Competitiveness of the Philippine IT industry: what lies ahead, A Molavi

Tags: South Korea, Thailand, competitiveness, China, Hong Kong, Malaysia, Philippines, electronics industry, information technology, the industry, the country, government, development, comparative advantage, market shares, semiconductors, consumer electronics, technology, Mexico, production process, developing countries, electronics, Taiwan, Market share, NITC, world market, generic technology, semiconductor industry, infrastructure, Philippine information technology
Content: II 5 ..,rnb,_,r0JoV,uorna,ul omXf PXeh_VTN.ip,poin2e.D,SevoecloopmSnedn_tmes2te0r00 II != Competitiveness of the Philippine IT Industry: What Lies Ahead" MYRNA S. AUSTRIA** ABSTRACT This paper examines the competitiveness of the Philippine information technology (IT) industry vis-a-vis its emerging competitors and neighboring countries in the region. While the industry boasts of being the largest foreign exchange earner for the coum try, it suffers from structural weaknesses that, unless addressed, render its long-term competitiveness at risk, especially as the country's competitors are increasing their stake in the world IT market much faster than the country. Infrastructural and institutional bottlenecks and the inadequacy of the educational system to meet the human resource requirements of the industry have remained severe constraints to its long-term growth. In light of the accelerating global technology race, opportunities for the country to upgrade its competitive position have become much more difficult. In this regard, this paper identifies some cross-cutting strategies to lessen or overcome such difficulties and keep the industry's present edge. INTRODUCTION The development experience of the past three decades has demonstrated the strategic role information technology (IT) plays in the global economy. As an industry, IT has dominated world trade growth in the 1990s, thus contributing to the rapid growth of exports. As a generic technology, it has also revolutionized production process * An earlier version of this paper was presented during the conference "Policy Adjustments to WTO/APEC/AFTA," sponsored by the Philippine Exporters Confederation-Trade and Investment Policy Analysis and Advocacy Support Project on 15 September 1999. ** Senior Research Fellow, Philippine Institute for Development Studies. The author would like to acknowledge the excellent research assistance provided by Ms. May Coronado.
106 I JOURNALOFPHILIPPINEDEVELOPMENT
by cutting costs and enhancing product quality and performance. The IT industr3_ particularly its semiconductors segment, has become essential in the development of virtually all other high-tech industries, from toys to wrist watches, computers, cars, appliances, machines, and missiles. Likewise, 1Thas become an indispensable infrastructure in the 1990s, having modernized traditional infrastructures such as transportation and communication. The electronics 1 industry has catapulted Singapore, Hong Kong, South Korea, and Taiwan to their status as the newly industrializing economies (NIEs). The electronics industry has steered the NIEs along the course of their export-led growth. The unprecedented growth experienced by these economies since the late 1980s has become the envy of other Developing Nations. The exposure of these economies to IT started between the late 1970s and early 1980s when they became an integral part of the global production network of American and Japanese multinational companies that feed the global market with IT products, particularly semiconductors. Within a decade or so, they were able to develop their indigenous IT industry with their own brands and products. Soon each one became one of the largest global producers of key segments of the IT industry. The Philippines, since the mid-1980s, has also become an integral part of that global electronic production network. The semiconductor industry has topped the country's exports and has weathered the adverse effects of the recent financial crisis.
Nonetheless, the country's participation in the global network is
threatened by its limited local activity on assembly and testing,
part of the production chain that has low value-added. The main objective of the paper is to assess the competitiveness
of the Philippine IT industry and examine the factors affecting its
current and future development. By definition, the IT industry
covers both the manufacturing
of IT products (computer
i By definition, under the WTO IT Agreement, the only segment of the electronics industry that is not included in the IT industry is consumer electronics.
AUSTRIA: IT Industry 1107
hardware, telecommunication equipment, semiconductors) and the provision of IT services (computer software and services). However, due to the very limited data on IT services, the paper is focused heavily on IT products. The paper is organized as follows. The next section presents an overview of the international environment for the IT industry with greater focus on the experience of the NIEs and the lessons that other developing economies, like the Philippines, can learn from their success. The third section discusses the development of the Philippine IT industry including the policies that helped shape and continues to affect the industry today. The succeeding section assesses the competitiveness of the Philippine IT industry, vis-h-vis its major competitors. The second to the last section presents an analysis of the issues confronting the Philippine IT industry and its future development. The conclusion and recommendations for the Philippine IT industry for the 21st century comprise the final section. ?
THE INTERNATIONAL INDUSTRY
ENVIRONMENT
FOR THE IT
One significant agreement that greatly affects the IT industry is the Information Technology Agreement (ITA) forged during the Ministerial Conference of the World Trade Organization (WTO) in Singapore in December 1996. Under the agreement, tariffs on information technology products would be reduced to zero through equal rates of reduction in four steps: July 1997, January 1988, January 1999, and January 2000. However, an extended staging of reduction until 2005 is also allowed under certain circumstances.
The ITA covers a wide range of product categories that include
computer hardware
and software,
semiconductors,
telecommunications equipment, electronic office equipment, and manufacturing equipment, particularly for use in semi-conductor production. Excluded from the agreement, however, are consumer electronics.
1081 JOURNALOF PHILIPPINEDEVELOPMENT The direct effect of the 1TA is to increase trade in IT products, as the elimination of tariffs would make them cheaper. Having cheaper IT products has profound and far-reaching impacts on the economy It reduces production cost, as virtually all industries use IT products. It also encourages the development of the information industry, especially in less developing countries where information exchange has always been a problem. Above all, cheaper IT products and services would further increase the diffusion of information technology in all sectors (business, industries, households, and government). Considering the speed, accuracy_ and flexibility that they would bring to the production process and information exchange, cheaper IT products would enhance productivity and efficiency.
Global Production Success
Network: the Key to IT Industry's
The introduction of developing economies to the IT global production network is best explained by the tl.,vinggeesephe_nomenon. It started in the early 1980s when multinational companies from Japan established their affiliates in developing countries in response to shortage in labor, surge in wage rates and the appreciation of the yen following the Plaza Accord in 1985. These factors lowered the price competitiveness in the world market of products produced from japan. This situation forced Japan to go global in its production strategy by relocating its labor-intensive industries to Asia to defend its export markets (Austria and Medalla 1996; DFAT 1998). Soon, multinational companies from the U.S. and Europe followed as part of their global strategy to remain competitive. One of the industries that benefited from the flying geese phenomenon was the electronics industry, where part of the production process involves assembly and testing, both of which are labor-intensive. To maintain their cost-competitiveness, Japanese and U.S. firms relocated their lower end processes and products to offshoreproduction locations in Asia, where labor is relatively cheap. Since an electronic product involves a thousand parts and components, production sites were developed around Asia, where each site would specialize in the
AUSTRIA: IT Industry [109
production of a particular part and component or subprocess. The
selection of a location would depend on where each subprocess could
be performed with utmost efficiency or the least cost.
The strategy resulted in the horizontal division of labor networks that link production sites, i.e., integrated production process in one or
more production sites. The trend shows that more sophisticated
electronic products are produced in the NIEs, where they are provided
with the technology to become original equipment manufacturer
(OEM 2) suppliers. On the other hand, the relatively advanced ASEAN
economies (Thailand and Malaysia) became the hosts of the production
of standardized products and the labor-abundant
countries
(Philippines, China and India) specialized in the assembly and testing of these products (Chia 1995).
Although the availability of cheap labor in Asia was the initial
force that triggered the creation of the global chain of production, what
ultimately made it possible was the availability of fully equipped
infrastructure for international transport and distribution and
telecommunications (Mikami 1998), thus reducing the cost of production
in multiple locations (Poapongsakorn and Fuller 1998). The continuing
development in telecommunications, for example, has allowed firms
to exchange information with overseas suppliers. Likewise, the delivery
of parts and components with short life cycle is made possible by the
electronic system for simplified customs procedures, as in the ports of
Singapore and Hong Kong.
All this made possible the new organizational imperatives of justin-time, total quality control, and continuous process improvement as
pioneered by Japan and adopted by multinational corporations from
the U.S. and Europe, which were driven by global competition (Hanna
et al. 1996). Under the new imperatives, the delivery of parts is
coordinated to meet the immediate demands of production. This
shortens the production life cycle and increase speed of response to
changing market conditions, thereby enhancing the competitiveness
of multinational companies.
Under OEM, a local firm makes a complete product according to the specification supplied by a foreign manufacturer, which then sells under its own brand name.
