Research Paper SERIES No. 2003-04: The Philippine Innovation System: Structure and Characteristics

RESEARCH PAPER
SERIES No. 2003-04
The Philippine Innovation System:

Structure and Characteristics
Epictetus E. Patalinghug
PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES

Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
The author is a Professor of Economics and Management at the College of
Business Administration, University of the Philippines (UP), Diliman,
Quezon City where he teaches industrial economics, regulation and public
policy, competitive and industry analysis, international finance, managerial
economics, macroeconomics for managers, and technological innovation.
He has published several articles dealing with science and technology policy,
management of technology, research and development, competitiveness
and productivity. He is the coauthor of the book Managing technology for
global competitiveness: the Philippine experience (UP Press, 2000).
The Philippine Innovation System:
Structure and Characteristics
Epictetus E. Patalinghug
RESEARCH PAPER SERIES NO. 2003-04
PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES

Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Copyright 2003
Philippine Institute for Development Studies
Printed in the Philippines. All rights reserved.
The views expressed in this paper are those of the author and do not
necessarily reflect the views of any individual or organization. Please do
not quote without permission from the author nor PIDS.
Please address all inquiries to:
Philippine Institute for Development Studies

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RP 11-03-500
ii
Table of Contents
List of Tables and Figures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv.
List of Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Abstract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
II. Methodology. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 2
III. The Philippine Innovation System . . . . . . . . . . . .. . . . . 4
IV. The American Innovation System. . . . . . . . . . . .. . . . . . 9
V. The Japanese Innovation System. . . . . . . . . . . .. . . . . . . 14
VI. The German Innovation System. . . . . . . . . . . .. . . . . . . . 18
VII. Understanding the Fundamentals. . . . . . . . . .. . . . . . . . 21
VIII. Improving the National Innovation System . . . . . . . . . 24
IX. Diagnosing the Problem. . . . . . . . . .. . . . . . . . . . . . . . . . 43
X. Conclusion: Bridging the Gap. . . . . . . . . .. . . . . . . . . . . 46
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
32
iii
The Philippine Innovation System: Structure and Characteristics
List of Tables and Figures
Tables
1 R&D Expenditures by Major Sectors: 1989-1996 . . . . . . . . .12 7
2 R&D Personnel by Major Sectors: 1989-1996 . . . . . . . . . . . 8
3 Employment of Scientists and Engineers in Industrial
Research Laboratories in U.S. Manufacturing Firms:
1921-1946. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
30
4 Scientists and Engineers at Japanese Universities
and Colleges Engaged in R&D: 1965-1981. . . . . . . . . . . . . . .31 ..
5 R&D Personnel in Germany: 1992. . . . . . . . . . . . . . . . . . . . .31 ..
6 Employment in Technical, Scientific
and Managerial Occupations: 1991-1999. . . . . . . . . . . . . . . ..32 ..
7 Employment in Chemical-Based Industries: 1983-1994. . . .33 ..
8 Employment in Steel-Based Industries: 1983-1994. . . . . . ..33 ..
9 Product Technology Capability
in the Metal Fabrication Industry. . . . . . . . . . . . . . . . . . . . . .37 ..
10 R&D Expenditures and Capital Investment
in Major Japanese Manufacturing Companies:
1985-1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 40
11 Concentration Ratios, Effective Protection Rates
and Price-Cost Margins in Selected
Manufacturing Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 ..
Figure
1 Major Components of an Innovation System. . . . . . . . . . . .25
..
iv
List of Abbreviations
ASTI Advanced Science and Technology Institute
BOI Board of Investments
BPS Bureau of Product Standards
CAD Computer-Aided Design
CAM Computer-Aided Manufacturing
CAPE Consultancy in Agriculture
for Productivity Enhancement Program
CNC Computer and Numerically
Controlled Machine
DA Department of Agriculture
DOST Department of Science and Technology
ESEP Engineering and Science Education Project
ITDI Industrial Technology Development Institute
MLP Manufacturing Linkage Program
MNAAP Medium-Term National Action Agenda
for Productivity
MNC Multinational Corporation
MPEX Manufacturing Productivity
Extension Program
MTPDP Medium-Term Philippine Development Plan
NEDA National Economic and Development
Authority
NSDB National Science and Development Board
NSTA National Science and Technology Authority
PCHRD Philippine Council for Health Research
and Development
PTFST Presidential Task Force on Science
and Technology
RDC Research and Development Center
R&D Research and Development
SEI Science Education Institute
S&T Science and Technology
SME Small and Medium Enterprise
STAND Science and Technology Agenda
for National Development
STCC Science and Technology Coordinating
Council
v
STII Science and Technology Information Institute
STMP Science and Technology Master Plan
TAPI Technology Application and Promotion
Institute
TESDA Technical Education and Skills
Development Authority
TRC Technology and Resource Center
TVET Technical and Vocational Education and
Training
UNDP United Nations Development Programme
UP University of the Philippines
vi
Abstract
National innovation system is anchored on the theory that industrial

development requires technological capability in industry, and that
exploitation of technology is most critical at the firm level.
This paper describes the structure and characteristics of the
Philippine innovation system and compares it with those of the
United States, Japan, and Germany. It concludes that the Philippine
innovation system must gear up to the requirements of a catch-up
system to fit its institutions to its economic structure. This requires
all the elements of the system to address the technological capability,
adaptation, assimilation, and modification needs of a catch-up
economy.
vii
I

Introduction
Industrial development requires technological capability in industry.

The national innovation system (NIS) is anchored on the theory that
industrial development requires technological capability in industry,
and that the exploitation of technology is most critical at the firm level.
National policies can build and develop the technological capability
of domestic firms. The recent internationalization of business has
convinced policymakers and managers to view national innovation
systems as strategic assets in global economic competition.
The objective of this study is to describe and analyze the structure
and characteristics of the Philippine innovation system. This paper
uses international best practices in the national innovation system in
evaluating the effectiveness of the Philippine innovation system and
in recommending policies to improve the system.
This report is organized as follows. The next section begins with
a discussion of the theory and methodology of national system of
innovation. The succeeding four sections describe the structure and
characteristics of the Philippine, American, Japanese, and German
innovation systems, respectively. The ensuing section briefly highlights
the strengths and weaknesses of the American, Japanese, and German
innovation systems. Another section evaluates the gaps and
effectiveness of the Philippine innovation system. Still another section
diagnoses some policy issues. The last section discusses the relevant
conclusions and recommendations.
1
II

Methodology
The theoretical framework used to analyze the NIS varies. List (1959)
considers the need for government responsibility for education and
training (and for protecting “infant industries”) as an important
element of his concept of NIS. He also sees the necessity of creating an
infrastructure supporting industrial development. Freeman’s (1987)
concept of national system of innovation refers to the organization of
research and development (R&D) and of production in firms, the role
of government, the interfirm relationships, and the interaction between
them. His NIS theory is simply based on modern innovation theory.
Nelson (1987, 1988) focuses his analysis on the combined public and
private character of technology and the role of private firms,
government, and universities in the production of new technology.
Porter’s (1990) four different determinants (firm strategy, factor
conditions, demand conditions, and supporting industries) affecting
the competitiveness of a national industry may be considered
comprising another framework for NIS. Porter postulates that the
competitive advantage of a nation consists of those national attributes
that foster competitive advantage of some of its industries. The
competitive advantage of nations can be analyzed in terms of their
clusters of industries, and Porter’s mix-of-cluster approach is a useful
tool for an empirical comparison of NISs. Lundvall (1992) extends
Porter’s framework by explaining the link between learning and
innovation. He asserts that learning is predominantly an interactive
and socially embedded process, which cannot be understood without
considering its institutional, economic, and cultural context. While
Porter considers national systems as environments to individual
industries involved in international competition, Lundvall focuses on
the workings of the national system in its own right. Nelson (1993)
2
Methodology
presented 14 country-specific case studies in an attempt to portray the

historical interplay of social, political, institutional, economic and
cultural factors in shaping current innovation systems.
The approach of this study is based on the Freeman framework,
which focuses on the interaction between the production system and
the process of innovation. This approach addresses the issue of which
organizational forms are most conducive to the development and
efficient use of new technology, not the budgetary, institutional, and
policy constraints that can get in the way of government efforts to
promote innovation. NIS is an analysis of the specific systemic context
in which a national government intervenes.
3
The Philippine The
Innovation
Philippine
System:
Innovation
Structure
System
and Characteristics
III

The Philippine
Innovation System
The government created the National Science and Development Board

(NSDB) in 1958 to formulate and implement science and technology
(S&T) policies, and to coordinate S&T agencies. In 1974, a national
science development plan was incorporated in the Medium-Term
Philippine Development Plan (MTPDP): 1974-1977. All succeeding
MTPDPs contained a chapter or sections on S&T policies, plans, and
programs. In 1982, the NSDB was reorganized and renamed National
Science and Technology Authority (NSTA). Under this setup, S&T
councils were created to formulate sectoral policies, programs, and
strategies, and allocate funds for specific fields. In 1986, the Department
of Science and Technology (DOST) was created from the restructured
NSTA.
The following agencies were created under the DOST structure:
1. Technology Application and Promotion Institute: promoted
the commercialization of technologies
2. Science Education Institute: formulated plans for the
development of S&T education and training
3. Science and Technology Information Institute: maintained
S&T data system
4. Industrial Technology Development Institute: undertook
applied R&D in industrial manufacturing, mineral processing,
and energy
5. Advanced Science and Technology Institute: undertook R&D
in high-technology areas.
In 1988, the Presidential Task Force on Science and Technology
(PTFST) was created to formulate the Science and Technology
Development Plan. In 1989, the Science and Technology Coordinating
Council (STCC) was created to implement the recommendation of the
PTFST.
4
The Philppine Innovation System
The DOST introduced the Science and Technology Master Plan

