Year Anniversary 20th
Vol. XV No. 2
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rowth in productivity does not only stem from improved allocation of resources among economic sectors and industries and from improved organization of firms but also from technology adoption, adaptation or generation. A country’s international competitiveness and growth prospects are shaped in part by its capability to absorb, adapt, improve and/or develop technology that are appropriate to its changing circumstances.
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ISSN 0115-9097
Developing the Technology for Global Market
Competition* Ponciano S. Intal, Jr.
Technology, therefore, is central to the issue of international competitiveness. Dahlman (1990) highlights four critical elements for technological policy and the technological support structure needed to successfully compete internationally, namely: p technology acquisition – acquiring foreign technology to reduce the gap between the best local practice and international practice; ———————— *This also appears as PIDS Policy Notes No. 97-08.
WHAT'S INSIDE 2 4 14
Study Reveals: Demand Grows, Market Expands but Productivity Declines Capital Surge: Boon or Bane to the Developing Economies? PIDS Calendar of Seminars
p technology diffusion – using and diffusing technology effectively to reduce the wide dispersion of efficiencies of firms and industries in the economy; p technology adaptation and generation – improving and developing technology to keep up with the latest international developments; and = Page 6
Once again, this issue of the DRN touches on the issue of global market competition. Since the country aspired to catch up with the economic tigers of Asia, it had relentlessly pursued economic policies that had successfully taken initiatives toward this goal. Beyond Asia, the country also aspires to join the fast growing league of countries that form the new, globalizing and liberalizing world. But there are critical requirements to this. As Dr. Ponciano S. Intal, PIDS president, points out in his paper, technology is a central issue in global market competition. The paper also
EDITOR'S NOTES tries to drum in the idea that past efforts at jumpstarting the economy and plans of polevaulting it into the 21st century of global economy could be easily derailed by one policy misstep: underinvesting in technology. Dr. Intal’s paper shares a number of insights to assist discerning policymakers and for DRN readers to have a deeper understanding of the technology-related issues. Productivity, another key factor for a successful market competition, is discussed
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Study Reveals: Demand Grows, Market Expands
but Productivity Declines Productivity analysis in food manufacturing and electrical machinery industries
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he food manufacturing and electronics machinery industries are growing in terms of increasing demand and expanding market but their productivity has been declining over the years. This was revealed in a study presented at the Pulong Saliksikan sa PIDS on February 20, 1997 entitled “Productivity Analysis in Food Manufacturing and Electrical Machinery Industries” by Ma. Teresa C. Sanchez, Research Associate at PIDS. The Pulong was attended by representatives from the private business sector and industry associations, officials from government agencies like the Board of Investments, Technical Education and Skills Development Authority (TESDA), Department of Science and Technology (DOST) and National Economic and Development Authority (NEDA), research staff from the PIDS, and members of the academic and research community. This study is a take-off from the 1995 research done by Dr. Caesar Cororaton, PIDS Research Fellow, and his associates which determined the dwindling productivity of the country’s manufacturing industries from 1956-1992. In this latest study, Sanchez zeroed in on the sub-industries comprising the food manufacturing and electrical machinery industries. She analyzed their productivity by measuring total factor productivity (TFP) whose components are technical efficiency (TE) and technical
progress (TP) from 1983-1993, using the stochastic frontier approach. TP is defined as an improvement of the best or standard production practice of an industry while TE is described as obtaining the maximum potential output under the current technology. In simpler terms, TP refers to the adoption of the right machineries and appropriate technology while TE refers to the usage of such machineries and technology efficiently.
Erratic performance Study estimates showed that in the food manufacturing industry, the
number of sub-industries having positive TFP and TP changes had been erratic during the ten-year period but settled to 14 out of a total of 33 in 1993. They include those engaged in meat processing, preserving and canning; powdered, condensed and evaporated milk; canning and preserving vegetable sauces; canning of fish and other marine products; crude vegetable oil, cake and meal except coconut oil; flavoring extracts and food coloring; and food products (not elsewhere classified). In terms of technical efficiency, the study showed that sub-industries within the food manufacturing indus-
Table 1. Output and Growth Rate of Output in the Food Manufacturing Industry, 1983-1991
Period (in P million, 1988 prices) 1983 1988 1991 Growth rate (in percent) 1983-1988 1988-1991 1983-1991
All Manufacturing Food Manufacturing 345,173 385,010 529,602
76,619 83,367 106,345
11.5 37.6 53.4
8.8 27.6 38.8
1.9 9.4 5.9
1.5 6.9 4.3
Average annual growth rate (in percent) 1983-1988 1988-1991 1983-1991 Source: Census of Establishments, various years.
DEVELOPMENT RESEARCH NEWS
try have a mean average of 0.8133 coefficient which means that they realized an average of 81.3 percent of their technical abilities. Of the 33 subindustries, 18 have TE coefficients above the average of 0.62-0.89 with the flavoring extract and food coloring sub-industries topping the list of the most technically efficient. These 18 contributed 67.74 percent of the total value of output of the food manufacturing industry in 1993. Overall, in spite of the positive changes in TE, it was found that the technical efficiencies of all sub-industries have been declining during the period. The declining trend also runs true for the electrical machinery industry. In 1983-1988, only two sub-industries posted positive TFP growth. In the next three years, it rose to 16 or 100 percent which implies that massive acquisition and adaptation of new and appropriate technology may have been undertaken during that time. But since then, the number had gone down drastically to only three or 18.8 percent in 1992. This number rose to five in 1993. These are producers of radio and TV receiving sets; parts and supplies for radio and TV; electrical accumulators; insulated wires and cables; and current-carrying wiring devices. On the other hand, the technical efficiency of the industry was higher at 92.2 percent of their technical abilities. However, only half of the 16 subindustries were found to be efficient. The primary cells and batteries sub-industry has the highest average technical efficiency coefficient. The others include those producing electrical appliances and houseware; electric fans and vacuum cleaners; electrical lamps and fluorescent tubes; parts and supplies for radio and TV; electric motors and generators; current-carrying wiring devices; and electric accumulators.
