The current policy focus on i4.0 in the Philippines offers an opening to address longstanding regional development gaps and digital divides, especially between urban and rural regions. Left unchecked, these gaps could make “left behind places” become flashpoints of social upheaval and anti-establishment behaviour, writes Jeremiah Magpile
As COVID 19 batters down on the Southeast Asian economy, policymakers and firms across the region are increasingly looking to Industry 4.0 (i4.0) as a key component of their pandemic recovery strategies. Thirty-nine per cent of Asian manufacturers are adopting technologies such as artificial intelligence, Internet of Things (IOT), and cloud to enhance supply chain monitoring in response to demand and supply shocks. Both high and low-income countries are investing in digital infrastructure and human capital as the pandemic necessitates innovative business and public service delivery channels.
In the Philippines, government leaders are recognizing digital capabilities as critical to adjusting to the “new normal” posed by COVID 19. Illustrating this sentiment at a recent digitalization event, the Department of Information and Communications and Technology (DICT) Secretary likened digital capabilities to that of “basic needs like food, clothing and shelter.”
To this end, the government has launched several national initiatives such as an ambitious national Digital Strategy and Artificial Intelligence Roadmap to galvanize investment in digital infrastructure and i4.0 capacity while building high skill, knowledge-intensive capabilities that move key industries up the value chain. The AI Roadmap includes a plan to establish a flagship National Centre for AI Research that will serve as a platform to partner with international tech companies like Amazon and Google to identify AI applications across industries.
Executed effectively, these schemes have potential to sustain growth and maintain international competitiveness including in prized sectors like the $26 billion IT-Business Process Outsourcing (IT-BPO) industry. At stake are jobs of the future: IT-BPO and more labour intensive sectors like manufacturing remain vulnerable to automation and reshoring of jobs to developed home countries. Leveraging local competencies (e.g. in healthcare, accounting, and data analysis) towards higher value, knowledge-based activities are key to meeting the job-generation promise of technology.
Regional approaches matter
Regional and place-based approaches have a role to play in achieving this objective. Indeed, Emerging research by De Propris and Bailey (2020) highlight the potential to embed i4.0 in local socio-organizational innovations to achieve development objectives – including revitalizing local production systems. The current policy focus on i4.0 in the Philippines offers an opening to address longstanding regional development gaps and digital divides, especially between urban and rural regions.
These gaps are pronounced outside Manila where access to fast, reliable internet remains spotty. Left unchecked, these gaps can make “left behind places” become flashpoints of social upheaval and anti-establishment behaviour.
Initiatives such as the Department of Trade and Industry-led Regional Inclusive Innovation Centres (RIICs) – part of a broader Inclusive Innovation Industry Strategy (I3S) – are right steps in this direction. This program incentivizes public-private partnerships that foster research commercialization and business models that address industry and societal issues. Ongoing pilots in 4 provinces seemingly engage start-ups and researchers in the R&D process, linking industry development to existing agribusiness or manufacturing capabilities.
However, publicly available information about the status of these pilots is limited and it is unclear how target regions were selected in the first place. Additional consideration is needed to ensure that tax/subsidy incentives featured in the program do not lead to dead weight loss and exacerbate existing market gaps.
One way to do so is by incrementally building on related industry based on robust diagnoses of where a target region sits on the development spectrum. For example, the Philippines Department of Trade and Industry is encouraging manufacturing firms to participate in “smart industry assessments” to gauge i4.0 capacity and identify implementation roadmaps. However, these ad-hoc reviews of firm capacity are not explicitly linked to broader local development strategies.
Emerging research by Corradini et al (2021) suggests potential ways to better integrate industry assessments into regional planning by quantifying absorptive capacity and spatial proximity as drivers of i4.0. Using 2000-2014 EU patent data on i4.0-reated technologies, finds that EU regions have proclivities toward distinct i4.0 technologies (e.g. manufacturing hubs are poised for IOT).
Insights from Pasig City, Philippines
Much of the current academic literature is limited to developed countries. To identify distinct considerations for emerging contexts, my dissertation explores the ways in which i4.0 transforms the geography of production of goods and services, in Pasig City, Philippines and gauges the responsiveness of national/local policies to these needs.