(STMP) in 1990, which set the goals and objectives for the S&T sector,
and provided a framework for the effective coordination of S&T
projects and programs consistent with national development policies.
STMP cited the following major problems in the S&T sector: (a)
underutilization of S&T for development, as reflected in the low quality
and low productivity of the production sector and heavy dependence
on imports; (2) underinvestment in S&T development in terms of
manpower training, technological services, R&D facilities and financial
resources; and (3) weak linkages between technology generation,
adaptation, and utilization.
The three main strategies of the STMP are: (1) modernization of
the production sector through massive technology transfer from
domestic and foreign sources; (2) upgrading of R&D capability through
intensive activities in high-priority sectors; and (3) development of
S&T infrastructure, including institution building, manpower
development, and development of S&T culture.
The Comprehensive Technology Transfer and Commercialization
program was initiated to disseminate and commercialize locally
developed technologies. But there was a lack of locally developed
commercially viable technologies. There was little government-private
sector joint research ventures, and government budgetary constraints
made it impossible to implement the S&T infrastructure projects.
The MTPDP for 1993-1998 targeted an increase in R&D
expenditures from 0.24 percent of GNP in 1992 to 1 percent of GNP in
1998. However, the priority activities in support of this goal were not
adequately implemented. For instance, activities such as (1)
modernization of production facilities in technology-based industries;
(2) global technology search to acquire foreign technology in the
priority areas; (3) provision of S&T services (e.g., standards, quality
control, chemical and physical analysis, etc.); and (4) transfer and
commercialization of technologies for the development of competitive
industries have yet to be visibly felt in the industrial sector.
In 1993, DOST replaced STMP with the Science and Technology
Agenda for National Development (STAND). STAND’s objective was
to help realize the vision of Philippines 2000 by focusing S&T activities
on export niches identified by the private sector. While STMP identified
15 priority sectors, STAND identified seven export winners, 11 basic
domestic needs, three support industries, and the coconut industry.
STAND identified six specific strategies: (1) to increase private sector
5
participation in S&T activities; (2) to develop emerging technologies;

(3) to promote government-industry-academe linkages; (4) to develop
S&T manpower; (5) to review S&T policies; and (6) to promote
technology monitoring, assessment, and forecasting. Specific products
and processes are being identified for R&D in the STAND through
programs coordinated by DOST-approved product managers working
in consultation with academe, government and private sector. The
assistance of experts from private organizations (local and foreign)
has been enlisted by DOST under the United Nations Development
Programme (UNDP) funding support. A UNDP-assisted project,
“Achieving International Competitiveness Through Technology
Development and Transfer,” was undertaken for DOST by outside
experts in 1995. The Manufacturing Productivity Extension (MPEX)
Program of DOST assists SMEs in sourcing their technological
requirements and improving their productivity. DOST’s Consultancy
in Agriculture for Productivity Enhancement (CAPE) Program
facilitates the transfer of technologies to the farmers. The most current
program for DOST to build scientific and technological capability refers
to the Education and Science Education Project (ESEP), which is
supported by a program loan from the World Bank. It is envisioned to
build and upgrade scientific and engineering expertise and facilities
in selected engineering and science institutions. The ESEP includes a
Management of Technology program, which aims to build and
upgrade the managerial expertise of scientific and technical
decisionmakers. In addition, it provides assistance for the upgrading
of science and mathematics teaching in selected secondary schools in
the Philippines. By June 30, 1998 ESEP had produced 3,554 short-term
trainees, 1,077 diploma degree holders, 513 master’s degree graduates,
and 51 Ph.D. graduates. A total of 72,296 books and library materials
and 569 journals were delivered to participating institutions. Thirty
laboratories in tertiary institutions were upgraded, and 110 high school
laboratories were built. There is still no thorough assessment of the
extent to which ESEP has successfully met its objective of developing
science and technology manpower in the Philippines.
As seen in Table 1, R&D expenditures (in current terms) increased
by 23.1 percent on an annual basis between 1989 and 1992, and by 17.2
percent between 1993 and 1996. On the average, the government
provided 52.7 percent of the R&D expenditures during the 1989-1992
period, and 62.9 percent between 1993 and 1996. Industry support
provided approximately 26 percent of total R&D expenditures during
6
The Philppine Innovation System
Table 1. R&D expenditures by major sectors: 1989–1996

(at current prices in thousand pesos)
Sector 1989 1990 1991 1992
Higher Education 210,840 274,793 290,047 433,234

Government 903,503 705,908 1,019,628 1,728,348
Nongovernment 130,867 162,779 135,713 136,866
Private Industry 393,491 511,264 523,288 642,101
Total 1,638,701 1,564,744 1,968,676 2,940,549
1993 1994 1995 1996

Government 1,036,304 1,131,363 1,433,187 1,742,483
Nongovernment 155,626 170,442 207,700 249,918
Private Industry 547,484 599,603 730,677 879,195
Total 2,119,444 2,321,210 2,828,628 3,403,577
Sources: DOST, National Survey of Scientific and Technological Activities: Integrated Report
(1992); Cororaton et al. (1998).
the 1989-1996 period. In short, government agencies contributed the

biggest share to total R&D expenditures.
Fulltime R&D manpower totaled 9,719 in 1992 and 9,896 in 1996.
Total manpower increased by an average annual rate of 3.2 percent
during the 1989-1992 period, and 9.4 percent from 1993 to 1996. Full-
time R&D manpower increased at an average annual rate of 4.3 percent
over the 1989-1992 period and 8.3 percent over the 1993-1996 period.
In both parttime and fulltime manpower, government agencies utilized
the biggest number of R&D personnel. The private sector contributed
only 11.3 percent of total R&D manpower for the 1989-1996 period
(Table 2). Most of the R&D personnel have bachelor degrees, and those
with Ph.D. degrees have a negligible share. R&D personnel with Ph.D.
degrees are dominated by those in the social sciences, and consist of
10 percent from the engineering and technology fields.
This analysis shows that the public sector provides the bulk of
R&D expenditures and personnel. Policy reforms in the S&T sector
must therefore address the need to significantly increase the share of
private R&D in the Philippines.
7
Table 2. R&D personnel by major sectors: 1989–1996
Sector 1989 1990 1991 1992

Government 4,948 5,034 5,919 6,065
Nongovernment 843 893 896 922
Private Sector 1,646 1,630 1,652 1,694
Total 14,209 14,381 15,343 15,610
1993 1994 1995 1996

Government 4,298 4,931 5,080 5,609
Nongovernment 701 804 829 914
Private Sector 1,297 1,487 1,532 1,692
Total 11,679 13,399 13,804 15,242
Sources: DOST, National Survey of Scientific and Technological Activities:

Integrated Report (1992); Cororaton et al. (1998).
Note: R&D personnel refers to the sum of fulltime and parttime individuals in each
category.
DOST is coordinated by five sectoral planning councils (covering

the areas of agriculture and forestry, health, aquatic and marine
resources, industry and energy, and advanced science and technology);
seven R&D institutes (covering industrial technology; nuclear research,
forest products, food and nutrition, textile, metals, and advanced
science and technology); and six S&T service agencies (focusing on
science education and training, information networks,
commercialization of technology, weather forecasting, and volcanology
and seismology). An intercouncil committee coordinates the five
councils.
8
The American Innovation System
IV

The American
Innovation System
The organization and finance of innovation in the United States have

evolved considerably during the past 80 years. One distinguishing
feature of the U.S. innovation system is the enormous scale of its R&D
investment. Industrial research activity during the early twentieth
century was dominated by the chemicals and related industries
(chemicals, glass, rubber, and petroleum), which accounted for nearly
40 percent of the number of laboratories founded during 1899-1946,
and more than 40 percent of total research scientists and engineers
employed in manufacturing in 1921. Electrical machinery and
instruments accounted for more than 20 percent of all scientists and
engineers employed in industrial research in U.S. manufacturing in
1946. Thus, the major prewar research employers were the research-
intensive industries (chemicals, rubber, petroleum, and electrical
machinery), which accounted for at least 60 percent of the professionals
employed in industrial research during the period 1921-1946, and
which were geographically concentrated in five states: New York, New
Jersey, Pennsylvania, Ohio, and Illinois (Mowery and Rosenberg 1993).
Between 1921 and 1946, inhouse industrial research had
supplanted the inventor-entrepreneur, and reinforced the dominant
position among the largest 200 firms. Federal antitrust policy prevented
large firms from acquiring small technology-intensive firms. Large
firms invested heavily in industrial research during this period as a
survival strategy. Consequently, federal antitrust policy may have
paradoxically aided the survival of U.S. large firms and the growth of
a stable, oligopolistic structure in some U.S. manufacturing industries.
Industry accounted for about two-thirds of total R&D
expenditures throughout the 1930s; federal expenditures constituted
at most 20 percent; and the remainder came from universities, state
governments, private foundations, and research institutes. Industrial
and academic research were developed in parallel in the U.S. in the
9
late nineteenth century due to the example set by German industry

and academia. State governments provided public funding for many
U.S. universities. State governments’ contributions to university
research had exceeded the contribution of the federal government
during this period because both the curriculum and research of U.S.
public universities were closely geared to the requirements of the local
economy. The expansion in the number of engineering schools and
programs in the second half of the 19th century accelerated the use of
scientific knowledge in industry. The training of engineers was often
elementary in character, and few U.S. universities before 1940 engaged
in scientific research at the frontier. It was the larger body of scientific
knowledge (not frontier science) that was relevant to the needs of an
expanding U.S. industrial sector. The number of people bringing the
knowledge and methods of science to bear on internal problems was
vastly large. This helped the scientific and engineering “catch up” in
the U.S. during the early twentieth century, and which likewise aided
the diffusion and utilization of advanced scientific and engineering
knowledge (Mowery and Rosenberg 1993).
Another distinguishing feature of the U.S. innovation system
before World War II was its heavy reliance on the linkage between
industry and agriculture (e.g., the development of advanced
technologies for food processing and its technological superiority in
farm machinery and equipment). Much of the growth in U.S.
agricultural output per capita during the pre-1940 period depended
on the expansion of cultivated land and the dissemination of seed
strains that were suited to local growing conditions. During this period,
a sizable portion of the budget was devoted to extension activities
(e.g., testing, demonstration, and dissemination of best practices in
agriculture; and modification of seeds, techniques, and equipment to
fit local conditions). By 1940, scientific research was more important
than extension. Advances in biology and chemistry research were
exploited and were responsible for rapid agricultural productivity
growth during this period (Mowery and Rosenberg 1993).
In the postwar period, the support of the federal government for
U.S. basic, commercial, and military research expanded dramatically.
Nongovernmental institutions retained responsibility for the
performance of much of the U.S. R&D in the postwar period. In
contrast, federal government’s R&D went to support research
performed within the federal establishment itself in the prewar period.
This reflects the far more advanced state of development of university
10
and private sector research capabilities in the postwar period. Federal

