Semiconductors are among the Philippines’ most important manufactured products. But producing and exporting large amounts of electronics does not necessarily mean that all of the value represented by those products is created within the Philippine economy.
The 2018 Philippine input-output accounts reveal an interesting distinction. Our analysis of the detailed 240-industry table shows that semiconductor and electronic component manufacturing generated about P394 billion in value added, which is a substantial contribution to the economy.
Yet value added represented only about 31 percent of the industry’s gross output. Across the Philippine economy as a whole, value added was roughly 50 percent of gross output. This raises an important question: How much more value could the Philippines capture from an industry it has spent decades building?
Where does the rest of the output go?
Value added and gross output are not the same thing. Gross output measures the total value of what an industry produces, but producing that output requires intermediate inputs purchased from other industries.
After those intermediate inputs are deducted, what remains is value added, which includes compensation of employees, operating surplus and other primary inputs. This means the semiconductor industry’s 31 percent value-added ratio should not be interpreted as saying that 69 percent of its output is somehow “lost.”
This portion largely represents the intermediate goods and services required to produce semiconductor output. The development question is where those intermediate inputs come from and who creates the value associated with them.
If they are supplied by Philippine companies, semiconductor production stimulates additional activity elsewhere in the domestic economy. If a large portion comes from foreign suppliers, part of the production chain, and therefore part of the opportunity to create value, remains outside the country.
A problem identified more than 30 years ago
The issue was already visible in the 1980s. Henry Ong, Emma Cecelie Ligot and Wilfredo Racaza Jr. examined the structure of Philippine industries in “A Structural Analysis of the 1985 Philippine Economy: Its Implication on a Multi-Sectoral Economic Development Strategy,” published in the DLSU Business & Economics Review in 1993.
Their findings on electrical machinery, which included semiconductor production, were striking. The sector was already a major Philippine export earner, but according to the DLSU researchers, it had poor interlinkages with local industries because most of its input requirements were imported.
In fact, electrical machinery ranked first among the industries they examined in total import content. The researchers estimated import content at about 56 centavos for every peso of output.
The Philippines was therefore already producing and exporting sophisticated electronic products more than three decades ago, but much of the industrial ecosystem supporting that production remained outside the country.
This is crucial because a country can participate in a global industry without necessarily capturing all the potential economic benefits surrounding that industry.
What changed by 2018?
The good news is that semiconductor manufacturing appears to have become more connected to the Philippine economy.
Our calculations from the detailed 2018 input-output table give semiconductors and electronic components a backward linkage index of about 1.25. An index above 1.0 means the industry’s connections to suppliers were stronger than the average across Philippine industries.
Its forward linkage was about 1.81, which also indicates important connections with industries that use its production. So the Philippine semiconductor industry should not be described as an enclave with virtually no domestic connections. It creates significant value and has meaningful relationships with other parts of the economy.
But there is another important number. Our calculations show product-market import penetration for semiconductors and electronic components at approximately 52 percent in 2018.
This measure is different from the total import-content measure used by Ong, Ligot and Racaza in the 1985 study, so the two percentages cannot be directly compared. Nevertheless, the 2018 figure shows that imported semiconductor and electronic products remained highly significant relative to domestic supply.
The broader structural question identified in the 1985 DLSU study therefore remains relevant: Has the Philippines built enough domestic industries around its semiconductor industry?
P394 billion is already significant
It would be wrong to conclude from the 31 percent value-added ratio that semiconductor manufacturing contributes little to the Philippine economy. Quite the opposite.
At about P394 billion, semiconductor and electronic component manufacturing was among the larger generators of absolute value added in the detailed 2018 input-output accounts. The industry also supports employment, exports and demand for other industries.
The issue is not whether semiconductors create value. They clearly do. The more interesting question is whether the Philippines could capture considerably more value from an industry that is already large and well established.
This is a very different development challenge from attracting an entirely new industry. The factories already exist, the workers and technical capabilities already exist, and the Philippines already occupies a place in the global semiconductor supply chain.
