A New Industrial Policy for the Philippines (Part 2)

Transforming and Upgrading Manufacturing

Around the world, growth patterns and sources of competitiveness are changing dramatically with emerging economies becoming key players as the United States (US), European Union (EU), and Japan continue to face slow growth. Given the opportunities and challenges that the global picture poses, firms must be able to formulate their strategies from this global perspective to adapt to changing market trends. The government needs a strong, diversified, inclusive and sustained growth model where the industrial sector plays a key role in generating investment, employment, and innovation. To lay the foundations that would allow manufacturing to become a major growth driver, it must be transformed and upgraded.

To jump-start the upgrading process, the Department of Trade and Industry (DTI), Board of Investments (BOI) and the Philippine Institute for Development Studies (PIDS) are integrating the sectoral roadmaps prepared by various industries towards the formulation of a comprehensive industrial strategy. This is to enable manufacturing firms to upgrade, thrive and become catalysts and engines for sustained and inclusive growth. Industry policies will focus on measures to enhance firm productivity; link domestic firms with multinational companies and aggressively court more investment. Measures to deepen linkages with multinational firms’ international production networks and policies to provide export assistance, boost the survival of new entrants and help SMEs grow and develop are also important. Improving technological capabilities and strengthening supply chains are necessary to enable firms to move up the technology scale.

Making domestic firms internationally competitive is a major challenge that would require government support and close coordination among local and national government agencies and the private sector. In consultation with the private sector, the Roadmap Team is currently in the process of identifying the different industrial activities where the Philippines may have potential opportunities for sustained growth and employment generation, and focusing infrastructure on areas to encourage these activities. The most binding constraints affecting the growth and development of these activities will be identified. To address these, both horizontal (general issues like protection of property rights, improvement of business environment, and innovation strategy) and vertical measures (industry-specific like tax incentives and infrastructure provision to targeted industries) will be formulated. A coordination mechanism (industry council) will also be designed to allow more interaction with industries in identifying obstacles and determining the most appropriate interventions.

Nomura Research indicated that the Philippines has comparative advantage in sub-sectors like printers, multifunction peripheral, projectors, scanners, digital cameras and shipbuilding and repair. Nomura identified missing linkages in the electronics supply chain such as photovoltaic cell, LEDs, rechargeable batteries for hybrid electric vehicles and electric vehicles and mobile digital devices, and next generation energy infrastructure as possible areas for investment in the country. Nomura (2012) also indicated potentials in shipbuilding and repair especially in view of plans by Korea and Japan to expand in the overseas market.

These are exciting times for the Philippines, the economic outlook remains positive with 7.1% growth rate posted during the third quarter of the year.   The 2013 forecasts range from 5% to 8%.  With the Philippines’ steady growth pace, international credit rating agencies upgraded the country’s rating to a notch just below investment grade.  In the context of rapidly changing global conditions, the Philippines is now seen as a new growth area especially as investors look for alternative areas after the Japan quake and Thai flooding that disrupted many supply chains, as well as the rising yen and increasing labor costs in China.

 

Table 2: Analysis of Strengths, Weaknesses, Opportunities, and Threats (SWOT)

Strengths

  • Low & stable wage environment
  • Abundant young, skilled, English speaking workers
  • Export zones’ legal framework &  incentives
Weaknesses

  • High power cost
  • Poor infrastructure
Opportunities

  • 2011 flooding in Thailand that drove investors to seek alternative locations
  • Earthquake in Japan leading to supply chain disruptions
  • Rising yen
  • Rising labor cost in China& increasing tension between Japan & China due to maritime territorial dispute
Threats

  • Strong peso
  • Global uncertainty, economic slowdown in the developed world

 

Given its popularity and high trust rating, the present leadership is expected to continue implementing solid reforms and actions to overcome the difficult challenges in realizing the country’s potential. With strong collaboration among national agencies, local government units, and the private sector to improve the country’s infrastructure and investment climate; strengths such as low and stable wages, abundant, young, skilled, English speaking workers and a Roadmap providing the strategy and direction for the upgrading, diversification and transformation of the manufacturing industry; the Philippines is well-positioned to attract new investments that would catalyze growth and development of the manufacturing industry.

By creating the proper environment and ensuring that domestic industries are not disadvantaged by international competitors, the government can promote the success of our firms in both the domestic and international markets, leading to economic transformation. Only with the right environment can manufacturing unleash its full potentials to become an engine for sustained and inclusive growth and job creation.

 

References

Asian Development Bank. 2007. Country Diagnostics Study. Manila Philippines.

Fabella, R. and M.C. Fabella. 2012. Development Progeria? In Looking Back, moving Forward. Business World Publishing Corp. Quezon City.

Nomura Research Institute, Ltd. JICA. 2010. Study on the Supply Chain Electronics Industry in the Philippines.

Nomura Research Institute, Ltd. JICA. 2012. Accelerating FDIs in Philippine Shipbuilding Industry. Powerpoint presentation. DTI/BOI Shipbuilding Workshop. November 23, 2012.

World Bank. 2007. “Philippines invigorating growth, enhancing its impact”, Report No. 39226-PH,  PREM Unit East Asia and Pacific Region.

 

 

The author is Senior Research Fellow and Acting Vice-President, Philippine Institute for Development Studies (PIDS). Email: raldaba@mail.pids.gov.ph.

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