investment and innovation in manufacturing (final 31 dec 2012)

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Investment and Innovation in Manufacturing: FirmExpansion, Job Creation, and Improved Labour

Productivity as Solutions to Underemployment

Louisa Camille R. Poco

Jose Maria L. Marella

31 December 2012



1. Introduction

It is alleged that the dismal underemployment situation in the Philippines is a byproduct of the

historical neglect of the country’s manufacturing sector. The crucial link between manufacturing

and employment is the former’s potential to generate and sustain high labour productivity.

Special attention must be given to the semiconductor group since the country is seen to have a

comparative advantage in this area according to Usui (2012). In light of this, huge and sustained

investments in manufacturing are warranted for firms to expand their activities and generate

employment. In addition, the institutional strengthening of the science and research community

should be prioritized in order for technology and innovation to complement manufacturing

expansion with higher productivity.

2. Underemployment Situation

Table 1. Underemployment Rates according to the Labour Force Survey from 1997-2012

Source: National Statistics Office, Labour Force Survey

Underemployment reflects under-utilization of the productive capacity of the labour force

(KILM 7thed.). The National Statistics Office (NSO) adapts the measure’s definition that

includes all employed persons who express the desire to have additional hours of work in their

present job or an additional job, or to have a new job with longer working hours. Visibly

underemployed persons are those who work for less than 40 hours during the reference period



and want additional hours of work. Historically, the double digit rate has remained high in spite

of the booms and busts that the economy experienced under different administrations. Drivers of

the economy, the agriculture and services sectors have been consistently reported to be the

primary sources of underemployed persons. The desire to for more work-hours is especially

more pervasive in rural parts of the country. Bottom line is, people have jobs but are not satisfied

with them. Time-related underemployment rate paints a dismal picture of how corrective policies

that could have been implemented through time were not followed through over the years.

Beyond the measure is the “invisible” underemployment that reflects the terms of income earned

from the activity, low productivity, or the extent to which education or skills are underutilized or

mismatched. This is much more difficult to quantify and no definitive measure has been created,

according to the International Labour Organization. Although the numbers report the story, it can

also be established that no sustainable plan of action has been carried out in policy making and

implementation to solve the pestilent problem in the labour market that will improve efficiency

and productivity of workers.

3. Productivity and Underemployment

Most high-income economies followed the successful trajectory of initial agriculture dominance

followed by industrialization and finally post-industrialization – Communist China’s economy

was predominantly agricultural before adopting more outward policies and becoming the world’s

tradable goods powerhouse. In terms of productivity, the sectoral transition of this economy’s

labour force is smooth. It moved from low-productivity agriculture to a robust high-productivity

industry sector. Productivity growth and sectoral expansion are sustained, generating jobs and

translating output per worker into higher wages.

In the case of the Philippines, leapfrogging the conventional path has led to a misallocation of

the country’s labour force. According to the Norio Usui’s Asian Development Bank Report

(2012), the contribution of services to output has increased by 19.1 percent while that of

manufacturing has shrunk by 4.4 percent. The same report finds that a low-income service-led

economy will be unable to absorb a labour force with generally “moderate” skills.



Computations based on data from the World Bank and International Labour Organization

indicate that over a 30-year period, employment in manufacturing has declined by 1.7 percent

and that of services has expanded by 16 percent. Throughout this period, manufacturing has

employed more than half of the labour force in the industry sector.

Investigating the trends at the supply side, the 2010 Philippines Skills Report of the World Bank

states that there has been a dramatic increase in educational attainment from 1988-2006,

revealing higher shares of workforce composition with higher education levels but overall skills

demand has also grown in time in the country. The service-driven expansion of the economy

requires higher educational attainment to translate to higher wages and productivity. Chances of

employment will be higher for workers with higher educational attainment. However, the

workforce in the country is generally composed of elementary and high school graduates. Levels

of education will prevent workers from improving their condition and gaining decent

employment.

Hence, the underdevelopment of manufacturing throughout history has led to an oversaturated

service sector which only propagates underemployment. This breeds a continuous cycle of

dismal numbers in the labour market. Special attention needs to be given to the manufacturing

sector in order to generate more jobs and augment productivity therein.

4. Stimulating Investment and Generating Higher Productivity

Alejandro Lichauco’s Nationalist Economics (1988) discusses the country’s fallbacks in heavy

industrialization – among which are the previous governments’ refusal to heed the call to heavy

industrialization, anti-industrialist agendas of foreign entities, and political instability. Intal &

See (2004) further discuss that during the 1990s, manufacturing was fettered by coup attempts,

oil price increases from the Gulf War, calamity, and ultimately the 1997 Asian Crisis. The Asian

Productivity Organization (APO) Productivity Databook 2012 finds that China and Korea have

ranked the highest in manufacturing’s contribution to labour productivity growth between 1995

and 2010. Furthermore, between 1970 and 2010, export share to GDP rose from -10 to about 4

percent of GDP for Korea while in China it rose from 0 to 4 percent of GDP. These figures

cannot overemphasize the bigger picture of the importance of devoting a country’s resources to a

robust and dynamic manufacturing sector.