The opportunity lies in expanding the economic activities around that existing base.
What else can the Philippines capture?
A semiconductor industry requires much more than the manufacturing facility itself. It needs specialized materials, chemicals, precision components, production equipment, testing equipment, maintenance, packaging, logistics, software, engineering and other technical services.
More advanced portions of the value chain can also involve product development, research, engineering and design. Every part of that ecosystem represents another opportunity for value creation.
Suppose a semiconductor manufacturer expands Philippine production. If additional chemicals are imported, the expansion creates demand for a foreign chemical producer. If additional precision components are imported, the expansion supports a foreign component manufacturer.
If specialized equipment, engineering and technology services must also be sourced abroad, those portions of the semiconductor production chain remain outside the domestic economy.
But if competitive Philippine companies can supply some of those requirements, the same expansion produces a wider domestic effect. The semiconductor factory creates value itself, while its Philippine suppliers create additional value and the suppliers to those companies can create still more. This is how an industry develops into an industrial ecosystem.
The lesson from the country’s strongest multipliers
This also connects with an unusual finding from the 2018 input-output table.
As discussed in the previous article, hog farming had the strongest backward linkage among the 240 industries we analyzed. That obviously does not mean hog farming is technologically more sophisticated than semiconductor manufacturing.
It tells us something different. Hog farming has extensive relationships with its supply chain. Feed, agricultural products and other inputs connect it with many domestic producers.
The 1985 DLSU study had already observed that livestock and poultry were large purchasers of palay, corn, coconut and other crops.
Semiconductors operate within a far more technologically sophisticated production network, but a significant portion of that network extends beyond Philippine borders. The ideal development outcome is therefore not to choose one type of industry over the other.
It is to combine the strengths of both: technologically sophisticated industries with increasingly deep domestic production networks around them.
Moving up the semiconductor value chain
This is where the discussion about moving up the value chain becomes more concrete.
It is not simply about producing a more expensive semiconductor product. It is about increasing the number and sophistication of economic activities performed within the Philippines.
More local materials and components would increase domestic supplier activity. More testing and engineering would expand technical capabilities. More equipment and specialized services would create additional industries around semiconductor manufacturing.
More design, research and intellectual property would allow the country to participate in activities where knowledge and technological capabilities play a greater role.
Not every semiconductor input should necessarily be produced locally. There would be little economic sense in replacing efficient foreign suppliers with expensive domestic production merely to reduce imports.
Global supply chains exist partly because different countries specialize in activities where they are competitive. The objective should therefore not be complete self-sufficiency, but to identify parts of the semiconductor value chain where Philippine companies can realistically develop competitive capabilities.
The same recommendation, three decades later
Remarkably, Ong, Ligot and Racaza reached a related conclusion from the 1985 economy.
They argued that import dependence weakened the domestic benefits of some high-multiplier manufacturing industries. They specifically recommended the development of ancillary industries that could support import-dependent sectors such as electrical machinery and improve the domestic content of exports.
More than three decades later, the terminology has changed, but the challenge has not disappeared. Today we talk about industrial clusters, supplier development, global value chains, localization and technological upgrading.
The basic economic question remains remarkably similar: how much of the production network surrounding a major Philippine industry can Philippine companies competitively supply?
For semiconductors, that question matters because the industry is already large. The Philippines does not need to start from zero.
It already has a semiconductor manufacturing base that generated roughly P394 billion in value added in 2018. Its backward and forward linkages show that it has meaningful connections with the domestic economy.
But a value-added share of about 31 percent, together with substantial import exposure, suggests there is still room to build more economic activity around that base.
The next stage of semiconductor development should therefore not be measured only by how much the Philippines produces or exports. It should also be measured by how much more of the technology, materials, components, engineering, services and knowledge surrounding that production can be created by Philippine companies.
The Philippines has already learned how to manufacture semiconductors. The next challenge is to capture more of the value around them.