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Table 2. Output and Growth Rate of Output in the Electrical Machinery Industry, 1983-1991
Period (in P million, 1988 prices) 1983 1988 1991
All Manufacturing Food Manufacturing 345,173 385,010 529,602
18,034 25,628 55,520
11.5 37.6 53.4
42.1 116.6 207.9
1.9 9.4 5.9
7.0 29.1 23.1
Growth rate (in percent) 1983-1988 1988-1991 1983-1991 Average annual growth rate (in percent) 1983-1988 1988-1991 1983-1991
Source: Census of Establishments, various years.
Disturbing results The declining productivity of these major industries is disturbing since food manufacturing and electrical machineries are rapidly growing industries that may eventually contribute significantly to the country’s economy. The study also showed that their real output increased consistently during the period as the economy grew along with purchasing power and consumer spending. From P77 million in 1983, the food manufacturing industry’s real output rose to P83 million in 1988 to P106 million in 1991. In that eight-year stretch, the average annual growth rate of the industry increased to 4.3 percent. A more simple indication is that more than 50 percent of total personal consumption of Filipinos went to food and it remains as the largest expenditure item in the total household budget, according to the study. Meanwhile, rising domestic and foreign demand for high technology
equipment is expected to fuel the momentum of the electric machinery industry. The study revealed that the industry’s real output increased faster than the output in all manufacturing. From P18 million in 1983, it went up to P26 million in 1988 to P56 million in 1991. Output in real terms for the industry grew at an average annual growth rate of 23.1 percent during that eight year period. According to the study, brighter times are ahead for the electrical machinery industries as output is expected to rise further due to increasing demand for telecommunications, computers and consumer appliances. From the interviews with key people from the firms, there appears to be a clamor for the government to consider giving assistance to R&D activities which, as found by a study done by the International Labour Organization in 1989, are not given ad-
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big surge of private capital inflows of about US$105 billion per annum among developing countries was recorded in the past decade. The influx occurred in Indonesia, Malaysia, Philippines, Singapore, Thailand, Korea, China and Pakistan between 1985 and 1995. Capital inflows are fresh money coming in and infused into the economy through portfolio flows and foreign direct investments instead of just the old sovereign debts borrowed from international banks. Such finding was noted by Dr. Suiwah Leung, Director of Economics of the Development Program of the Australian National University (ANU) in her paper, Capital Inflows, Monetary Po licy and Exchange Rates in the Asian Region. Dr. Leung shared her study's findings with Philippine finance experts and researchers during the Pulong Saliksikan sa PIDS last March 10, 1997. How did this happen? Where did all these capital come from? Evidences show that capital inflows were “pulled” to the Asia-Pacific countries through their successful economic restructuring. At the same time, lower interest rates prevailing in developed countries from 1990 to 1993 “pushed” international capital to developing countries (Dooley, Fernandez-Arias and Kletzer 1996).
Capital surge courts inflation There are tradeoffs, however, posed by such capital surge. In the study, it was observed that as capital inflows occurred, current account deficit as a percentage of GDP also increased, with the exception of Singapore and Indonesia.And as capi-
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tal inflows add to the domestic money base and money supply of Asian countries which maintain pegged exchange rates, there was either a sharp rise or continuous trend of inflation increase at the onset of the capital surge. As a result of these capital surges, governments have to decide whether to regulate exchange rates or pursue an independent monetary policy to curb inflation rates. Asian countries caught in this ironic situation find it increasingly difficult to decide.
the countries under study during the year or shortly after the year when the capital surge began. This may indicate that monetary authorities initially resorted to sterilizing the capital inflows or tried to stabilize the exchange rate through foreign exchange market intervention.
Three choices The study showed that there are three policy options applied by monetary authorities of Asian countries when faced with capital surges.
Capital Surge: Boon or Bane to the Developing Economies? Resource movement detrimental If capital inflows will result in real exchange rate appreciation, resources will eventually move from the traded goods sector (either imported goods or exported goods, or both e.g., rice and corn milling; crude coconut, vegetable and animal oils and fats; textile mills products; wearing apparel; etc.) to the nontraded goods sector (neither imported nor exported goods e.g., construction, electricity, water services, financial institutions, real estate, government services, etc.) which is detrimental to the economy. Capital inflows, the lifeblood of every economy, are ironically turning to be a problem. The same study observed sharp increases in international reserves in all
p
The first option is to: k maintain pegged exchange
rates, k maintain present state of financial deregulation, and k apply sterilization measures through bank and nonbank measures. As observed, monetary authorities of Asian countries initially apply sterilization measures in an attempt to restrict the growth of net domestic asset through a) reduced government expenditures, or b) increases in taxes to counter increases in net foreign asset brought about by the capital surges. Sterilization through the banking channel includes sale on the open market of government paper held by central banks, and increases in the reserve requirements via implicit tax on banks.
DEVELOPMENT RESEARCH NEWS
Such sterilization measures, however, are not without offsetting effects.
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"...the use of direct controls in the 1990s could be more costly and less effective than the case in the 1960s."
The sale of government paper carries a quasi fiscal cost of holding government paper against low-yielding international reserves. Likewise, increasing banks’ reserve requirements may result in financial disintermediation as depositors move away from the banking sector to avoid the implicit tax on banking. Funds become directly routed to the ultimate borrowers from the ultimate lenders instead of passing through banks or other financial intermediaries. Sterilization also tends to keep domestic interest rate higher which in turn attracts more capital inflows, thus defeating the purpose of controlling domestic money and credit.
Re-regulation is becoming the recent trend in several countries like Indonesia, Malaysia and Thailand now faced with the difficulties of sterilization. It involves direct control by the central banks over the domestic and external financial sectors to assume the exchange rate risks.
Sterilization: limited and temporary
Direct controls: more costly, less effective
Because bank sterilization as a means to curb large capital inflows has limited and temporary effects, Asian countries also relied on sterilization through nonbank channels. This includes fiscal contractions, use of government pension fund, foreign debt service and easing capital outflow restrictions. But there are also offsetting effects of contractionary fiscal policy. It can restrict structural reforms in physical and social infrastructure. Freezing the substantial assets of government pension funds also retards economic growth.
k re-regulate or re-introduce credit rationing and direct control over banks and capital flows to reverse domestic financial deregulation.
