Is the Philippine Industrial Revolution forthcoming?

In a Facebook post two weeks ago, I said that while the Philippine economy continues to grow in good pace on the back of government spending and consumption, its fundamentals are inferior to that of Vietnam whose economy is driven by investments and exports. I further urged the Department of Trade and Industry (DTI) to review its industrial policy and begin developing new export winners.
My Facebook post was laced with distress given our deteriorating trade gap (exports – imports). Merchandise exports declined to just US$67.49 billion last year while imports ballooned to US$108.92 billion. The result was a whopping deficit of US$41.43 billion, nearly 50% more than that of 2017.
The weak link in the Philippine growth story is our manufacturing sector. We simply do not produce enough exportable goods which is why export revenues pale in comparison to that of our neighbors.
For context, the Philippines exported US$67.49 billion worth of goods last year. Vietnam, on the other hand, blazed ahead with double digit growth topping US$245 billion in revenues. Thailand’s revenues were US$252 billion while Indonesia’s was US$180 billion. The numbers speak for themselves — we have a lot of catching up to do.
Under the Aquino administration, the DTI initiated a project called the Manufacturing Resurgence Program. It crafted road maps to fast-track the development of some fifty industries. It was a qualified success with the manufacturing sector clocking in an average growth rate of 7.6% between 2010 and 2017.
At this point, however, we need nothing less than 20% growth for us to be regionally competitive. We need to leapfrog.
Secretary Mon Lopez was among the first to respond to my Facebook post. In a private message, he told me that he shares my concern and that he and his team have been working on a solution. He sent me a draft of his plan which is scheduled for nationwide implementation this year.
The fact that Sec. Lopez realizes the urgency of the situation and is confronting the issue squarely is already a win. Most bureaucrats would sweep an issue like this under the rug given its complexity. Sec. Lopez is not that kind of bureaucrat. He plans for the long-term, something that I appreciate. The hope is to ignite our very own industrial revolution.
HOW DID WE GET HERE?
Before delving on Sec. Lopez’s plan, let me first explain why our manufacturing sector has not developed in the same manner as that our neighbors.
The prohibitive provisions relating to foreign investment of the 1987 Constitution, expensive power cost, inferior infrastructure and difficulty in doing business is one set of ugly reasons. All these have caused foreign manufacturers to invest in more hospitable countries like Vietnam. By doing so, it deprived us from much needed technology transfer and recurring income through exports and tax revenues.
The second reason is government’s lack of spending on research and development (R&D). As we are all aware, R&D is the path to innovation and innovation is what drives the manufacturing sector. Innovation can come in the form of improved products, processes, marketing methods or even business practices. In other words, innovation is all about making products better, faster, safer and/or cheaper.
A UNESCO study shows a direct relation between R&D spending and economic and social development. The higher the R&D budget, the more rapidly industrialization takes place and consequently, the faster social development goals are met. The reverse is true. UNESCO recommends a minimum R&D expenditure of one percent of GDP.
How does the Philippine measure up? In 2017, we spent 0.7% of GDP on R&D while South Korea spent 4.3%, Singapore spent 2.2%, Thailand spent 5%; and Vietnam spent 2%.
No surprise, the Philippines ranks a lowly 73^rd out of 126 countries in term of its capacity to innovate, according to the latest Global Innovation Index.
Exacerbating matters is the scarcity of Filipino scientists and engineers. There are only 0.67 scientists and engineers available per 1,000 Filipinos versus 16 in Korea, 15 in Singapore, 14 in Japan and 1.5 for Vietnam.
To leapfrog, we need a revolution in our attitudes towards the sciences, a massive improvement in our educational curricula and a shift in priorities in the way we appropriate the national budget.
THE I3S PLAN FOR LARGE INDUSTRIES
Innovation is at the heart of Secretary Lopez’s new industrial plan aptly called the “Inclusive Innovation Industrial Strategy” or “i3S”, for short. Its purpose is to develop globally competitive industries, large and small, using innovation as an enabler.