Data from the National Statistics Office shows that Electronic Products has consistently

outperformed other industries in terms of exports, particularly in the semiconductor subsector. Of

the 936 firms in the electronics industry, the top chip makers and HDD producers are operating

in the Philippines. These include Philips, Sanyo, Fairchild, Hitachi, Toshiba, and Fujitsu among

others. Over 500,000 Filipinos are employed in these firms. But these figures are only modest.

The industry has been optimistic for quite some time, over expecting but still underperforming in

terms of growth. Over a period of 18 years, investment in electronics has averaged $879 million;

the trend does not depict any pattern and has even fluctuated. There were years with low

investmentat $40 million with 2010 registering the highest in history at $2.27 billion. The

performance of electronics must be bolstered by investments with a sustained upward trend.

Although the Philippines’ semiconductor sub-industry is purportedly performing well, it is not

performing well enough. Support has been garnered from government agencies in establishing

research and development facilities to boost the competitiveness of the country’s semiconductors

and electronics since last year’s global slump. Currently, the industry is still mainly engaged in

assembly and testing which are relatively low productivity activities compared to innovation and

design activities. Multinational firms have sought to locate the latter supply chains abroad but

recent economic downturns have led them to rethink strategies. More specifically, the

Philippines is emerging as a key global industry player even amidst competition from China,

Vietnam, Indonesia, and Malaysia. Expanding activities into innovation and design would allow

the sub-industry to move up in the value chain.

Gilberto Llanto (PIDS 2012) found that research and development is an important factor in

improving a country’s total factor productivity (TFP). Citing Cororaton (1997), underinvestment

in R&D is caused by weak funding from both public and private sector. Furthermore, Cororaton

(1999) found that the Philippines ranked very low in R&D expenditure as well as number of

scientists, engineers, and laboratories. Of 91 countries it ranked 68th. Furthermore, he found that

the Philippines has only 152 scientists per million in the population while the maximum level for

other countries is 6,736. In particular, one may conclude that the science and research sector is

underrepresented and suffers from lack of institutional strength. The country, if it is able to

attract spending in R&D and enable the proper institutions, will be able to translate investment

into higher productivity and wages.



5. Solutions

5.1. Investment

The first step is to introduce and implement comprehensive policies and incentives to attract

investments. This must be complemented with the essentials in cultivating investment

environment such as building infrastructure, reducing the ‘red tape’ and strengthening

institutions. This year, the country has improved in terms of global competitiveness, ranking 65

out of 144 countries in the recent report of the World Economic Forum. Cumulative FDI in 2011

yielded net inflows of US$ 1.3 billion despite the global slowdown. However, neighboring

countries such as Indonesia, Vietnam and Malaysia posted earnings from industrial giants

Singapore, Japan and the United States of US$19.3 billion, US$11 billion and US$10 billion in

2011 respectively.

It is important for industries to be expanded rapidly where workers can benefit and can obtain

employment. This paper emphasizes the significance of diversification and expansion that are the

keys in developing the top recipient of FDI commitments, the manufacturing sector. The wide

gap of inflows relative to Southeast Asian neighbours can be attributed to neglect in promotion of

core regulatory and industrial capabilities in growing the sector. A recent study by the Philippine

Institute for Development Studies assessed that the limited transformation of the economy as

reflected in the stagnant manufacturing sector remains to be the main source of the non-

inclusiveness of regional economic integration and globalization.To live up to its full potential in

terms of job creation and skill-matching, the sector’s competition must be enhanced. Export

processing zones where infrastructure is of high quality, utilities are available and have low cost

and bureaucratic red tape is lessened should be advocated further by the government. The

government, hand in hand with the Philippine Economic Zone Authority (PEZA), should push

for the development of robust and productive economic zones. Strong enforcement should be

present, executed by inviting firms to relocate to the country. In addition, if investment climateremains positive, then targets should be set and religiously followed annually.

5.2. Research and Development

Both Public and Private investment in R&D are very low but Intal & See (2004) propose a co-

joint approach in undertaking these investments. They argue that this would lead to a less



bureaucratic approach; one wherein private firms may gain access to the information and

research facilities that government possesses in order to conduct the needed studies together.

To stimulate private investment would require the correct signals. Investors must be able to find

that their funds will be put into good use and will translate into product innovation and design.