There are reasons to believe, however, that the use of direct controls in the 1990s could be more costly and less effective than the case in the 1960s and the 1970s. This is so because institutional investors such as pension funds and mutual funds are internationally more active now than in the past (IMF 1995) such that considerable professional skills are being applied to arbitrage between markets to obtain information on earnings and interest rate differentials and to circumvent direct controls.
Such offsetting effects thereby render the sterilization measures increasingly difficult to manage.
Direct controls could also prove to be less effective as the impact of US interest rates on domestic interest rates in Indonesia, Malaysia, Philippines and Korea increase significantly over time (Glick and Moreno 1994).
The second option is to: k maintain pegged exchange rates, and
With direct control over the domestic and external financial sectors, central banks bear the exchange rate
p
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risk, either by directly providing cover to international traders and debtors or indirectly providing cover to commercial banks. Finally, direct controls would appear to be unsustainable in the long run. The third option is to: k have greater exchange rate flexibility, k maintain domestic financial sector reforms or deregulation, and k institute a liberalization of the real sectors of the economy. p
More flexibility in the foreign exchange rate, in response to surges in capital inflows, can be made by widening the intervention band or allowing short-run nominal exchange rate appreciation. The crucial issue on whether this nominal appreciation will result in real appreciation of the currency will depend on the speed of the exchange rate pass through effect (defined as the speed at which import prices and foreign debt service payments in domestic or local currency decline as a result of the nominal appreciation of the currency). If the pass through effect is rapid, as in a deregulated economy, the nominal exchange rate appreciation may no t lead to a significant real exchange appreciation. However, even if the degree of the pass through effect is less so that the nominal exchange rate appreciation did result in real appreciation of the currency, a more flexible exchange rate would still be growth-enhancing for as long as capital inflows went into productive long-term investment. But there may be other associated costs to a more flexible exchange rate, specially in a fully liberalized
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Developing Technology... from Page 1 p strengthening technological capability by improving "human technical capital" to undertake the first three component tasks set out above.
Acquiring foreign technology Given that the Philippines does not have the human capital resources and the appropriate infrastructure to develop much of the technology needed by the country’s industries, it is clear that acquiring foreign technology cheaply and effectively is the first best option for improving the technological profile of the country vis-a-vis
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added operations will involve largely foreign direct investment that is either fully owned or through joint ventures. Thus, for example, the private group operating the Gateway Business Park (a privately-owned and developed industrial estate in Cavite) is actively searching for foreign investors in wafers manufacturing in order to consolidate the semiconductor support industries in the industrial estate. The role of foreign direct investment in helping upgrade the country’s production system technologically is also evident in other industries although not in the same degree of dependence perhaps as in the semiconductor industry. In the more established industries with mature technologies such as
"...acquiring foreign technology cheaply and effectively is the first best option for improving the technological profile of the country..." the rest of the world. Acquiring foreign technology can be done through a) foreign direct investments, b) import of capital goods, c) technological purchase through licensing agreements, and d) local efforts at translating foreign technology into specific methods via foreign study, reverse engineering, copying, and others (Dahlman 1990: 41). FDIs usher in new technologies Foreign direct investment increases both the investment rate and the technology content of the Philippine economy. The whole Philippine semiconductor industry grew largely as a result of foreign direct investments. Strengthening the technological base of the country’s semiconductor industry such that it can move from assembly operations to higher value
textiles, dependence on foreign investment for technological upgrading is less critical because the technology can be bought off the shelf for the most part. Thus, in these industries, local investors can upgrade their firms technologically without the need for foreign investors unless there are other considerations involved like foreign market linkages. Encouraging and courting foreign investors especially in skilled labor-intensive industries is, at present, an important means of strengthening the technological base of the country. ———————— 1 The ratios for Singapore and Hong Kong are atypically extremely high.
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Capital goods update local technologies Capital goods are, to a large extent, embodied technologies. At present, much of the capital goods in the country is imported. Importing capital goods has been an important means by which the country updates its technological stock. The higher the investment rate over a significant period of time is, the greater is the probability that the country’s technological stock will improve significantly. One reason for the improvement in the international competitiveness of Thailand, Indonesia and Malaysia over the Philippines during the 1980s and early 1990s has been the sharp reduction in the investment rate in the Philippines relative to Thailand, Indonesia and Malaysia for more than a decade. Moreover, imports of capital goods as a ratio of the gross domestic product has been lower in the Philippines than in Thailand, and especially Malaysia since the mid-1960s1 (Dahlman and Brimble 1990: 17). This means that the country’s firms became relatively technologically backward and less efficient compared with the newer and larger plants in the three other ASEAN countries whose economies have been geared for exports since the mid1980s. Raising the overall investment rate significantly and increasing the ratio of capital goods imports to the gross domestic product will likely reduce the technology backlog of many of the country’s industrial firms. Strengthening the country’s macroeconomic fundamentals through higher domestic saving and investment rates and improving the country’s industrial protection regime to encourage more efficient and outward linking agroindustrial sectors will therefore contribute to the upgrade of the country’s technological stock.
DEVELOPMENT RESEARCH NEWS
Japan and the United States alternated as the lead source of capital goods imports of the Philippines during 1975-1985. Beginning 1986, how-
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ances) and chemical-based industries, most of which were import substituting and domestic market oriented (Tan and Intal 1992).
