CHAPTER 4

RESULTS AND DISCUSSION

The results and discussions of the study are presented in this chapter.

This involves describing and demonstrating visual presentations that illustrate the

patterns and changes in gross value added in service, GDP per capita, gross

capital formation, foreign direct investment, and Employment over the 1991-2022

period, using trends.

I. Trends of Gross Value Added in Services

Figure 1 presents the Philippines' annual gross value added in services

from 1991 to 2022. According to the figure, the gross value added in services

has steadily expanded since 1991. In 1999, the growth rate was exceptionally

high, at 51%, and it has been steadily increasing.

According to the Philippine Statistics Authority (PSA), the gross value

added (GVA) generated from the services sector in the Philippines managed to

grow by 5.3% in 2021 to P11.2 trillion from P10.6 trillion in 2020 (Congressional

Policy and Budget Research Department House of Representatives, 2024). The

service sector industry is seeing significant growth, primarily driven by subsectors

such as transportation, communication and storage, trade finance, real estate,

private services, and government services sectors (Umali, 2013).

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70
70
60
60
50
GVA in %

50
40
GVA in %

40
30
20
30
10
20
0
1 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
10 99
1 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20
0 Year
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20

Year

Figure 1. Trend of Gross Value Added in Services for the year 1991-
2022 Source: World Bank Database

II. Trends of GDP Per Capita

Economic growth refers to the overall well-being of a country, and one way

to measure this is through GDP per capita. It is a crucial indicator for the

economy as it reflects the outcomes of a country's economic activities over a

year. The Philippines is also home to abundant natural resources and a labor

market that is easily accessible to skilled workers. Additionally, the country has

made strides in creating additional employment opportunities. (Juliannisa &

Artino, 2022).

The table shows that GDP per capita was $821.45 in 1991, rising to

$936.14 in 1992 and $938.76 in 1993. Between 1994 and 1996, values rose from

$1081.43 to $1334.10. Still, 1997 saw a little drop to $1294.11. The downturn

continued in 1998, dropping to $1000.00. However, GDP per capita increased by

 35

$1123.16 in 1999. Additionally, GDP per capita declined in 2001 and the early

2000s. Between 2006 and 2012, GDP per capita rose from $1452.22 to

$2671.77, suggesting robust economic growth. The increasing trajectory

continued, albeit with less pace, reaching $3077.43 by 2017 and in 2020 to

$3224.42. Moreover, the economic growth continued, and by 2022, GDP per

capita had reached $3498.50, The Philippines has achieved the most rapid

growth in Asia as private sector investment, government infrastructure

expenditures, and household consumption are among the factors that contribute

to its growth (Subagja & Mubarok, 2015).

4000
4000
US

3500
Product inin
Per Capita (in billion US$)

3500
Product

3000
3000
2500
Dollars

2000
2500
GrossDomestic

1500
Billion
GrossDomestic

2000
1000
1500
500
0
1000
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
19
500 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20
Year
0
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20

Year

Figure 2. Trend of GDP Per Capita for the year 1991-2022

Source: World Bank Database

III. Trends of Foreign Direct Investment

During the 1990s and mid-2010s up to the late 2010s, there was a

noticeable trend of negative net FDI values. This was due to a significant

increase in FDI net inflows, while FDI net outflows remained relatively low. The
 36

pattern highlights the Philippines' position as a recipient of foreign investment

rather than actively engaging in investments in other countries. The year 2007

marked the onset of the global economic crisis, which saw a significant increase

in net FDI. As the crisis worsened, investor confidence took a hit, leading to

significant instability in the financial markets (Reuters Staff, 2008)

The net FDI experienced a significant decline in both 2016 and 2021. This

decline resulted from a higher amount of FDI net inflows, indicating that foreign

investors had confidence in investing in the Philippines. The country has

consistently been one of Asia's top-performing economies and has become an

attractive investment destination, encouraging foreign investors. The BSP's

statement highlights the significant decrease in net FDI in 2021, which can be

attributed to the Philippines' highest recorded FDI net inflows of $10.52 billion.