The Philippines has a few large industries in place that have the potential to either be globally competitive or regionally dominant. Among them are: Shipbuilding, fisheries and agro-industries, electronics, auto parts, aerospace parts, tools and dies, chemicals, iron and steel, design-focused garments and furniture.
The goal is to enable these industries to tap new markets and/or expand market share either through the introduction of new innovative products, new product features or more competitive pricing.
For industries that produce intermediate parts, the goal is for them to deepen their participation in global supply chains through cost efficiency innovations.
Creating a culture of innovation among large industries calls for a strong collaboration between the academe and industry. Unfortunately, this is not the case today.
For decades, the academe has kept an arms-length distance with industry. There are many reasons for this, not the least of which is that most faculty members consider teaching and publishing articles in journals as their main mandate, not collaborating with the industry.
A culture of dialogue must be forged between industry and the academe in order for innovation to flourish. This will be achieved by institutionalizing and expanding extension programs (internships); by rewarding faculty members who collaborate with industry; by establishing research groups within universities; by establishing pathways for university publications and patents to translate into industry solutions; and by establishing common fabrication laboratories.
Having a physical place where all stakeholders in the innovation process can converge, collaborate and cooperate is perhaps the most potent way to encourage innovation. The i3S Plan calls for the establishment of Regional Inclusive Innovation Centers (RIICs), a venue where all those who participate in innovation are represented. This includes the academe, industry, MSMEs, government agencies, R&D laboratories, S&T Parks, incubators, fabrication laboratories, funders and investors. RIICs are envisioned to be the cornerstone of the innovation revolution, one that will benefit both large industries and MSMEs.
Finally, The right policy environment must be put in place to accelerate innovation. This is why the i3S plan pushes for the passage of the Innovation Act and Innovative Startups Bill. It also moves to strengthen the implementation of the Technology Transfer Act and ease in applying for intellectual property rights.
THE I3S PLAN FOR MSMES
The goals for the MSME sector are two-pronged. The first is to breed more entrepreneurs from among the youth, the women’s sector and the underemployed and the second is to set them on the path of innovation.
As we are all aware, creating a culture of entrepreneurship and innovation starts from childhood. There is no getting away from it, government’s three education-based agencies must play a role in this revolution.
The i3S plan implores the DepEd to revise its curricula to give greater attention to the sciences, technology, engineering, agro-fisheries, mathematics and entrepreneurship. Early education should also prepare our youth in problem solving, teamwork, communication skills, learning to learn, motivation, discipline, self-confidence, self-awareness and the capacity to embrace change.
For its part, TESDA must compliment its skills training courses with learning tracks on entrepreneurship and leadership.
CHED must improve its programs in a manner that allows greater interaction between our post-grad students and industry. Theoretical classroom training is no longer sufficient.
Central to the i3S plan is to make it as easy as possible for fledgling entrepreneurs to start and grow their businesses. The i3S Plan prescribes the expansion of the one-stop-shops for MSMEs that have already begun to mushroom around the country. These one-stop shops provide services including certification, licensing, training, production, and assistance in marketing. Later on, the services offered should include financial consulting and linkage to financial institutions.
Since, most entrepreneurs are hard-pressed for project financing, government must assist them in accessing grants, microcredit and tax incentives as well as equity funding from the private sector. Thus, part of the i3S Plan is to disseminate information on how to source financing and how to qualify for these.
The final component is the proliferation of industry clusters. Industry clusters are groups of similar and related businesses in a defined geographic area that share common markets, technologies and needed worker skills. Industry clustering allows MSMEs to consolidate their R&D efforts, share best practices and possible share the investment of equipment for common use. Industry clusters breeds specialization among localities.
So going back to the title of this piece…. is the Philippine industrial revolution forthcoming? That would depend on how efficiently the DTI can carry out its i3s plan. It’s a sensible plan…. but its success depends on its implementation. We can be assured, however, that the project will be pushed hard by Sec. Lopez.
The next big challenge is commercialization, or monetizing whatever is innovated or invented by large and small Filipino companies. That is the next challenge the DTI must face.
 
Andrew J. Masigan is an economist.