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Fostering innovation in the Philippines

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A sales person shows a buyer the features of Vivo mobile phone displayed at a stall inside a Cyberzone of the SM Mall of Asia in Pasay city, metro Manila, Philippines, 7 July 2017. (Photo: Reuters/Romeo Ranoco).

In Brief

Product innovations like Apple’s iPhoneX, the Fitbit watch and Bitcoin are contributing to the mainstreaming of innovation in the development policy landscape. Innovation is now viewed as key to finding enduring solutions to challenges such as job shortages and sustainable energy use.


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Across the globe, countries have committed to fostering innovation by 2030 in the UN Sustainable Development Goals. Developing countries such as the Philippines appear to be taking cognisance of the importance of innovation with an entire chapter in the Philippine Development Plan devoted to science, technology and innovation.

While innovation is recognised as important to improving productivity, firms and governments are paradoxically not investing enough therein.

The share of research and development (R&D) expenditure to GDP in the Philippines continues to be less than the 1 per cent UNESCO benchmark and below the R&D spending of several other ASEAN member states. Such trends are consistent with the results of the 2017 Global Innovation Index, in which the Philippines ranked 73rd out of 127 economies and fifth out of seven ASEAN members states (behind Singapore, Malaysia, Thailand and Vietnam but ahead of Indonesia and Cambodia).

Poor innovation investments typically arise because of a lack of complementary factors (including physical and human capital) both at the level of the firm and of government. While technological innovation in particular has the potential to make prosperity inclusive, it has also created digital divides. The proportion of people with internet access now stands at more than half of the global population (53.6 per cent). This is vastly better than the rate of 6.5 per cent in 2000, but it still means that nearly 3.6 billion people (more women than men and mostly from the developing world) do not have access to the internet and thus cannot avail of digital dividends. This is in spite of the much-lowered cost of ICT services compared to a decade ago.

In the Philippines, the increased use of digital technologies has hardly translated into inclusive growth, with poverty rates at a practical standstill despite recent robust economic growth.

Several surveys that measure innovation in the Philippines — including the Philippine Institute for Development Studies’ 2015 Survey on Innovation Activities and the World Bank’s Enterprise Survey — suggest that only one third of firms are product innovators and only around 30 to 40 per cent are engaged in process innovation.

The major determinants of innovative behaviour among Philippine firms are found to be: gross sales of the firm (which correlate with establishment size), educational attainment of employees, knowledge management practices, location and the industry group to which the firm belongs.

Firms report that cost factors (especially the direct costs of innovation activities) and a lack of necessary skills and knowledge are significant hindrances to innovation. A quarter of micro-, small- and medium-sized enterprises consider the direct costs of innovation to be too high. More than 10 per cent cite a lack of qualified personnel, the difficulty of finding partners in innovation and uncertain demand for innovative goods and services as additional challenges. 16.6 per cent report competition from established enterprises in their markets as a barrier to innovation.

Knowledge networks are limited in the Philippines, with firms tending to cooperate with other establishments within their enterprise, with their customers and with their suppliers. Firms also generally do not access technical assistance and support from the government or research institutions.

Even if the Philippines and other developing countries decided to spend more on R&D and innovation, this would not guarantee returns on innovation. When countries are far from the technological frontier, there are potential gains from ‘catch-up’ increases. But if the stock of human capital, firm and management capabilities or financial markets are lacking, then returns could be low and possibly even negative.

The Philippines needs a concrete plan of action to stir innovation. It needs to strengthen linkages among innovation actors and build up its pool of research scientists and engineers. An important lesson could be learnt from China: in the late 1970s to early 80s, China made massive investments in human capital and sent thousands of scholars in science and engineering to the top US universities, and has subsequently reaped returns on these investments.

The importance of leadership also cannot be ignored. Managers must become knowledge builders and the government must provide meaningful support to firms and innovators by boosting investments in technology and research infrastructure. The government should also reduce regulatory burdens to innovation and improve regulatory quality. This way, returns and dividends on innovation investments can be maximised and reaped by all.

Jose R G Albert is Senior Research Fellow and Francis M A Quimba is Research Fellow at the Philippine Institute for Development Studies (PIDS). The views expressed are the authors’ own.

4 responses to “Fostering innovation in the Philippines”

  1. And not one word about the real cause for the lack of productive factors and the consistent poverty rate in spite of growth: corruption.

  2. Thanks for an informative analysis. Ranking fifth our of seven ASEAN member states and 73rd in the world means the Philippines has a lot of catching up to do. As an admittedly not terribly well informed outside observer it seems to me that the country is caught in an unfortunate negative feedback loop where its poverty, poor educational system, and Muslim insurgency movements fuel ongoing instability which the government cannot seem to do more than barely cope with. Would investments/aid from other countries like the USA, Japan, and China help shift these problematic dynamics? With Trump in office one can be sure the USA won’t offer much. Japan is struggling with its own demographic and security challenges. Will Duterte turn to Xi and China?

  3. Thanks for the comments, Barry and Richard. Re your point about corruption, Barry, while corruption is a factor for poverty traps, specifying corruption to be the sole cause for the lack of productive factors and the consistent poverty rates may be going too far. My work in about two dozen countries (both advanced and developing economies) suggests that corruption is everywhere, taking different forms. It certainly is a driver for poverty traps, but it isn’t the sole driver. In the case of the Philippines, I would point out that our being feudal makes inequalities persist with poorer areas continuing to elect “fat dynasties”, further fueling social inequities. Regarding your points Richard, foreign investments are certainly welcome. We haven’t attracted as much as other countries also, but regardless of whether we attract more investments, there is danger in any developing country that even if we increase investments in innovation and R&D, the returns to these investments may be weak, or even negative if complementary factors are missing. This is why catch up in the innovation landscape will ultimately need human capital investments in making our people more receptive to science and engineering careers, as well as making sure that both public and private sector managements are shifting paradigms to embracing innovation, coupled with government weeding out regulatory frameworks that can be barriers to innovation. Cheers.

  4. This argument is repeatedly being made but strikes me as having little basis in development theory. Innovation is expensive. It is much cheaper to adopt technology from more developed nations, who have to do it to have any growth at all. This is half the basis of convergence theory (the other being diminishing marginal returns to capital accumulation). The Philippines is a long way from the technology frontier, so it is little wonder that its firms don’t bother with developing new technology. All the factors the authors identify as limiting R&D in the Philippines are functions of underdevelopment. Investing in R&D essentially amounts to specialising against ASEAN nations’ comparative advantage. This is a bad idea. At the very least, make the point that firms should focus R&D on tailoring technology from advanced nations to local conditions; things like the idea of 80% functionality at 20% of the price, which dominates, among other things, the smart phone market in developing countries. It’s absolutely sensible for firms in these nations to have low R&D spending, especially when they are a local subsidiary of a foreign firm based in a more advanced nation that has a comparative advantage in advanced technology development.

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