110 I JOURNALOFPHILIPPINEDEVELOPMENT Lessons from the NIEs The development experience of the NIEs during the past two decades has become the envy of most, if not all, developing countries. For these countries, the IT industry was the outgrowth of the local consumer electronics industry that flourished in the 1980s. Their experience in consumer electronics influenced the building of their IT capabilities. In the 1990s, the NIEs moved away from serving as production sites of low-cost OEM supplies for transnational corporations to being primary producers selling their own brand names (Hanna et al. 1996; Hong 1997). Taiwan, for example, had no indigenous semiconductor manufacturing capability until the mid-1970s, but it became a major supplier of computers and semiconductor devices in the world market by the mid-1980s. South Korea also did not have any semiconductor manufacturing capability tmtil the early 1980s, yet it has now become the world's third largest producer of dynamic random access memories (DRAMs), an advanced semiconductor product. Singapore was into consumer electronics products in the mid-1960s. By mid-1980s, the country had become a major producer of computer equipment. What lessons can we learn from the success of the NIEs? The NIEs have used diverse strategies to build their IT industries. Taiwan, for example, relied more on the government to initiate the development of IT as an industry while South Korea depended more on its conglomerates 3 (Hong 1997). Singapore, on the other hand, concentrated on providing the right environment, particularly in building world-class infrastructure, tO attract IT multinational companies. All of these NIEs have used similar frameworks, processes, and institutions to implement their strate gies. But their success did not come overnight. It was the result of cross-cutting policies and strategies that they adopted inthe 1970s and 1980s. 3 This is somewhat an exceptional case, since Taiwan has practiced laissez faire in most of its development period.
AUSTRIA:IT Industry Illl * Investment in select technical manpower training in the U.S andfapan. Acknowledging that it does not have the technology nor the manpower to start its semiconductor industr)5 Taiwan invested heavily in sending people for technical training in U.S. semiconductor firms for the particular technology it wanted to develop. These individuals later became the core group in the developmental process of Taiwan's semiconductor industry. They occupied key positions in research institutes and eventually also set up their own semiconductor companies. South Korea also adopted the same strategy by giving incentives to encourage people to train abroad. It sent scientists and engineers to industrial establishments, research institutes, and universities in developed countries so they can learn advanced technologies. , Investment in secondary and tertiary training. Taiwan, South Korea and Singapore also invested in developing their secondary and tertiary educational institutions in such a way that the education of the graduates would match the needs of industries. This was made possible by involving the industries in the design of science and technology education curriculum. , Establishment of vocah'onal traininginstitutes. Korea established public vocational training institutes. It also provides incentives by requiring firms with more than 500 employees t6 provide six months of training in approved schemes. Large firms also established their own training centers where they trained at least 10 percent of their workforce. ° Incentives for "_rain re-drain. "Taiwan gave incentives to draw back the Chinese-Taiwanese who studied in the U.S. in the 1960s and 1970s and later were employed in the Silicon Valley (Swee 1996). This overseas source of technical skills not only had scientific and engineering knowledge but also production and management experience in U.S. corporations. The Taiwanese government used the alumni networks to track these
112 I JOURNALOF PHILIPPINEDEVELOPMENT people and gave incentives to those who were selected, including tax holidays and seed money to start their own ventures, as well as well-paying jobs. As a result, more than 19,000 skilled workers returned to Taiwan from 1950 to 1988. Korea did the same. From 1968 to 1989, about 1,000 scientists returned to Korea (Hanna et al. 1996). · Lessreliance on tbreign investment for technology transfer Foreign investment was essential during the initial stage, as the NIEs became the assembly and packaging sites of overseas production strateg)z Realizing that this left them with little room for technology transfer, they embarked on a different strategy that changed the nature of interaction between local and foreign companies (Ernst and O'Connor 1992). Taiwan sent out invitations to bid for technology imports. For the successful bidders, Taiwan entered into technology transfer contracts that often included design and production capability transfer, including information about product applications. Korea also relied on OEM and technology licensing for technology acquisition. This included agreements on outright production technology transfer or patent rights. · Estabh'shment of specialized RdrD institutes. For the NIEs, research was imperative to developing new technologies and products so they could enhance their competitiveness without being dependent on foreign technology. Developing their technological capability, especially on product design, was their priority. This compelled them to establish research institutes specializing in IT. Thus, Taiwan has the Industrial Technology Research Institute (ITRI) and the Electronic Research Service Organization (ERSO). The 1TRI undertakes APPLIED RESEARCH for the development of industrial technologies. The ERSO, as the main research organization for the electronics industry, develops various semiconductor technologies, which it will then transfer to the private sector for commercial production. All research in these two organizations is funded by the government.
AUSTRIA: IT Industry 1113 Korea has several research institutes responsible for electronics research and promotion, namely, the Korea Institute of Science and Technology, the National Industrial Research Institute and the Fine Instrument Center, and the Korea Institute of Electronics Technology (KIET). The primary goal of the KIET is to support R&D in high-tech areas. Singapore has the Information Technology Institute under the National Computer Board, which is responsible for R&D. Research in the institute has led to technologically advanced products sold internationally. · IT diFFusion in thepublic sector. The government played a major role in IT diffusion in the NIEs, using IT to modernize public administration. The strategy reduced transaction costs between government and business and improved the delivery of public services. At the same time, it created demand for IT products and services, thereby fostering the expansion of the IT industry. All the NIEs promoted public sector computerization. Of these, Singapore has been the most coherent and ambitious in its approach. In 1981, it launched its civil service computerization program to facilitate business transactions between the public and government. It specifically developed strategic IT application systems to promote "one-stop" service, and established information utilities for user communities such as health, education, law, and commerce. Today, Singapore has SingaporeO.ne system, a cyber network that interconnects every home, business, school, government agency and institution through an information network that provides a range of services to users without requiring them to leave their homes or offices. Such services include online shopping and other ecommerce transactions, distance learning and other online courseware, videoconferencing, network gaming and other entertainment-on-demand services, Internet, and public sector services round the clock.
114 [ JOURNALOFPHILIPPINEDEVELOPMENT
· Fir ditYmsion through the private sector. The governments of the NIEs also promoted IT diffusion in the private sector, particularly the SMEs. They accomplished this by encouraging greater automation in factories. They also provided the SMEs with technical assistance for their computerization and technology systems. Among others, IT adoption has been recognized as essential to the success of the garments industry of Singapore and Hong Kong (Hanna et al. 1996).
· Investment in inЈrastructure. The NIEs also invested in world-class
key infrastructures, particularly in telecommunications and
transportation,
which became the target of IT-based
modernization. The best example of such infrastructure is the port
of Singapore. The availability of electronic systems for simplified
customs is the key factor for the efficiency and stability of
international transport and distribution, which is critical to the
global production network strategy of multinational companies.
· Support industries. The availability of support industries also enabled the NIEs to establish a foothold in the global production network of multinational companies (Nagasaka 1998). It also reduced production cost, thus increasing price competitiveness. As a result, local procurement of parts and components in the NIEs rose to 80 percent.
THE DEVELOPMENT IT INDUSTRY
OF THE PHILIPPINE
Compared to the NIEs, the IT industry of the Philippines is relatively young. Yet it has developed into one of the fastest growing and important industries of the country. In fact, it is now the largest foreign exchange earner for the Philippines. The 1Tindustry has also become more than just an industry that produces output and services, having grown into an enabling technology that links businesses, industries, households, individuals, and governments, as information technology continues to pervade all sectors of the society.
i
AUSTRIA: IT Industry [115 Approximately 518 IT firms in the country are registered with the Board of Investments (BOO and the Philippine Export Processing Zone Authority. These are mostly located in Metro Manila and in the export processing zones and industrial parks in various parts of the country (BETP 1998). The computer industry, on the other hand, is made up mostly of foreign-owned subsidiaries, local distributors, dealers, importers and traders of computer hardware and peripherals. Although there are over a hundred companies in the computer industry, less than 10 have a semblance of computer hardware manufacturing and/or computer component assembly work.
Domestic policy environment A number of factors changed the overall domestic policy environment in the country in the 1990s. There was a general policy of openness, as shown by the lowering of tariffs and other trade barriers; expansion of areas (particularly services and infrastructure) opened doors for foreign investments; and foreign exchange deregulation. Another was the country's strong macroeconomic fundamentals (i.e., low inflation rate and interest rate), which enabled it to weather the financial crisis that hit the Asian region in 1997. Below are the policies that have benefited the country's IT industry.
trade liberalization through the ITA. Under the ITA the Philippines has committed to bind tariff rates to zero on 188 IT
product lines by 2000, and 47 product lines by 2005. Most of the
products committed to zero tariff rate by 2000 belong to the 10 percent tariff level in 1998. On the other hand, those committed
to an extended staging of reduction until 2005 have tariff rates
between 20 percent and 40 percent in 1998.
With tariff rates declining to zero, imports of IT products are
expected to become cheaper and hence exposes the domestic
industry to greater competition and provides a wide variety of
product choices for the consumers. Nonetheless,
greater
116 [ jOURNALOF PHILIPPINEDEVELOPMENT
competition promotes efficiency in the economy. Furthermore, while the country's exports will also be exposed to greater competition abroad, tariff reduction in other countries would mean greater market access for the country's IT products.
t
Deregulation oЈ the telecommunications
industry. The
deregulation of the industry became possible with the issuance of
Executive Order (EO) No. 59 in February 1993. The EO called for
the compulsory
interconnection
of all authorized
telecommunication facilities, effectively abolishing the monopoly held by the Philippine Long Distance Company (PLDT) since 1928.
In July of the same year, EO 109 was issued, requiring all cellular telephone system and international gateway facility operators to
install at least 400,000 and 300,000 new phone lines, respectively, within five years. As of 1998, 78.7 percent of the total"required telephone lines had been installed (NTC 1998). The deregulation of the industry created an environment conducive to growth and investments. New players entered,
resulting in promoting greater competition within the industry. Firms expanded their networks and introduced new technologies and services. All these resulted in a sharp increase in investments in the industry and in the number of service providers and users. In short, an increase in the demand for telecommunication
equipment and products ensued.