Data was gathered through 17 semi-structured interviews with local stakeholders – including firms, local government units (LGU) (e.g., the City Administrator’s office), national agencies (e.g. Department of Trade and Industry), and local chambers of commerce.
One key finding is that at current global levels of adoption, i4.0 may have limited reorganising (e.g., reshoring) effects on Pasig’s labour market. Instead, interviews with leading adopters in customer-facing industries such as the financial services and telecommunications (telco) sector reveal heightened investment in local digital capability. Telcos like PLDT and Globe with considerable technical capacity and resources managed to diversify into higher value, i4.0 enabled products and services by acquiring – including through international joint ventures – now highly successful and widely used e-payment platforms.
However, appetite and capacity for i4.0 adoption varies across and within industries – resulting in low levels of i4.0 adoption. Tier 1 suppliers in labour-intensive sectors such as semiconductor manufacturing often lack direct access to investors. Persistently low wages discourage investment in capital intensive i4.0 capabilities. Small and medium enterprises (SMEs) which make up 90% of registered businesses in Pasig face even greater gaps in the form of lack of digitally skilled workers, technical know-how, and face prohibitive investment costs.
In the long term, this spikiness in i4.0 capacity may lead not only to varying degrees of susceptibility to reshoring, but also to gaps in market power between SMEs and large firms – in this case operators of large digital platforms (Belllandi et al., 2019). Digital platforms may gain disproportionate rents to the extent that digital services are standardized against differentiated needs of SMEs (Ibid; Crescenzi et al, 2020).
LGUs such as Pasig City have a role to play in brokering the gap and ensuring an equitable capture of value from i4.0. For instance, fiscal incentives and streamlined trade rules in locally managed special economic zones are associated with higher i4.0 uptake. Yet interviews conducted suggest that these can be costly, legally cumbersome, and do not necessarily guarantee a return for cash strapped local governments,
A less trendy but tested approach involves promoting incremental improvements in local i4.0 capacity. In Pasig, a successful push to expand the City’s operating budget and establish a dedicated local economic development office is a step in the right direction. This new office will provide local firms business development and enterprise growth, investment facilitation, and enhance integrated economic planning. The City is also training SMEs on digital literacy and management skills as local firms shift their businesses online.
In conclusion, on balance, these preliminary efforts are a necessary first step in a long journey towards i4.0 readiness. However, they will urgently need to be scaled up as the Philippines prepares to devolve an unprecedented set of responsibilities and revenue to LGUs like Pasig City. The Mandanas Ruling will shift implementation responsibility of the i4.0 portfolio (along with other national initiatives) to local government starting 2022. As the LGUs continue to face capacity gaps, public-private partnerships will be needed to meet the investment requirements of i4.0. To do so, an LGU such as Pasig City should consider recalibrating its risk tolerance for multi-stakeholder initiatives needed to achieve the promise of i4.0.
Bellandi, M., De Propris, L. and Santini, E. (2019). Industry 4.0+ challenges to local productive systems and place-based integrated industrial policies. In: P. Bianchi, S. Labory and C. Durán, eds., Transforming Industrial Policy for the Digital Age : Production, Territories and structural change. ProQuest EBook Central.
Corradini, C., Santini, E. and Vecciolini, C. (2021). The geography of Industry 4.0 technologies across European regions. Regional Studies, [online] pp.1–14. DOI: 10.1080/00343404.2021.1884216
Crescenzi, R., Iammarino, S., Ioramashvili, C., Rodríguez-Pose, A. and Storper, M. (2020). The Geography of Innovation and Development: global spread and local hotspots. http://eprints.lse.ac.uk/105116/1/Crescenzi_geography_of_innovation_and_development_published.pdf
De Propris, L. and Bailey, D. (2020). Industry 4.0 and Regional Transformations. [online] pp.97–111. https://library.oapen.org/bitstream/handle/20.500.12657/37355/9780367178413_text.pdf
*This research was supported by the LSE Saw Swee Hock Southeast Asia Centre Student Dissertation Fieldwork Grant 2020-2021.
*The views expressed in the blog are those of the author alone. They do not reflect the position of the Saw Swee Hock Southeast Asia Centre, nor that of the London School of Economics and Political Science.