"...the current (Philippine) policy increasingly emphasizes foreign direct investments over foreign technology licensing as the key means of acquiring foreign technology..." ever, Japan was consistently the leading source of major capital goods imports such as nonelectrical machinery and equipment, and road and transport equipment. The third category— telecommunications and electrical machinery—was primarily imported from the US until 1989 when Japan became the leading source in all three major categories of capital goods imports (Tan and Intal 1992). Technology licensing as shortcut to technology transfer The third important means of acquiring foreign technology is through foreign technology licensing contracts. The Bureau of Patents, Trademarks and Technology Transfer reports that there were 495 technology transfer agreements with US entities and 194 technology transfer agreements with Japanese entities as of 1990. Of the Japanese license agreements with Philippine firms, around 44 percent are with Philippine firms without any equity participation whatsoever by the Japanese licensor while only 5 percent are with virtually Japaneseowned subsidiaries in the Philippines. Thus, technology transfer via the licensing route tend to be resorted to primarily by local firms. As of 1990, the Japanese technology transfer agreements were concentrated in the metal-based industries (e.g., automotive, electrical machinery and appli-
It may be noted that South Korea relied on the technology licensing route in its acquisition of foreign technology inasmuch as it restricted the flow of foreign investment into the country. In sharp contrast, Singapore relied more on foreign direct investments although at the cost of a larger foreign presence in the Singaporean economy. Although the Philippine government has no explicit technology policy, the current policy increasingly emphasizes foreign direct investments over foreign technology licensing as the key means of acquiring foreign technology. Nevertheless, there is no disincentive to foreign licensing except that clauses in the technology transfer agreements encouraging technology dependence are prohibited. The Philippine policy posture appears to be similar to the Thai policy posture, i.e., greater emphasis on foreign direct investment as the means of foreign technology acquisition. For Thailand and the Philippines, however, there seems to be no deliberate efforts to influence foreign direct investments to hasten the process of technology transfer to local firms and personnel. In Thailand, subcontractors of multinational firms also tend to be foreign firms. It appears though that using technology transfer criteria for selective investment policy is not as effective as improving the capability of local firms to absorb newer
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technology and become more viable subcontractors of the foreign multinationals (Dahlman and Brimble 1990: 15). Nevertheless,... it is useful for the government to view foreign direct investments also from a technology acquisition and deepening perspective in order that the set of industries to be promoted at each point in time will have technological complementarities. Strengthening technological capability The last means of acquiring foreign technology is increasing the country’s technological capability through foreign study or training, bringing in of foreign experts, reverse engineering, copying, and others. One of the first actions of the Japanese government in its modernization drive during the Meiji period was to hire thousands of foreign experts and engineers and send Japanese abroad to study. China recently sent thousands of Chinese to foreign universities to study. South Korea initiated a successful program of encouraging South Korean experts and scientists to return to South Korea and be involved not only in research and teaching but also in providing expert advisory services to South Korean firms. The Philippine government has tried to tap the expertise of the overseas Filipino experts and scientists through the Balik-Scientist program and the Transfer of Know-how through Expatriate Nationals (TOKTEN). But the government could still initiate better programs similar to the South Korean research institutes. It could support a strengthened, institutionalized and streamlined program of tapping overseas Filipino scientists and experts to provide, together with
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Developing Technology... from Page 7
locally based experts and scientists, expert advisory services to Filipino firms. This implies that the government would have to set aside funds for this and not rely primarily on aid funds like TOKTEN. It also means that the appropriate mechanisms are not government institutes or the bureaucracy but rather private or joint private-government mechanisms. This will ensure greater flexibility in providing appropriate emoluments to locally based and overseas Filipino scientists and experts following a program that is consistent with a welldefined and well-designed strategy and program of action to support the country’s agroindustrial restructuring efforts.
Using and diffusing foreign technology The government has this handsoff policy with respect to the use of technology transfer criteria for selective investment promotion. The policy challenge is to provide the appropriate incentive measures and institutional support system that would ensure a more effective and widespread use and diffusion of foreign technology throughout the whole economy. Ensuring faster and wider diffusion of technology in the country is important given the wide spectrum of efficiencies and inefficiencies among firms within the various industries in the Philippines. The latter can be attributed in part to the variation in technology being used. For example: k among the garment firms in 1988, 52 percent were efficient small
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firms, 8 percent were efficient large firms, 22 percent were very inefficient small firms and 2 percent were very inefficient large firms (Austria 1994: 56), k among the textile firms in 1988, 24 percent were efficient small firms, 9 percent were efficient large firms, 23 percent were very inefficient small firms and 11 percent were very inefficient large firms (Austria 1994: 57), k among the appliance manufacturing plants in 1988, about 33 per-
"Ensuring faster and wider diffusion of technology in the country is important given the wide spectrum of efficiencies and inefficiencies among firms within the various industries in the Philippines." cent were efficient, 20 percent were mildly inefficient and 47 percent were very inefficient (Lapid 1994: 68), k among the small appliance manufacturing plants, 26 percent were efficient while 59 percent were very inefficient (Lapid 1994: 68), k among the radio and TV parts manufacturing plants in 1988, about 25 percent of all the firms were efficient while two thirds were inefficient. Within the sector, the large firms predominate with more than half of all the firms being large firms. Of all the large firms, about 22 percent were efficient and about 75 percent were very inefficient (Lapid 1994: 68-69), k among the resins firms in 1988, 38 percent were efficient, 15 per-
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cent were mildly inefficient, and 46 percent were inefficient (Banzon 1994: 57), k among the plastics workshop, 41 percent were efficient (of which 32 percent were small producers), 16 percent were mildly inefficient, and 36 percent were highly inefficient (Banzon 1994: 58), k among the dairy product plants, about 37 percent were efficient, 16 percent were mildly inefficient, and about 42 percent were very inefficient; among the small plants, about 34 percent were efficient and about 47 percent were very inefficient (de Dios 1994: 33), and k among the meat processing plants in 1988, about 20 percent were efficient, 30 percent were mildly inefficient and nearly 50 percent were very inefficient. Among the small plants, 20 percent were efficient and 46 percent were very inefficient (de Dios 1994: 32). Routes to success There are several mechanisms and special institutions that have been utilized by the successful East Asian economies in their efforts to hasten and widen the diffusion of technology. They include the following: p Information, training and industrial extension system South Korea has, for example, the Korea Institute of Economics and Technology (KIET) which has online databases on technology, undertakes special technology search from its data files and provides technical support to client South Korean firms. The country also has the South Korean Productivity Center which has a flexible automation demonstration center and offers extensive training in the use of new technologies. In Taiwan, the China Productivity Center provides
DEVELOPMENT RESEARCH NEWS
training and extension, and sends out experienced engineers to visit plants to help manufacturers solve specific technological and productivity problems (Dahlman 1990: 10-51). Japan’s prefectural governments provided information on new technology through the regional research and testing centers which a) offer technical guidance and testing services, b) organize lectures and training courses, and c) have publications on new technologies for the small- and medium-scale enterprises (SMEs) (Nagaoka 1989: 41). In the Philippines, much remains to be done to strengthen the industrial technical extension system in the country. What the country offers The Philippines needs to establish an institution similar to the KIET which has online data bases on foreign technology and undertakes specialized searches for its client firms. While the country has the Center for International Trade Expositions and Missions (CITEM) and the Design Center
"...there are inadequate national standards pertaining to various industries ... Philippine producers have inadequate knowledge of relevant international standards."