This increase results from the global economic recovery following the COVID-19

pandemic. The Philippines' expanding economy and diverse industries have

caught the attention of foreign investors looking for opportunities in a recovering

market (Crismundo, 2022)

 37

4B

2B
Figure 3. Trend of Foreign Direct Investment for the year 1991-2022
Source:0 World Bank Database
IV. Trends91 of93Gross
95 9Capital
97 999 0Formation
01 003 005 007 009 011 013 015 017 019 21
19 19 19 1 1 2 2 2 2 2 2 2 2 2 2 20
2000000000

The graph
4000000000 depicting the gross capital formation in the Philippines from
6000000000
1991 to 2022 demonstrates a general upward trend with some fluctuations. In the
8000000000
early 1990s, the gross capital formation started at approximately 10.2 billion PHP
10000000000
in 1991, showing consistent growth, reaching around 17 billion PHP by 1994. The
12000000000

growth trend continued, notably increasing

Year to over 22 billion PHP in 1996.

However, there was a significant drop in 1998, falling to about 14.9 billion PHP,

likely reflecting the impact of the Asian financial crisis.

From 1999 onwards, the gross capital formation generally increased,

reaching approximately 25.1 billion PHP in 2007. A sharp rise was observed from

2008 to 2010, peaking at around 42.5 billion PHP in 2010. This upward trend

continued, with the capital formation reaching approximately 48.5 billion PHP in

2011 and further increasing to about 78.4 billion PHP by 2016.

The highest values were recorded in the years following 2017, with gross

capital formation peaking at around 99.8 billion PHP in 2022, despite a notable

dip in 2020, where it fell to approximately 63 billion PHP, likely due to the

economic impact of the COVID-19 pandemic (Biswas, 2023)

 38

120 B

Gross Capital Formation

100 B

( in billion US$) 80 B

60 B

40 B

20 B

Year
Fi
gure 4. Trend of Gross Capital Formation for the year 1991-2022
Source: World Bank Database

V. Trends of Employment in Services

The graph for Employment in the services sector in the Philippines from

1991 to 2022 displays a clear upward trend. In 1991, the percentage of

Employment in services was approximately 38.66%, and this figure steadily

increased, reaching around 57.37% by 2022. According to a study by

Patalinghug (2013), the BPO industry has created millions of jobs, significantly

impacting Employment in the services sector. The government's support through

policies and incentives has further strengthened this industry, making it one of

the largest employers in the country. Other than that, tourism is another primary

driver of employment growth in services. As Cruz (2017) reported, the

development of the tourism industry has generated substantial employment

opportunities in hospitality, travel services, and retail.

 39

Moreover, the expansion of educational and healthcare services has

contributed to the rise in service sector employment. Research by Espiritu (2016)

indicates that the growth of private educational institutions and healthcare

facilities has led to increased demand for professionals in these fields. The

demographic trends and increasing awareness about health and education have

supported this growth.

Employmnet in Services in

70

60

50
%

40

30

20

10

Year
Figure 5. Trend of Employment in Services for the year 1991-2022
Source: World Bank Database

VI. Testing for Stationarity

The Augmented Dickey-Fuller tests are used to determine whether

variables have a unit root, which indicates non-stationarity. The subsequent

results are shown in Table 1, generated by using EViews.

The results of the unit root test are presented in Table 1. The results

indicated that the five variables (GVA, GDPC, GCF, FDI, ES) exhibit non

stationary at their level. In this instance, all variables were subjected to a

 40

smoothing process known as differencing. After applying the first differencing, all

variables obtained stationarity, allowing us to move forward with the further

stages of analysis.

Table 1. Augmented Dickey-Fuller (ADF) test results

ADF Test Statistics

Variables Intercept Intercept and Trend Order of integration

Level 1st diff Level 1st diff

GVA -0.920 ns -4.670*** -1.760 ns -4.653*** I(1)

GDPC 0.425 ns -4.970*** -1.454 ns -5.078*** I(1)

GCF 0.051ns -5.104*** -2.040 ns -5.267*** I(1)

FDI -2.130 ns -7.774*** -2.641ns -7.761*** I(1)

ES -2.00 ns -5.627*** -1.138 ns -6.117*** I(1)

Note: Values are ADF t-statistics. The null hypothesis that the time series variable has a unit root can be rejected at 1%

(***), 5% level (**), and not significant (ns).

