DEPARTMENT OF TRADE AND INDUSTRY

Policy
Briefs
Series No. 2018-05

Innovation in the Philippines’

Technology Sector
Source: techstory.in

Innovation involves the transformation of useful ideas or inventions into products and services that
customers are willing to pay for. This kind of activity stimulates economies as it creates synergies among
actors of the ecosystem such as entrepreneurs, government, investment organizations, educational in-
stitutions and companies. At the request of the Department of Trade and Industry (DTI), the United
States Agency for International Development (USAID)/Philippine Science, Technology, Research and
Innovation for Development (STRIDE) Program facilitated around 40 structured discussions to assess the
innovation needs of the Philippines.

This policy brief presents a collection of opinions of these various actors in the country’s innovation
ecosystem, with 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.

Innovation Ecosystem for Technology

The Philippines’ innovation ecosystem for the technology sector is led by the The Philippines’
electronics, aerospace, and automotive industries. It is stimulated by economic innovation
and dynamic relationships that are mainly involved in technology development.
ecosystem for
The players include large multinational corporations (MNCs), small-medium
enterprises (SMEs), startups, associations, universities and government agencies the technology
like the Department of Trade and Industry (DTI), Department of Science and sector is led by
Technology (DOST) and the Commission on Higher Education (CHED). Figure the electronics,
1 exhibits the flow of interactions that allow the creation and transfer of aerospace and
knowledge that ultimately results to economic development and growth. automotive
industries.
The 2016 Global Innovation Index Report shows that the Philippines ranked 74th
out of 128 economies in innovation performance. This position indicates a low
level of innovation even when compared with other Association of Southeast
Asian Nation (ASEAN) member states (5th out of 7). At its current position, the
country is far behind most of its ASEAN neighbors such as Singapore (6th),
Innovation in the Philippines’ Technology Sector 1
Malaysia (35th), Thailand (52nd) and Vietnam (59th). Moreover, its position is
also being challenged by other countries such as Indonesia (88th) and Cambodia
(95th). Hence, relevant policies must be put in place to catch-up with other
countries that have heavily invested in innovation. Particularly, the Philippines
Particulary, the
should give priority in setting up the fundamental blocks of innovation that Philippines
would support businesses involved in high-technology activities. should give
priority in
setting up the
fundamental
blocks of
innovation that
would support
businesses
involved
in high-
technology
activities.

Figure 1. Innovation Ecosystem

Source: Adapted from RTI’s Innovation Ecosystem Conceptual Framework

Some Relevant Indicators

The result of the global executives’ perspective on innovation appears favorable

for the Philippines. As shown in Figure 2, the general outlook on the country’s
capacity for innovation has been increasing from 2.94 in 2013 to 4.54 in 2015.
This is quite positive in comparison with other indicators such as availability
of scientists and engineers, company spending on research and development
(R&D), government procurement of advanced technology products, quality of
scientific research institutions and university-industry collaboration in R&D,
which have shown minimal increases over the years.

Figure 2. Global Executives’ Survey: Philippines

Innovation in the Philippines’ Technology Sector 2

What can be inferred from combining Figures 1 and 2 is that the key elements
for innovation include: (1) human capital including scientists and engineers
that are developed by the universities; (2) investment in R&D and the
creation of knowledge; and (3) transfer of knowledge through start-ups and/or
commercialization with existing companies.

It is worth noting that the Philippines is not lacking in supply of human capital,
principally of young engineers and technical graduates. In fact, the country
produces around 60,000 engineers annually. Only a small percentage of these
graduates, however, are employed in research-related jobs, while many others
choose business process outsourcing (BPO) jobs that provide stability, higher
pay and better benefits. Furthermore, the proportion of graduates with science,
technology, engineering, and mathematics (STEM) degrees is also diminishing.

In contrast, the Philippines is weakest in terms of knowledge creation as it trails

behind other countries in terms of R&D investment as a percentage of gross
domestic product (GDP). The same is true for the total number of researchers
in the country.

The Philippines’ Strengths and Areas for Improvement

The potential of innovation as well as its impact is highly affected by country-

specific factors that stimulate investment, growth and other activities. This
section provides the commonly-cited indicators that show the Philippines’
current state and its “readiness” for innovation (Figure 3).

Figure 3. Selected Indicators

Innovation in the Philippines’ Technology Sector 3

Strengths

• GDP/Capita Growth. A country’s GDP indicates the health of the economy.