R&D spending has been a large fraction of national R&D investment
during the postwar period (total R&D spending ranged from slightly
more than 1 percent of GNP to almost 3 percent of GNP). In recent
years, most of basic research was performed in universities and
federally funded research and development centers, which were
administered by universities and colleges. However, most of the
support for basic research was provided by a small number of federal
agencies: Department of Health and Human Services (particularly the
National Institutes of Health), National Science Foundation,
Department of Defense, Department of Energy, and the National
Aeronautics and Space Administration. The military R&D spending
dominated the federal R&D budget for the last 30 years of the postwar
period and was far more development-intensive than the rest of the
federal R&D budget. Defense procurement likewise lowered barriers
to entry and allowed the entry and rapid growth of numerous young
and relatively small firms in the computer industry (Mowery and
Rosenberg 1993).
Another feature of the structure of the postwar U.S. research
system was the expansion of research in U.S. universities due to
expansion in federal support making U.S. universities the centers for
the performance of scientific research. Federal support for university
research covers both the demand side (contracts and grants for specific
research projects) and supply side (acquisitions of physical equipment
and facility needed to both teach and undertake high-quality research,
and financial aid for students in higher education). Federal support
for research therefore strengthened the university commitment to
research and reinforced the link between research and teaching.
Still another feature of the postwar U.S. research system was the
role of small startup firms in conceptualizing new technologies,
particularly in computer, microelectronics, and biotechnology
industries. High levels of labor mobility within regional
agglomerations of high-technology firms served as an important
channel of technology diffusion. In addition, a vigorous U.S. venture
capital market supplemented by public equity offerings played an
important role in support of new firms during their infancy. Moreover,
a relatively permissive intellectual property regime in computer,
microelectronics, and biotechnology industries aided the
conceptualization of innovations by new firms in terms of facilitating
technology diffusion and reducing the burden on new and young firms
11
of litigation over innovations that might have originated in part within

established firms. Postwar U.S. antitrust policy likewise assisted
startup firms due to liberal-patent-licensing terms of the consent decree
of the 1956 settlement of the AT&T case (microelectronics) and the
IBM case (computer). Postwar antitrust policies likewise discouraged
established firms from acquiring high-technology smaller firms.
Military procurement from startup firms also enhanced further the
possibilities of substantial technological spillovers from military to
civilian applications (Mowery and Rosenberg 1993).
In the 1970s, returns to R&D investments and the rate of growth
in real industry expenditures on R&D declined too due to competitive
pressures from foreign firms, increases in the real cost of capital, and
slowdown in the growth rate of the U.S. economy. Industry funding
of basic research declined and many of the central research facilities
of the giant corporations redirected R&D resources away from longer-
term activities and toward development projects that were more likely
to produce near-term commercial payoffs (Rosenberg and Mowery
1993; Lester 1998).
The international environment changed drastically in the 1980s,
affecting adversely the U.S. innovation system. The process of
economic and technological convergence reduced the gap in per capita
income, productivity, and R&D investment between the U.S. and many
major industrial economies. More sophisticated foreign firms emerged
in the market, and U.S. superiority in high-technology markets was
eroded. Private firms responded to these environmental changes by
pursuing other external ways of exploiting R&D such as cooperative
research programs with foreign or domestic firms and university-
industry research linkages. On the other hand, the federal government
undertook new initiatives in research funding, trade policy, and
intellectual property protection to increase the domestic economic
returns to public and private R&D investments in the U.S.
In the 1980s the structure of the U.S. industrial research system
also changed considerably. The dominance of inhouse corporate
research laboratory may have declined and the role of new firms in
the commercialization of new technologies may have been reduced.
New startup firms in high-technology industries are prone to pursue
technology commercialization through collaboration with larger
domestic or foreign firms instead of pursuing the goal independently.
The U.S. venture capital market is now excessively focused on short-
term results and is providing insufficient support for long-term
12
technology development. Venture capital market is likewise described

to have become a less important source of support for startup firms
due to the increasing costs of new product development. Established
U.S. and foreign firms are increasingly acquiring startup firms because
of the changing public policy environment in the U.S., which has
relaxed its antitrust policy that previously discouraged acquisitions
of startups by large industrial firms. Efforts to strengthen domestic
protection for intellectual property may reduce the viability of startup
firms (at least in the computer industry). The U.S. military is no longer
a strategic player in the market for computer and semiconductor, and
the possibilities for military-civilian technology spillovers have
declined.
All of the above structural changes appear to reduce the main
elements that distinguish the U.S. national innovation system from
those of many other nations.1
_______________
1
This section draws heavily from Mowery and Rosenberg (1993).
13
V

The Japanese Innovation System
During the Tokugawa regime, which secluded Japan from the rest of
the world from 1639 to 1854, trade was restricted to the Chinese and
the Dutch. The Dutch provided the government with information on
many aspects of science and technology, which were translated into
Japanese and diffused to other feudal lords. The literacy rate in Japan
was likewise high in the 17th and 18th centuries because of the existence
of two school systems: (1) schools owned by the feudal local
governments and (2) private schools, many of them run by Buddhist
temples. Thus, the technological level of Japan was not too much behind
the West, and the establishment of the public education system in the
Meiji Era (1868–1911) was smooth, because the educational infra-
structure was already in place. Higher education system (particularly
technology and engineering education) was developed, with the help
of British professors, in the nineteenth century. During this era, the
Japanese government also built and owned plants and factories in
railroad, mining, shipbuilding, machinery and textile industries.
Technology transfer was made through the following channels:
importing technology, hiring foreign engineers and specialists, and
importing machines and plants. At the same time, indigenous
technology complemented imported technology by providing the
ability to assess the various technologies available from the west, and
the capability to adapt them to domestic conditions (Odagiri and Goto
1993; Hoshino 1982).2
The Japanese scientific and engineering infrastructure was
developed in the 1914-1945 period. Several universities and other
_______________
2
Caves and Uekusa (1976) reported that a survey of Japanese manufacturers showed that,
on average, one-third of the respondents’ expenditures on research and development was
allocated to building the capacity to know what technology was available for purchase or
copy, and the ability to modify and adapt foreign technology to domestic use.
14
higher education institutions were established and supplied many

trained engineers. Trading companies were used as channels of
information and supplied foreign books and journals. More vocational
schools were established, which developed a greater supply of skilled
workers who were capable of handling advanced equipment. Basic
research institutions (e.g., national industrial laboratories and corporate
R&D laboratories) were created to serve the needs of technology-based
industries. Government took measures to expand rapidly scientific
and technological departments at universities and set up a variety of
new research laboratories after the war began. The Science Council
was established in 1933 to increase research funds for universities and
other research institutions, and to promote efficient research
management. For instance, the grants provided by the Science Council
encouraged and financed projects undertaken by researchers belonging
to different institutions. The development of scientific and
technological infrastructure, complemented by increasing production
and R&D activities provided the environment for the development of
world-class Japanese manufacturing industries (Odagiri and Goto 1993;
Hashimoto 1999).
At the end of World War II, Japan realized that although two-
thirds of its production capacity was not destroyed, its production
skills and R&D knowledge were obsolete. So Japan developed the
catch-up program all over again by implementing a two-pronged
strategy: (1) importation of advanced technology and (2) promotion
of a domestic technological base. Industrial policy was implemented.
Scarce foreign currency was allocated to firms capable of adapting
and improving imported technology. Restriction on imports and of
foreign direct investment was imposed. This policy forced foreign firms
to exploit their technological superiority by selling their technology.
Japanese firms, on the other hand, were given only the option of
importing technology. Industrial policy was successfully implemented
in Japan because firms which imported technology invested in inhouse
R&D facilities, and were eager to import technology because of
expectation of high returns (Odagiri and Goto 1993). However,
technology assimilation was not smooth. Organizational infrastructure
had to be created to train managers and workers to properly use
modern methods and techniques, and to adapt to modern organized
management practices (Hoshino 1982).
Since the 1960s, the Japanese have observed that the terms of
technology imports became less favorable, so they emphasized
15
domestic R&D capability through the use of incentives such as tax

breaks, subsidies, and low-interest loans. This policy shift resulted in
the decline of government support of industrial R&D and in the
substantial increase in the R&D expenditures of private firms. Joint or
cooperative research efforts were encouraged. Japanese science and
technology efforts shifted its emphasis to the promotion of basic
research and the globalization of innovation. The following features
of management in Japanese firms also contributed to a rapidly
changing and R&D-intensive environment: (1) a bias toward growth
maximization; (2) familiarity of management with research,
production, and marketing; (3) close links between R&D, sales, and
production departments; and (4) smooth transfer of new processes and
products into production, partly due to a policy of lifetime employment
in big firms that give incentives to provide internal training and
practice internal promotion (Odagiri and Goto 1993).
Takahashi (2001) argues that Japan’s failure to respond to the
digital age is one of the causes of the decline in the competitiveness of
its high-technology industries. Another cause is the changing
proportion of science- and engineering-driven industries. Science-
driven industries aim to commercialize new scientific discoveries,
while engineering-driven industries aim to produce new products and
services by exploiting the existing stock of knowledge. The emergence
of dominant design is a sign that an industry has shifted from the
science-driven phase to the engineering-driven phase. Japan is good
at engineering-driven industries because these industries fit the
country’s institutions, which revolve around collective knowledge
creation. On the other hand, science-driven industries (e.g.,
biotechnology) require individual creativity. Basic research is useful
in science-driven industries, while research on generic technologies is
important in engineering-driven industries. Government and
foundations finance basic research in science-driven industries, while
the private sector finances applied research and development in
engineering-driven industries. Integrated assembly is the appropriate
organizational form for engineering-driven industries, while a single-
venture mission is the appropriate one for science-driven industries.
The appropriate form of organization in the information-technology
industry has changed from one of integrated-assembly to one of a single
mission. American companies have restructured their operations to
fit this changing environment. However, the majority of Japanese
16
manufacturers remain as integrated organizations. This failure to

restructure explains the loss of competitiveness by Japanese companies
in this industry because it “deprived them of the speed of development
and [the] freedom to procure various parts at reasonable cost”
(Takahashi 2001).
17
VI