VII. Lag Length Determination

Table 3 demonstrates that Lag 2 is chosen because of the lower AIC, FPE,

and HQ. It balances pattern identification and model simplicity to portray model

dynamics accurately.

Table 3 of Lag Length of Determination

Lag LogL LR FPE AIC SC HQ

0 -169.014 NA 4.320044 116.9665 117.2022 117.0403

1 -1554.869 215.9540 2.090041 109.3013 110.7158* 109.7443

2 -1518.342 45.34428* 1.120041* 108.5063* 111.0995 109.3185*

 41

3 -1494.321 21.53610 1.950041 108.5738 112.3457 109.7551

Note: (*) indicates the lag order selected by the criterion

Relationship of the Determinants of Service Sector Growth in the

Philippines

This section presents the results of the vector autoregressive (VAR)

estimates of the variables Gross Value Added in Services (GVA), Gross Domestic

Product Per Capita (GDPC), Gross Capital Formation (GCF), Foreign Direct

Investment (FDI) and Employment in Services (ES).

VIII. VECTOR AUTOREGRESSION ESTIMATES

GVA GDPC GCF FDI ES

GVA 0.567639* -40.38010 -1.692532 -9.420000 0.140149
(-1) [1.99112] [-0.63746] [-0.53242] [-1.33012] [0.51599]

GVA 0.089967 -72.42623 4.862387 -8.061429 -0.115957

(-2) [0.31199] [-1.13036] [0.15122] [-1.12588] [-0.42206]

GDPC -0.000835 1.000836* -12120852 2773574 -0.000403

(-1) [-0.54112] [2.91762] [-0.70410] [0.72355] [-0.27392]

GDPC 0.001286 0.108257 49746894* -1576930. 0.001491

(-2) [0.77308] [0.29298] [2.68275] [-0.38190] [0.94098]

GCF 1.070128 -4.904355 0.498608 -0.0018291 1.830000

(-1) [0.38016] [-0.78411] [1.58850] [-0.26170] [0.68146]

GCF -2.670656 -1.470000 -0.786988 -0.104534 -5.000000

(-2) [-0.00090] [-0.22479] [-2.39894] [1.43099] [-1.78262]

FDI 1.970934 -1.340008 -0.629439 0.101202 3.820000

(-1) [0.20459] [-0.62525] [-0.58594] [0.42308] [0.41579]
 42

FDI 2.874616 -1.523867 -1.555629 -0.201985 -8.990449

(-2) [0.25644] [-0.61180] [-1.24453] [-0.72568] [-0.84180]

ES 0.572970* -24.10056 -5.531120 1.551040* 0.690984*

(-1) [2.07759] [-0.39329] [-1.79860] [2.26501] [2.62976]

ES -0.380151 130.7755 6.445276 60300234 0.221069

(-2) [-1.17128] [1.81338] [1.78090] [0.07482] [0.71491]

C 8.021702 889.0999 3.852289 1.370010 2.836078

[2.02965] [1.01243] [0.08741] [1.39604] [0.75317]

Adjusted R² 0.983514 0 .984722 0.960702 0.784648 0.992269

Log Likelihood 22.51470 -184.6218 -716.5581 -671.4969 -21.06265

AIC 2.234313 13.04145 48.50387 45.49979

2.137510

SC 2.748086 13.55523 49.01764 46.01357

2.651282

Note: (*) significant at a 5% level

Using EViews to find the associated p-values of the model, the result

shows that the current value of GVA is affected by its value in the last year with a

p-value of 0.04, which indicates that for each additional unit in the previous year's

GVA, there is a corresponding increase of 57% in the current value. On the other

hand, the value of GVA two years ago has no significant relationship with its

current value, showing there is no effect between the two. The table further

shows that the values of GDPC and FDI from the previous year and the two

years prior have no influence on the values of GVA. Meanwhile, the past value of

ES or Employment in Services denotes a positive relationship with the current

value of GVA, increasing the unit value by 58%. It aligned with the study of
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Engracia et al. (2022) that Employment in services has a positive relationship

with the service sector, indicating that an increase in Employment in Services

leads to higher GVA and economic growth. However, the value of Employment in

services two years ago has no effect on the current value of GVA, contradicting

the study.