Investment incentives. A comprehensive system of incentives exists for both domestic and foreign investment in the Philippines. The electronics industry, identified as an export winner, has always been included in the list of areas covered by the country's Investment Priorities Plan (IPP). As such, enterprises in the industry are qualified for the incentive package under the 1987 Omnibus Investment Code (OIC) administered by the BOI. Incentives under the 1987 OIC include income tax holiday, tax and duty exemptions on imported capital equipment, Tax Credits on domestic capital equipment, and some non-fiscal incentives
AUSTRIA: IT Industry ]117
like simplified custom procedures, access to bonded and employment of foreign nationals in supervisory, advisory positions.
warehouses technical or
Establishment of exportprocessing zones and technologyparks. To promote industrialization in regions outside Metro Manila, the government facilitates the establishment of export processing zones, industrial estates, and free port zones. Firms operating in such zones and industrial estates enjoy an integrated package of incentives, and access to streamlined government procedures, infrastructure services, and good transport links to ports and airports, which are not available outside the zones. The incentives include duty-free import privileges and generous local taxation arrangements.
Trade performance Export of IT services. The Philippines is now known as the second largest producer of computer services in Asia, the first being India. Exports of the industry increased from a measly US$60 million in 1993 to US$250 million in 1997, or an average annual growth rate of 43 percent during the period (Figure 1). The U.S. accounts for about 80 percent of the industry's exports. Recently, however, the industry began expanding its services fo Japan, Middle East, and the Association of SouthEast Asian Nations (ASEAN). The Y2K problem opened huge opportunities for the industry, as more and more U.S. and Japanese companies have since used Manila as their major outsourcing center for software development, conversion, maintenance, and other Y2K-related tasks. Most of these services are provided offshore. One great comparative advantage of the industry is the capability of the country's IT professionals to provide high-quality service at a lower price than those of their counterparts in the U.S. or Europe.
AUSTRIA: IT Industry [119 A detailed analysis of the five-digit Standard International Trade Classification (SITC) commodity composition of the industry's exports reveals the structural weaknesses of the industry. Exports are concentrated to 11 products out of the 81 IT products exported by the country. Together, these products account for an average of 93 percent of the total IT exports (Appendix Table 1). Of the 11 products, semiconductor products manufactured from materials imported on consignment basis (SITC 931-02.22) 4 accounted for the largest share of 54 percent of the total IT exports. The above finding confirms what is often said about the industry, that is, high import content and capability is limited to the assembly and testing of imported parts and components. A World Bank study (1997) in fact shows that the average local content is only 20 percent in semiconductors, 25 percent in simple circuit products, and 15 percent in more complex products. High import content implies that foreign exchange earnings are far less than the gross level. It also means that the industry does not create direct forward and backward linkages to the economy. Furthermore, considering that assembly and testing belong to the lower segment of the IT production chain, the upper segment being product design and fabrication, the value-added of the industry is therefore very low, if not limited to mere labor. Assembly and testing also do not require any sophisticated manufacturing technologies. Thus, technology transfer is minimal. The high concentration of IT exports to a few low value-added products is very risky, especially since the country relies on the industry for its major foreign exchange earnings. For one thing, it makes the country vulnerable to cyclical demand downturns. For another, there will always be competing locations for these types of products, as the labor cost in the country becomes relatively more expensive (as is already evident among its emerging competitors like China, Vietnam, India, and even Mexico). More importantly, the lower-level assembly characteristic serves as a " This includes SITC 931-02.21, 931-02.22, 931-02.23, 931-02.24 and 931-02.29
AUSTRIA: IT Industry [121
equipment (28.2 percent). The sharp increase in the imports of telecommunication equipment is due to the deregulation of the telecommunication industry in 1993. Since the country does not have a telecommunication equipment manufacturing industry, it has to rely solely on imports. On the other hand, the increase in the imports of computer hardware is due to the growing p'roportion of all sectors of the society using computers.
Trade balance. The IT industry registered a trade surplus (US$1.2 billion) only in 1997 (Figure 4). However, a more detailed analysis of five-digit SITC products reveals that a few IT products have been net foreign exchange earners since 1991. These include input or output units, whether or not containing units in the same housing (SITC 75260); diodes, other than photosensitive or lightemitting (SITC 77631); transistors with dissipation rate of less than 1 W (SITC 77632); other semiconductor devices (SITC 77639); digital monolithic Integrated Circuits (SITC 77641); electronic microassemblies (SITC 77649); brakes and servo-brakes (SITC 78433); materials imported on consignment basis for the manufacture of semiconductors (SITC 91302); line telephone sets witlx cordless handsets (SITC 76411); transmission apparatus (SITC 76432), radar and remote control apparatus (SITC 76483); line telephone handsets (SITC 76424); other inductors for power supplies for automatic data processing machines (SITC 77125); and other fixed resistors for power handling capacity (SITC 77232).
ASSESSMENT
OF THE COMPETITIVENESS
PHILIPPINE IT INDUSTRY
OF THE
The competitiveness of the Philippine IT industry in the world market is the key to its sustained growth in the next millenium. This section of the paper discusses how the country's IT industry compares with those of its competitors in the region. Among the countries in the region, the Philippines is the only one where the IT industry is highly concentrated to just one major IT segment, i.e. semiconductors (Table 1). In contrast, 'the other countries have two or three: Malaysia has semiconductors and
122 I JOURNALOF PHILIPPINEDEVELOPMENT computer hardware, and so do Thailand and Singapore. Indonesia has telecommunication equipment, computer hardware, and other 1T products; so does China. Mexico has computer hard ware and other IT products. Hong Kong has the best structure, as its exports are fairly distributed among the four major IT segments. The implication of this becomes more serious when one considers the country's high dependence on IT for its export earnings, again in contrast to its neighbors, except for Singapore (Table 2). This implies that the total exports of the country are highly vulnerable to the global situation of the IT industry, unlike the other countries which will have products other than IT to rely on for their exports when the global market for IT products becomes unfavorable to them.
16.00 14,00 12.00
_ Exports · Importa_ m Trade balance
[_'N_
6.00 _. 4,t_l - 200 -
S.
,
:_
I
1991
1992 _
I993 _
1994 _
1995 _
1996
1997
(2.00)
Year
Source: PCTAS
Figure 4. Trade balance in Philippine IT, 1991-1997 (US$ billion)
AUSTRIA: IT Industry [123
Table 1. Structure of IT in the total exports 1991-1997 (percent)
.... Country
Computer hardware
Semiconductors
Telecomunications
of selected countries,
Other I'T products
' Total IT
Philippines
8.2
Indonesia
25.2
Malaysia
24.5
Thailand
44:0
80.6
9.2
2.0
12.1
39.0
23.7
54.4
18.5
2.7
29.0
14.2
12.9
100.0 100.0 100.0 100.0
Singapore
49.1
South Korea
19.2
Hong Kong
23.8
China
25.5
Mexico
23.5
29.6
12.2
9.1
52.0
14.6
14.3
34.4
20.7
21.2
9.7
29.8
35.0
13.4
19.5
43.6
100.0 100.0 100.0 100.0 100.0
Note: Data are not available for the following: Malaysia and Korea, 1997; China and Hong Kong, 1991; Thailand, 1996. Source: PCTAS
Table 2. Share of IT in the total exports 1997 (percent)
Country
1991 1992 1993 1994
of selected countries, 1991-
1995
1996
ў 1997 Average
Philippines Indonesia Malaysia Thailand
38.0 0.7 22.8 14.9
26.3 1.4 24.2 16.2
29.4 1.5 27.4 16.8
34.5 2.7 30.1 19.1
41.8 3.0 33.3 20.7
51.1 4.2 37.2
58.3 3.9 22.1
39.9 2.5 29.2 18.3
Singapore
31.5 43.6 39.2 51.6
South Korea 17.4 18.4 18.7 21.1
Hong Kong
21.5 22.1 22.3
China Mexico
-
5.6
6.5
8.0
4.8 14.9 15.1 16.8
50.3 52.7 53.0 46.0
24.1 23.3
20.5
23.6 22.6 22.1 22.4
9.6 10.9 11.7
8.7
16.3 16.3 18.3 14.6
Note: Data are not available for the following: Malaysia and Korea, 1997; China and Hong Kong, 1991; Thailand, 1996.
124 I JOURNALOFPHILIPPINEDEVELOPMENT Measures of competitiveness Two measures of competitiveness are used here: (i) success in expanding world market shares and (ii) revealed comparative advantage (RCA). The latter is measured as the ratio of a product's share in a country's exports and the product's share in world trade s. A ratio of greater than I indicates that a country has a comparative advantage in that product while a ratio of less than 1 indicates the opposite. Market share, in terms of market share, the Philippine IT industry has yet to create its niche. In view of this, concern for its long-term growth prospects understandably becomes more critical. The country's market share remained at I percent during the period 1990 to 1997, in contrast to China's and Mexico's share of 2 percent each (Table 3). These two countries are increasing their stakes in the IT market much faster than any of the ASEAN-Four. This is further shown by the much rapid- growth of exports from these two countries compared to the Philippines (Table 4).
