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MANILA, Philippines — The Philippines risks repeating the failures of the 1970s Bataan export zone if the vaunted Pax Silica site in New Clark City draws foreign investors without a government-led push into chip design and fabrication, a University of the Philippines study said.
Beyond the manufacturing side, the study points out how the government's historic "paltry" budget for science and technology, an unfocused education system, and decades of brain drain hollowed out the country’s pool of experts, while Taiwan heavily bankrolled its own research and development and aligned its schools with industrial goals.
The study, published last month as a discussion paper by the UP Center for Integrative and Development Studies, compares how Taiwan and the Philippines developed their semiconductor industries after both entered the business in the late 1960s as low-cost sites for the assembly, testing and packaging of chips made elsewhere.
Taiwan spent the three decades that followed building an industry that now spans design, fabrication and advanced packaging — investment that led it to become today's source of about 90% of the world's most advanced chips.
The Philippines, however, is still constrained to back-end assembly and testing, and has yet to build a single wafer fabrication plant, the paper said.
The paper's authors, Lianne Angelico Depante of the National Graduate Institute for Policy Studies in Japan and Kirsten Lianne Mae Dedase of the UP National College of Public Administration and Governance, argue that the vast difference between Taipei and Manila's chip industries was more a product of policy decisions between the 1970s and the 1990s than market forces.
The researchers examined the policies Taipei and Manila governments adopted between the 1970s and the 1990s, when the foundations of both chip industries were laid.
Without domestic fabrication, or the ability to manufacture microchips locally, the Philippines will continue to be "a processor of upstream foreign value rather than a producer of its own," the paper read.
Pax Silica
The research noted that the Philippines is now betting much of its chip industry outlook around the planned 1,619-hectare economic security zone in New Clark City, which President Ferdinand Marcos Jr. touted in his most recent State of the Nation Address.
The zone sits within the larger Luzon Economic Corridor, a logistics network linking Subic, Clark, Manila and Batangas that is being developed with United States backing under the Pax Silica initiative.
The paper argues that this has essentially been done before, the paper contends, with the creation of the Bataan Export Processing Zone (BEPZ) in 1972.
The study notes that the BEPZ was designed "primarily to attract foreign investment and generate employment" through "a combination of fiscal and non-fiscal incentives, including the provision of physical infrastructure and government-guaranteed financing and policies permitting full foreign ownership and duty-free production."
This drew large manufacturers, including Intel and Texas Instruments. Buoyed by this success, the government eventually pursued more economic zones in Baguio, Cavite, and Cebu.
However, the BEPZ itself did not lead to more advanced manufacturing and failed to bring about local technology transfer due to several factors.
Among others, the Bataan zone was far from major academic and commercial centers, as well as remote from Metro Manila. Because of its remote location, its potential to generate knowledge spillovers and facilitate technology transfer among firms was limited, the study read.
"Site selection was not solely determined by economic or logistical factors but also by political considerations, which influenced the placement of several zones and, in some cases, reinforced their spatial disconnect from key hubs of industry and knowledge," the paper read.
The government eventually decided, with the 1995 PEZA law, to largely turn ecozone development over to the private sector.
While the hands-off approach allowed more foreign investors in, the researchers say it turned the nation's industrial parks into isolated "enclaves with minimal integration into the domestic economy."
Unlike Taiwan, which tightly linked its tech zones to national innovation systems, Philippine zones suffer from a "paucity of deliberate policies" to build local supply chains or spur local technology transfer.
Taiwan's own cluster, the Hsinchu Science Park, opened in 1980 next to two engineering schools, National Tsing Hua University and National Chiao Tung University, and within reach of the state research institutes that would later spin off its largest chipmakers.
The study is careful not to present the planned economic zone in New Clark City as doomed. The project under Pax Silica could still anchor a genuine cluster of assembly firms, startups, universities, public research bodies and prospective fabrication and design companies, the study read, but only alongside industrial and fiscal policies that go beyond building roads and ports.
Those would include shared fabrication, design and testing facilities, research consortia for joint work and technology transfer, and dedicated funding for spinoffs and university research.
Without them, the paper warned, the site "risks repeating history and becoming yet another primarily logistics-oriented initiative, while exposing the country to geopolitical risks without commensurate gains in development."
Paltry budget for science and technology
The study also noted that while Taiwan aggressively funded its chip ambitions, the Philippines starved its primary science agency of funding.
Over the years, the Department of Science and Technology has received a "paltry budget" of less than 1% of total national spending. The researchers argued this limited support and funding, especially for research and development, kept back the country's industry from moving beyond low-value assembly lines.
In contrast, Taiwan used public capital to back risky, unproven technologies. The Taiwanese government directly funded up to 49% of the Taiwan Semiconductor Manufacturing Company's initial capital — spinning the global chip giant off from its state research institute, ITRI — and empowered public labs to co-invest alongside private enterprise.
Tech-voc gap and brain drain
Among many differences in both economies' approach to education, the study noted that technical and vocational education and training (TVET) formed the backbone of Taiwan's strategy, while the Philippines left higher education largely to market forces.
Taiwan aligned its school system directly with its industrial goals. By 1980, TVET students in Taiwan "outnumbered their university counterparts by more than 50 percent," providing the necessary backbone of technicians and engineers for its "burgeoning electronics and semiconductor industry."
The Philippines meanwhile was largely hands off and left universities to offer programs based on what it argues was short-term market demand. As a result, students historically "gravitated toward law, business administration, education, and the humanities, leaving science and engineering underrepresented."
TVET in the Philippines is also mostly privately run and tailored toward the service sector rather than manufacturing, the study noted.
This is further compounded by "longstanding cultural norms" where technical and vocational fields were "commonly viewed as less prestigious" than white-collar professions.
The two economies also diverged sharply in how they supported their engineers and scientists. While Taiwan brought back overseas engineers and executives to build domestic tech giants, the Philippines to this day experiences a persistent "brain drain" where professionals would move overseas for better career opportunities.
Manila's efforts to bring its scientists back struggled to gain ground because the domestic economy lacked the commensurate high-tech jobs. The government's Balik (Return) Scientist Program — modeled directly after Taiwan's — has achieved limited success, the paper noted.
Of the 320 scientists who joined the program in the early 2010s, more than half eventually decided to again move overseas because talent retention was severely "constrained by the country's limited industrial base."
What the study recommends
The study lists seven recommendations for developing countries trying to build chip industries.
Among others, it said public research agencies should be given mandates that allow "calculated risk-taking," including the power to incubate spinoff firms and run applied research in design, advanced packaging and lab-scale wafer fabrication.
That "does not imply indiscriminate spending but a willingness to tolerate failure as an inherent part of learning," the paper said.
Governments must also fund capital-intensive segments that private firms avoid "in the absence of state commitment and risk-sharing mechanisms," it said.
For the Philippines, the study proposed a dedicated semiconductor development fund offering equity, matching grants, concessional financing or research subsidies to local firms and startups.
Support should be conditioned on "technology transfer, workforce upgrading, local supplier development, patent generation" and not on profit alone, it said.
