^6.08

r..

= 3.42 Ste:= 7.81 Sl'.,= 4.3'

Tf.

=

^11.2.1;

r., =

^9.3~

Sre= ^16.~7

Sl'.,= 12.08

"Fi9- 130-39- MISCELLAIJEOU$

PERCENTAGE RETURN ON SALES

Fi9_ 13\,-39- MISCELLAtJEOUS PERC£~TAGE RETURN ONCAPITAL

lng these results. (1) Are the rates of return higher for the tax-exempt than for the non-tax-exempt? (2) What explains for the !ime-path of the rates of return of the two classes of firms?

How related are they to the balance of payments condition of the country, especially as regards the exchange rate between the peso

of the widely known phenomenon that the industries established, especially those which were tax-exempt, were highly import- dependent.12 (3) Is tax-exemption the most important explanation for the high profit rates? To what extent is the variation in

groups by measuring the following items:

6r

=

^r_ei ^{r (i}

=

^{sales, equity)}

ni

6s

=

_sr sr (i

=

^{sales, equity)}

el nl

12 I shall examine this ~tatement In greater detail In a later paper.