Table 3. Market (percent)
Country
1991
share in IT exports of selected 1992 1993 1994 1995 1996 1997
countries, Average share 1991-1997
Philippines Indonesia Malaysia Thailand
1.0 0.7
0.8 0.9
1.1 1.6 2.2
1.2
0.1 0.1
0.1 0.2
0.2 0.3
0.3
0.2
2.4 2.6
3.1 3.5
3.9 4.3
3.3
1.3 1.4
1.5 1.7
1.8
2.1
1.6
1991-1997 Change 1997-1991 1.2 0.3 2.0 0.8
Singapore
5.6 7.3
7.1 9.9
9.5 9.5 10.4
8.5
4.8
South Korea
3.8 3.7
3.8 4.0
4.8 4.3
4.1
(3.8)
Hong Kong
1.7
1.6 1.3
1.1 0.9
0.9
1.2
(0.8)
China Mexico
1.3
1.5 1.9
2.3 2.4
3.2
2.1
2.0
0.4 1.8 1.9 2.0 2.1 2.3 3.1
1.9
2.7
Notes: Data are not available in the following: 1996; Hong Kong; and China, 1991 Source: Estimates of the author using PCTAS
Malaysia
and Korea, 1997; Thailand,
5 RCA_aj = (x__/X_)xj / (XL_v,v../X..___)v,v where xii refers to product i exported X,II tho counfry's total exports; and w subgcripts, the world totals.
by country j;
AUSTRIA: IT Industry 1125
Table 4. Average real growth rate of IT exports
1991-1997
(1990 prices) (percent)
in selected
countries,
Country
Computer hardware
Philippines
32.6
Indonesia
79.5
Malaysia*
44.1
Thailand
22.3
Semiconductors 24.5 26,3 19,7 19.3
Telecommunications 15.4 33.8 18.1 9.9
Other IT Total IT products
35.4
24.9
41.1
44.2
102,5
26.9
15.8
19,0
Singapore
20.5
25.9
South Korea
11.9
19,1
Hong Kong
(20,4)
16.3
11.4
27.2
21.4
14.6
8.8
15.3
(6,4)
(9.9)
(3.8)
China**
52,1
41.0
Mexico
41,5
70,6
27,0
20.5
31,9
81.2
54.9
54.3
Note: Compounded growth rate was computed for the following periods as follows: * - 1991-96; ** - 1992-97 Source: PCTAS
The Philippines also had the least percentage (41 percent) of products that managed to increase their market shares during the period 1991 to 1997 (Table 5). Again, very significant here are Indonesia, China and Mexico. Although the market share of Indonesia is a lot smaller than that of the Philippines (Table 3), 87 percent of its products are increasing their market share, in contrast to the Philippines' 41 percent. Also, China's and Mexico's respective market shares are not only higher and growing much faster than those of the Philippines, but 83 percent of China's and 73 percent of Mexico's products have improved their market shares (Table 5). The above finding is not surprising. Given that these countries are also low-wage countries and given the increasing wages in the Philippines, they serve as alternative locations for the laborintensive segment of the IT production chain. This should serve as a clear signal that unless the country moves away from laborintensive assembly type of IT products, it would lose its share in the IT market. Competition from low-wage countries would
126 [ JOURNALOFPHILIPPINEDEVELOPMENT
Table 5. Percentage
of products
1997 (five-digit
SITC)
with improved
competitiveness,
1991-
Country
Total no.
Market share
of export products
No. of products with increased market share
% of total
Revealed comparative
advantage
No. of products with increased
% of Total
RCA
Philippines
81
Indonesia
100
Malaysia
131
Thailand
121
33
40.7
87
87.0
109
83.2
94
78.0
29
35.8
87
87.0
101
77.1
78
64.5
Singapore
131
South Korea
127
Hong Kong
114
104
79.4
64
50.4
31
27.2
China
132
Mexico
129
109
82.6
94
72.9
Source: Estimates of the, author using PCTAS
95
72.5
62
48.8
48
42.0
85
64.4
109
84.5
eventually erode the country's comparative advantage unless its IT industry shifts to technology-intensive products. The problem does not so much lie in rising wages, as shown by the experiences of Malaysia, Thailand and the NIEs,,which attained high economic growth rates despite rising wage rates, as in producing and selling the right products in the market. Is the Philippines ready to embark on the expected shift? The succeeding section of this paper addresses this question.
Revealed comparative advantage. The revealed comparative advantage indicator shows that the country is competitive in IT, i.e., RCA is greater than 1 (Table 6). Nonetheless, there was a decline in the country's competitiveness between 1991 and 1997. On the other hand, while China and Indonesia are not competitive yet, their competitiveness improved during the same period. This explains their increasing market shares, as discussed earlier. Mexico is competitive, and its competitiveness is increasing much faster than that of the Philippines.
AUSTRIA: IT Industry 1127
Table 6. Revealed comparative countries, 1991-1997
advantage of IT exports in selected
Country
1991 1992
1993 1994
1995 1996
1997 Change 1997-1991
Philippines
2.1
1,0
1.1
1.1
1.1 1.4
1.6
(0,4)
Indonesia
0.1
0.1
0.1
0.2
0.2 0.3
0.2
0.2
Malaysia
2.0
2.1
2.2
2.2
2.2 2.5
0.5
Thailand
1.3
1.4
1,3
1.4
1.4
1.4
0.1
Singapore
2.7
3.8
3.1
3.8
3,4 3.5
3.4
0.7
South Korea 1.5
1.6
1.5
1.5
1.6 1.6
0.1
Hong Kong
-
1.9
1.8
1.6
1.6 1.5
1.4
(0.4)
China Mexico
0.5
0.5
0.6
0.6 0.7
0.8
0.3
0.4
1.3
1.2
1.2
1.1 1.1
1.2
0.8
Notes: There are no reported data for the following: Malaysia, 1997; Thailand, 1996; Korea, 1997; Hong Kong, 1991; and China, 1991 Source: Estimates of the author using PCTAS
Only 16 products out of the 81 five-digit SITC products being exported by the country are shown to be competitive (see Appendix Table 3 for the list of competitive and non-competitive products). Of those products, six are consistently improving their competitiveness (Figure 5), while 10 are in danger of losing their competitiveness as shown by their deteriorating RCAs (Figure 6).
128 I JOURNALOF PHILIPPINEDEVELOPMENT
_I]_ 77632 - Tmlmie_ with I W di_izp_ti_ll _
2J),_
--RCA
16.(X) 14.N) 12.tl)
(.P1_ўl1h nile ( ] 991-97_29,0 '_
12_)
_
I O.(X)
H.(X)
,o'__ _
4,(10
2.(X)
_,-.,(xx) ,I
q
I
I
" I .......... _
I
L.
P,_91 1_)2 I '.,_3 1994 IPg_ 19_k5 Ic2"-J7 Ymu-
SITC 794_3. Bralase_e,_"vo.bcu"kesa_d pupa
$I_ ")'7641- Digital monolitY,_ h_t_m_ c_l_
20.(xl
_RCA
16.(_ + 14.011 12.IN
10.00 _.faO
''+ .... _._
_
4.(X)
B2.(x.)_I--._,-_, :
;
,
,
,- ....
]991 117)2 1993 IS*_ Y_r
1995 1996 1_*'7
2.,C() _
SITC 76411. Teleplmlle _ pmJvi&m!Nlolms
_ J0._)
6,00
6.(X) .... 1I 62,.I0X0)1i4_"(]_0m*a,th nee(1992-97_ 4_,4% 199t 199_ 1993 1994 19)5
19'_ 1997
4.00 _. +8,0010"_0-0
O,(X)
_,011 .
6,(X)
.---- -- --
·*
...+....++.._]_ Ј4.(X)12L.0016G'Cro0w_th rate t(,1_·991-.-97i" =" = i= " /
J ·[ ° "
I_)l
I992 1_93 1994 1995 19_6 1997
.... 84. ,f1x1)0IO'O_,_-D-_
SITC 7(_4_,.4- L,metўk.i_mў kemd_-'L_
SITC 75260. Input o'e output t_
1._,(,1 ....
Mm_ete._
16._1 GmwthmLc(199_.-9"7_32].(PY_ I4.(X) I2,IX)
10.(k') _g.lx_ _
4._
2,(X)
Ig_)l 199_ 199_ 1994 )_Y#5 1996 1997
IK,(g) _ 16,C0 14.00 .
....
5,_ketshm'e
GpP_1_mtў(J99]-_tT):4_-'_
T 12.L_I I().(l) _. 8,i_
6,(X_
4,1_ ,_
4.(Xl
2.111
,----...-, ....
_
1991 lggcg 1993 1994 1995 19"_ 1937
SITC 77621 · D_tldes.nar photrm_aitb.ў nor light emi_bl_
_ITC 77(_ - Other _ _-.a duot_r ch_v[ў_
6.00 1991 1992 t993 ].994 19")5 l_ ye_
-
40._)
I!:+
lP_//
15_) " 19_)1 19_r2 Ig_)3 1994 1995 1996 1997 Year
Source: Estimates of the author using PCTAS Figure 5. Philippine export products with increasing 1991-97
competitiveness,
$[lI: 7"/681- Pic_';-_t _1 _'yllila, mounts]
14,(_J 12.(")
mRCA Or,_rll_(199I-'_J:-3.0".