The German Innovation System
In the nineteenth century, Germany turned to Britain and Belgium

for technical know-how, new machinery, and skilled workers in the
machine building and iron and steel industries. The German
government often provided financial support for the purchase of
foreign machines, which were used as demonstration materials in local
R&D laboratories. Government-financed system for education and
research in technology, science, and business was pioneered in
Germany and was a major social innovation in the nineteenth century.
The university was the institutional focus of scientific research in
Germany. In addition, academies of science were founded in several
German states, which were primarily tasked to pursue scientific
research. However, many universities were in a poor state to undertake
scientific research. Some German state governments reformed their
universities; others established new ones with better curricula;
professors were hired based on their reputation derived from their
publications. Professorial chairs were filled with the best people and
provided them with adequate facilities. University research in
Germany, particularly in medicine, physics and chemistry, rose to
world leadership; student numbers increased rapidly; and government
funds for universities increased even faster than the number of students
did.
German universities in the nineteenth century accomplished
much for science, but ignored engineering on the assumption that the
latter lacked the dignity of a science. Some engineering schools were
established in the eighteenth century to train administrators in
government-owned mining industry, civil engineers and architects in
government service, military engineers, and artillery officers. In the
1820s, polytechnic schools were established to train technicians for
private industry. Several levels emerged in the vocational and technical
18
The German ))Innovation System
education system: apprenticeship system, middle-level schools, and

university level. The polytechnic schools raised entrance requirements,
improved their teaching, and gained social recognition when their
graduates were accepted for public service. In the 1870s, the polytechnic
schools were called “Technische Hochschulen,” and were elevated to
higher status that required similar entrance examinations as the
universities. In 1899, the Technische Hochschulen was given the right
to grant doctoral degrees. Around 1900, business schools were
established and were later developed into university-level institutions.
Middle level schools were likewise established. Thus, a system of
business education emerged with several levels: apprenticeship
system, middle-level schools, and university-level institutions.
At the beginning of the twentieth century, Germany had
established a sophisticated education system covering all levels, with
emphasis on technology, science, and business. Universities and
Technische Hochschulen produced relatively high-quality research,
and university-industry links were enhanced. German colleges and
universities graduated 30,000 engineers compared to about 21,000 in
the U.S. in the first decade of the twentieth century. In addition, central
government and federal states established and financed some 40 to 50
research institutes in applied areas (e.g., weather and atmosphere,
geography and geology, health, agriculture, shipbuilding, biology,
fishery, etc.) and basic areas (e.g., physics, chemistry, medicine, etc.)
which complement the universities’ research capabilities in these areas.
The Kaiser-Wilhelm Society was established in 1911 to tap industry as
a source of research funds. Five institutes were established: the
Institutes for Chemistry, Physical Chemistry, and Coal Research were
mostly financed by industry, while the Institutes for Biology and
Experimental Therapy were jointly funded by the government and
industry; the government’s contribution was in the form of land and
salaries of some of the Institutes’ staff.
Germany was the largest exporter of pharmaceuticals, dyestuffs
and synthetic fertilizers in the 19th century because it relied heavily on
technological innovations emanating from chemical, medical, and
biological research at the universities and research institutes. Toward
the end of the 19th century, when electric power technology was
introduced, German firms assumed technological leadership in new
industries (e.g., iron and steel, metal processing, electrotechnical,
combustion engine) because of its sophisticated education and research
system.
19
After the Second World War, Germany was divided into East
and West Germany. Large parts of Germany’s industrial facilities were
destroyed, and the basic components of the West German innovation
system were reconstructed. The Kaiser-Wilhelm Society became the
Max Planck Society in 1948; and the trade union structure was
introduced to limit trade union conflicts within firms and industries.
The Max Planck Society (composed of 60 institutes in 1989) is
financed by central government and federal state governments on a
50-50 basis. Eighty percent of the funds are concentrated in research
in the natural sciences performed by leading scientists recruited from
universities. Unlike its predecessor, the Kaiser-Wilhelm Society, which
focused on applied research (e.g., textile research, leather research,
etc.), the Max Planck Society focused on basic research. The Fraunhofer
Society filled the gap left by the Max Planck Society by providing a
strong link between universities and industry and concentrating in
applied research, serving clients from industry and government on
project contract basis.
At present, Germany could be commended for having a portfolio
of exports spread over many product groups: machinery, motor
vehicles, chemicals and pharmaceuticals, scientific instruments, metal
products, telecommunications, power generating equipment, and iron
and steel. Industry, not the government, is the major source of R&D
funds. However, the higher education system is no longer a showpiece
in Germany’s innovation system. Germany has neglected its higher
education system since the mid-1970s. A governance system must be
introduced to give universities more responsibilities and provide them
with incentives to be more efficient. A strong university system will
provide not only a solid base for Germany’s innovation system but
also the capability for technological innovation in the future. Germany
must also prepare to accommodate the internationalization of business
and the globalization of innovation.3
_______________
3
This section draws heavily from Keck (1993).
20
VII

Understanding the Fundamentals
Japan’s national system of innovation differs from the U.S. in three

aspects:
1. The role of small companies. Large corporations account for a
much larger share of innovations in Japan, while small newly
established firms generate a steady stream of technological
breakthroughs in the U.S.
2. The role of government in promoting R&D. Japanese government
spends far less to support private sector R&D than its U.S.
counterpart. Corporate funding for R&D is significant in
Japan, but government-funded research accounts for nearly
50 percent of the total R&D expenditures in the U.S.
3. The nature of advanced training for R&D personnel. Japan relies
heavily on inhouse apprenticeship and permanent employ-
ment, which is more cost-effective, but is not as rigorous
academically as that in the U.S. On the other hand, the quality
of university-based research in Japan is low compared to that
in the U.S. Furthermore, university-industry linkages are far
more extensive and transparent in the U.S. than they are in
Japan. The lower levels of interfirm labor mobility in Japan
(partly due to the practice of lifetime employment in large
corporations) restrict technology transfer. However, the
Japanese innovation system promotes cooperative research
projects to offset the negative effect of labor-market practice
on the transfer of technology. On the other hand, continuity
in personnel plays a key role in successfully managing
innovations in Japanese companies. The practice of moving
personnel along with the innovation from research to
commercialization promotes interaction across the various
stages of innovation, and facilitates the integration of a large
21
amount of tacit knowledge embodied in process

development (Hane 1999).
The strongest feature of the Japanese innovation system is the
fast pace of domestic adoption of new technology in manufacturing.
This is because the system has consistently supported domestic
technology adoption and strong domestic competition in technology
commercialization. Technology adoption and technology diffusion
from existing knowledge have been adroitly pursued by the Japanese
innovation system during the technology catch-up stage. Now that it
has reached the technology leadership stage, the Japanese innovation
system has emphasized basic research or the generation of new
knowledge from frontier science.4 Shifts in industrial structure have
also been very drastic in Japan. Barriers to entry into new and growing
industries have been lowered in the era of liberalization and
internationalization of business. Thus, a Japanese firm must innovate
to survive.
Japan’s effective innovation system is helped by its latecomer
advantage and government policies. However, the most important
element of its success is attributed to the willingness of its private sector
(investors, managers, engineers, and workers) to respond to the
opportunities open to them, to start an unfamiliar business, and to
adopt and assimilate new technologies.
The strength of the German innovation system, on the other hand,
lies in the institutional forms which they pioneered in the 19th century:
(1) research-oriented university that combines its educational function
with the advancement of scientific knowledge; (2) science-based firm
with inhouse R&D separated from production; (3) a comprehensive
system of technical education; (4) specialized research institutes in
applied areas; and (5) academies of science, professional associations,
and nonprofit foundations for scientific research.
The German innovation system likewise efficiently established
and implemented government-funded national laboratory systems to
solve scientific and theoretical problems of great importance to the
society and which required more resources (capital, researchers,
_______________
4
Although there is rapid increase of basic research conducted by Japanese universities and
colleges, as well as an increased role of basic research within Japan’s R&D efforts, Japan’s
total effort in basic research remains modest by U.S. standards (Okimoto and Saxonhouse
1987).
22
Understanding the Fundamentals
instruments, materials, working time) than can be provided by

corporate R&D centers and educational institutions.
The weakest link in the present German innovation system is the
neglect of the higher education system since the 1970s, resulting in
increased student population but decreased personnel and real
expenditures. Institutional reforms are needed to address the
inadequacy in teaching and research. The existing structures to
coordinate the technical and scientific efforts of the universities are
deficient. For instance, the split of the former Ministry for Scientific
Research into Ministry for Education and Science (responsible for R&D
undertaken in universities) and Ministry for Research and Technology
(responsible for R&D outside the higher education sector) had made
coordination of the innovation system more difficult and more
fragmented.
The Philippine innovation system can emulate from the
institutional forms established in the United States, Japan, and
Germany. It can adapt a few of them, and sometimes improve them to
address the country’s needs and advance technological development.
23
VIII