which help firms in product development and product design, this experience can be extended to include institutions or mechanisms that, like the China Productivity Center in Taiwan, enable the fielding of experienced engineers to client firms to help solve specific technical problems. The country can also institute a program simi-
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lar to Singapore’s Local Industries Upgrading Program that links up multinationals with selected local firms for training on new technologies. What the Philippines has an abundance of are institutions and mechanisms geared for livelihood programs like the Technology, Livelihood and Resource Center (TLRC). Many of the industry teams in the Export Development Council have recommended the establishment of industry productivity centers cum training centers cum demonstration or model factories (e.g., decorative ceramics, jewelry, marble). These centers could be tapped as additional institutional mechanisms for spreading further new technologies and good manufacturing practices. p Standards, testing and quality control The Japanese prefectural governments and industrial cooperatives established 46 institutions to provide testing services and technical guidance to regional industries during 18941925. The Japanese national government also established national testing and research institutions during the period (Nagaoka 1989: 2-3). An extensive system for the diffusion of technology early in the country’s industrialization drive was also established. Japan’s programs on a national quality control system and the industrial standard and certification system during the 1950s and early 1960s were but natural extensions and intensifications of the initiatives during the early part of the 20th century. In the Philippines, there are inadequate national standards pertaining to various industries. For example, there are ISO standards that have not yet been incorporated in the Philippine national standards for fruits. Philippine producers have inadequate knowledge of relevant international standards. Moreover, in the metals in-
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dustry, a significant portion of the firms are unaware of the Philippine national standards. Philippine firms, especially the small- and medium-scale enterprises, tend not to employ quality management principles and quality control measures. Laboratory facilities also appear to be sorely inadequate and/or below par in quality (there are a few exceptions such as the MIRDC facilities which have an ISO 9000 rating). At times, Philippine exporters have to send their samples to foreign laboratories for testing because of lack of facilities in the country (Sharif 1995: 69-70). The Philippines may as well follow the Japanese example. It is recommended that the country establish strong testing centers and technical guidance centers in key industrial production areas of the country. What can be done The government can work with the private sector including private universities on a possible joint effort in the establishment and operation of the testing services and technical guidance centers. The centers can charge appropriate fees to make them as self supporting as possible. A possible model of a testing and technical guidance facility in the Philippines is the Tokyo Metropolitan Industrial Technology Center (Nagaoka 1989: 72-73) with its major activities, namely, k Testing, inspection and analysis (for a fee) of equipment, parts and materials for firms (SMEs) without such testing and inspection facilities; k Research (with subsidy from the government) on selected themes
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Subcontracting The well developed subcontracting system in Japan is generally considered one of the important reasons behind the international competitiveness of the Japanese economy. Subcontracting is now strongly encouraged in the Asian NIEs. In contrast, subcontracting is not yet well established in the Philippines. p
Developing Technology... from Page 9
with the results disseminated through technical consultations, guidance tours, research reports, and lectures to interested firms; k Technical guidance (free) on a wide range of fields like machinery, metals, electricity, chemistry and industrial arts; k Supply of technical information (free); k Guidance tours (free); k Technical advisors (free) in the development of new products and techniques; k Training of technical experts (for a fee); and k Technical exchange program (free) among SMEs for exchanging different experiences and facilitation of technical transfer and exchange. It is also important for the country to strengthen its quality control system as well as the industrial standard and certification system. Not enough Although there is the ISO 9000 program being undertaken by the Department of Trade and the Department of Science and Technology (DOST), it is apparent that this is not enough considering that most firms in the country would not require and neither could afford the ISO 9000 program. Popularization of the statistical quality control system through television and radio courses could be undertaken, just like what Japan did in 1956 and 1957 in order to popularize the system especially to the small- and medium enterprises.
Subcontracting is viewed here in terms of “... [a] long term comprehensive and implicit contract that includes the supply of technical guidance, supply of working capital, leasing of equipment, risk sharing by a parent firm (as well as) strong incentives and pressures for the subcontractor to innovate” (Nagaoka 1989: 36). Japan as a model There is a growing view that where there is strong competition
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subcontractors are competitively selected. Frequent interaction among subcontractors through the subcontractor associations also allows for fast diffusion of new technologies, and there is a built-in pressure to the SME subcontractors to improve efficiency because parent firms usually do not allow price adjustments of subcontractors if there were cost increases like wage increase and energy cost increase. There are also incentives for subcontractors with suggestions for better component design. Subcontractors with high technological capability can also participate in the actual product design (Nagaoka 1989: 68-69). Japan vs. Asean countries Subcontracting in Japan is efficient and contributes to the economy’s flexibility and competitiveness because there exist numerous SMEs with the capability to absorb technology
"The well developed subcontracting system in Japan is generally considered one of the important reasons behind the international competitiveness of the Japanese economy...In contrast, subcontracting is not yet well established in the Philippines." among subcontractors, the subcontracting system can be more efficient than vertically integrated production units. Indeed, in the Japanese case, the strong competitive pressure among the subcontractors has led to greater efficiency in the subcontracting network in terms of organizational structure, e.g., development of subcontractors with advanced and specialized technology, integrated inventory control systems, and more sophisticated contractual relationships (Nagaoka 1989: 37). In the Japanese case, subcontracting encourages innovation because
and even collaborate technologically with the parent firms. In contrast, subcontracting in the Philippines and other ASEAN countries is hampered by the technical and organizational weaknesses of the SME sector. In these countries, the government is more proactive in the promotion of stronger technological linkages between the SMEs and the parent firms through such programs as Singapore’s Local Industries Upgrading Program. As noted earlier, these government interventions are most successful if they focus on improving the technological absorptive capacities of SMEs.
DEVELOPMENT RESEARCH NEWS
To hasten and widen the diffusion of technologies in the Philippines, it is important that the government adopts a well designed program of strengthening the linkages between large enterprises and the SMEs. This could be done through programs similar to Singapore’s Local Industries Upgrading Program or Taiwan’s CenterPeriphery Factory Program, and by establishing technical support institutions similar to the Tokyo Metropolitan Industrial Technology Center or support programs similar to Singapore’s Small Industries Technical Assistance Programs.