....*- + _ .J ,__ , , , ,
AUSTRIA:IT Industry i129
SITC76432 - Tra.smi_ ippmm_
a_ 5.0u
14,i_ :, 12,[,gW-)
mRCA O.._nh_l_(l_l-P?):l,3%
I _'_"" .... L_
< _.oo _.,, .__
]- 6,_ "i"5,_ " ..... ' , I-
SIT(::?(>_I'_-2r_llmof m_mplmno__J llt_u_
g[_ "/71]J - [lldU_iorl lhf l_ver _u[_li_ao('dat_p_._l_l_ m_hln_ _d lele_nl ap]_ rl_l_
'°._ 5._ , _.®_
G r,l'.vt_rv_ (1_) [=_'/):] 0 %
1.0_ _.oo_ , _._ _
=t_/ - --*_
I"
_
I
_
I-
12._'_ _°_ T 6._ -]" .... *
01X',',N_fiIe (I_) 1.97:T,7_
1,1_ _,_ _ _._
- -i----------+_+---------+_-+--------
I
I
_- -
SIL_ 77(_9 - [:]ў_Imnicmicm_i_m_liўl
,_ITC 7(_41_-3l_#dar alt4 l'=motgcontrol upparalua other tMlt LIII"l.o)':i
_b._J I._.X.IO...I.
....
M_k, ct _lu_
0-_-,P,v-tChAml_ ( 1_1-97): ,11.6 %
_ _,q..),,_'l) __.(io lo.c'O · I._ 1991 L_J2 i_3
Y_I_J4 1_
30,00 _ .i _._)
.
_.,_ __
_
5_1 I_Jў_ 1997
]12a..(Y(O_i
....
Mmket ah_r_
-C-IJLrCo_All rn_ (1991-97): - I.R %
i 65,.r(io_i
,,,.,,o-i _"_
4.(_ ·-
2.(K) .....
*
3,00 2xl) ....
1._ўX)
l_)l
I_
1993 _ў
199_ 19e_i 1997
L4,(W),. I_.1_ -
--RCA Omwill rule ( 1':_t1.97);.0.9 5f.
6.(W) $.(Xl :-;
14.(J) 12.IX)
--RCA
G ro'_,hru(=(I":;91-9(7:)4:,%3
6.C0 5X_
_,tl)
.....
_
I.tll
4_
1 ""I
I
I
I
I
21Xl
]----.F---_--
1,Ill
I
I
I
"
Source: Estimates by the author using PCTAS
Figure 6. Philippine
export products
with decreasil_g competitive-
I
ness, 1991-97
130 [ JOURNALOFPHILIPPINEDEVELOPMENT Compared to the other previously mentioned countries, the Philippines had the least percentage (36 percent) of products that registered improvements in competitiveness between 1991 and 1997 (Table 5). Improving and sustaining the competitiveness of the country's products are critical to increasing the market share of the country. As shown in Figures 5 and 6, the competitiveness of a product moves in the same direction as its market share. Likewise, as indicated in the figures, products with increasing competitiveness registered very high export growth rates while those experiencing a decline in their competitiveness registered very low, if not negative, growth rates.
Market positioning For a better understanding
of why the Philippines is not in-
creasing its competitiveness and market share as fast as the other
countries covered by the study, an analysis of the country's mar-
ket positioning of its exports is next examined. Based on the World Bank study (1997), a country is considered competitive in a prod-
uct if its world market share is growing, and a product is consid-
ered dynamic if its trade is growing faster than the average for all
products. As shown in Table 7, this results in four types of commodity classification. Quadrant I is the optimal position, since a
country is increasing its market share in dynamic products; Quad-
rant II is the worst position, since a country is losing market shares
in dynamic products; Quadrant III is a vulnerable position, since a country is increasing its share in a stagnant product; and Quad-
rant IV is a position where a country needs some restructuring
away from the stagnant products.
The high level of concentration in one product would not be a
problem for exporting so long as the demand for that product is
growing (World Bank 1997). Unfortunately, this is not true of the
Philippines. Table 8 shows the products under each category above
for the country. Herein lies another danger signal for the country.
Much of its exports (44 percent) are accounted for by IT products
that are deteriorating in world trade relative to other products.
AUSTRIA: IT Industry 1131
Table 7. Market positioning classification
Shareof the country'esxports inworldtrade
Sharcofproductsinworldtrade
Rising(dynamic)
Falling(stagnanO
Rising (competitive)
I Optimal
III Vulnerable
Falling (noncompetitive)
II Lost opportunity
Source: World Bank (1997)
IV Restructuring
This means that the country is increasing its share in products whose shares in world trade are falling. Only 42 percent of exports are generated from products that are growing and dynamic in world trade; 12 percent are generated by products whose share in world trade are increasing but for which the country is losing its market share; and 1.5 percent are generated by products that need some restructuring. And while the latter looks small in percentage, the amount of resources involved could be large. Efficiency in the economy could therefore be improved by moving away from the production of these products and reallocating the resources to where they could be used more efficiently. A comparison with the other countries also shows that the country is not positioning its markets as best as the others (Table 9). The majority of the exports of the other ASEAN members, the NIEs, China, and Mexico consist of products that are growing in world trade. In short, they are exporting the right products.
Table 8. Mar.keў positioning
of IT products,
Op_ml
Code
D_ip_on
75290 75997 77632 77641 77689 78433 76411 76491 75995 76421 76423 77121 77232 77255 77258 77259 77865 77867 77869 87435 89879
Otherunitsofautomaticclataprocesshng machines Partsandaccessorlesofheadlng752 Transistors with a dissipation rate of less than 1W Cardsinco_oraKngelccimnk integrated circuits Partsofelectmnicintegratedcircmtsand microassemblies Brakesand_ Linetelephonesetswithco_handsats Partsofdectricalapparatusforline telephony and telegraphy Parts and accessories of machines of sub-heading751.2 Microphoneshav'_gafrequencymageot 300 I-Izto 3.4 KHz Loudspeakers, wiihauthoesmg ISlaficconvertersforau_amaiicdata processingmad'Linesand telecommunications O[he_f_xedresistorsforpowerhandling capacity Elech_onicswi_es Plugsandsocketsforco-axialcablesand primed circuits Connecllcmandcoatactelementsbrwires and cables Ceramic dielectric, mullilayer fixed capacitors Other fixed capacitors Parts of capadtors Imtmments forreinsuring _r _ p _ess ur e O[hermedla fo_mprodt_ing phenom_ta
Average annual ўalue of exports (US$ million}
1788.60
Philippines,
1991-97
Lest Oppo_mity
V_n_able
I_t
Code
[email protected]_
Coae
De_ip_0,_
Coae
75220 7763I 77633 77637 77639 77643 77645 77683 76415 76432 76493 76499 72855 74918 77125 77314 77315 77863 77878 77884 87425 87478 89859
Printeddrcuits Dindes, otherthanphotesensiI_veorl_ghtemithng TransistorswithadissipslionrateollWormore Photusen.silivesemiconduct_rdevk'es Othersemicc_ducturd_ Othermonolihhicini%_atedcircuits Hybrid integratedcircuits Mountedpiezo-electeiccrystals Telephonicortelegraphicswltrhmg apparaOls Transmissioneppamlusinc_rporsling mcepiion apparatus Aerialsandant_nnaeandparts_sadfor radio lelephonyand radio telegraphy Magneiic type sound heads and parts for recording Partsofappamtusfortheassembtyof semiconductors Partsof autumated machinesfor Iransport of_emanuhctoroofsemiconducturdevices Othe_inductursforpowersuppliesfordata processing mad_ines Ehecboniccc_ductms Otherelectronicco_du ctm_s Aluminumalcctmlyticfixedcapafitom P_tycardsandtags ind_orpanelsincorporafingLCDorLED Opti_llnslrumen_s and appliances Instrumentsand apparatus forsemk-onductur wafers Other magnetic tapes and discs
75260 Inputoroutputtmits 77220 Printedcircuits 77649 Electeonk:miccoassemblies 73591 Parlsofioca..u_iironbe_an millingmachines 74190 Partsofchemicalvapordeposilion appamtesforsem_conducturpmdudion 74391 Јartsofspin dyer forsemiconductorwafer processing 75131 Elecbosta_ photocopyingapparatus 77231 Fixedcarbonresistors,c_mposili_nor film types 87131 Electronbeam miaescopes 87449 Parts and accessories ofprod_ts of heading 8744 88136 Parts and accessofies of the apparatus of heading88133 75910 Partsandaccessofiesofphotc*copying appa ratos 76424 LineteL_honehandsets 77885 Partsofapparstusofsub-heading77884
77635 77688 76383 76384 76419 76483 72819 72842 72852 74133 74189 74359 77868 87426 87439 87443 87446 88135 89845 76492 77235 77238 89867
Thyrist_rs,diacsandtriars Parlsofmotm0edpiezo-etechiccryslals Soundropmducmgapparatus,_t'fpe Magne6cbperemrde_,cassettetypr Other_O2shc.hadmga_y-ph(mesystem Rad_andremo_ўerd_olappa_s Partsoimachims_edforsemkonduc_rswafers _tion_torassemblyof semiconductors Par_cderu:_tionequipm_t Apparatasandpartsdthemanufacmmd semimoducturdevices _valx_d_s_t_mapl?ara_skў s emimnducteўpm duciion Spindryerfor_ўader_g Varlableoraclj_ble(tne...set)appara_us Partsandaccessoriesofoplicalinsh'uments Partsand accessoriesof_h'ummls ofheaclmg759.1 S_e_spectropl'_ome_ar_and spe_graphsusingopticalmdiat/0ns Ofl_erb_sirame_andapf_-at_mderl_mli_gr44 Apparatusformakmgchcu.itpatiemsf_r semlcondeclor wafers Magnetiўlapesdofawidthexceedh_6.Smm Parisofamplil_e_,mlcmphonesandlmutepeakers OIhervarlabtemslst_ Par_ofvadableredstm's Mediaformprod_gpI'x_ommac_er than sotmdor image
5212
1233.20
815
% Share
41.7
I2.2
44,2
1,9
AUSTRIA: IT Industry 1133 A further analysis of the products for which the Philippines is losing market opportunities shows that these are the same products for which the country's competitors (Indonesia, Mexico and China) are gaining market shares. Unless the country regains or improves its competitiveness on these products, its competitors will eventually eat up whatever small market share remains for the country.