Improving the National

Innovation System
The major components of the national innovation system are firms,

universities, technical-vocational institutions, technological
information infrastructure, research and development centers (RDCs),
technology and resource centers (TRCs), financial system, and
government (Figure 1).
Firms
The internal organizations of firms are the critical components of the
structure of the national innovation system. Most innovations are
developed and adopted by firms. The organization of the flow of
information and of the learning process influences the innovative
capability of a firm. In particular, the linkage between sales, production,
and R&D departments of the firm is an important aspect of the
innovation process. Interfirm relationships (i.e., competition and
cooperation) are other important aspects in the structure of the national
innovation system.
The resource-based theory that applies to firms asserts that
bundles of resources lie at the heart of a firm’s competitive advantage
(Penrose 1959 and Barney 1997). The ability of a firm to adopt and
exploit technology depends on its internal capabilities. Arnold (1995)
classifies four levels or phases in the development of firm-level
technological capabilities: (a) low-technology small and medium
enterprises (SMEs), (b) bootstrappers, (c) technological competents,
and (d) research performers.
Low-tech SMEs have no technological capability and have no need
for it. Bootstrappers hire a minimum of one person (usually an
engineer) to monitor and understand the significance of technological
changes happening outside the firm. Technological competents possess
enough capability to do serious development work and participate in
24
Improving the National Innovation System
technology networks. Research performers take a long-run view of

R&D capabilities. There are two types of research performers: (a) large
domestic firms and multinational corporations (MNCs) with internal
R&D departments, and (b) high-technology small startup firms located
in science parks or spinoffs from university-industry cooperative
research. In focusing on the private sector’s demand for technology,
low-tech SMEs and bootstrappers are inclined to obtain their technical
inputs from suppliers of machinery and raw materials. Technological
competents and research performers are the types to locate in science
parks, participate in domestic or international research consortiums,
or involve in university-industry linkage programs.
Gutierrez (2002) has surveyed potential investors in the proposed
UP Diliman Science and Technology Park, and reported that 73 percent
of the respondents are local companies while 23 percent are
subsidiaries of MNCs (companies that fit Arnold’s stereotypes of
“technological competents” and “research performers”). Tanchanco
Figure 1. Major components of an innovation system
25
(2001) provides a list of products in the seafood, fruits/vegetables,

rootcrops, and other fruits sectors, most of which were developed by
government institutions (DOST, Department of Agriculture or DA,
the Bureau of Fisheries and Aquatic Resources or BFAR and
universities including UP Diliman and UP Los Baños).
A private sector response to exploit commercial opportunities is
exemplified by Pascual Laboratories. The company has established a
subsidiary called Altermed to adopt and commercialize two herbal
products developed by the National Integrated Research Program on
Medicinal Plants under DOST’s Philippine Council for Health Research
and Development (PCHRD). Altermed is engaged in the production
of lagundi under the brand name Ascof, and sambong under the brand
name Releaf. Ascof is available in 300-mg. plain and 600-mg. forte.
Releaf is available in 250-mg. plain and 500-mg. forte. Lagundi is an
anti-cough and anti-asthma product while sambong is used as a remedy
for urolithiasis, a urinary ailment (Ancog 2001).
The development of herbal medicine is part of the national policy
of self-reliance.
MNCs dominate 65 percent of the domestic pharmaceutical
market. The literature on technology transfer promotes the idea that
foreign direct investment is one of the channels of technology transfer
to local companies. However, MNCs prefer direct investment rather
than licensing, especially when it involves new and most profitable
technologies. Local firms’ only chances of gaining access to technology
may lie in reverse engineering, or hiring of former MNC employees
with special skills. The effectiveness of the reverse engineering strategy
is questionable because local firms may lack the technical skills required
to imitate the newest and most profitable technologies (Blomstrom
and Kokko 2001). This was not the strategy followed by Pascual
Laboratories. It scanned locally available technologies, adopted it, and
commercialized two products developed by a government RDC. A
case of private exploitation of government-funded R&D.
Universities
Universities are the primary source of new skills, new knowledge, and
new ideas, which make substantial and direct contributions to
industrial development. Research-intensive universities are expected
to commercialize the creative ideas of their students, staff, and faculties
and to bring the benefits of science to the public. This expectation
26
creates different institutional responses from universities in different

countries. Some universities pursue extensive links with industry;
others are limited to informal faculty-firm collaboration because of
constraints imposed on public universities to accept funds from private
firms that have commercial interest in the outcome of their research
activities. The responses of some universities are due to the internal
incentives and promotion system that rewards basic and theoretical
research over applied and industry-focused research.
The history of university-industry links in both Japan and the
U.S. suggests that educational institutions tended to specialize in fields
of science and engineering that addressed the needs of the local
economy. For example, state universities geared their research and
curriculum to commercial opportunities in fields such as agriculture
and mining engineering, particularly for universities located in
agricultural and mining states. The University of Akron in Ohio built
expertise in polymers and elastomers to support Akron’s tire industry.
Cornell University in New York pioneered the first American electrical
engineering department whose faculty and students (in collaboration
with George Westinghouse) built the first municipal electric power
service for the mining town of Telluride, Colorado (Mowery and
Rosenberg 1993; Kodama and Branscomb 1999). In Japan, a professor
in metallurgy at the University of Tokyo fixed technical problems at
the two major iron mills (Kamaishi and Yawata) by redesigning the
imported furnaces, supervising the state of operation, and
subsequently employing his students to help improve the operation
of the mills (Odagiri and Goto 1993; Kodama and Branscomb 1999;
Odagiri 1999).
The trend toward university-industry cooperation has raised
concerns on its impact on the tradeoffs between the public goals of
education and knowledge generation and the private goal of benefiting
commercially from new knowledge. The first issue deals with
dissemination of information. Do industry collaborations with
academia increase the diffusion of research results? Are there instances
when companies cooperating with universities ask to keep information
confidential, or prevent faculty from publishing research results? The
second issue involves the nature of research. Will the involvement in
applied research adversely affect the pursuit of fundamental research?
The third issue refers to the effect of collaboration to access to university
research by newcomers. Do collaborative projects based in traditional
27
or personal networks make access transparent and open to new

partners? (Hane 1999). These are some unanswered questions on the
impact of university-industry collaboration.
Brooks (1996) enumerates a number of unresolved issues or
questions on future research policy and strategy:
1. Will the national laboratories or nonprofit research institutions
separate from universities be the principal locus of
government support for addressing the competitiveness and
economic performance missions, or will the main locus remain
within or in close association with the research universities?
2. What are the implications for university priorities of the
increased importance of the knowledge synthesis and
diffusion functions compared with the previous emphasis on
the creation of new knowledge?
3. What kinds of ground rules, criteria, and procedures should
be developed for the extent and form of participation of
government agencies in cooperative research and educational
projects?
4. Given that the primary goal of public sector investment in
technology creation or diffusion is net job creation in the long
run, what are the implications of government support on the
selection of the most appropriate institutions and
technologies?
5. How can criteria for public investment in new knowledge
creation or diffusion be developed to provide assurance that
public funds are not displacing potential private investment,
which is likely to be more cost-effective because of its greater
responsiveness to markets?
6. What are the long-term implications of the priority now being
given to the economic performance mission as a justification
for public investment in science and technology, and of the
allocation of public resources among four classes of
institutions: universities, government RDCs, nongov-
ernmental nonprofit organizations, and private industry?
The Philippine experience in university-industry collaboration
is exemplified by the Manufacturing Linkage Program (MLP), which
was organized in 1985 by the engineering alumni of the University of
the Philippines with funding support from DOST’s Philippine Council
for Industry and Energy Research and Development. MLP’s main goal
28
is to strengthen the manufacturing sector of the Philippines by carrying

out activities that motivate engineering students to pursue careers in
manufacturing. Plant tours, seminars, summer internships, briefing
sessions, and roundtable discussions are MLP’s main activities
intended to address the problems and specific concerns of the
manufacturing industry (Aliga 2000). MLP can pursue meaningful
university-industry collaboration by recruiting science and engineering
faculty from universities to undertake cooperative projects with
manufacturing industry engineers to develop, adapt, and improve
product or process technology that would address specific problems
facing the industry.
In the long run, a concept like MLP should be self-generating
through financial contributions from participating firms and nonprofit
foundations. In addition, MLP can generate funds by charging fees to
its value-creating services such as seminars, briefing sessions, industry
assessments, and information dissemination. It can also be
strengthened and made sustainable by corporatizing the program;
renting an office space with complete communication facilities; and
hiring a core of fulltime staff to coordinate its activities. The implication
of a completely private-run MLP is that it will demonstrate the private
sector’s willingness to respond to opportunities open to them, to
cooperate with one another, and to address problems of utmost concern
to the Philippine manufacturing industry via this novel institutional
form.
Scientists and engineers

One common denominator in the success story of the American,
Japanese, and German innovation systems is the large number of
engineers and scientists their educational systems have produced
during their technology catch-up period. The large number of people
bringing the knowledge and methods of science to tackle industrial
problems aided the diffusion and utilization of advanced technological
knowledge (Mowery and Rosenberg 1993). Table 3 confirms this
pattern. The number of scientists and engineers in research-intensive
U.S. industries increased from 2775 in 1921 to 45,941. A similar pattern
was observed in Japan. The Japanese system significantly increased
the number of scientists and engineers from 2,100 in 1965 to 44,000 in
1981 (Table 4). Germany had 474,900 R&D personnel, five times larger
than those of South Korea (88,764) in 1992 (Table 5).
29
Table 3. Employment of scientists and engineers in industrial research

laboratories in U.S. manufacturing firms: 1921-1946
1921 1927 1933 1940 1946
Chemicals 1102 1812 3255 7675 14,066