Technology adaptation offers greater returns Effective technology transfer generally require some adaptation to the country’s factor price situation, compared to the factor conditions and factor price situation in the technology’s country of origin. Technological adaptation is particularly important in the agricultural area because of the location specificity of agricultural technologies. Technology transfer can occur at various stages of “technological packaging.” That is, technology transfer can occur at the stage of a capital good which is highly packaged, or at one step removed, as a technology that is reverse engineered and already adapted and translated to the Philippine conditions by the country’s research institutions. The greater is the country’s “technological capability,” especially of its technological research institutions, the better are the chances that the technology transfer will occur at the pre-fully packaged stage. Given the economic development and the quality of scientific and technical knowhow in the country, investing substantially in developing new technology is not called for especially in the electronics and machinery
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arena where the R&D costs of new products and technologies are high. The country’s capability to develop technologies is also hampered by the lack of a viable capital goods industry, which is almost a sine qua non for any effective and sustained capability in developing new technologies. There is a greater need as well as probability of success in the agricultural area because of the locational specificity of agricultural technology (including seeds) and the country’s larger stock of scientific power in the area. Nevertheless, even in agriculture, there would be greater returns to research at present if it is primarily geared for technologi-
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The institutional structure for science and technology in the country is weak, hampered by low salaries, antiquated equipment and poor linkage with industry. Despite a comparatively large pool of potential scientists and engineers for R&D, the training of most is inadequate. Accordingly, the share of scientists and engineers engaged in R&D to the total pool of potential scientists and engineers is comparatively one of the lowest in the region. Much of Philippine R&D expenditures is in the public sector and
"Much of Philippine R&D expenditures is in the public sector and largely geared to the academic sector rather than toward financing the actual needs of the productive sectors."
cal adaptation rather than focusing on basic research. Low investment, low returns Considering that technological adaptation involves R&D expenditures, it is therefore apparent that other things being equal, the higher the R&D expenditures, the greater is the likely magnitude and probable success of technological adaptation. The Philippine R&D expenditures as a ratio of GNP averaged 0.11 percent of GNP during 1985-1990 (Tan and Intal 1992, Table 2). This ratio is much lower than the corresponding ratios of Thailand (0.17 percent in 1987), Singapore (0.90 percent in 1985), Taiwan (1.04 percent in 1986), South Korea (1.82 percent in 1986) and Japan (3.49 percent in 1985) (Dahlman and Brimble 1990: 28).
largely geared to the academic sector rather than toward financing the actual needs of the productive sectors. The R&D sector in the Philippines historically did not have a strong symbiotic relationship with the industrial sector. Magpantay (1993) blames the colonial and neocolonial past of the country which led to the rise of a trader’s (comprador) class and the dominant position in industry of multinationals which tend to import technologies rather than develop them. A more likely reason, though, is that the incentive structure within the bureaucracy does not encourage the strong orientation of the research community in the public sector to the needs of the industrial sector.
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Developing Technology... from Page 11
For greater symbiosis There are two options for a greater symbiosis between the R&D sector and the agroindustrial sector: p Option 1: Transform all government R&D institutions, especially those geared for industry, into joint private-government institutes, with initial funding from the government for their endowment funds. This measure effectively privatizes the institutes to allow them to have more realistic salary levels and structures to entice and retain the best personnel; and p Option 2: Require all R&D institutes to source a significant percentage of their financing from projects with the private sector. This measure can be implemented through a matching grant system. For the R&D institutes to have some stability, the government may finance the salaries of the regular plantilla but the direct cost of the projects must have private sector funding. In addition, promotion policies should include as criterion, service to the private sector. The government, through the Science and Technology Coordinating Council and the STAND, has increasingly emphasized the importance of making R&D geared to serve the private sector and the economy. The challenge is in ensuring that the incentive structure within the government and/ or the institutional structure of the R&D sector is conducive to the increased client- and economic-orienta-
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tion of the R&D system. In this regard, it is recommended that the two options mentioned here be implemented where feasible. The first option has some implications on the organization of the DOST. Specifically, it may be worth looking into the efficacy of privatizing many of the institutes under DOST or their institution jointly with the private sector, e.g., MIRDC, ITDI and PTRI. At the same time, a number of the DOST institutes that are more geared toward basic research (e.g., ASTI) can be transferred to or instituted in selected academic agencies simply because most of the serious research work in the basic sciences involve mainly faculty members of academic institutions. These research institutions can be overseen by a consortium of universities (Magpantay 1993). The new DOST will then be a leaner and more strategic player in the R&D sector which can work closely with the private sector and the academe either through the joint ownership of the research institutes or through research and matching grants.
Investing in human capital Technological capability, defined as the "...ability to scan, assess, select, use, assimilate, adapt, improve and develop technology that is appropriate to changing circumstances" (Dahlman 1990: 47-48) fundamentally depends on the quality of people and the effi-
k NOW AVAILABLE k
Recent data on the Philippine economy and an updated on-line listing of PIDS publications can now be accessed for free at: http://www.pids.gov.ph
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cacy of institutions involved in the technology transmission process. Improving the human capital foundations of the country’s technological capability means improving the quality of Philippine education, especially technical education, raising the quantity and quality of the country’s S&T practitioners, and strengthening on-the-job training of workers. Historically, the Philippines has given more importance to education than many developing countries in the world. The average number of schooling years of Filipinos and the percentage of graduates of tertiary education are higher than most other developing countries. However, the quality of basic education in the country has slipped badly over the years while those of other countries in the region have substantially improved. The Philippines appears to be especially comparatively weak in science, mathematics and technical education. The country's weakness of education in science and mathematics at the secondary level is due to the teacher training policy and low professional standing of teachers in the country. Teacher training emphasizes form and method rather than substance (i.e., education courses with minor or major fields in the sciences and mathematics, rather than science and mathematics courses with minor or major fields in education). Those who go to the teaching profession tend to be less academically prepared than those in such courses as medicine, law, or engineering. As a result, the science and mathematics teachers tend to be less academically prepared to effectively teach science and mathematics at the secondary level (Magpantay 1993).
