DTI POLICY BRIEFS
The DTI Policy Briefs are DTI homegrown short research papers on trade, investment, and industry related issues and topics that usually center on DTI current thrusts and priorities.
Averaging between eight (8) to twelve (12) pages, these documents provide a comprehensive yet concise analysis and informative explanations of trade and industry policy issues and challenges, together with policy options and recommendations that policymakers, researchers, and stakeholders may consider to help in addressing those issues or challenges at hand.
The DTI Policy Briefs is a series publication prepared and published by the DTI – Bureau of Trade and Industrial Policy Research (BTIPR). The views and opinions expressed in the policy briefs are of the author/s and do not necessarily reflect Philippine government policy.
Globally, economies have embraced electronic commerce or e-commerce as a normal way of doing business. Governments have adopted e-commerce for a more efficient, effective and transparent delivery of public service. It has become a way of life for majority of citizens around the world.
Previously, economies have focused more on the domestic aspects of e-commerce which entailed a lot of work on the legal and regulatory framework for e-commerce and its domestic implementation. Now, more economies are looking at cross-border e-commerce which has been high in the agenda of multilateral, regional and even bilateral fora. In addition to facilitating Trade in Goods, e-commerce paved the way for Trade in Services, including Digital Trade. It has paved the way for Micro, Small and Medium Enterprises (MSMEs) to directly access the global market. If there have been challenges in the initial implementation of e-commerce domestically, the challenge is even greater in the implementation of cross-border e-commerce.
One of the next big transformations is the use of Distributed Ledger Technology (DLT). The widespread adoption of computers during the mid to late 20th century has lessened the traditional use of physical ledgers and paved the way for the use of digital files. DLT allows information storage, timestamp provision, and controlled security log access. The algorithms that enable the creation of distributed ledgers are “powerful, disruptive innovations that could transform the delivery of public and private services and enhance productivity through a wide range of applications.
Widening trade deficits are usually seen as a policy problem and understanding the pattern and sources of the deficit is important to help us formulate the correct policy advice. From a macro perspective, deficits are explained partly by economic growth and changes in relative prices measured by real effective exchange rates. Microeconomic factors also play a role, particularly the declining competitiveness of our industries and failure to upgrade and move up the global value chain.
- 2019-04: Philippine New Industrial Policy: Embracing Industry 4.0 and Building Regional Inclusive Innovation Centers
Amidst new technologies and other global and domestic development challenges, the Philippines is implementing a new industrial policy called Inclusive Innovation Industrial Strategy or i3S.
Innovation is at the front and center of this industrial policy being pursued through strong government-academe-industry collaboration. The new industrial strategy integrates an Industry 4.0 policy that embraces new and emerging technologies, thus enabling the country to leapfrog towards inclusive and sustainable industrial development and ensures that nobody is left behind.
Regional Inclusive Innovation Centers or RIICs will serve as platforms to link stakeholders from government, academe and industry to address gaps in the innovation and entrepreneurship ecosystem. Through the RIICs, the country’s industrialization would be driven more by science, technology, and innovation, with focus on human resource development and more market-oriented research leading to the creation of new products, new processes, and new business models.
The Philippines is situated along the belt of rubber-producing countries; it frequently ranks among the top 10 exporters of raw or semi-processed rubber. However, the industry has undergone economic downgrading in recent years – from exporting processed raw rubber to sending cup lumps to Malaysia – due to the uncompetitive domestic processing environment.
Current issues faced by the domestic rubber industry include high logistics and energy costs and an uncertain security situation in Mindanao, which is the major rubber-producing island in the Philippines.
Global mango production has grown rapidly over the past ten years, from US$696 million (in value) in 2005 to nearly US$2.1 billion (in value) in 2015 (UN Comtrade, 2016).
The mango industry in the Philippines serves as an important source of livelihood for around 2.5 million farmers (PCAARRD-DOST, 2011). The Philippines’ participation in the mango GVC is in the export of processed mango wherein 85 percent of its overall production is sent to the export market.
In 2015, the country ranked 7th among exporters of fresh and dried mangoes and took up almost 4 percent of share (US$91 million in exports) in the global market (UN Comtrade, 2016). Despite the Philippines’ favorable climate conditions, its exports of mango products have been declining in recent years because of difficulty in meeting strict SPS requirements in major markets.
The Philippine agricultural sector is inherently linked to poverty. Nevertheless, it remains vital in achieving inclusive growth as it employs about 30 percent of the country’s workforce (World Bank, 2016). Moreover, innovation in agriculture could lead to increases in productivity, income and employment. For instance, an innovation in mango disease management technology could improve yields for some 2.5 million smallholder farmers engaged in mango production, and effectively improve sales for input providers, traders, and processors. More than inventing the technology, however, the complex dynamics of the innovation ecosystem should also be considered as this can either facilitate or constrain the generation, dissemination or adoption of such innovations.