Petroleum 159 465 994 2849 4750
Rubber Products 207 361 564 1000 1069
Electrical Machinery 199 732 1322 3269 6993
Transportation Equipment 83 256 394 1765 4491
Instruments 127 234 581 1318 2246
Others 898 2460 3817 9,901 12,326
TOTAL 2775 6320 10,927 27,777 45,941
Source: Mowery and Rosenberg (1993).
Table 6 presents the number of employed persons in technical,

scientific and managerial occupations in the Philippines from 1991 to
1999. Even if we assume that all of them are R&D personnel, the average
annual growth rate of R&D personnel from 1991 to 1999 was at 2.9
percent—a very disappointing performance. As Table 2 shows, this is
not far from reality. R&D personnel actually increased by 3.2 percent
annually from 1989 to 1992, and by 1 percent annually from 1989 to
1996.
Rosenberg (1985) shows that almost two-thirds of private
industrial R&D in the U.S. was concentrated in five industrial sectors
in the 1980s: aerospace, electrical and electronics, instruments,
computers, and chemicals and allied products. Tables 7 and 8 present
data on employment in the Philippine chemical-based and steel-based
industries, respectively. Employment grew at an annual rate of 2.7
percent in chemical-based industries, and 0.7 percent in steel-based
industries for the 1983-1994 period.
Technical training institutions

Short-term, on-the-job, and apprenticeship training for managers,
technicians, and skilled workers is provided by a system of technical
and vocational institutions. This system supplies a pool of skilled
manpower to new and growing firms and industries. All important
30
Table 4. Scientists and engineers at Japanese universities

and colleges engaged in R&D: 1965-1981
Year Scientists and Engineers
1965 2,100
1966 3,300
1967 4,100
1968 7,200
1969 7,600
1970 19,000
1971 18,000
1972 18,700
1973 33,100
1974 35,200
1975 36,400
1976 41,400
1977 45,900
1978 45,700
1979 50,200
1980 46,700
1981 44,000
Source: Okimoto and Saxonhouse (1987).
Table 5. R&D personnel in Germany: 1992
Type Number
Government Institutes 75,900

Universities 96,000
Business Enterprises 303,000
TOTAL 474,900
Source: Klodt (1996).
31
Table 6. Employment in technical, scientific and managerial occupations:

1991-1999 (in thousands)
1991 1992 1993 1994 1995
Professional, technical 1,344 1,392 1,398 1,366 1,428

and related workers (5.80%) (5.80%) (5.70%) (5.40%) (5.60%)
Administrative, executive 277 284 326 358 421

and managerial workers (1.20%) (1.20%) (1.30%) (1.40%) (1.60%)
Production and related 4,903 5,067 5,128 5,493 5,571

workers, transport (21.30%) (21.20%) (21%) (21.80%) (21.70%)
equipment operators
and laborers
All occupations 22,978 23,917 24,443 25,166 25,698

(100%) (100%) (100%) (100%) (100%)
1996 1997 1998 1999
Professional, technical 1,640 1,654 1,697 1,763

and related workers (6%) (5.90%) (6%) (6.10%)
Administrative, executive 456 531 570 662

and managerial workers (1.70%) (1.90%) (2%) (2.30%)
Production and related 6,259 6,506 6,366 6,493

workers, transport (22.80%) (23.30%0 (22.50%) (22.40%)
equipment operators
and laborers
All occupations 27,442 27,888 28,262 29,003

(100%) (100%) (100%) (100%)
Source: National Statistical Coordination Board, Philippine Statistical Yearbook (1998-2000

issues).
32
Table 7. Employment in chemical-based industries, 1983-1994
Industry 1983 1985 1988 1994
Basic Industrial Chemicals 4,466 3,976 4,462 6,783

Fertilizers 1,772 2,510 2,620 1,906
Synthetic Resins 2,026 1,697 2,481 1,800
Pesticides and Insecticides 1,341 657 1,316 1,151
Other Chemical Products 24,432 23,749 29,700 31,101
Plastic Products 16,778 10,585 17,616 25,876
TOTAL 50,815 43,174 58,195 68,617
Sources: National Statistics Office, specifically the 1983, 1988, and 1994
Census of Establishments, and the 1985 Annual Survey of Manufacturers.
Table 8. Employment in steel-based industries: 1983-1994
Sector 1983 1985 1988 1994
Iron and Steel 17,388 15,024 15,507 21,516

Nonferrous Metal 3,619 3,317 2,618 3,589
Fabricated Metal Products 19,379 14,680 21,733 29,365
Machinery 16,541 13,603 18,576 21,801
Electrical Machinery
and Appliances 52,521 37,608 54,374 107,910
Transport Equipment 22,255 12,194 14,053 24,098
Sources: National Statistics Office, specifically the 1983, 1988, and 1994
Census of Establishments, and the 1985 Annual Survey of Manufacturers.
inputs to the innovation process do not come from formal science-

based R&D efforts. Informal and tacit knowledge and insights of
workers, engineers, and managers are likewise crucial inputs to the
innovation process.
33
The primary provider of technical and vocational education and

training (TVET) in the Philippines is the private sector offering post-
secondary, nondegree courses. However, TVET graduates are not
exactly the technicians and skilled workers required by new and
emerging industries, or even by established manufacturing industries,
because their training revolves around office and clerical work, service
and sales, automotive repair, and driving. This explains why the
unemployment rate of TVET graduates is higher than the national
average unemployment rate (Orbeta 1999).
The effectiveness of the Technical Education and Skills
Development Authority (TESDA) in coordinating the technical
manpower requirements for economic development remains a major
policy issue. If the private sector is not providing the appropriate skills
needed for industrial development, are the public technical institutions
(including technical universities like Technological University of the
Philippines) doing a better job? The private sector is adequately
providing computer education skills, although it needs to strengthen
the technical aspect of information technology education such as
computer engineering, systems integration, and software design. The
institutional form of the German technical education system provides
a useful benchmark in improving the Philippine technical education
system.
The existing technician training system requires some
improvement. For instance, for training to produce good results, the
inputs from industries must be complemented by inputs from research
institutions, nonprofit foundations, and universities, which may
provide a better perspective on the economy’s long-term requirements.
A strong worker training system does not exist simply because of the
short-term orientation of the industry. An ideal training system
produces workers with broad training and education to better cope
with technical problems and be flexible with a changing environment.
However, in practice, Philippine companies simply provide minimum
training for workers to do specific tasks. The reason behind this is that
local managers fear that well-trained workers will transfer to other
companies that are actual or potential competitors. Local companies
can emulate from operations of subsidiaries of MNCs that provide
better training and pay higher wages.
34
Research and development institutes

Institutions are needed to help link companies with external knowledge
and technology. These institutions can take the form of research and
development centers (RDCs) or technology and resource centers
(TRCs). RDCs are institutions undertaking basic and applied research
(technology generation) and extension (technology development and
diffusion). RDCs are usually established to provide common R&D
facilities for an industry or group of firms. On the other hand, TRCs
are mainly undertaking technology diffusion of existing knowledge
and are the conduits of extension services.
Some of our RDCs are duplicating the applied research activities
done in TRCs, companies, and universities. On the other hand, the
RDCs in the Philippines are RDCs only in name based on their legal
charter, but they actually function like TRCs. TRCs are critically useful
in improving the Philippine innovation system because they can focus
on the following functions: a) conducting technology awareness
programs (e.g., seminars, workshops, briefings); b) tracking
technological trends in the industry, c) providing industry-related
information to members; d) collecting market information and
establishing industry database; e) offering specialized training in fields
not available elsewhere in the education and training system; f) doing
consulting and development work for individual firms or a group of
firms; g) conducting applied research projects commissioned by
members; and h) dissemination of research results.
Most companies need routine technology assistance, not
information on emerging technologies and frontier science. An RDC
is designed to transfer advanced technologies to industry, but most
companies may not need state-of-the-art technologies that are
expensive and untested. Most SMEs may need help with improving
existing operations using proven technologies, and how to strengthen
quality, inventory control, design, training, and marketing. A well-
functioning TRC will precisely engage in activities that are recognized
to be more important to SMEs. TRCs in the U.S., Sweden, Japan,
Taiwan, and Hong Kong provide the following services for SMEs:
technology needs assessment, problem solving, technology awareness
and tracking, technology acquisition, market research, recruitment
services, production management, product design and development,
35
overseas study visits, field trips, assistance with ISO certification,

inspection and testing services, consulting services, software for data
processing, training, technology demonstration, technology brokerage
and referral, implementation assistance, and advisory services.
Ancog (2001) reports that the technologies developed by
government RDCs are simple, easy to adopt, and can be
commercialized quite profitably. However, the R&D projects were
chosen based on the expertise of RDCs and the interest of the scientists.
It has also been reported that DOST’s Metals Industry Research and
Development Center has developed spin casting, spinning, computer-
aided design-computer-aided manufacturing (otherwise known as
CAD-CAM), computer and numerically controlled machine (or CNC),
solid waste management, gemstone processing and iron furniture-
making technologies. On the other end, a United Nations Development
(UNDP) and DOST study (Roble 1995) concludes that most of the
product technology capability intervention needed in the metal
fabrication industry involves training, marketing, and promotion
(Table 9). TRCs have a clearly defined purpose and customer base,
and R&D projects are industry- rather than scientist-driven if
government TRCs (masquerading as RDCs) have a corporate structure
and gradually shift their dependence from government support to
industry support.
Thus, TRCs are the institutions created to apply existing
technology and not to develop new technology. Great Britain lost its
technological leadership by the end of the 19th century because British
institutions were incapable of diffusing innovations and using them
in a wide variety of new applications. Such loss was not due to the
failure of British scientists and inventors to find new discoveries or to
make radical innovations because British scientists and inventors made
outstanding contribution to the development of electricity. In contrast,
German and American industry exploited the generally available new
scientific knowledge far more effectively than British industry by
rapidly creating the institutions to identify, adopt, diffuse, and exploit
available technologies (Freeman 1992).
It is clear that institutional innovations are as important as
scientific discoveries in the national innovation system.
Technological information system

Patents provide information on domestic and foreign technology.
Information and database on firm capabilities can help firms find joint
36
Table 9. Product technology capability in the metal fabrication industry
Product Technology Capability Intervention
A. Origin Equipment Manufacturer

(OEM) Machinery Parts
1. Development Training of research staff and IPR
B. Replacement Casting Parts for