The Philippines’ excellent growth rate is encouraging but may also be quite
misleading since the country is smaller and thus, “moves” relatively easier.
Likewise, its growth is driven by a “consumption economy,” which may not
be sustainable in the long run.

• Current Account Surplus (% of GDP). The Philippines has a positive current

account surplus, indicating that it is a net lender. The country is performing
well in comparison with other Asian countries based on this indicator. Data
on current account and GDP per capita are both sourced from the World
Bank.

• Job Creation. Job creation in the Philippines is likewise favorable. Data for
job creation demonstrates the average annual growth of jobs from 2012 to
2015, sourced from the International Labour Organization (ILO).

• Capacity for Innovation. As previously mentioned, the results of the World

Economic Forum’s Executive Survey 2015 shows a positive outlook on the
Philippines’ capacity for innovation.

• High-tech Exports (% of Manufactured Exports). The Philippines is the

highest-ranked country in terms of high-technology exports. This underscores The Philippines
the role of the high-tech industry in the country’s manufacturing sector. is the highest-
Data for this indicator is sourced from the United Nations’ statistics division ranked country
(UN Comtrade). in terms of
high-technology
Areas for Improvement
exports. This
underscores the
role of the high-
tech industry
in the country’s
manufacturing
sector.

Innovation in the Philippines’ Technology Sector 4

• Educated Labor Force. The percentage of labor that has post-secondary
education is high in the Philippines. However, other ASEAN member states
are also performing well and better than the Philippines in this category.

• Foreign Direct Investment (% of GDP). Foreign direct investment (FDI) is

essential in enabling the growth and development of a country. In terms of
this indicator, the Philippines has higher FDI than South Korea; although
mature economies have understandably low FDI due to high levels of
domestic private and public investments.

• Government Procurement of Advanced Technology. The level of government

procurement of advanced technology indicates a country’s initiative for
product development and capacity of its local supply chain. The Philippines
ranks second to the last for this indicator, based on the opinion of 14,000
business executives.

• University and Industry Collaboration. From the same Executive Opinion

Survey, the Philippines is viewed to be performing ahead of Cambodia and
Vietnam in terms of university and industry collaboration.

... Philippines
is still lacking in
• Ease of Doing Business. The ease of doing business indicator is based on the
World Bank rating. This considers factors such as permitting, infrastructure, terms of patent
property laws, access to credit, taxes, import/export, contracts, and activities, which
insolvency laws/process. The Philippines is only ahead of Cambodia based incorporates
on such factors. total patent
application by
• Ease of Starting a Business. This indicator is similarly sourced from the residents, both
World Bank. It demonstrates the environment faced by entrepreneurs in domestic patents
an economy. The Philippines along with other ASEAN counterparts are
performing far from more mature economies like South Korea.
in national
offices and
• Patent Activity. Intellectual Property (IP) protection is often attached to the global patents
concept of innovation and economic growth. Comparative data shows that filed through
the Philippines is still lacking in terms of patent activities, which incorporates the Patent
total patent applications by residents, both domestic patents in national Cooperation
offices and global patents filed through the Patent Cooperation Treaty (PCT). Treaty (PCT).
Innovation in the Philippines’ Technology Sector 5
High-Tech Sector Innovation Needs

The Philippine innovation ecosystem has both strengths and weaknesses that
must be built on and dealt with. Supporting its main sectors, namely, electronics,
aerospace, and automotive segments, are, therefore, critical in stimulating
growth through innovation.

For instance, the electronics and electrical equipment industry lead the
country’s exports with US$23.1 billion (2014); while mechanical appliances
places second with US$8.9 billion. There are also several opportunities in the
transportation sector, including automotive production, wherein global trade is There are
valued more than US$1 trillion. also several
opportunities in
Asia is similarly on the rise as the fastest growing aerospace market with a
significant increase in civilian aircraft projected. All of these are presenting
the transporation
opportunities that can can strengthen the country’s manufacturing sector, which sector, including
is currently being overtaken by the services sector. Highlighted below are some automotive
specific recommendation for the aerospace, automotive and electronics and production,
semiconductors lifted from the industry roadmaps: wherein global
trade is valued
Aerospace more than US$1
trillion.
• Build capacity via education and training. Design training programs
and certification for aerospace manufacturers and service providers that
correspond with the global aerospace standards. Improving the aerospace
engineering curricula can also bridge the gap between academe and
industry.

• Support the development of a local supply chain. Exploit the linkages

between aerospace manufacturers to develop the supply chain of local
producers. Also, maximize the use of DOST facilities as well as their
expertise for metal processes and testing of manufactured products/parts.