The Department of Trade and Industry (DTI) has embarked on pursuing an innovation policy called the Inclusive Innovation Industrial Strategy (I3S). The goal of the I3S is to develop innovative and globally competitive industries with strong linkages to domestic and global value chains. This innovation policy prioritizes 12 sectors, namely, aerospace; agribusiness; auto and auto parts; chemicals; construction; electrical and electronics; furniture, garments, and creatives; Information Technology – Business Processing Management (IT-BPM) and E-commerce; shipbuilding and roll-on roll-off (RORO); tool and die; iron and steel; transport and logistics; and tourism.
The Philippines recognizes the role of innovation in sustaining economic growth and uplifting the quality of life of its citizens. Several government initiatives such as the Philippine Development Plan (PDP) 2017–2022, Republic Act 10055 (Technology Transfer Act of 2009), and the 2017 Investment Priorities Plan (IPP), among others, demonstrate efforts in building the inclusive innovation system of the country.
This policy brief presents a collection of opinions from these various actors in the country’s innovation ecosystem, with the focus on the Electronics, Aerospace, and Automotive industries. It provides insight into some issues that are faced by the technology sectors in light of stimulating a fruitful discussion that could help facilitate support for innovation efforts in the Philippines.
The Philippines’ logistics system is deemed archaic, inefficient and costly to users. However, available logistics data is scant and unable to provide information on the actual performance of the country’s logistics capabilities. Knowledge of logistics performance is critical for firms as a starting reference in assessing their relative position. Additionally, it can help raise awareness and improve cooperation among members of the supply chain.
In order to sustain a high level and inclusive growth, the government is implementing a growth model where a modern industrial sector plays a key role in generating investment and employment. Innovation is at the heart of the new industrial policy known as Inclusive Innovation Industrial Strategy (or i3S). Its goal is to grow and develop globally competitive and innovative industries with strong forward and backward linkages. i3S focuses on three major areas namely, a) creation of an innovation and entrepreneurship ecosystem; b) removal of obstacles to growth to build industry clusters; and c) strengthening domestic supply and value chains to deepen our participation in global and regional value chains and networks. The implementation of the strategy relies on strong government-academe-education-industry collaboration, with the government acting as main coordinator and facilitator in addressing the most binding constraints that prevent industries from growing. Central to the new industrial policy framework is the process of competition-innovation and entrepreneurship-productivity that serve as channels through which investments, employment, and growth are generated.
The industry priorities of the i3S cover automotive; aerospace parts and maintenance, repair and overhaul of aircrafts; agribusiness and tourism; chemicals; construction, transport, and logistics; creative, furniture, and garments; electrical and electronics; innovation and research and development (R&D) activities; climate change and parts and components supply development (inclusive businesses); iron and steel, tool and die; IT-business process management and e-commerce; and shipbuilding and ship repair.
The Philippines is among the fastest-growing economies in the world, with an average annual GDP growth of 5.4% from 2006 to 2015. This steady and strong growth is sustained by a growing population, strong export-oriented services sector, substantial upswing in Foreign Direct Investments (FDIs), and large and active diaspora.
Over the past five years, the Department of Trade and Industry (DTI) has focused on developing sound and rational policies to support a stable trade and industry environment. The strategies, which aim to contribute to the overall goal of sustainable and inclusive growth, include increasing manufacturing growth through global value chains (GVCs).
Philippine participation in the automotive global value chain (GVC) is focused on the production of parts and components – particularly wiring, electronic components, and aluminum components – and systems modules – specifically in the electrical and electronics system (ignition, chassis electronics and interior electronics), and in the chassis system (drive trains, rolling chassis, wheel and tire assemblies, front and rear end modules, and vibration controls.
The potential for upgrading in the automotive GVC may be anchored on the local industry’s well-established global footprint in wire harnesses, a competitive human resource pool, and effective Export Processing Zone (EPZ) regime, CARS’ provision of incentives to lead firms, and the commitment of leading industry stakeholders.
The paper GVC includes five general stages – inputs, milling, conversion, distribution, and waste collection – and has four primary production segments” sawmilling, pulp milling, paper milling, and conversion activities. The paper industry is estimated to be worth between US$300-US$500 billion, with Asia driving most of the growth.
Factors contributing to growth include increasing demand for packaging and shipping materials (as manufacturing production networks are becoming more fragmented) and the improvement of living standards in emerging nations, which has boosted sales of health and hygiene products. Meanwhile, as information technology replaces traditional paper in established markets, lead firms are consolidating operations and seeking access to cheaper and more efficient inputs in emerging markets. This evolution is shifting the industry geographically.