Local Mining, Cement Quarrying,
and Milling Equipment
1. Production Training in modern foundry operations, quality
control, and heat treatment technology
C. OEM Automotive Parts
Casting Parts
1. Production Training in new technologies
2. Marketing Marketing skills tailored to the replacement parts
in the local market
D. Tool and Die for Manufacturers
of Semiconductors
1. Production Training in the use of modern equipment and
processes; adoption of standard die components
2. Procurement Purchasing/inventory control on standard die
components
3. Engineering Training in die design capability; innovation in
reconfiguring obsolete equipment
E. Appliances
1. Production Expansion of subcontractors with capability to
supply assembler; training in production of
intermediate products
2. Marketing Promotion of exports of appliances
Source: Roble (1995).
venture partners, formulate export promotion programs, and target

sectors for inward foreign investment. Permissive intellectual property
regime in new and emerging industries will facilitate technology
diffusion through the entry of numerous startup firms. Commitment
to meeting international product quality standards (e.g., ISO 9000)
facilitates both national and international trade. A common metrology
37
and testing center is useful in providing common service facilities for

calibrating machinery and testing instruments. Testing services can
likewise be provided by the private sector.5 A credible laboratory
certification process helps develop the market for new and established
products.
The number of patents granted to local investors stood at 888 in
1999 (from 741 in 1981). However, in 1998, only eight patents were
granted. On the other hand, the number of patents granted to foreign
investors was placed at 804 in 1999 (from 806 in 1981). The 1998 figure
was 568. Although the number of local patents registered with the
Intellectual Property Office is not impressive, access to foreign patent
information will meet the objective of providing information on firm
capabilities for local companies that will assist them in formulating
strategies for partnership and strategic alliances with foreign firms.
Sometimes the number of patents is misleading. For instance, although
American universities licensed a substantial number of patents, most
of the revenues generated by universities came from a relatively few
non-exclusive licensed patents of a very basic nature (Hane 1999). Some
argue that Japanese technological performance is overstated if patents
are used in international comparisons because the Japanese have
registered “more patents than others because the knowledge they seek
to protect tends to be less significant technologically” (Okimoto and
Saxonhouse 1987). Evidence also shows that the number of registered
Japanese patents is understated because Japanese professors do not
bother to register them because of lack of legal and administrative
support and the financial costs involved (Hane 1999).
The legal framework for intellectual property protection has
been firmed up by the passage of Republic Act No. 8293, prescribing
the Intellectual Property Code and establishing the Intellectual
Property Office (IPO). At the University of the Philippines, proposed
guidelines governing intellectual property rights have been drafted.
Various RDCs under DOST (e.g., PCHRD) have also formulated
technology transfer guidelines (Ancog 2001).
Standardization in the Philippines is government-dominated.
Substandard goods abound in the domestic market and the majority
of export products are manufactured according to the standards and
_______________
5
Bureau of Product Standards (BPS) has about 30 accredited testing laboratories in Metro
Manila, 25 of which are privately owned (Raneses 2000).
38
specifications prescribed by foreign buyers. Although national

standards in the Philippines are comparable with other developing
countries, standards in the basic industries (machinery, electronics)
are inadequate. Among the factors explaining the low stock of
standards are the following: lack of information or understanding of
standards, lack of competent testing facilities of international caliber,
lack of competent manpower on standardization, and lack of
technology guidance on quality improvement for SMEs (Raneses 2000).
Financial system
A sophisticated financial system that provides a pool of venture capital
builds a strong foundation and support for the survival and growth
of numerous high-technology startup companies. If the venture capital
market is excessively focused on short-term results, it will not be of
big help in the development of firm-level technological capability in
the long run.
The U.S. experience shows that a vigorous venture capital market
emerged when intellectual property protection was permissive in the
computer, electronics, and biotechnology industries. But the financial
market became conservative when intellectual property protection was
tightened in these emerging technologies.
The contribution of the financial system to a well-functioning
innovation system depends on how open bankers and investors are to
the concept of lending to entrepreneurs and firms based on intangible
assets with good business prospects. Intangible assets can take the
following forms: discoveries of inventors, new scientific findings of
scientists, and tacit knowledge and skills among managers,
entrepreneurs, engineers, and workers. Currently, the banking system
is collateral-intensive. Ancog (2001) and David (1999) suggest the
allocation of more resources for research, development, and technology
commercialization. For instance, technology generation in corn and
sugar is underfunded (David 1999). In contrast, Kodama (1995) has
shown that the R&D expenditures of major Japanese companies had
exceeded capital investment by 1985 (Table 10).
Government
Government plays an important role in the innovation process because
it directly supports research, development and the promotion of
science. Government policy on taxes, tariffs, standards, and
environment influences the rate and direction of innovation. But the
39
Table 10. R&D expenditures and capital investment

in major Japanese manufacturing companies: 1985-1987
Company R&D Expenditures Capital Investment R&D/Capital Ratio

(million yen) (million yen)
(1) (2) (1)/(2)
1. Toyota Motor 258,333 301,333 0.86

2. Hitachi 251,773 123,367 2.04
3. NEC 235,667 180,667 1.30
4. Matsushita Electric 204,647 41,971 4.88
5. Toshiba 179,133 127,433 1.41
6. Fujitsu 163,637 113,833 1.44
7. Nissan Motor 160,000 106,533 1.50
8. Honda 114,867 80,380 1.43
9. Mitsubishi Electric 113,000 77,000 1.47
10. Sony 92,978 77,968 1.19
11. Mitsubishi Heavy Industries 87,333 65,022 1.34
12. Mazda Motor 77,433 102,667 0.75
13. Nippondenso 59,860 86,233 0.69
14. Canon 59,563 53,579 1.11
15. Sharp 59,164 56,176 1.05
16. Nippon Steel 55,000 140,000 0.39
17. Fuji Photo Film 43,278 42,533 1.02
18. Sanyo Electric 41,945 56,261 0.75
19. Ricoh 36,720 26,671 1.38
20. Takeda Chemical Industries 34,900 22,440 1.56
21. Kobe Steel 34,233 71,865 0.48
22. Asahi Chemical Industries 33,833 52,033 0.65
23. Kawasaki Steel 31,267 100,133 0.31
24. Ishikawajima-Harima 31,267 12,933 2.42
25. Bridgestone 29,667 36,467 0.81
Source: Kodama (1995).
40
most important influence of government in the process of innovation

lies in the user and procurement function of innovation, which makes
a big difference on the commercial viability of new products in the
market.
Government policy was blamed for the decline of the British
innovation system from 1900 to 1950. Weak antitrust policy encouraged
anticompetitive price and market-sharing agreements among British
firms, which undercut the incentives for the pursuit of competitive
advantage through innovation. Cartel agreements among small and
inefficient firms were legitimized in the 1930s. And financial support
for technical and managerial education at the secondary and university
levels was minimal despite the need to improve the number of
engineers and the quality of its training (Mowery and Rosenberg 1989).
Government policy was likewise blamed for the slow institutional
response and the loss in productivity leadership for Britain in new
industries (e.g., electric power, synthetics, automobiles, and precision
engineering) at the end of the 19th century (Freeman 1992).
In the Philippines, David (1999) has documented the weaknesses
in the institutional framework of the research system in the agricultural
and natural resources sectors. For instance, only 30 to 40 percent of
public expenditures for these sectors have been allocated for
productivity-enhancing expenditures. Cororaton (1999b) confirms the
underinvestment in R&D and estimates the corresponding gap at about
0.5778 of GNP, or approximately P14.6 billion in current prices in 1997.
It does not help that the Department of Agriculture (DA) is still drafting
the guidelines for the commercialization of genetically modified crops.
Local government units are no help either. Recently, for example, the
municipal council of Ilagan, Isabela voted unanimously against a plan
for Monsanto to conduct field trials for dry season Bacillus
thuringiensis-injected corn (popularly known as BT corn) in this town
even though Monsanto obtained a permit from the National Committee
on Biosafety of the Philippines (Manila Bulletin, 5 January 2002).
Finally, Table 11 shows the concentration ratios, effective
protection rates, and cost-price margins in selected Philippine
manufacturing industries, where scientists and engineers are
concentrated. Although effective protection rates have fallen
substantially from 1988 (the start of the Tariff Reform Program),
41
Table 11. Concentration ratios, effective protection rates, and price-cost margins
in selected manufacturing industries (in percent)
Industry Concentration Effective Protection Price Cost

Ratio Rate Margin
(1995) (1994) (1995)
Petroleum Refineries 100.00 20.07 32

Professional and Scientific 99.97 1.09 24
Nonferrous Metal Products 98.57 -1.15 24
Glass and Glass Products 92.05 20.21 52
Industrial Chemicals 84.65 3.04 31
Transport Equipment 84.40 57.32 23
Iron and Steel 70.55 9.12 24
Machinery (except electrical) 79.43 0.36 28
Petroleum and Coal Products 87.40 -10.06 26
Fabricated Metal Products 74.32 28.74 28
Other Chemicals 69.09 29.14 46
Textiles 72.37 7.95 30
Food Processing 81.74 14.45 32
Food Manufacturing 77.92 50.26 41
Source: Aldaba (2000).
concentration ratios are still absolutely high in these industries

(averaging 83.75%) in 1995. Concentration ratios are positively
correlated with price-cost margins. The dominant market position of
these industries can be explained by the lack of an effective competition
policy in the Philippines. Aldaba (2000) claims this situation has led
to the underinvestment in R&D by the private sector. This predicament
is akin to the British situation from 1900 to 1950. While the British case
led to the loss of technological leadership, the Philippine case illustrates
why technological catch-up is extremely difficult.
42
IX

