Southeast Asia and Three “Invisible” Preconditions in the New Era of Industrial Policies

As industrial policies take centre stage in major economies like the United States, Europe, and China, it becomes imperative to think about what the response of developing countries should be. We argue that for developing countries to implement industrial policies effectively, they should first assess the status of some basic preconditions, especially aspects of technology absorptive capacity, the presence of standards systems as well as innovation ecosystems. Despite their ubiquity and enabling roles, these preconditions are often “invisible” to policy observers because they require a sophisticated understanding of a country’s industrial sectors and technology drivers.

The first challenge to formulating relevant industrial policies revolves around developing countries’ absorptive capacity for industrial technologies. A key issue lies in the skills required to operate basic machines and robots and to implement advanced production processes. A report from the World Bank underscores that access to technology alone is insufficient to reap its benefits since firms must actively adopt it. Not only is the effective absorption of technologies dependent upon trade and investment policies, and navigating patent and industrial trademark landscapes, but it also rests upon the need for local professionals and workers to develop the skills necessary to adopt foreign techniques and technology. Given that firm-level data is often lacking in national databases, absorptive capacity is hard to measure, making it the first “invisible” precondition for effective industrial policies.

Countries with higher absorptive capacity for new technologies can also expect to accrue benefits in terms of job creation. The World Economic Forum Future of Jobs report provides insights on the perception of impact of major global developments on jobs. According to the report, 51 per cent of firms in the East Asia and Pacific sampled view the macro-trend of increased adoption of new and frontier technologies as job creators. This is higher than the global average of 36 per cent. Southeast Asian countries such as Malaysia (71 per cent) and Indonesia (60 per cent) have relatively strong responses to this trend compared to others in the East Asia and Pacific region. This may indicate that these countries are more sensitised to implementing operational changes into industrial processes that promote the usage and application of new technologies.

The second challenge centres on quality standards. These are so ubiquitous, and yet we do not see them. The food we eat, the machines we use, and the goods factories produce and assemble require standards and certifications. These are supported by a Quality Infrastructure (QI), which includes networks of labs, experts, and compliance with global norms necessary to sell and export goods and services. While countries can use standards and laboratories from overseas, local experts still need to supervise the process, which is why it is sometimes known as part of the invisible infrastructure in an industrial landscape. Improving standards and certifications by the QI is the starting point for selling and upgrading products and services.

UNIDO’s Quality Infrastructure for Sustainable Development Index (QI4SD) provides a comprehensive QI ranking which incorporates the assessment of standards, conformity assessments, accreditation, metrology, and policy. Amongst the Southeast Asian countries, Singapore (59), Thailand (52), and Malaysia (49) score the highest, with all these countries assessed highly for accreditation processes. On the flipside, conformity assessment sub-indices, the degree to which a product’s design and operating characteristics meet established standards or specifications were amongst the lowest in the index composition. Germany is the leading QI country with a score of 88, with high sub-index values across the board.

The third precondition for effective industrial policies is having a platform for collaboration with institutions where frontier technologies are advancing to complement the innovation ecosystems of developing countries. In these countries, a major challenge is the lack of access to frontier knowledge and technologies.

This difficulty in accessing frontier knowledge and technologies by developing countries occurs because the scientific research that underpins frontier technologies is mostly located in universities and research centres of high-income countries. Competing in basic science against leading scientific communities is often counter-productive for developing countries, as it involves creating expensive scientific infrastructure without immediate links to commercial applications. A better strategy for developing countries would be to create collaborative links with world-leading research centres, thus accessing frontier knowledge without the financial burden. The participation of Singapore in the EUREKA collaborative innovation platform, cooperation through UNIDO’s Investment and Technology Promotion Offices, ITPOs, and the eligibility of Southeast Asian countries for Horizon Europe scientific funding are some of the pathways that countries of this region can explore to create valuable links to world-renowned research centres. The quantity and quality of these knowledge flows between countries are, however, difficult to measure, and thus are often “invisible” to policymakers and analysts.

According to a UNIDO report, Thailand’s efforts to establish an innovation ecosystem have been less successful than those of technology leaders such as South Korea and China. This is due to Thailand’s focus on trade and investment activities in its early stages of industrial development, with a smaller emphasis on foundational Science, Technology and Innovation (STI) policies. These policies are important for enhancing knowledge networks and improving science and technology capabilities. A report by the Cambridge Industrial Innovation Policy, Institute for Manufacturing (IfM) of the University of Cambridge, also illustrates the need to continue mastering frontier manufacturing technologies to develop Indonesia’s innovation ecosystem, which is still in its early stages of development.

Improving industrial policy effectiveness is particularly important for Southeast Asian countries in the current global scenario of multiple crises and geopolitical shifts. While large economies such as the United States, the European Union, China, and other high-income countries are competing to strengthen their primacy in key technologies, Southeast Asian economies have become key production platforms linked to these new global demands. This requires Southeast Asian countries to take a pro-active stance in improving the underlying, and often “invisible” pre-conditions for effective industrial policies.

Editor’s Note:
ASEANFocus+ articles are timely critical insight pieces published by the ASEAN Studies Centre.