• Expand markets by enticing Tier 1 and 2 to the Philippines. Concentrate on

Tier 1 or Tier 2 suppliers of big aerospace companies (OEMs) for strategic
products and services. Simultaneously, increase incentives extended by
government for foreign investment.

• Increase government investment in attracting local and foreign partners.

Reform investment policies and establish training facilities to advance the
skills of the labor force.

Automotive

• Increase competitiveness with technical maturity of people and

infrastructure. Prioritize policies that would reduce power costs, increase
logistics efficiency and those related to free trade zones. Develop auto R&D
centers specializing in product technology that would also facilitate human
resource development.

• Incentivize with policy reforms and stability by harmonizing Philippine

standards with international standards for labor incentives, customs
procedures, and systems, as well as for technical, environmental, and safety.

Innovation in the Philippines’ Technology Sector 6

• Provide business intelligence by creating and managing an auto database
that provides information on key indicators as well as relevant domestic
and international policies.

Electronics and Semiconductors

• Identify global market and technology trends, and strategically invest. Pick
out strategic and specific products and technologies to focus on, based on
the current trends for the Philippines.

• Compare resources and operating environment competitiveness. Identify the

necessary resources policies, supply chain, and operating environment that
will strengthen existing firms and enable them to attract new investments.

• Augment resources, policies, and supply chain to execute strategically.

Innovation Needs Assessment

The first step in creating a solution that would encourage innovation in the
high-tech sector of the Philippines is to identify and understand the associated
needs. This effort will help facilitate discussion involving the ultimate users of
innovation. Given this, a total of 60 respondents from the industry and industry
associations were interviewed to obtain qualitative information on potential
needs, help identify possible solutions, and gather information on which needs
should be prioritized. Information was obtained using a structured, but informal,
interview process.

To help articulate the needs, the USAID/STRIDE team interviewed key

stakeholders to provide views regarding the needs of their organization,
innovation support required, momentum and priorities. The focus of the
interviews centered on the main foundations of the innovation ecosystem
previously shown in Figure 1.

Support options were also presented as hypothetical services where ... according to
respondents were made to choose options that might fit the current situation in stakeholders, the
the Philippines. A total of 40 interview sessions were conducted with around priority need
60 respondents representing various industries (electronics/semiconductors,
for electronics,
aerospace, automotive) and organizational characteristics (size, ownership,
and industry role). semiconductors
and aerospace
The interviews were able to highlight four key needs, which are shown in Figure sectors is an
3. The “All Industries” category summarizes the top needs for all respondents, improved local
ranked in order from 1 to 3. The results for specific industries are also revealed. supply chain for
For example, according to stakeholders, the priority need for electronics, innovation.
semiconductors and aerospace sectors is an improved local supply chain for
innovation. For software and data analytics, on the other hand, the priority
should be on increased R&D. Meanwhile, professional support is much needed
for startups.

Innovation in the Philippines’ Technology Sector 7

 All Electronics, Aerospace Transpor
tation, Software, Start-Ups
Industries Semiconduct ors Automoti
ve Data Analytics

Figure 3. Top Rank Needs for the Phlippines High-Tech Sector

Overall, the most articulated need is related to R&D. Participants pointed out Participant
that limited R&D is a major constraint in the high-tech industry. However, pointed out that
respondents are positive that capabilities and interest can improve in the limited R&D is a
short run. It is worth noting that real impact will initiate from foundational major constraint
improvements in R&D capabilities especially in universities and companies in the high-tech
that have access to appropriate resources. industry.
The second priority is for the local supply chain to develop towards prototyping,
testing, and pilot scale production. This indicates the need for consolidation ... real impact
of supply, which can be achieved in the form of shared R&D infrastructure, will initiate from
which emerged as a third priority. The respondents revealed existing efforts to foundational
provide shared R&D and offered suggestions on how these can be improved for improvements
optimized impact. in R&D
capabalities
Lastly, a strong need for support for startups was articulated. In particular,
especially in
professional support is an essential need for high-tech startups in order for them
to understand value propositions for various markets, IP strategies, venture, and universities and
finance, as well as operations. More details regarding the four priority needs companies that
are shown in Table 1. have access
to approriate
resources.