Table 9. Market positioning
1991-1997
(percent)
of the IT products in selected countries,
Country Philippines Indonesia Malaysia Thailand
Optimal 41.7 72.0 54.8 57,5
Vulnerable 44.2 22.0 33.7 17,8
Lost opportunity 12.2 4.3 11.2 22.7
Retreat 1.9 1.7 0.2 2.0
Total 100.0 100.0 100.0 100.0
Singapore
74,4
South Korea
51.5
Hong Kong
26.8
China
64.9
Mexico
82.1
4, 7 21.8 23.0 31.1 15.8
7.2 24.9 42.4 3.2 1.9
13.7
100.0
1.8
100.0
7.8
100.0
0.8
100.0
0.2
100.0
ISSUES CONFRONTING
THE PHILIPPINE IT
INDUSTRY AND ITS FUTURE DEVELOPMENT
What are the reasons behind the worrisome prospects for the Philippine IT industry? Below are a number of factors that may explain the industry's present situation, some of which are systemic in nature.
_" Lack o/political will to implement a comprehensive policy to promote IT as an industry IT can be viewed from three perspectives. One, as a strategic industry producing products for exports and domestic use, either for consumers or downstream
industries. Two, as a generic technology using IT in the production process to improve productivity and performance. Three, as an advanced infrastructure, like in telecommunica-
tions and transportation, (Hanna et al. 1996).
to improve the-delivery of services
134 ] JOURNALOFPHILIPPINEDEVELOPMENT As an industry, semiconductor has been identified as an export winner in the country. But apart from the BOI incentives for semiconductor firms, there is no comprehensive and clear policy to promote IT as an industry. This is very evident under Section 1 of EO 125, which states: "[It has been] declared the policy of government in furtherance of national development to create the appropriate policy and institutional environment to rationalize and accelerate the use, application, and exploitation of IT as a productivity tool and as a development strategy for modernization and economic development." It is clear from the above policy declaration that the Philippines is promoting IT as a generic technology (to improve productivity) and as an infrastructure (for modernization and economic development) but not as an industry. This is in contrast to the experience of the NIEs, which have explicit policies to promote IT as an industry. The lack of political will to implement IT as an industry is made more evident by the following: _- IT21 unrealistic. IT21, launched in early 1998, outlines the country's vision and goal of transforming itself into "Asia's Knowledge Center" under a three-phase strategy. Phase I: the infrastructure for every sector of the economy to have access to IT should have been laid by 2000; Phase II: by 2005 the use of IT should have become pervasive in daily life while the country should have produced competitive IT products for world market; and Phase 3: the vision should have been realized within the first decade of the 21_ century (N1TC 1997). The plan lacks focus. The vision, while ambitious by itself, is not realistic considering the current state of the industry. For example, Phase I has yet to materialize. The government h_is also been identified as the lead user of IT but the whole bureaucracy is not even interconnected to this day.
AUSTRIA: IT Industry ]135 Fragmented government efforts in promoting IT. Several offices are in charge of policymaking and promoting IT in the country. One of these is the National IT Council (NITC), which was set up during the Ramos administration as the highest planning and policy advisory body on IT, with the National Computer Council (NCC) as its technical arm. Under the Estrada administration, the Y2K Commission and the Presidential Consultant on IT and Communication were established as additional policymaking bodies. The Y2K Commission was in charge of monitoring the government and industry's preparedness to deal with the millenium bug. Today, the existence of several IT offices has made the functions of NITC redundant, making the coordination of government efforts on IT difficult. _- Inadequate investments in R&D. There is a general consensus that for high-tech industries, investment in R&D is at least equally important as those related to production (Ernst and O'Connor 1992). Investment in R&D has become a source of competition for IT firms considering the fast speed of technological obsolescence in recent years, which is one year for some IT products. Product development has therefore become an essential factor to remaining competitive and a source of temporary technological monopoly rents until new technologies become obsolete or better technologies are developed. The NIEs have invested a lot in R&D to develop their technological capability. South Korea had an average ratio of investment to GNP of 2.3 percent per year during the period 1990 to 1995; Singapore had 1.1 percent, and Taiwan 1.7 percent (NAPES database). In contrast, a study by Cororaton (1999), using the UNESCO data, shows that the Philippines' ratio of investment to GNP--at 0.2 percent in 1992--is far below the maximum of 3 percent among the countries studied.
136 JOURNALOF PHILIPPINEDEVELOPMENT _- Lack od speciah'zed sla'lls [or tu'gh value-added lTproducts. The skills requirements for work beyond final assembly have become greater. However, the country's engineers do not have the specialized skills for high value-added IT products. Companies have to spend a substantial amount to send their manpower to the United States for training. Such a high cost erodes their price competitiveness. Compounding the situation is the fact that the average stay of this kind of manpower is only two years, since they are being pirated by companies overseas.
_- [ndrastructure and institutional bottlenecks. Inadequate
infrastructure,
particularly
in transportation
and
telecommunication, and congestion in the metropolis, have
been perennial problems of the country. There is also the high cost of doing business caused by delays in the processing of
papers and graft and corruption. High infrastructure costs and
delays erode profitability and competitiveness.
One clear institutional bottleneck affecting the industry is the apparent absence of a complete and accurate database for
IT services and software. Exports and imports of IT services are recorded under the "services" account classification of the
Bangko Sentral ng Pifipinas (BSP), which includes all other types of services. Other official statistical gathering bodies like the National Statistics Office (NSO), National Statistical Coordination Board (NSCB), and the Department of Trade and Industry (DTI) also do not distinguish IT services and software from other services under their existing classification of accounts or industries. The absence of such database makes
industry analysis difficult, if not impossible.
_- Inadequate support industries, including those providing support services. The high import content of the country's IT industry is also caused partly by inadequate support industries and services in the country that are supposed to allow the primary production activities to take place without interruption and to adapt and expand.
AUSTRIA: IT Industry 1137
_" Demand for 1T applications: is there a solid domestic market
base?Despite the growth in demand for IT products as a result
of the increased per capita income in recent years and the
deregulation of the telecommunication industry, the current
domestic market has remained small. However, it has a great
potential for expansion. The public service sector can give the
industry a big boost if only it would increase its demand for IT.
The computerization of public service in the NIEs has not only
improved the delivery of such service and lowered transaction
costs between government and business or households, it has
also created a huge domestic demand for IT, which in turn
has led to the industry's growth and expansion. In the
Philippines, while there is admittedly a marked increase in the
computerization
of government projects, the state of
technological advancement in the public sector nonetheless remains low.
CONCLUSION AND RECOMMENDATIONS The study has highlighted the structural weaknesses of the Philippine IT industry. The industry is still on a substantially lower level than the NIEs, both in terms of product sophistication and the technological complexity of the production process involved as production consists mostly of labor-intensive assembly operations. This was shown by the high concentration of exports of the industry in a few low value-added products. Localization of inputs is still at an embryonic stage as the industry relies on parts imported on a consignment basis. Infrastructural and institutional bottlenecks and the inadequacy of the educational system to meet the technical human resource requirements of the industry have remained critical constraints to the industry's further growth. Technological advancement in the IT industry is very fast. However, the limited capability of the industry in the country in terms of skills and facilities has constrained the continued transfer of process technologies from multinational companies. Unless the industry improves its local capability to cope with new and advanced technologies, its long-term competitiveness will be at
138 [ JOURNALOF PHILIPPINEDEVELOPMENT
risk, especially as the country's ;competitors are increasing their
stake in the global IT market much faster than the country.
The main agenda at the turn of the century should be to
transform the Philippine IT industry from a labor-intensive, low-
skill industry to a knowledge- and technology-intensive
one.