Diagnosing the Problem
The poor private sector participation in R&D is manifested by the

lack of interest in availing itself of R&D-related incentives offered
by the Board of Investments (BOI). Since 1991, only 11 companies
availed of BOI incentives for R&D activities. Cororaton (1999a) points
to the weak link between the government and the private sector in
terms of R&D activities (e.g., absence of respectable databases and
technology information system). Furthermore, at least 70 percent of
total R&D expenditures in the Philippines is accounted by the public
sector (Patalinghug 1999). The argument for incentives is that it is
necessary to induce private R&D investment. The recent findings of
a survey revealed that private firms preferred government incentives
for infrastructure or tariff reduction to reduce the cost of doing
business over government incentives for R&D (Gutierrez 2002). R&D
is not an attractive undertaking in the Philippines. First, few are
undertaking R&D because they lack the capability. Second, non-R&D
incentives are more generous and are marked by a capital-using bias
compared to the existing R&D incentives. A catch-up innovation
system will address the technological capability-building needs of
local firms and industries.
The private sector is reluctant to develop R&D and is incapable
of doing so. The reluctance is due to the uncertainty, risk, and high
cost that accompany R&D investments. The lack of capability is
attributable to the limited number of technical personnel that can
understand, adopt, modify, assimilate, disseminate, and improve on
imported technologies. The thrust of the Philippine national innovation
system must be the establishment of institutions and the promotion of
institutional innovations that build the capability to monitor, choose,
adopt, disseminate and modify existing stocks of knowledge. For
instance, government R&D institutes do not have the flexibility,
43
accountability, incentives, and fiscal autonomy to create opportunities

for cooperative research with the private sector, or with the universities.
On the other hand, the private sector must possess the willingness to
respond to opportunities open to them even in an unfamiliar business
requiring the use of new techniques. The private sector must share the
risks and costs of undertaking R&D with the government. Economic
incentives can only work under this environment.
Philippine semiconductor exports contributed only 10 to 15
percent of value-added. One explanation for this predicament is the
shortsightedness of Filipino investors. Investors and financial
institutions are motivated by short-term expectations. They have
neither interest in nor understanding of the long-term opportunities
and needs of their industries. The high cost of capital forces companies
to have a short-term horizon because they fear that long-term
investment opportunities threaten their survival. Are managers’ short-
term horizons forced on them by external conditions (e.g., the inability
of the financial system to lower the cost of capital) or is it a
manifestation of the managers’ lack of risk-taking skills and lack of
knowledge about their companies’ products, markets, production
processes, and opportunities? The explanation must be a combination
of both. However, an innovation system that consists of a financial
system with a dynamic venture capital market will provide a strong
support for managers and companies that pursue long-term
opportunities for their businesses.
Broader training for workers increases flexibility, improves
productivity, and reduces coordination costs. However, firms are
reluctant to invest in extensive training because of the mobility of
workers who might bring the newly acquired skills to competitors.
Labor mobility also exists in Germany, but German firms continue to
invest heavily in worker training. Market failure exists because worker
training benefits the whole economy, but it is not in the self-interest of
individual firms to undertake the investment. The solution is for
government to encourage public-private partnerships for job training.
Labor-management bargaining may target on training as a major non-
wage demand. But the pressure on individual firms will be difficult to
resist if training is institutionalized in the tripartite bargaining among
management, labor, and government. Tax benefits or tax incentives
may be offered to firms investing in worker education and training.
Government must also work harder to develop an environment of
cooperative (rather than confrontational) labor-management relations
44
Diagnosing the Poblem
in the country (Dertouzos et al. 1989). The change in the atmosphere

requires that government seeks cooperation from other sectors
(academe, labor, industry, and civil society) to achieve this goal.
MNAAP can support ongoing productivity improvement programs
such as labor-management councils, gain-sharing schemes, and safety/
health committees.
While the practice of lifetime employment played a crucial role
in the successful management of the Japanese innovation system, the
prevailing practice in the Philippines is contractual employment.
Esguerra (1997) argues that hiring costs and firm-specific human capital
determine a firm’s decision to invest in a long-term employment
relationship with its employees. The firm’s dependence on nonregular
workers will be greater for jobs or positions that require minimal firm-
specific skills. Korea encourages firms to invest in firm-specific skills.
A law enacted in 1974 made inplant training compulsory for all
industrial enterprises employing 300 or more workers (Kim 1997). An
effective innovation system must possess the intensity of effort and
commitment to expose workers and firms to new knowledge. Firm-
based training is a conscious effort to internalize new information and
techniques. In other countries with weak firm training policies, strict
implementation of their social and labor laws practically makes it
extremely difficult to practice contractual employment. Building new
skills and flexible human capital is consistent with MNAAP’s goal of
developing globally competitive human resources.
45
IX

Conclusion: Bridging the Gap
The framework of the Philippine innovation system must focus on

the catch-up type. The prerequisite of this type of innovation system
is the establishment of institutions and promotion of institutional
innovations that build the capability to monitor, choose, adopt,
disseminate, and modify existing stock of knowledge. Institutional
innovation requires not only a shorter time lag from technology
adoption phase to commercialization phase, but also the promotion
of vigorous competition among domestic firms which cooperate in
the development stage of generic technologies.
Another measure of a successful catch-up innovation system is
the willingness of the private sector to respond to opportunities open
to them, start an unfamiliar business, and assimilate new techniques.
A catch-up innovation system requires a significant role of
government in the start-up costs (mostly buildings and equipment) of
R&D institutions that are needed to make the overall system work
efficiently. However, the failure of government support to
technological development can be explained by government
assumption of nearly all costs of the new institutions. Managers and
private firms have the incentive to carry out a project even if they
expect it to have no commercial use. The problem can be avoided by
letting the private sector share the risks and cost with the government.
The university-industry collaboration is practically non-existent
in the Philippine innovation system. Although there are some
unresolved questions on this institutional set-up, the reality is that it
worked effectively for U.S., Japan, and Germany during their catch-
up stage. And it has been revived to work effectively for their systems
at their current technology-leadership stage. Ground rules, criteria,
and procedures can be developed to make universities work in close
association with industry and government in addressing the
46
Conclusion: Bridging The Gap
competitiveness, economic growth, and sustainability goals.

The educational and technical training system must have the
capability to produce a large number of quality scientists, engineers,
managers, technicians, and skilled workers. This large number of
people aids the diffusion, absorption, and utilization of advanced
scientific and engineering knowledge in the catch-up stage of the
Philippine economy. Companies must also be willing to partly bear
the risks of giving a broadly designed training to workers in high-
mobility markets.
Research and development institutions will be ineffective if they
aim to undertake fundamental research in big science and frontier
science in a country whose short-term to medium-term needs largely
require routine technology assistance in improving existing operations
using proven technologies; and strengthening quality, inventory,
control, design, training, and marketing. Most of the existing
government RDCs must expand and deliver effectively their TRC-type
services for SMEs. But government must eventually phase out their
involvement in technology extension institutions (TRCs) because they
will just displace potential private investment that is likely to be more
cost-effective due to its greater responsiveness to markets.
Testing and certification services of high caliber help develop the
market for new products and services. A strong network of standard-
developing bodies comprising of government, industry, and
universities can be encouraged. There is also a need to institute a
consistent and sustained promotion of standards as quality,
productivity, and technology management tools.
Finally, government can address the ineffectual R&D incentive
scheme by implementing a catch-up innovation system that addresses
the technological capability-building needs of local firms and
industries.6 Public-private partnerships in job training will address
the reluctance of firms to invest in extensive worker training. Building
new skills and flexible human capital is consistent with MNAAP’s goal
of developing globally competitive human resources. MNAAP can
likewise complement ongoing initiatives on productivity improvement
such as labor-management councils, gain-sharing schemes, and safety-
health committees.
_______________
6
See Patalinghug (2001) for possible incentives to R&D activities.
47
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RESEARCH PAPER

SERIES No. 2003-04

The Philippine Innovation System:

PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES

RESEARCH PAPER SERIES NO. 2003-04

PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES

Printed in the Philippines. All rights reserved.

Please address all inquiries to:

Philippine Institute for Development Studies

List of Tables and Figures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv.

III. The Philippine Innovation System . . . . . . . . . . . .. . . . . 4

IV. The American Innovation System. . . . . . . . . . . .. . . . . . 9

V. The Japanese Innovation System. . . . . . . . . . . .. . . . . . . 14

VI. The German Innovation System. . . . . . . . . . . .. . . . . . . . 18

VII. Understanding the Fundamentals. . . . . . . . . .. . . . . . . . 21

VIII. Improving the National Innovation System . . . . . . . . . 24

IX. Diagnosing the Problem. . . . . . . . . .. . . . . . . . . . . . . . . . 43

X. Conclusion: Bridging the Gap. . . . . . . . . .. . . . . . . . . . . 46

List of Tables and Figures

National innovation system is anchored on the theory that industrial

Industrial development requires technological capability in industry.

presented 14 country-specific case studies in an attempt to portray the

The government created the National Science and Development Board

The DOST introduced the Science and Technology Master Plan

participation in S&T activities; (2) to develop emerging technologies;

Table 1. R&D expenditures by major sectors: 1989–1996

Sector 1989 1990 1991 1992

Higher Education 210,840 274,793 290,047 433,234

1993 1994 1995 1996

Higher Education 380,029 419,801 457,063 531,981

the 1989-1996 period. In short, government agencies contributed the

Table 2. R&D personnel by major sectors: 1989–1996

Sector 1989 1990 1991 1992

Higher Education 6,772 6,824 6,876 6,929

1993 1994 1995 1996

Higher Education 5,384 6,177 6,363 7,027

Sources: DOST, National Survey of Scientific and Technological Activities:

DOST is coordinated by five sectoral planning councils (covering

The organization and finance of innovation in the United States have

late nineteenth century due to the example set by German industry

and private sector research capabilities in the postwar period. Federal

of litigation over innovations that might have originated in part within

technology development. Venture capital market is likewise described

The Japanese Innovation System

higher education institutions were established and supplied many

domestic R&D capability through the use of incentives such as tax

manufacturers remain as integrated organizations. This failure to

The German Innovation System

In the nineteenth century, Germany turned to Britain and Belgium

education system: apprenticeship system, middle-level schools, and

Understanding the Fundamentals

Japan’s national system of innovation differs from the U.S. in three

amount of tacit knowledge embodied in process

instruments, materials, working time) than can be provided by

Improving the National

The major components of the national innovation system are firms,

technology networks. Research performers take a long-run view of

Figure 1. Major components of an innovation system

(2001) provides a list of products in the seafood, fruits/vegetables,