DEVELOPMENT RESEARCH NEWS
Tertiary education in the country has tended to focus on courses with little laboratory needs like commerce, liberal arts and education courses. This is because tertiary education in the country is primarily privatelyprovided under a regime of cost minimization. About 20 percent of tertiary students in the Philippines are enrolled in engineering and other technology courses. In contrast, tertiary education in Japan and the East Asian NIEs has been strongly biased in favor of tech-
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ber of trainable graduates of engineering courses at comparatively low wages. Underinvesting in S&T The country appears to be underinvesting in S&T. The proportion of R&D personnel to total population in the Philippines declined during the 1980s, from 229 personnel per one million population in 1980 to 120 personnel per one million in 1987 probably because of the budgetary crunch dur-
"The incentive structure in both the bureaucracy and academe does not augur well for a robust R&D sector in the country."
nical areas. For example, the proportion of tertiary education students enrolled in technical areas to total tertiary students is 52 percent in Singapore, 39 percent in Taiwan and 36 percent in Hong Kong (Dahlman 1990: 54). Also, the quality of technical education in the country is likely to be lower than that in the East Asian NIEs as indicated by the high failure rate in engineering board exams in the country. It is likely that the strong bias for technical education in these NIEs explains in part their success in assimilating and effectively using technology for their economic growth. Although there are less tertiary students in technical areas in the Philippines than in the East Asian NIEs, there are more graduates to total population in the country as compared to the NIEs because of the higher rate of enrollment. This explains the growing attractiveness of the Philippines as an investment location for semiconductors and other technology intensive industries because of the large num-
ing the decade. In contrast, Singapore had 1,931 personnel per million, South Korea had 2,102 personnel, and Japan had 6,269 personnel in 1984 (Magpantay 1993). The stunted growth of the country’s technological capability is also indicated by the inverted Utrend in the share of patents granted to local investors, rising from 42 percent in 1977 to 50 percent in 1980 but declining to 24 percent in 1990 (Tan and Intal 1992). The incentive structure in both the bureaucracy and academe does not augur well for a robust R&D sector in the country. Although the doctoral graduates in the sciences and engineering are very few in the country, they are given low honoraria rates for research activities and are shunted to managerial positions very soon in their careers. Moreover, Filipino scientists are largely isolated from the international scientific community because of irregular subscriptions to scientific journals, poor local funding of trips of Filipino scientists to foreign seminars
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and workshops, and inadequate access to the Internet. Finally, salaries of scientists in the UP system are low and (in the light of the salary standardization law) at times even lower than their previous students who eventually became faculty members with higher professorial rank at other state colleges and universities (Magpantay 1993). It is apparent that the government would have to radically change the current incentive structure within the bureaucracy and the academe in order to revive and strengthen the R&D sector in the country and thereby significantly improve the country’s capability to “...scan, assess, select, use, asssimilate, adapt, improve, and develop technology...” (Dahlman 1990: 47-48) that is appropriate to the changing needs and circumstances of the country. On-the-job training is another mechanism for improving the capability of the country’s workforce to learn and adapt new technologies. It appears that multinationals are particularly conscious of the importance of on-the-job training, especially for the more skill-intensive industries. For example, about 89 percent of Japanese joint ventures in the Philippines use on-the-job training (Imaoka 1989 as reported in Tan and Intal 1992), although the rate of on-the-job trainees sent to the parent companies in Japan is less in the Philippines than in the other ASEAN countries. The intensive use of on-the-job training in Japan is worth emulating and evaluating for adaptation to Philippine conditions.
References Austria, M. Textile and Garments Industries: Impact of Trade Policy Reforms on Performance, Competitiveness and Structure. Research Paper No. 94-06. Makati: Philippine Institute for Development Studies, 1994.
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PIDS Calendar of Seminars January-June 1997 January 15 Stabilization and Structural Adjustment Policies in the Philippines PIDS-MIMAP
February 20 Productivity Analysis in Semiconductor and Food Industries Ma. Teresa C. Sanchez
March 4 Policy Seminar on the Philippine Mangrove Resource Valuation Project Marian S. delos Angeles
Developing Technology... from Page 13
Banzon, C. Synthetic Resins and Plastic Industries: Impact of Trade Policies on Performance, Competitiveness and Structure. Research Paper No. 94-03. Makati: Philippine Institute for Development Studies, 1994. Dahlman, C. “The Role of Government: Education Policy, Technical Change, R&D, and Competitive Advantage.” In International Competitiveness: Interaction of the Public and Private Sectors, edited by I. ul Haque. Washington, D.C.: The World Bank, 1990. _________ and P. Brimble. “Technology Strategy and Policy for Industrial Competitiveness: A Case Study of Thailand.” Industry and Energy
10 Capital Flows, Monetary Policy and Exchange Rates in the Asian Region Dr. Suiwah E. Leung
25-28 Regional Seminar on the Data and Information Research Program (DIRP) Celia M. Reyes
19-22 "Writing for Advocacy" Seminar (specific for the DOH staff)
May
April
8 Documentation of the Process Involved in the Project "Baseline Research on Healthcare Financing Reforms" PIDS-DOH
10 Roundtable Discussion on the Impact of Trade Policy Reforms on Selected Manufacturing Industries: Packaging, Car Parts, and Meat and Livestock Tariff Commission-WTO-AFTA Advisory Council 11 Economic Growth and Social Development in Asia: Meeting the Challenge of the Development Policy Risk Transition Bruce Koppel Department Working Paper No. 24. Washington, D.C.: The World Bank, 1990. de Dios, L. Meat and Dairy Processing Industry: Impact of Trade Policies on Performance, Competitiveness and Structure. Research Paper No. 94-08. Makati: Philippine Institute for Development Studies, 1994. Intal, P. “Fostering Nationalism.” Manila Chronicle reprinted in Economic Notes, 1990, 1987. Lapid, D. Appliance Industry: Impact of Trade Policy Reforms on Performance, Competitiveness and Structure. Research Paper No. 94-05. Makati: Philippine Institute for Development Studies, 1994. Magpantay, J. “Streamlining the Science and Technology Sector for the Country’s Development Goals.” Report submitted to the Philippine Institute for Development Studies and the Department of Budget and Management, 1993.