However, for the country to upgrade its competitive position in the industry amid the accelerating global technology race, a
number of cross-cutting strategies to lessen or overcome such
difficulties may be considered:
a) Implementation
of a comprehensive
IT policy
# Private sector to identify ITproducts and services for promotion
and development. The industry itself should identify its niche
products and services. These products and services will then be the focus of efforts on R&D, manpower development, and investment.
The industry needs to capitalize on 1T services, which appear
to be its greatest strength. With the fast development of
telecommunications, demand for IT services offshore is expected
to increase, given that the cost of providing 1T services through this
modality is much cheaper than providing it at the client's site. Likewise, while the country is traditionally known as a
computer service provider, the industry needs to strengthen its capability in software development. This could be done by encouraging consumers to use local brands, thereby increasing
the demand for local software. Along the way, this strategy
will provide the software industry with experience and a base
for relevant skills and ultimately become the launching pad
·for exports.
# Review policy gaps in IT. IT21 should be reviewed and strengthened where it is weak. Considering that IT policies are currently being implemented by various agencies, there is a need to review these policies and identify policy gap_.
# Strengthening of NITC as agency tasked to promote the IT industry. Currently, the NITC has no budget and relies on its
AUSTRIA:IT Industry [139 members to finance its meetings. An agency without a budget is like a car without gasoline; it cannot function. Hence, the NITC should be given an annual budget for it to carry out its functions. Also, the Commission on Higher Education (CHED) and the Department of Education and Sports (DECS) should have greater involvement in the NITC, particularly in IT policy formulation, considering their critical role in developing the technical human resource requirements of the IT industry. b) Investments in R&D # Private sector to invest more in R&D. Given the limited government budget, the private sector should assume a greater role in R&D for the industry. The government can encourage the private sector to do so by giving them some incentives. , Focus R&D on high value-added ITproducts, product design and process. Accessing the newest technology through licensing is becoming more difficult, since greater emphasis is now given to intellectual property rights (IPR). Hence, the country's limited resources should be directed to the development of the technologies required by the targeted IT products. * Strict enforcement of IPR. To encourage the development of new products and process, the country should strictly enforce intellectual property rights. c) Development of specialized skills for high value-added IT products * Incorporate IT in all levels oF education (prima05 secondary and tertiary). While this measure would mean an increase in the cost of education and/or additional years in schooling, it would undoubtedly create an "IT culture" in the mindset of the future workforce and prepare them for the greater skills requirements of globalization. To implement this proposed measure, DECS and CHED should be technology advocates themselves. Investment in
140i jOURNALOFPHILIPPINDEEVELOPMENT computers and student access to the Internet should get a bigger share of the budget of these two agencies. , Re-design engineering and other natural sciences curriculum. Emphasis should be given to developing the capability, creativity and willingness of students to develop new products and processes. The industry should be involved in designing the curriculum to ensure that graduates have the kind of education the industry needs. , Investment in specialized teclmical training schools to enhance the technical competencies of the labor force. Skills are essential to moving up the technological ladder. An engineering course is not enough, since developments in information technology are happening very fast. Again, the industry should be involved in designing the training programs. d) Development of a national information infrastructure * Investment in telecommunications infrastructure. Government should invest in building public telecommunication and specialized networks that Could make IT accessible to everyone. In this regard, government-business partnership has a crucial role to play in guiding thebroad directions for standards, regulations, and network-based applications. For specialized networks (e.g., customs, health services, government database), standardization and coordination among the various agencies concerned are essential. , Harmonize classification oЈIT services. IT services should be classified separately from other types of services. Statistical gathering agencies should follow the GATS Services Sectoral Classification as follows: (i) consultancy services related to the installation of computer hardware; (ii) software implementation services; (iii) data-processing services; (iv) database services; and (v) others (WTO 1998).
AUSTRIA:IT Industry 1141 * Build a database/or IT services. There is a need to build a comprehensive statistical database for IT services for use in formulating plans and strategies needed to develop this segment of the industry. The database should follow the international classification of the industry, as discussed above. Such database should form part of the existing government statistical system accessible to the public. e) Role of government in IT diffusion , Create an enabling environment/or ITdiffusion. This could be achieved through cheaper access to information and technology. Such access would encourage potential IT users to invest in information and communications facilities, thereby creating more demand for IT products. , Government to utilize local IT consultants. Instead of hiring foreign consultants to provide IT services in government projects (including foreign-funded projects), the government should utilize local consultants. It is ironic that the demand abroad for the services of Filipino IT professionals is increasing while they are not being fully utilized here.
142 I ' JOURNALOFPHILIPPINEDEVELOPMENT REFERENCES Austria, M. and E. Medalla. 1996. The Study on Trade and Investment Policies in Developing Countries--Philippines. Japan: Institute of Developing Economies. BETP (Bureau of Export Trade Promotion). 1998. Industry Profile--Electronics, Industrial Manufacturers Division, Bureau of Export Trade Promotion. Makati City, Philippin6s: BETE Department of Trade and Industry. · 1999. Information Technology Services Industry Profile, International Services Division. Makati City, Philippines: BETE Department of Trade and Industry. Chia, S.Y, 1995. The International Procurement and Sales Behaviour of MultinatiOnal Enterprises. InCorporate .Links and FDI in Asia and the Pacific, edited by E Chela and E Drysdale. Harper International. Cororaton, C. 1999. R&D Gaps in the Philippines. PIDS Discussion Paper Series No. 99-16. Makati City, Philippines: Philippine Institute for Development Studies. Department of Foreign Affairs and Trade (DFAT). 1998. The Philippines Beyond the Crisis. Australia: East Asia Analytical Unit, DFAT. Ernst, D. and D. O'Connor. 1992. Competing in the Electronics Industry Paris: Organization for Economic Cooperation and Development. Fernandez, D. and J. Riedel. 1998. US Companies' Business Operations in Asia: Information Technology Industry. In Can Asia Recover Its Vitality? Globalization and the Roles of Japanese and US Corporations, edited by IDE and JETRO. JETRO and IDE Joint Symposium, Tokyo, Japan.
AUSTRIA: IT industry [143
Hanna, N., S. Boyson and S. Gunaratne. 1996. The East Asian Miracle and Information Technology: Strategic Management of Technical Learning. WB Discussion Paper No.326. Washington, D.C.: World Bank.
Hong, S.G. 1997. The Political Economy of lndustrial Policy in East Asia--The Semiconductor Industry in Taiwan and South Koma. Massachusettes, USA: Edward Elgal Publishing, Inc. Mikami, Y-.1998. Asia's PC and Semiconductor Industries and the Conditions for Their Future Development. In Can Asia Recover Its Vitality? Globalization and the Roles of Japanese.and US Corporations, edited by IDE and JETRO. JETRO and IDE Joint Symposium, Tokyo, Iapan.
Nagasaka, T. 1998. The Industrial NetWorks of Japanese Corporations. In Can Asia_ Recover Its IStality? Globalization and the Roles of Japanese and US Corporations, edited by IDE and JETRO. JETRO and IDE Joint Symposium, Tokyo, Japan.
NAPES (National Asia-Pacific Economic Scientific· Database).
Canberra, Australia: Australian National University.
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NITC (National Information Technology Council). 1997. IT21 Philippines: Asia's Knowledge Center--IT Action Agenda for · the 21st Century Manila: NITC.
NTC (National Telecommunications
Commission). 1998. NTC-
Annual Report 1998, Department of Telecommunications and
Communication. Quezon City, Philippines: NTC.
Poapongsakom, N. and B. Fuller. !998. The Role of Foreign Direct investment and Production Networks in the Development of the Thai Auto and Electronics Industry. In Can Asia Recover Its Vitality? Globalization and the Roles of Japanese and US Corporations, edited by IDE and ]ETRO. JETRO and'iDE Joint Symposium, Tokyo, Japan.
144 [ JOURNALOF PHILIPPINEDEVELOPMENT Swee, G.K. 1996. The Technology Ladder in Development: the Singapore Case. Asian Pacific Economic Literature 10 (1):l- World Bank, 1997. Philippines: Managing Global Integration. World Bank Report No. 17024-PH. Washington D.C.: WB. World Trade Organization. 1996. Ministerial Declaration on Trade in Information Technology Products. Singapore: WTO. .1998. Computer and Related Services, A Background Note by the Secretariat. Singapore: WTO.