Innovation in the Philippines’ Technology Sector 8

 Table 1. The Four Prioirity Needs in Detail

Stakeholders’ Broader Perspectives on Innovation

The interviews conducted also uncovered some issues related to the Philippines’
innovation challenges. The discussions revealed both positivity and concern
from the respondents as there are fundamental issues threatening the innovation-
based progress of the country. While there have been several efforts in support
of innovation, these efforts appear to be uncoordinated and, thus, there are
lessons to be learned from past experiences. The following are key themes that
surfaced from the interviews:

• Education and training require stronger collaboration between industry

and academe, especially in the area of R&D. Some companies have tried
to address this issue by holding on-the-job trainings. Some Professors on the
Innovation in the Philippines’ Technology Sector 9
 other hand, are also supporting knowledge transfer of current technology-
related practices back into the classroom. A common feedback from the
industry is that graduate do not have the capability for research work and
thus, the company needs to invest time and money to train them. Companies
who invest in research training meanwhile, struggle to hire or keep their
employees.

• Government policies and programs related to R&D are present but

coordination between agencies is weak. Most respondents are unaware
or confused about government-funded R&D programs. According to them,
the programs are very restrictive (e.g., specific industries, organization
ownership, repayment, and PEZA) and processes are arduous and uncertain,
hence, they choose not to invest their time and energy.

• Investment for technology is uncommon in the Philippines. Most investors

remain traditional and settle for less riskier investments like in real estate
and traditional businesses. Small companies are also less motivated to grow
as they do not have the capability to scale up. Limitations in investment, tax
implications, and experience remain as constraints.

• Existing R&D does not match the prevailing industry problems, and usually
exhibit academe-centric perspectives. In order to drive innovation, R&D
should be able to solve real-life problems, which the industry can use to
produce improvements that will benefit the whole economy.

• Local supply chain is required to support innovation in terms of reduced

cycle time and cost, as well as shared problem solving. The current
situation forces companies to import prototype parts, or contract globally
for prototype and pilot-scale development efforts, which takes longer time,
depreciating the value of innovation.

Strategic Areas for Innovation Investment

The future of innovation requires strong independent and collaborative efforts

from the government, academe and industry. While there is no single approach
that would meet all needs, there are important efforts that the government Many programs
should consider strengthening. related to
innovation
Many programs related to innovation already exist but a lot of these must already exist
be improved to enable companies to navigate the system and encourage but a lot of
partnerships among actors. The Philippines can also drive innovation in the these must
short-run by focusing on strategic areas with the highest perceived impact. More
be improved
importantly, the government should identify areas with innovation clusters that
can help create synergies that promote joint efforts. The respondents’ views on to enable
strategic areas are presented below: companies to
navigate the
• Sustainability is crucial; this includes waste management infrastructure; system and
reliable and renewable power and energy; public infrastructure and traffic, encourage
electric vehicles/mobility; smart monitoring and management for agriculture partnerships
and urbanization; and water sources.
among actors.
• Next-Generation BPO. The proven business model of BPO can be leveraged
and used to develop a new area of value such as outsourcing integrated
circuit (IC) design or other engineering services.
Innovation in the Philippines’ Technology Sector 10
• Health/Medicine can be explored, based on the strength of the local market,
in consideration of the needs, capabilities, and geographic dispersion of
the population. Opportunities in telemedicine were also mentioned by
the respondents, along with broader topics such as biotech, biomedical
devices, and pharmaceuticals.
Manufacturing,
• Digitization and Big Data are highly needed in the Philippines as the including
country is still practicing paper culture due to limited trust and geographic future methods
constraints. Internet of Things (IoT) and data management are minimum for process
capabilities that must be met in order to compete globally. innovation,
should still
• Manufacturing, including future methods for process innovation, should still
include human element linked to robotics, so as not to completely eradicate
include human
the value of Philippine workers. The respondents likewise emphasized that element linked
it is too late for the country to explore semiconductor fabrication and that to robotics,
power rates are too high. so as not to
completely
• Materials including metals, plastics, and coatings. Some respondents eradicate
expressed concern that the Philippines is already way behind other the value of
countries, and it is rather too difficult to compete in alternative chemistries
Philippine
given the current situation.
workers

Innovation in the Philippines’ Technology Sector 11

 This policy brief was prepared by the Bureau of Trade
DEPARTMENT OF TRADE AND INDUSTRY
and Industrial Policy Research of the Department

Policy
of Trade and Industry. The can be downloaded at
www. industry.gov.ph.

Briefs
The views and opinions expressed in this policy brief
are of the author/s and do not necessarily reflect
Philippine government policy.

Series No. 2018-04 The DTI Policy Briefs is series publication published
by the Department of Trade and Industry – Bureau of
Trade and Industrial Policy Research (BTIPR), with
email address at [email protected].