This will be hard for the Philippines because the agencies devoted to research and development

are not coordinated. The Department of Science and Technology (DOST) and the National

Academy of Science and Technology (NAST) are some vital agencies with untapped potential.

Furthermore, in 2008 Flor Lacanilao revealed that the Council of the NAST does not consist of a

single scientist. At the helm of the country’s scientific community are underqualified leaders

whose names barely appear in scientific journals. Furthermore, the structural problems extend to

the translation of knowledge to product design. This paper emphasizes that the correct

institutions are already in place, all that is needed is cohesion. Specifically, agencies such as the

Board of Investments, DOST, and NAST must be at the helm of R&D initiatives. Subsequently,

the findings of such projects should be made publicly accessible so that even firms with no

budget for R&D may benefit from the new stock of knowledge. Further funding for conferences

and seminars for instructing the beneficiary firms must also take place. Numerous conferences,

summits, and forums for innovation exist for agriculture in the Philippines but not so in

manufacturing. The lack of such is precisely the reason why R&D does not fulfill its purpose as a

positive spillover in the Philippine manufacturing sector – knowledge is not made mainstream

therefore firms are unable to adopt new techniques and processes.

Furthermore, the various educational agencies such as the Commission on Higher Education

(CHEd) and the Department of Education (DepEd) must do its part to promote pursuing

education in the sciences before, during, and after earning one’s college diploma. CHEd chair

Patricia Licuanan revealed that science and math courses are “under-subscribed” while those in

information technology, business administration, and hotel and restaurant management are

“oversaturated”. Tan, Canales, Cruz, and Punongbayan (2011), using data from CHEd, found

that between 2006 and 2010, natural sciences courses attract an average of only 1.04 percent of

total female college enrollees and only 0.73 percent of males. Furthermore, only 0.53 percent of

females 0.46 percent of males enroll in mathematics. The outcome of this trend is a deficit in

skilled leaders and professionals in technology and research.



6. Conclusion

Recommendations laid out in this paper are at the heart of sustainable job creation and higher

productivity generation in the country’s context. We should keep in mind that developed

neighbouring countries have progressed because of the structural change from low-productivity

to high-productivity goods through the improvements in the manufacturing sector. Efforts of

policymakers should be ‘growth-led’ in solving underemployment, boosting the economy in the

demand side through continuous capital spending and foreign direct investments partnered with

strong institutions and business environments which will consequently reduce poverty.

Aside from capital accumulation, growth models have equally emphasized the importance of

technology and innovation. Economic policy must include this variable in order to transform

knowledge and research into new techniques and in turn into higher productivity and ultimately

higher wages. The systemic deficiencies of the scientific community stifle the potential to

augment manufacturing productive capacity.

While this paper places emphasis on the semiconductor industry, prospects of firm expansion

and moving up in the value chain must be extended to the entire industry sector as well; most

especially in this age when production is internationally diffused.

Since underemployment is an inefficiency in which the labour force is underutilized, this paper

pinpoints exactly where this resource should be employed as well as recommends the needed

improvements in order to accommodate them with more and higher paying jobs.



References

Asian Productivity Organization Productivity Databook. (2012).

Cororaton, C. (1999). R&D Gaps in the Philippines. Journal of Philippine Development 25(2):

47-65.Del Prado, F., Tabuga, A. & Yap, J. (2012). Regional Economic Integration and Inclusive

Growth: Framing the Issues. Philippine Institute for Development Studies.

Intal, P. & See, E. Whither the Philippine Manufacturing Sector . Paper presented at the technicalworkshop on production network and industrial adjustment: institutions, policies and regionalcooperation, AKIC, Manila, 12 October 2004.

Key Indicators of the Labour Market, International Labour Organization. (2011).

Lacanilao, F. (2008). Nonscientists run Philippine science academy. Retrieved fromwww.bahaykuboresearch.net.

Lichauco, A. (1988). Nationalist Economics: History, Theory, and Practice. Institute for RuralIndustrialization.

Perkins, D. (2006). Economics of Development . New York: W.W. Norton Company.

Philippine Skills Report: Skills for the Labour Market in the Philippines. World Bank, Report No. 50096-PH (2012).

Quismundo, T. (2012). Few enrolling in math, science courses critical to nat’l development –

CHEd . Retrieved from Inquirer.net.

Semiconductors and Electronics Industry of the Philippines, Incorporated.

Tan, E., Canales, K., Cruz, K. & Punongbayan, J. (2011). Why are Boys Falling behind Girls in

Schooling?. UP School of Economics Discussion Papers, DP No. 2011-12.

Usui, N. (2012). Taking the Right Road to Inclusive Growth. Asian Development Bank.

investment and innovation in manufacturing (final 31 dec 2012)

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