AUSTRIA: IT Industry
[145
Appendix Table 1. Share in total IT exports, 1991-1997 (%)
Code Description
1991 1992 1993 1994 1995 1996 1997 Average
Computer hardware
75260 Input or output
units
4.9 6.8 5.6 3.9 2.7 4.5 11.4
5.7
75997 Parts and accessories of
data-processing
machines
4.9 0.7 0.8 1.2 2.3 3.1 2.6
2.2
Semiconductors
77632 Transistors with lessIW
dissipation rate 1.2 1,3 1.0 1.6 1,7 1.8 1.5
1.5
77639 Other semicon
ductor devices
3.1 4.9 4.2 3.2 3.0 3.6 2.2
3.4
77641 Integrated circuils 1.3
0.0 0.0 5.3 11.0 10.1
4.0
77649 Electronic
microassemblies 31.6 14.5 17.2 17.3 10.4 2.9 4.0
14.0
78433 Brakes and servo-brakes
0.9 1.0 1.6 1.2 1.2 i.2
1.0
93102 Materials imported 37.7 54.0 54.3 56.0 60.6 59.7 56.9
54.2
on consignment basis for the manufacture of
semiconductors and
electrical equipment
Telecommunications
76411 Telephone sels and
videophones
0.8 1.9 1.8 2.1 1.9 3.6 3.3
2.2
76432 Transmission apparatus
3.4 5.5 5.2 4.2 2.7 1.2 1.0
3.3
76493 Aerial and an_mae 2.6 1.8 1.8 2.0 1.8 1.5 0.7
1.7
and parts used for radio telephony and radio _s_egraphy
Total sham
91.5 92.3 92.9 93.1 93.5 94.1 94.9
93.2
Source: PCTAS
146 ] JOURNAL OF PHILIPPINE DEVELOPMENT
Appendix Table 2. Share in total IT imports, Philippines, I_ul-luv," UT,0
Code Descriptio,_
19911. 1992 1993 1994 1.995 1996 1997 AveJ'age
Computer ha_.dware
75260 Input or output
units
018 4.7
1.6 ·1,3 1.2
1.3
0.8
11.7
75997 Parts mxd accessories
of data p,'ocessing
macl_Jnes
4.2
5.5
3.6
3.2
3.9
5.2
8.8
4.9
" Semiconductors
77641 Integrated circuits
1.5
0.7
1.0
0.9
1..2 11).8 2.1
1.2
·77649 Electrotnic
mic,'oasseJJablies
2.{) 2.3
1.5
1.1
1.0
1.0 2.7
I·.7
· 77689 Pm'ts of electronic
integrated circuits ed_d
micJ-oassemblies
28.9 .11..4 12.3 12.3
9.5
8,1 ·14.0
1.3.8
' 931.02 Materials imported
on consig,_ment basis for the manufacture of
semiconductors_ and electrical
·.
equip,nent
32.4 43.8 46.2 48.8 49.1 48.4 40.2
44.1
Telecommunications
76415 Telephonic or telegraphic
switching apparatus 1.7
1.6
2.3
3.7
3.0
2.9
2.3
2-5
76431 Transmission apparatus ofl'ter than for
radio-broadcasth'tg or
television
0.9
1.5 1.9
1.8 3.0
2.5
2.3
2.0
7649:1 Parts of electrical
apparatus for lh_e
telephony
2.0
3.6
2.5
2.4
2.4
4.4
4.7
3.2
or te.le .gra g_hY
76493 Ae,',als or antennae
and parts used for radio telephony ,-u_d
radio telegraphy
3.5
4.4
5.5
4.3
4.3
5.4
3.3
4.4
·Other IT products
77259 Connection and contact
elements .for wh'es and
cables
1_9 1.8
1.5
1.5 1.3
0.9
0.8
1.4
77314 Electr_rtic conduўto,'s 0.6
1·.4 1-3
1.3
1.1
fl.9
0.7
1.0
Tota.1 share Source: PCTAS
80.3 82.8 81.2 82.7 811.0 81.8 82.8
81.8
1147 AUSTRIA: IT Industry
Appendix Table 3. List of competitive and non-competitive IT products, Philippines, 1991-1997
Code
Competitive Descriptiort
Code
Non-competitive, Description
75260 77631 77632 77639 77641 77649 77681 78433 76411 76424 76432 76492 77125 76483 76493 77232
Input or output units Diodes, other than photosensitive or light emitting Transistors with a dissipation rate of less than 1W Other semiconductor devices Digital monolithicintegrated circuits Electronicmicroassemblies Mounted piezo-electric crystals Brakesand servo-brakes Line telephone sets wifl-tcordless handsets Line telephonehansets Transmissionapparatus incorporating reception apparatus Partsofamplifiers, microphones and loudspeakers Other inductors for power supplies for data processingma&h'tes Radarand remoteco,rtrolapparatusotherthan for toys Aerials and anteru'taeand parts used for radio telephooy and radio telegraphy Other fixed resistors for power handlingcapacity
75220 Otherdigitalautomaticdataprocessirtgunit 75230 Digitalautomatic data processing unit other than those of sub-heading 7522 75290 Other units of automatic data
processing machines
75997 Partand accessoriesofheading752 77220 PrJ.ntedcircuits
77633 Transistors with a dissipation rateof 1Wor more
77635 Thyristors, diacs, and triacs
77637 Photo_nsitivesemiconductor devices 77643 Other monolithicintegrated circuits
77645 Hybridi,ltegratedcircuits 77688 Parts of mounted piezo-dectric crystals
77689 Parts of electronicintegrated circuils and microassemblies'
76382 Trhnscribhrgnlachi,les
76..38.3Sound-reproducingapparatus,cassettetype
76384 Magnetic tape recorders, cassette type 76415 Tdephooic or tdegraphic switchillg apparatLts
%419 Othet'apparatusincludiogentry-phones),stems 76431 l'hmsmission apparatus
76481 Portablereceivers(orcalling,alertingandpaghlg 76491 Parts of electrical apparatus forlinie
telepho,ry and teleg,aphy
76499 59850 72819
Magnetic type sound heads and paris for recording Chemicalelements(toped f()luse ill](_Iect[Io[_ics Parts of machines used (or semiconductor w afers
72842 72852 72855 73111
Ellcapsulation equipment forsemiconducto[' assembly Parts of'encapsulation equipment Partsofappaattsfose'nc +dtct sassenby Machines for tirerem.ovalof nlaterial
by laser [11the production of semkonductor Wflves'
73591 Parts of focusediron beam.milling machines 74131 Furnace8 and ovens for the production of semiconductor devices
%133 Apparatus and parts of the manufacture of semiconductor devices 741_ Partsofapparatusforrapidheatingofwafers 74189 Chemlcalvapor depositkm apparatus for semiconductor production 74190 Partsofchemicalvapordeposition apparatus for semiconductor production 7;4359 Sph'_dryer for sea'dcondLtctowr aferprocessh'tg 74391 Partsofspin dyrer forsemiconductor v,,aferprocessing 74565 CleaningmaclTincfsr'_sremiconductt_pr ackages 74918 Parts of automated machines for transport of the ro.anufacture[tf_sere.[conductodr evices
75113 Word processh'tgnl.achines 75131 Electrostaticphotocopying apparatus 75133 Other photocopying appa,'atus
148 I JOURNALOF PHILIPPINEDEVELOPMENT
Code
Competitive Description
Code
Non-competitive Description
75910 Partsartdaccessoric.o'sfph(_ttKt_pyinagpparatus 75995 'Parts and accessoriesof machines ofsub-
heading 751.2 76421 MiCrOl_Shonheasving a frequeocy ,'ange of 300 Hz to 3,4KHz
76423 Loudspeakers, wlthout housing 77121 Static converters for automatic data
77231 77233 77235 77238 77255
processing n'tacl'dnesand telecon_munications Fixedcarbonreaistors,con'tpositionor filn'types Wirewound variableresistors, including rheostats and potentiometers Other variable resistors Partsof variable resistors Electror_icswitches
77258 77259 77314 77315
Plugs and sockets for co-axialcables and _,'inted circuits t_onnecti_r_and contact elements ['ofwires and cables Eleclronlccol"lductors Other electroniccortductors
77863 Alumi,nmlalectrolytic-fixedcapacitors 77865 Ceramicdielectric,multilayer fixedcapacitors 77866 Dielectric-fixedcapacitors of papers and j_lastlcs 77867 Othe,' fixed capacitors 77868 Variableor ad ustable(pre-set)apparatus 77869 Parts of capacitors 77878. Proximity cards and tags 77879 Parts of 77878
77884 77885 87131 87425 87426 87431 87435 87437 87439
Indicatorpanels irlcorporati,lgLCDor LED Parts o'fapparatus oFsubheadmg 77884 Electronbeam microscopes Optical instr u,nents and appliances Parts aridaccessoriesof opffc_lhlstru,nents h_.strurneotsfor nieasurl'llgor checking theflow ofli_.uids hlstru,r_.e,_ftos,'nleasuring o,'checkir_gr_ressure Other instruments for measuring and- cbecking of heading 759.1 Parts arid access_ries_f instruments of
87443 87445
headirlg 759.1 Spectrometers, spect,'ophotometers, and _ectographs using optlcal radiations Uther i,lstrumentsand apparatus usillgoptical radiations
87446 Other it'lstrumerttsand apparatus under heading 8744 87449 l'artsand accc.,ssoric(_}fproductsofbeading 8744 87477 b'lstrun_.el_.atnsd apparatus designed for tetecommun[cations
87478 hlstl_.trnentasnd apparatus forsemicorlductor wafers 87479 Parts and accessories of iostruments _'or semicoJ'_ductordevices
88135 Apparatus for making circuit patterns for semiconductor wafers
881_ Partsand _cessori__,osftheapl:_raatusofheadh_g 8glK_
89845 Magnetict',a}_esof'a width exceeding6.Smm 89859 Other magnetic taFes and discs 89867 Magnetic tapes for reproduch_g phenomena other than sound
89879 Other media for reproducingphenomena

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