Moreover, GDPC's value last year significantly affected its present value,

as inferred from its p-value of 0.00. These results show a positive relationship,

which means that every unit increase in the last year's value of GDPC, while the

past value of GVA, GCF, FDI, and ES last year and the past two years do not

have a significant effect on the current value of GDPC.

Additionally, the GDPC from two periods ago significantly affects the

current period's GCF, which had a p-value of 0.01 a year ago. This is aligned with

the study of Intal and Fukunari (2014), who examine the role of gross capital

formation in the economic integration of ASEAN countries, including the

Philippines. It finds that increased investment in infrastructure and productive

assets has been a critical driver of economic growth in the region. The values of

GVA, GCF, FDI, and ES from one and two years ago do not have a positive

relationship with the current value of GCF, and also, the value of GDPC one year

ago has no effect on GCF's current value.

The current period's FDI is positively influenced by the Employment in

services in the previous period, as evidenced by a p-value of 0.03. Alfaro's (2003)

research indicates that FDI can be attracted to a country with skilled labor and a

robust service sector through Employment in services and the past and two
 44

years prior values of GVA, GCF, and FDI and the value two years ago of

Employment does not affect the current value of FDI.

Lastly, there is a significant relationship between the present value of ES

and its prior value, with a p-value of 0.01, which indicates an increase of 69% in

the current value for each additional unit in the GVA from the previous year.

IX. GRANGER CAUSALITY TEST

Table 5. Granger Causality results

Null Hypothesis Obs F-statistic Prob
GDPC does not Granger Cause GVA 30 2.43988 0.1077

GVA does not Granger Cause GDPC 0.40908 0.6686

GCF does not Granger Cause GVA 30 2.47391 0.1046

GVA does not Granger Cause GCF 1.37487 0.2713

FDI does not Granger Cause GVA 30 0.25104 0.7799

GVA does not Granger Cause FDI 1.57147 0.2276

ES does not Granger Cause GVA 30 3.48987* 0.0461

GVA does not Granger Cause ES 0.03870 0.9621

GCF does not Granger Cause GDPC 30 1.73382 0.1972

GDPC does not Granger Cause GCF 7.05895* 0.0037

FDI does not Granger Cause GDPC 30 0.81931 0.4522

GDPC does not Granger Cause FDI 5.17111* 0.0132

ES does not Granger Cause GDPC 30 2.24760 0.1266

GDPC does not Granger Cause ES 0.52496 0.5980

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FDI does not Granger Cause GCF 30 0.83211 0.4468

GCF does not Granger Cause FDI 6.45833* 0.0055

ES does not Granger Cause GCF 30 3.48558* 0.0462

GCF does not Granger Cause ES 1.00992 0.3786

ES does not Granger Cause FDI 30 1.74720 0.1949

FDI does not Granger Cause ES 0.15717 0.8554

Note: (*) significant at a 5% level

Table 5 shows the casualty of GVA, GDPC, GCF, FDI, and ES. The

findings indicate that the null hypothesis, which states that ES does not Granger

cause GVA, GDPC does not Granger cause GCF, GDPC does not Granger

cause FDI, GCF does not Granger cause FDI, and ES does not Granger cause

GCF, is rejected at a significance level of 0.05. This is because the p-values for

these hypotheses are lower than the alpha threshold of 0.05, which indicates that

the values of (X) in can be used to predict the values of (Y).

It can be observed that there is a unidirectional relationship between ES

does not Granger cause GVA, GDPC does not Granger cause GCF, GDPC does

not Granger cause FDI, GCF does not Granger cause FDI, and ES does not

Granger cause GCF meaning that ES Granger causes GVA, but GVA does not

Granger cause ES. This unidirectional relationship indicates a situation in which

one variable can be employed to predict another variable, but the reverse is not

valid. This implies that changes to the first variable produce changes to the

second variable, while changes to the second variable do not affect changes to
 46

the first variable or vice versa. In other terms, there is a one-way influence from

one variable to another.

Moreover, no bidirectional relationships are found where causality is

significant in both directions at the 5% significance level. On the other hand,

several pairs of variables exhibit no significant Granger causality in either

direction. These include GDPC to GVA, GCF to GVA, FDI to GVA, FDI to ES,

GDPC to ES, and GCF to ES.