The recent entry of the Philippines into the aerospace industry has been mainly organically driven, leveraging the country’s large qualified, English-speaking human capital pool, competitive export processing zone (EPZ) incentives and existing manufacturing capabilities developed while serving the regional and global automotive and electronics industries.
With global trade of over US$400 billion, the development of the country’s aerospace sector offers the potential to increase export revenues, gain access to sophisticated manufacturing technologies and create better opportunities for its highly educated workforce
The policy brief outlines the new Philippine industrial policy which aims to create more and better jobs in order to make growth more inclusive and achieve shared prosperity for all Filipinos. It starts by providing a discussion of the macroeconomic performance of the Philippines along with an analysis of the emerging industrial structure. Section II highlights the imbalance in regional economic performance accompanied by poverty in the rural areas and high unemployment in regions such as NCR, CALABARZON, and Central Luzon, where economic opportunities are relatively higher. Section III reviews the most binding constraints preventing our industries from maximizing their potential opportunities. Section IV presents the country’s new industrial policy knows as the Inclusive Innovation Industrial Strategy (i3S) that aims to grow globally competitive and innovative industries with innovation at the core of industrial policies and programs.
The global chemicals market, which has grown rapidly over the past three decades, has shifted geographies. From traditional markets, demand and supply for chemicals has migrated to growth economies, particularly in the Asia Pacific Region. This relocation of the global chemicals industry provides numerous opportunities for countries such as the Philippines, to enter and/or upgrade in the industry’s GVC.
Chemical exports from the Philippines, and its participation in the chemicals GVC, have been recent, with most progress occurring since the mid-1980s. Participation in the export market is based primarily on commodity products in oleochemicals and petrochemicals sub-sectors. While the country is a small player in the global chemicals trade, accounting for just 0.2% of exports in 2014, it has generally been successful in carving out a presence in these niche products, and is one of the global leaders in most of its top product categories.
The electronics and electrical (E&E) industry encompasses a broad range of component, intermediate, and final products that feed into a number of different end markets. In 2014, world exports in electronic components was US$616 billion, electrical equipment was US$508 billion, final electronic products and specific subassemblies was US$1.4 trillion, and final consumer appliances, equipment and specific subassemblies was US$342 billion.
The country’s overall participation in the E&E GVC can be further improved by leveraging on its competitive advantages, which include highly skilled, low cost, and English-speaking workforce, stable and responsive PEZA governance, and an established global footprint in integrated circuits and automotive E&E products. Several challenges such as stagnation of exports and FDI in the industry, migration of engineering talent to other countries, and competition from other ASEAN countries should also be addressed to develop the sectors’ competitiveness.
The Philippines is in a unique position in the shipbuilding Global Value Chain as it has both demand for smaller vessels in the domestic market and it is an exporter of large commercial ships for the international market. From a global perspective, the country has been the fourth largest ship producer (based on the gross tonnage) since 2010.
Moving forward, the Philippines is in a good position to expand global market share in the export-oriented segment, by increasing global awareness and proactively targeting potential foreign-owned shipbuilders and suppliers seeking more cost-effective locations.
The Philippines’ current involvement in the cocoa-chocolate GVC is limited as it primarily acts as importer of immediate and final products for domestic consumption. Despite many competitive advantages, the country’s exports remain low as it ranks 72nd in terms of exports, as its global market share of less than 0.01%.
The country’s most pronounced strength is related to its geographic conditions that allow for growth of higher-value cocoa beans across the country, as well as its location, which is close to emerging markets.
While the country has a rich history as being a significant exporter of beans, variety of impediments such as coffee rust, shifting dynamics within the global industry and insufficient government support have caused the domestic industry to atrophy in recent decades.
The Philippines’ current coffee production levels are analogous to small-scale nations such as Guinea, Togo, and Madagascar. The value of its 2015 exports of green and roasted coffee accounted for less than 0.0004% and 0.003% of global trade, respectively.
The Philippines’ most pronounced strength in the coffee GVC relates to geographic conditions that allowed the industry to flourish and produce all four varieties of coffee, namely: Robusta, Arabica, Excelsa and Liberica, throughout the country.
Traditional markets have been replaced with vertically coordinated market linkage systems, where local sourcing in both developed and developing countries has largely been replaced by centralized national, regional, or international supply chains, and strict sets of standards must be met to gain access to these chains.
Over the past few decades, the orientation of the Philippines’ economy has shifted from agriculture to services, which continues to this day. Structural changes in the economy and demographics of the country have affected the sector.