15 Assessment of Tariff Reform in the 1990s Rosario G. Manasan 16 Roundtable Discussion on Issues and Answers: Discussing Emerging Concerns and Information Needs of Health Policy PIDS-DOH
Nagaoka, S. “Overview of Japanese Industrial Technology Development.” Industry and Energy Department Working Paper No. 6. Washington, D.C.: The World Bank, 1989. Sharif, N. “GAINEX Program: Dynamic Technological Initiatives for Emerging Agroindustrial Export Winners.” Report submitted to the Department of Science and Technology, and the United Nations Development Programme, Manila, 1995. Tan, J. A. and P. Intal. “A Preliminary Study on Japanese Technology Transfer to the Philippines.” Paper presented at the International Conference on Japan’s Role in the Transfer of Technology in ASEAN Countries, Bangkok, 26 - 27 June 1992. DRN
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Vol. XV No. 2
22 Macroeconomic Impact of a Tariff Reduction: A Three-Gap Analysis with Model Simulations Josef T. Yap 29 Productivity Analysis on Garments and Textiles Caesar B. Cororaton
20 APEC Philippine Study Center Network: Thesis Grants Committee Meeting 24 Technical Workshop on the Tariff Framework for More Efficient, Globally Competitive Philippine Economy: Macro Studies PIDS-Tariff Commission 25 Productivity, Policies and Performance Caesar B. Cororaton/Erlinda M. Medalla
June 3 Poverty Reduction and Inequality in East Asia Francisco Ferreira 17 APEC Philippine Study Center Network: Research Program Development Committee Meeting
27 Environment and Natural Resources Accounting: Various Approaches Marian S. delos Angeles
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Editorial Board Dr. Ponciano S. Intal, Jr. President Dr. Mario B. Lamberte Vice-President Ms. Jennifer P.T. Liguton Director for Research Information Mr. Mario C. Feranil Director for Project Services and Development Ms. Andrea S. Agcaoili Director for Operations and Finance Atty. Roque A. Sorioso Legal Consultant
Staff Jennifer P.T. Liguton Editor-in-Chief Corazon P. Desuasido Issue Editor Genna J. Estrabon, Edwin S. Martin and Liza P. Sonico Contributing Editors Barbara B. Fabian Guest Contributing Editor
Capital Surge... from Page 5 economy. Because asset prices adjust faster than goods prices, the tendency is that both nominal and real exchange rates may overshoot their long run equilibrium levels. This temporary overshooting of exchange may result in unnecessary (and costly) movement of resources across sectors. Moreover, the fact that capital markets of developing economies are not fully developed, overshooting may also result in a sudden reversal of capital inflows which is also very costly.
However, one of the major benefits of flexible exchange rate option is that monetary policy can be targeted to control inflation. In addition, this can result in a much improved management of exchange rate risks through the development of forward markets in currencies.
Best option Based on the responses of several Asian countries to surges in capital inflows (which is mostly sterilized intervention in an environment of pegged exchange rate and continued financial deregulation), Dr. Leung ar-
Valentina V. Tolentino and Rossana P. Cleofas Exchange Delia S.Romero, Galicano A. Godes, Necita Z. Aquino and Federico D. Ulzame Circulation and Subscription Jane C. Alcantara Lay-out and Design
gues that the third option appears to be the best available alternative. Furthermore, greater exchange rate flexibility and increased real sector liberalization (e.g., trade reform program, privatization, etc.) would even be more beneficial than having to re-
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Demand Grows... from Page 3
equate attention, particularly by the food manufacturing industry. Interview results also cited demands for assistance in product diversification, extension of the validity of tax incentives and expansion of credit facilities and incentives to pioneering sub-industries such as those engaged in wafer fabrication.
Government moves Technical education of engineers and scientists should be encouraged by the government through training opportunities and advanced studies. It was pointed out during the open forum of the Pulong Saliksikan session that this may already have been addressed through the creation of TESDA. Board of Investments representatives also mentioned about the National Agenda for Productivity and
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the existing technology transfer, R&D and incentive policies already made by the government. Meanwhile, the DOST’s scholarship program that absorbs 3,500 science, math and engineering scholars in government service was also cited along with the Department’s support to the Balik Scientist Program encouraging foreignbased Filipino scientists to be reintegrated into the Philippine industry. The Science Education Institute of DOST also sponsors high school and college level science-oriented students and sends selected Filipino experts abroad for advanced studies. The potentials for growth of the food manufacturing and electric machinery industries are high and efforts to strengthen their productivity should be exerted both by the government and the private sector. Although it was learned during the Pulong that some have already been made with regard to training, education and R&D, the need for better policies and programs to increase productivity remains. DRN
EDITOR'S NOTES from Page 1
on p. 2, focusing on two industries: food manufacturing and electrical machinery. These two were generally found in a PIDS study to have declining productivities and therefore crying out to be rescued through a prudent policy intervention. Capital, the lifeblood of an economy, comes a-flowing in some Asian countries with an interesting accompanying issue: capital surge causes inflation, monetary controls, exchange rate and related problems. Dr. Suiwah Leung of the Australian National University shares her study (p. 4) on how and why this happens. Finally, the DRN lists on p. 14 the line-up of PIDS seminars until June as an information update for its readers.
Capital Surge... from Page 15 introduce regulation in an environment of pegged exchange rate to address the negative and detrimental effects of capital surges.
References Dooley, M., E. Fernandez-Arias and K. Kletzer. "Is the Debt Crisis History? Recent Private Capital Inflows to Developing Countries." The World Bank Economic Review 10, 1 (1996): 217-32. Glick, R. and R. Moreno. "Capital Flows and Monetary Policy in East Asia." Working Paper PB94-08, Center for Pacific Basin Monetary and Economic Studies, Federal Reserve Bank of San Francisco, 1994. International Monetary Fund. International Capital Markets: Developments, Prospects, and Policy Issues. Washington, D.C., 1995. DRN
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DEVELOPMENT RESEARCH NEWS is a bi-monthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars. PIDS is a nonstock, nonprofit government research institution engaged in longterm, policy-oriented research. This publication is part of the Institute's program to disseminate information to promote the use of research findings. The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City, Philippines Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 E-mail address: publications@pidsnet.pids.gov.ph Re-entered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P150.00 for local subscribers; and US$20.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice.