Mactan export processing zones : a deviant case in economic logic or a definite case of premature deindustrialization?

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Photo Provided by OP Graham

Olivia P. Graham

10862129

Oliviapgraham@gmail.com

Master’s Thesis International Development Studies

Graduate School of Social Sciences

University of Amsterdam

Supervisor: Dr. N.P.C. Beerepoot

Second Reader: Dr. D.L. Arnold

December, 2016

Case in Economic Logic or a Definite Case of

Premature Deindustrialization?

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Abstract

In the past forty years, emerging economies in many regions of the world have engaged heavily in an export-oriented growth discourse. Through outward facing policies and investment schemes, countries like the Philippines have sought to use Export Processing Zones (EPZs) as incubators for foreign investment, knowledge transfer and employment absorption. EPZs, however, on both a global and national level, have been seen as a “second best policy” for economic development, and more recently, viewed as an inefficient instrument for growth. A rising service-sector economy and strong business process outsourcing industry has shaped and changed the growth prospects in the Philippines. The presence of premature deindustrialization has created a shift away from an emphasis on manufacturing as a growth mechanism, and has the potential to threaten the relevance and future of the Mactan Export Processing Zones.

Despite these changes in the regional economy of Cebu, research has yet been done on the effects of premature deindustrialization on EPZs in the Philippines or the perceptions of local stakeholders and companies of the current economic relevance of the zones. Hence, this thesis asks how the Mactan Export Processing Zones defy current export-led logic and what explains the continued significance of the EPZs for the regional economy of Cebu. Evidence has been drawn from a qualitative research design, comprising semi-structured interviews, observation and analysis of secondary data such as export and labor statistics. The study found that institutional stakeholders view the zones as relevant to their economy, especially as underemployment continues to grow in the region, with no other options for the absorption of semi-skilled laborers. Furthermore, it was found that that the presence of premature deindustrialization has emerged and can be seen through increased automation within locator companies. Although theory anticipated that companies would have become more innovative, thus increasing automation to decrease reliance on human labor, while working on moving up the value chain, these side effects of premature deindustrialization and theory were minimally evident. The study therefore concludes that deindustrialization, which would render Export Processing Zones in the Philippines nearly obsolete, has in reality barely posed a threat to the zones and their current operations.

Keywords: Export Processing Zones, Premature Deindustrialization, Global Value Chains, Philippines

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Acknowledgements

I truly cannot believe the end of this year and a half adventure is coming to a close. With that being said, I would firstly like to thank those that made this research possible and made my experiences in Cebu City unforgettable. I cannot express my gratitude enough for the friends I made in Cebu, guiding me through the city, the culture and the bustling corporate setting. I would like to thank my participants in this research who gave their time, knowledge and local insights with such humility and helpfulness.

Secondly, I am extremely grateful to my supervisor, Niels Beerepoot. Niels, thank you so much for all of the knowledge and faith you have bestowed upon me during this processes. Your viewpoints, feedback and deep knowledge on the region and research topic have been invaluable and supportive during the past eight months.

To friends across all oceans, thank you for patience, laughter and words of encouragement that you have given to me during my time in Amsterdam, they have certainly gotten me through the peaks and troughs of this experience. To the library group, one million thanks for the coffee breaks, the sounding boards you have acted as and the adventure this past year has been. Finally, I would like to thank my parents for encouraging me to follow my dreams, leave New York and embark on this journey of a life time. Despite being 3,000 miles away, your positivity,

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List of Acronyms

BOI Bureau of Investments

BPO Business Process Outsourcing

CLIP Cebu Light Industrial Park

COIP Cebu Office of Investment Promotion

DTI Department of Trade

EOI Export Oriented Industrialization

EPZ Export Processing Zone

FDI Foreign Direct Investment

GDP Gross Domestic Product

GVC Global Value Chain

IMF International Monetary Fund

ISO International Organization for Standardization ISI Import Substitution Industrialization

MEPZ Mactan Export Processing Zone

MEPZCEM Mactan Export Processing Chamber of Export Manufactures

MRP Manufacturing Resurgence Program

NIC Newly Industrialized Country

PEZA Philippines Economic Zone Authority

PHP Philippine Peso

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Chapter 1: Introduction

1.1 Research Background

Globalization, the process of borderless business practices and seamless international knowledge and cash transfer, has changed the production of goods and services in the world economy. Recent technological advancements, especially in the fields of communications, container shipping and air freight, have facilitated the seemingly free flow of capital as well as movement of goods and services from virtually all corners of the globe (Baldwin, 2011). The ease of transferring goods and services has shaped the evolvement of economic development policies from inward focused, to outward facing export policies. Initially, developing economies employed an import-substitution policy to kick start economic growth and development on the basis of backward economies opening to foreign investment to help build a domestic industry (Felix, 1989). Met with critique and lack of economies of scale hampering growth, market liberalization and trade openness took hold of the global growth agenda. This outward facing policy which pushed for openness and the creation of job opportunities sought to benefit countries like the Philippines, which has maintained a seemingly steady supply of semi-skilled, young workers.

The Philippines, the country in which this research is based, has both benefitted and struggled to harness all of the direct benefits that newfound economic openness typically provides. In recent years, the Philippines has become chronicled as a development puzzle, experiencing rising growth but plagued with a decline in private, domestic and foreign investment (Magnoli Bocchi, 2008). As the business process outsourcing industries have taken ahold of the Philippines, skyscrapers and economic growth mirroring nearly developed countries have impacted the landscape of employment opportunities. This shift has opened questions on the role that manufacturing sector plays alongside a rapidly growing service-based industry.

Emerging markets like the Philippines, which have already shifted their resources and energy onto incubating a service-sector economy without fully industrializing, face significant risks to their development. Seen as a phenomenon in “developed” economies, Dani Rodrik (2015) has begun to bring to light the risks that this theory, known as premature deindustrialization, can have on economies who have not reached “development” through manufacturing.! Various

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manufacturing sectors in numerous developing economies. As industrialization through manufacturing has been heralded as the traditional path for development, this research examines the threats that the process of premature deindustrialization poses to one of the Philippines main tools for economic development; export processing zones.

While export processing zones have continued to grow in number, questions of their effectiveness in creating an opportunity for rapid, lasting economic development have also been raised. Theory on the success of export processing zones has stated that unless strong governance and most especially, backward linkages with the domestic market are both put into practice, export zones will not reach their potential for success (Din, 1994). The Philippines has seen mixed and lagging development in recent years, however, they have continued expansion of economic zones, despite being chronicled as a “second-best” solution for economic growth (Engman et al., 2007).

Through the automation process, there remains the potential for a diminishing amount of labor required for the same amount of output, causing its potential as an initial threat to export processing zones. As one of the main reasons for the construction of export processing zones in emerging economies has included taking advantage of a surplus of low-skilled labor, the arrival of mechanization in manufacturing may lead to the displacement of labor from manufacturing sectors as automation may lead to underemployment and unemployment. Arguments and theories with potential to displace labor include the relocation and reconfiguration of global value chains, especially as China has become portrayed as the workshop of the world (Story, 2007). Both automating and relocating production processes have the potential to severely impact the role of EPZs.

This research has been conducted in a case study format applying these theories to Metropolitan Cebu, Philippines. Comprising of three cities and two islands, the proximity of three enclave export processing zones adjacent both the second largest city in the Philippines and a budding BPO sector have provided a diverse region for research. The Mactan Export Processing Zones holds relevance for this research due to its continuous expansion and variety of multinational corporations producing in the region as well as the limited current research held within the zone. The rise of business process offshoring (BPO) and rapid growth of the service sector within a country that has not yet reached peak industrialization reflects a changing landscape for business

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practices, signaling a shift away from manufactured goods and production as a means of labor employment and economic growth.

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1.2 Research Rationale

The rationale for this research stems from the potential effects that premature deindustrialization may have on the outlets for growth and manufacturing in the Metropolitan Cebu area. As an early adopter of export processing zones, they have been a corner stone for economic development policies within the Philippines (Warr, 1987). While the effectiveness of export process zones as an instrument for economic development has undergone extensive research, the reasons companies continue to locate within them instead of moving to more cost-effective countries as not been recently explored within the academic debate. This especially holds true as the rise of China as the world’s workshop, which has had the potential to skew investments and companies away from the Philippines.

The academic significance of this research will contribute to the greater discussion on the relevance of export processing zones as a growth instrument, but more precisely focusing on how the processes of premature deindustrialization, automation and global value chain restructuring threaten EPZs. While an academic debate on premature deindustrialization has begun, little application has been done on the effects of this process in regards to the foreign owned manufacturing industry within the Philippines (Ramaswamy & Rowthorn 1997, Rodrik 2015). Alongside these gaps in research, this study adds a modern update on the relevance and resilience EPZs through threats of premature deindustrialization and its bi-products; automation and global value chain restructuring. Debates provide that through a rise in automation, companies will be more apt to rely on machines and automated processes for repetitive work done in lesser value added types of production, thus creating job-polarization or contributing to a rise in automated related unemployment. This research is relevant as it seeks to refute or reinforce notions that EPZs are no longer attractive or relevant for fostering and promoting economic development. If threats to EPZs in Metropolitan Cebu are prevalent, identifying the extent of the threats and what this poses for the local economy will be extremely pressing in both policy and practice.

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1.3 Thesis Overview

This thesis begins by providing an overview of the threats of premature deindustrialization for the Mactan Export Processing Zones as well as the reasons this research is both relevant and exploratory in nature. The subsequent chapter will explain the theoretical foundations that this research has been rooted within both export-led industrialization and premature deindustrialization. The third chapter will detail the research methodologies and strategies used during data collection as well as during the data classification stages. Chapter four will provide a brief overview of the political, historical and economic history of the Philippines alongside the initial reasons that caused the Philippines to become attractive for foreign investment. Once this overview has been provided, chapter five will propose details and analysis on the current relevance of the zones for the region, based upon secondary data collected in the field alongside perceptions from both institutional stakeholders and multinational corporations. The sixth chapter will present an analysis of the effects of premature deindustrialization, automation and restructuring of value chains have had on locators within the zones. The seventh and final chapter will provide a final conclusion of the empirical findings as well as provide insights on future areas of study.

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Chapter 2: Theoretical Framework

The upcoming chapter strives to explain and examine two main academic concepts operating as the foundation for this research and analysis. The initial discourse focuses on the pathways and shifts in policy regarding industrialization, emphasizing a nearly global adoption of export-led industrialization. The following section will closely analyze export processing zones as a mechanism for growth, alongside debates that both enhance and question their effectiveness. The second portion of this chapter will recognize a new global phenomena affecting the future of economic growth known as premature deindustrialization. This trend has the potential to vastly threaten export-led industrialization through manufacturing. Therefore, the succeeding section will provide insights on potential dangers it causes to the current models of economic growth. 2.1 The Pathway of Industrialization

Economic growth, a key pillar in the quest for a country’s journey to development, has long been associated with a liberalization of trade policies and a breaking down of global trade barriers (Kruger & Myint, 2009). However, rapid economic growth was not always attributed to such outward facing policies. At the time when colonization was fading from the global agenda, particularly after the Second World War, a new global schema focusing on the presence of global poverty had ascended. This emergence quickly called for the recognition of countries labeled as behind’ both socially and economically (Kruger & Myint, 2009). The first attempts made to focus on industrialization for such “laggard countries” called for the concentration and cultivation of domestic industries through a highly protectionist stance. Import-substitution, introduced during the 1950s and 1960s, advocated for the creation of industries and enhancement of production of goods that had been previously imported (Baer, 1972). Portrayed as a “catch-up” strategy for industrializing countries, the import-substitution policy design was established for when a “technologically backward economy tries to accelerate industrial investment primarily for the home market…” (Felix, 1989: 1455). Therefore, countries looking towards increasing GDP and development looked inward to create policies and environments to foster production within the domestic market. A technique that became favored

“to prevent domestic demand from leaking abroad, thereby keeping saving and fiscal

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The success of this inward facing policy was met with various challenges however. While ISI theory advocated for protectionist policies, placing an emphasis on a strong domestic market through domestically produced goods, not all participating countries benefited from this strategy. Countries with smaller economies of scale, especially in industries requiring high government assistance, struggled to achieve such rapid and remarkable growth (Baer, 1972). Critiques of import substitution have also included the penalizing of exports, a channel in which knowledge and technology transfer have the potential to improve and grow in the local market (Bruton, 1998). Cracks and doubts also started to emerge as this internally fixated policy remained heavily focused on countries whose domestic markets lacked large markets and consumption levels that more developed countries had already attained.

2.1.1 From ISI to EOI

As critiques of ISI began acknowledging the limited growth potential for many markets, a shift towards export-oriented industrialization started to appear. By focusing solely on domestic markets, economies of scale were small and countries could not progress beyond their national borders and offerings. Such limited scope created limitations towards foreign investment, technology and knowledge spillover, as well as a lack of competition in the global market place (Madini, 1999). Thus the case for economic openness was accentuated through the export-led growth hypothesis that

“Sustained growth cannot be maintained in domestic market because of their

limited size. Export markets are nearly limitless and do not involve growth restrictions, implying they can act as a catalyst for output growth...” (Dreger & Herzer, 2013).

Acknowledging that the domestic market could no longer provide the scope needed for rapid industrialization, a new emphasis on export-oriented industrialization policy took root globally. Export-led growth, a strategy utilized in hopes of growing capacity through the means of focusing on foreign markets was also met with both praise and critique. Thus debates on the shift from ISI to EOI were promoted through an emphasis on critiques of using the open international market as leverage for growth opportunities. Macroeconomist Thomas Palley presented three main arguments for the use of a more open trade agenda; a gain from a focus of comparative advantage, political economy benefits, and the resounding growth benefits from global trade (Palley, 2011). Positive remarks on the shift and remains of export-oriented growth have argued

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three positive attributes; there would remain increased economies of scale, the improved technological positioning of many lesser developed nations and increase the opportunities for employment through the encouragement of production for exports (Mukherjee, 2012). The push for market openness and trade liberalization policies, as opposed to the protectionist domestic policies were encouraged due to four overarching benefits of this change:

Table 1: Benefits of EOI

Benefits of Economic Openness and Outward Facing Policies

1. The creation of employment for abundant labor pools through increasing scale 2. Endogenous spillover effects such as technical progress and knowledge 3. The increase of foreign exchange through foreign direct investment.

4. Increased competition in the global market by tapping into economies of scale

(Madini, 1999)

The shift away from ISI towards EOI opened the doors for new investment opportunities to further stimulate growth, while also calling upon governments to augment their policies. Foreign direct investment became a bi-product of outward facing policies as a way for governments to begin opening their boarders for export, but also to allow for a greater financing and GDP boosting. This use of EOI also became a benchmark based upon the successes of a small classification of countries who employed such policies, seeking a typically from agriculture or rural based societies to rapidly growing industrial economies. This classification included countries such as South Korea, Taiwan, Singapore and Hong Kong, classified as Newly Industrializing Countries, for their use of strong policy enforcement and an openness towards trade and investment (Lee & Lee, 2011). To garner more foreign investment, newly industrialized countries (NICs) saw a complete policy shift, deregulating and privatizing economic activities “to unleash the vitality of the private sector and play a positive role in augmenting the market system” (Ozawa, 1992: 31).

However, critiques of this policy cite the success and variance of these policies a direct correlation on the levels of government intervention and regulation. Policies and their enforcement would later determine the success of the development of industry for export, as well as the ability to attract foreign investment and enforce local labor laws. Criticisms of export-led industrialization also credit this growth mechanism and its policies on adjusted exchange rates and freshly liberalized markets as a path towards speculative bubbles and expedited potential for

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financial crisis’ (Blecker, 2003). As the quest for GDP growth continued, various policy and investment instruments were developed to increase the opportunities for rapid growth for newly industrializing countries. While tariffs and tax benefits had become, and have remained, one of the strongest policies to manage such growth, governments across the world sought to achieve this through the construction of duty-free, foreign occupied enclave areas. Referred to globally as duty-free zones, export zones, or export processing zones, these enclave style trade zones have become synonymous with export-led industrialization, but also have changed immensely since their original inception (Landingin & Wadley, 2005).

2.1.2 Export Processing Zones as a Growth Mechanism

The rise of export processing zones has infiltrated development discourse and policymaking since their inception in the late 1950s. Beginning originally in Shannon, Ireland in 1959, they have spread rapidly predominantly through East Asia, Latin America and Africa to a lesser extent (Engman et al, 2007). Export processing zones have been defined by the World Bank as:

“an export processing zone is an industrial estate, usually a fenced-in area of 10 to 300 hectares, that specializes in manufacturing for export. It offers firms free trade conditions and a liberal regulatory environment (World Bank, 1992:7).”

Aside from the specifications of the zone, it is crucial to the academic debate to understand the cause for the creation and rise of export processing zones as a tool for economic growth. Remedio (1996) emphasized that the original idea of the export zones emerged from a push for export led industrialization. Citing the zones as a means to create jobs, facilitate the transfer of technology, increase foreign exchange earnings and enhance competition, all of which are pillars for successful export-led growth (Remedio, 1996).

The adoption of export processing zones was originally sought after as a mechanism to attract foreign direct investments in countries where ease of doing business, specific infrastructural requirements and overall stability was not always guaranteed (Aggarwal, 2006). The promotion and development of such economic zones became the endorsed method of adapting to deficiencies in infrastructure, an overload of bureaucratic complexities, and simplifying logistics like leasing and owning land (Aggarwal, 2006). Alongside this logic, positive remarks of scholars Nilsson and Johansson have equated export zones as catalysis for growth. Emphasizing that, while export zones speed up economic growth through exports, they also provide residual, endogenous effects that also benefit the local economy besides labor employment and large

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export surpluses (Johansson & Nilsson, 1997). Primarily, as the amount of transnational firm’s increase, foreign knowledge, capital and technological advances through knowledge transfer are more likely to occur. Thus, spurring on new information and kick starting the drive for domestic firms to seek out efforts towards increased production for the international market, and potentially domestic market (Amirahmadi &Wu, 1995). The catalytic hopes of export processing zones are also primarily encouraged by the host-country, as their main involvement remains the promotion and incentive scheme of foreign capital as well as maintaining the grounds and infrastructure of the zone (Amirahmadi & Wu, 1995). For EPZs to have been deemed an effective catalyst for economic development, two criteria have been used to measure their success. The two measurements include the attraction of FDI by transnational firms and secondly, the creation of backwards linkages, inviting the domestic sector into the workings of the EPZ.

While export-led industrialization has been presented, pushed, and promoted to developing countries across the globe, the general successes for EPZs has been severely mixed. The promotion of zones as a current engine for growth has been splintered, primarily due to their lack of success in regions outside of East Asia (Singa Boyenge, 2007). Commonly known as the “East Asian Tigers” Singapore, South Korea, Hong Kong and Taiwan relentlessly pursued early economic “openness agendas” and swiftly implementing export-led industrialization policies, including the export processing zone model (Palley, 2011). As early adaptors, Taiwan and South Korea quickly reached the take-off stage for industrialization, attributed to the use of export-led industrialization policies in conjunction with export processing zones. This method, heralded as a model case, served to rapidly increase employment, foreign direct investment and knowledge transfer. This outcome of rapid industrialization attributed to a spill over into the development of their domestic production markets as well (Madani, 1999).

Highlighting the successes in promotion, policy, and practice which countries such as South Korea have experienced, countries in the same region such as Malaysia and the Philippines have not felt the same results. In countries where export zones have not provided similar results to the East Asian Tigers, like in Philippines and Malaysia, a portion of this has been attributed to the integration of EPZs (Gibbon et al., 2008). Debates on their effectiveness include the government’s ability to provide a more integrated domestic economy, through clusters of

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used to incentivize countries to adopt the zones are also reasons EPZs have not been met with continuous success. As production of goods in zones globally has been associated with lower value-added services without high levels of technology, such as garments and technology, knowledge transfer becomes less feasible (Omar & Stoever, 2008). Theoretical debates surrounding the effectiveness of outward looking growth policies and the employment of export zones as a catalyst for growth have varied immensely globally. While critiques on the individual success that EPZs have had for promotion growth remain strong, the number of zones globally continue to grow. Thus, this research will focus upon export processing zones in their current state as well as threats posed to these enclave areas through the process of premature deindustrialization.

2.2 Threats to Export Processing Zones

As discussed in the previous section, industrialization has been heralded as the main pathway toward economic growth through outward facing policies. While the establishment of export processing zones originally sought to close the gaps between the industrialized and industrializing, new threats to their existence and effectiveness have emerged.

2.2.1 Premature Deindustrialization

In recent decades, development scholars had vouched for the proper use of export zones as a tool for economic growth, development and to further a global industrialization agenda (Madani, 1999). However, a new turning point has been reached in the inception of industrialization, a decline in the production of manufactured goods. The phenomena of deindustrialization, which advanced economies have been experiencing since the 1960s can be demarcated by

“… the secular decline in the share of manufacturing employment in the advanced economies” (Ramaswamy & Rowthorn, 1997: 6).

First presented by Dasgupta and Singh in 2006, then later elaborated on through Dani Rodrik, the phenomena of premature deindustrialization, a shift away from manufacturing towards a service sector economy, has begun to sweep through developing economies, and even sooner than that of ‘advanced economies’. Defined by Rodrik, the process occurs as

“… manufacturing begins to shrink (or is on course for shrinking) at levels of income that are a fraction of those at which the advanced economies start to deindustrialize. These

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developing countries are turning into service economies without having gone through a proper experience of industrialization” (Rodrik, 2015: 3).

Rodrik cites two main causes for the reasons in which premature deindustrialization has begun to take place in developing economies much sooner than their Western counterparts. These causes will be used to analyze the actualities of premature deindustrialization in this research. The first, technological advancement in the production process and secondly, globalization, which for the purpose of this research will focus specifically in the restructuring of global value chains. This poses a significant problem for developing countries, stripping away the opportunity for future economic growth by taking away the pathway to do so. Through premature deindustrialization, a shift of workers and productivity from rural to urban settings may no longer though a decline in manufacturing (Rodrik, 2015). By cutting off the relocation of capital and causing an inability to continue to scale up small and medium sized manufacturing sectors, economic growth may become halted, causing further employment and income inequality. The potential for an increase in automation has also begun to raise questions about the future of employment opportunities.

2.2.2 Automation

An increase in access and efficiency of technologies for manufacturing, and the mechanization of the manufacturing sector, have been referred to as the rise of the Second Machine Age, chronicled by Brynjolfsson & McAfee (2014). This new age, a wordplay on the first era of industrialization, emphasizes the role mechanization and automation can potentially have for industrializing economies. Through the lens of Parasuraman et al, automation is defined as “a

device or system that accomplishes (partially or fully), a function that was previously carried out by a human operator” (Parasuraman, et al, 2000: 289). Automation in the realm of

manufacturing has the potential to cause not only disruption in the work place, but also to diminish the potential for job creation, a key factor in the quest for export-led industrialization. These further advances of technology diminish demand for labor in repetitive tasks that are commonly seen in production and manufacturing, especially as mechanization contributes to higher productivity levels (Brynjolfsson & McAfee, 2014). Through improvements in technology, the theory of potential technological employment will also be utilized as a framework to understand the effects of automation on premature deindustrialization. Technological unemployment can thus be defined as

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“unemployment due to our discovery of means of economizing the use of labor, outrunning

the pace at which we can find new uses of labor” (Brynjolfsson &McAfee, 2014: 173).

Automation and technological advancement have become contributing causes to both premature deindustrialization and unabsorbed, semi-skilled labor. This undergoing process reflects on the potential inability of organizations and institutions to keep pace with technological change. Long lasting effects of automation are to be seen across developing nations and economies who currently rely on low-cost labor, primarily as their comparative advantage in global trade (Brynjolfsson &McAfee, 2014).

The debate on the effects of automation in the workplace have reinforced the argument presented by Brynjolfsson &McAfee. Scholars such as Carl Benedikt Frey and Michael Osborne argue in their 2013 study on the Future of Employment, that in industrialized countries like the United States, 47% of Americans are at risk of losing their jobs through computerization, concluding it was even higher in Japan at 49% (Benedikt Frey & Osborne, 2013). Throughout industrialized countries including the United States, Britain, and Japan, machine learning puts a significant piece of employment in a precarious position for the future. Declaring trends such as “job-polarization” defined by Goos and Manning, “where middle-skill jobs, such as manufacturing are declining but both low-skill and high-skill jobs are expanding” (Goos et al, 2014). Subsequently, routine work is argued as the target for the technological unemployment. Job-polarization and the growth of jobs despite the threat and rise of automation is elaborated upon David Autor (2014). Autor both debates and relaxes the notion set forth in The Second Machine Age. While agreeing that automation has made a distinct mark on the future of labor and employment, Autor dispels the notion of that automation will render manual labor outmoded, but rather acknowledges that there is a paradigm shift in labor and the workforce. Later maintaining that such a shift, is one that allows for the increase in efficiency and creating more opportunity to expand business in other areas, thus requiring more human labor. Autor insists that:

“Automation, also compliments labor, raises output in ways that lead to higher demand for labor, and interacts with adjustments in labor supply” (Autor, 2014: 5).

This further emphasizes that changes in technology do alter the types of jobs available and that polarization, not immense unemployment, will evolve in the trends of automation in the coming years. While the debate on automation and its effects on labor vary, the question of its impact on manufacturing and global chains is also significant. This occurs by having the production of

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goods, in order to cut costs and remain globally competitive, disbursed across multiple countries and continents. This process has become increasingly popular in industries where the pieces of the value chain are located within EPZs, such as apparel, electronics and commodities. As countries began to shift from ISI to EOI policies, developing economies also became entrenched in the emergent configuration of production networks and global value chains (Milberg & Winkler, 2010). Through such policy adjustments, countries were exposed to greater economies of scale, making production on the global scale, and for various parts, extremely profitable and feasible. The shifting and rearranging of production location also gained momentum as multinational corporations could begin to capitalize on lower wages in numerous parts of the world (Baldwin, 2011).

2.2.3 Restructuring Of Value Chains for Economic Development

The restructuring of global value chains and production networks by means of moving or clustering production has the opportunity to disrupt the positioning of export processing zones within global networks. Global value chains, can be defined as a process which highlights the value of activities required to bring a product of service from conception through the different phases of production to final consumers (Gereffi et al, 2001). Formerly controlled by mass multinational corporations seeking to develop their markets geographically, the expansion of production as a cost cutting mechanism has increased the positioning and importance for developing countries in this string of events (Gereffi & Fernandez-Stark, 2011). The control of value chains has also significantly altered their structure. Explained by Greg Felker (2003), two features to the restructuring of global production chains include the reoccurring theme of technological advancement of MNCs within Southeast Asia, as well as the co-location of production activities and industry segments within specific regions.

As policy shifts towards EOI prompted developing countries to adopt outward facing policies and find a place on the supply chain, their placement into the global production network relied primarily on low-wage, semi-skilled workers. Therefore, many emerging economies began producing limited value-added goods during their economic liberalization. Critiques of this policy shift illuminated a problem for developing countries. The problem stressed the idea that emerging economies may be stuck offering only the lowest of the value added processes, unable to climb the up the value chain.

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“If countries are only engaged in the simplest forms of EOI, ie: assembling imported

parts for overseas markets in export-processing zones, then they would develop neither the institutions, not the know-how, nor the consumer markets needed to create and sustain entire industries” (Gereffi, 2014: 18).

On the contrary, developing countries now yield much more extensive power as their policies have the potential to shape engagement and value placement within the global market place through restructuring and upgrading of their placement in the GVC (Gereffi & Fernandez-Stark, 2011). This adjustment has played a significant role on policy for emerging economies.

As they were once just interested in joining into the global market through EOI, development policies have advanced and upgraded away from simple participation towards gaining access to higher value added activities. Economic upgrading, moving from low to relatively high value activates in GVC has been looked at with a newfound importance for developing economies (Gereffi & Fernandez-Stark, 2011). Four types of upgrading, as chronicled by John Humphrey

and Hubert Schmitz, show the shifts in production as an occurrence of clustering.

Table 2: Value Chain Upgrading

(Humphrey & Schmitz, 2003) The restructuring and upgrading of value chains has increased productivity immensely, especially in technology-heavy industries like computers or semi-conductors. Arguments posed by the OECD present the rise of countries such as China, with a large inflow of FDI, as a threat to developed, OECD countries. The threats have come from how rapidly they have moved up the value chain through use of imported technology allowed by FDI (OECD, 2007). Staying competitive in the global value chain and global market place, thus seems to be reliant on the production of value-added goods.

Ultimately, debates on the structuring and re-organizing of global value chains do not come without weariness and doubt for the value and the dangers this can pose for developing countries.

Process

Upgrading Firms seek to upgrade processes by transforming inputs into outputs more efficiently by re-organizing the production system or introducing superior technology

Production Upgrading

Firms can upgrade by moving into more sophisticated product lines

Functional

Upgrading Firms can acquire new functions in the chain such as design or marketing Chain

Upgrading

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Worries have mounted that the primarily labor-intensive or unskilled activities developing countries have pursued in the global value chain may not actually raise skill requirements. Conversely, these activities could have the reverse effect of intentions, which is the reduction of possible technological spillovers (Humphrey, 2004). While insertion in to the global value chain is necessary as a catalyst for economic growth, remaining trapped in low value-added production also comes with potential problems.

2.3! Concluding Remarks

In summary, this chapter has provided clarification on the foundation for which this research has been rooted in. Industrialization, through both ISI and EOI strategies has been the basis for economic development policies since the end of the Second World War. While manufacturing and the use of export processing zones have been heralded as mechanisms for economic growth, the outlook of their success and offerings are changing. Threats to the industrial sector, due to automation and a restructuring of global value chains now poses the potential to cut off pathways toward rapid economic growth for developing countries. The implications of premature deindustrialization through a dismantling of the labor-intensive manufacturing sector are austere and thus must be explored further. An explanation of the ways in which these themes have been explored and researched in the context of Cebu City, Philippines is provided in the subsequent chapter.

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Chapter 3: Research Methodology

This chapter outlines the scope of the research, how the questions for research have been posed, and the ways in which they will be addressed. The principal goal of the research has been to understand through the face of threats of premature deindustrialization, how the Mactan Export Processing Zones have remained intact and how they defy theories that threaten export-led logic. But also, to understand why multinational corporations chose to remain in the zone and the Cebu-Mactan region overall, despite these threats. To gain a greater consensus on the current status of zones and the actors involved, this research also analyzes the perceptions of the effectiveness of the zones within the local economy through local institutional stakeholders. After proposing the main research question and sub-questions, this chapter will elaborate upon the research location, its selection and the data collection process through an explanation of the research methodology.

3.1 Research Questions

How do the Mactan Export Processing Zones defy current export-led economic logic and what explains the continued significance of the EPZ for the regional economy of Cebu?

Sub-Questions:

A.! How do local institutional stakeholders still promote and perceive the current importance of the export procession zone for the regional economy?

B.! Why are multinational corporations remaining in the Mactan Export Processing Zone and how have they changed their operations since their establishment in the MEPZ?

C.! How do threats of global production chain restructuring affect the future relevance of MEPZ?

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3.2 Operationalization Table

Concept Dimension Variable Indicator

EPZ as a Growth

Mechanism Employment rate What is the labor force participation rate in Cebu?

What is the current employment rate? What amount of the population is employed by companies in the EPZ?

Foreign Direct Investment

Current inflow of Foreign Direct Investment into Cebu?

GDP Growth What is the contribution of manufacturing towards the Philippines GDP?

What are recent trends in GDP growth/decline?

Labor Force Is low-skilled labor still being absorbed through the manufacturing sector?

Local Institutional Stakeholders

Government

policies How have government policies towards export led development through EPZs changed?

What tax holidays and incentives are still in place to attract companies to continue production within the MEPZ?

Have they encouraged or discouraged growth of EPZ for economic development?

Public Sector Engagement

Is the public sector actively promoting the Mactan EPZ?

Are the local institutional stakeholders still promoting the zone through marketing techniques?

Multinational

Corporations Private Sector Engagement Are backwards linkages being pursued, created and utilized? Has there been a shift in perception of the EPZs as an effective tool for production ?

Private Sector Demands

How have the demands of the corporations changed over time?

Have the local MNCs and institutional stakeholders worked together to adjust for changes in demand or MNC needs?

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What are the requirements for new labor entering the EPZ?

Threats to EPZs

Automated manufacturing

How has automation in the companies in the EPZ occurred?

In what ways has automation, if present, altered the current means of production in MEPZ?

Loss of jobs/ company integration due to labor standards or wage requirements?

Restructuring of Global value

chain

Has production of specific electronics, textiles, etc that once took place in MPEZ relocated to China? Surrounding countries? Have local multinationals had to change the products produced to adjust for the altering of GVCs? Location of production within the global value chain

How have GVCs restructured in a way that has affected the placement of products manufactured in MEPZ on the value chain itself?

Special Economic Zones

What is currently being done to promote new economic zones?

How are the faces of economic zones and EPZs changing in Mactan?

What lobbying has been conducted to influence or encourage SEZs over the current EPZ model?

Export Zone Stability Status of the Mactan Export Processing Zone

What is the current status of the zone? Via size of empty lots, locators, types of businesses.

Why are companies remaining still in the zone?

What is currently in the process for the continuation and expansion of zones in Mactan/Cebu?

Export Zone Attractiveness

What is attractive about operating in the zone from the perspective of an MNC?

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3.4 Research Location

3.4.1 Metro Cebu, Philippines

The island province of Cebu acts as host to the Metropolitan Cebu area, and encompasses the second largest metropolitan area in the Philippines with a population of 2,551,100 people (Philippines Statistics Authority, 2010). Situated within the Central Visayas, the province is located in the southern, central area of the archipelago. Metro Cebu is comprised of three main cities, Cebu City, Mandaue City and Lapu-Lapu City alongside seven distinct, smaller municipalities (van Helvoirt, 2011). Cebu City itself remains the fifth largest city in the Philippines with a 2010 population of 866,171 (Philippine Statistic Authority, 2010). With a large population, Metro Cebu also houses over twenty

universities, providing the opportunity for Cebu to achieve and maintain an extremely educated workforce. As this population remains vastly educated for the size of the region, there is no doubt that the 48 years of American rule in the Philippines has played a significant role in the growth of multinational firms as employers of local Filipinos, particularly due the fluency levels in English (San Juan, Jr, E., 2011). Congruently, as a vast majority of the population, especially in educated or urban areas speaks English, this provides an incentive for firms in a variety of sectors to consider the Philippines as a potential country for expansion or production.

The focus on Cebu for this research project stems from its diverse economic offerings and developed infrastructure. It houses a multitude of business parks and seven export and economic zones, established due to the proximity to the port of Cebu and the Mactan-Cebu international airport. However, the focus of this research will be on three zones, the Mactan Export Processing Zones I, II and Cebu Light Industrial Park, all located on Mactan Island. As metro Cebu contains the second largest metropolitan population in the Philippines, its large labor force has allowed for increased visibility on the effects the EPZs carry on the local population, workforce and economy.

Also, Cebu has made for an increasingly interesting case due to its growth in its emerging service-sector economy, spawned on by massive advances in the business process outsourcing

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industry (BPO). This is evident as Cebu City has been ranked as the 8th best place for offshoring in 2015 by Tholons consulting firm. The juxtaposition between the growing BPO-IT industry and remaining presence of two large EPZs and one light industrial park allows for an interesting analysis and presentation for different methods for achieving economic growth. In addition to this, the availability and access to government municipalities, authorities and promotional organizations provided ways to gain access into field insights and potential stakeholders.

3.4.2 Mactan Export Processing Zones

Photo Courtesy of Halsagz Plating Corporation

As one of the first established export zones in the Philippines, this region houses a variety of authorities, government organizations and institutional stakeholders such as the Philippines Export Zone Authority, the Mactan Export Processing Zone Chamber of Exporters and Manufacturers, as well as a multitude of multinational corporations. The MEPZ is located within Lapu-Lapu City, situated on Mactan Island, as shown above. Originally established in 1979, the export processing zone has expanded rapidly, not only by land, but also through the amount of companies represented in the zone. The zone had a slow beginning as just after its inception, in 1986, it was home to just six occupants (Beerepoot & van Westen, 2001). As the initial zone remains at 120-hectares with 158 companies, it had become clear that a squeeze for land had become relevant and the need for a second zone was required and the Mactan Export Processing Zone II was constructed in 1997 (Beerepoot & van Westen, 2001). Through the use of a public-private partnership with the municipal government and a regional land development firm, Acoland, the second zone of 63 hectares was built, comprising of 54 companies in 2012 (City of

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zone known as Cebu Light Industrial Park (CLIP), which was constructed in 2010 (Lapu-Lapu City, 2016). Also developed through a public-private partnership with the Filipino firm Science Park of the Philippines, Inc., it encompasses a 70-hectare space intended primarily for manufacturing and light industry. The most prevalent industries within MEPZ include but are not limited to jewelry, textiles and garments, semi-conductors, automotive, consumer electronics, furniture and metal processing. (Beerepoot & van Westen, 2001). The City of Lapu-Lapu promotes this region as it’s industrial tax-free zone emphasizing its global competitiveness as its largest importers in Japan, the United States and also the European Economic Zone (Lapu-Lapu-City, 2016). The location for these export processing zones is extremely relevant to their success, located just minutes from Mactan-Cebu International Airport as well as across the channel from the Port of Cebu. Also, due to their central location they are able to draw on mass population, while currently employing over 87,000 workers directly (MEPZCEM, 2015).

3.5 Research Methodology

This research has been anchored within the foundations of both social constructivism and post-positivism. As this research has sought to understand perceptions and opinions of the main actors in this study, social constructivism has been used to comprehend participant’s perceptions. Through the use of highly open-ended questions throughout the interview and data collection process, it has allowed me to “rely as much as possible on the participants’ views of the situation being studied” (Creswell, 2003:8). While this research aimed to analyze participants’ perceptions and apply the perceptions to processes that are potentially on-going and present, a post positivist world view has also been utilized. Post-positivism and the problems studied through this methodology typically reflect the need to identify and asses the causes that influences incomes, allowing for the potential to measure object reality, shaping our knowledge. This stance on knowledge and reflection also assumes that there laws or theories that govern the world, and these need to be tested or verified and verified so we can understand the world (Creswell, 2003:7). Through this mechanism, the proposed methodological stance has allowed for the ability to investigate relationships in a single case study. Moreover, as this research process has been analyzed through an economic lens, the framework provided by Tony Lawson (2005), caused me to adopt a “social ontology”, allowing myself as a researcher to include and synthesize the underlying causes of economic phenomena.

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3.6 Research Design

To achieve a rich and comprehensive understanding of the relevance of MEPZ in Cebu, the research was conducted systematically through a strictly qualitative approach and will be treated as such, through the lens of a case-study. A qualitative case study design, in this context, has allowed the research to explore the process of changing relevance for MEPZ as well as understand the threats or lack of threats that contribute to its further presence and stability. As defined by Creswell,

“A case study and ethnographic research involve a detailed description of the settings or individuals, followed by the analysis of the data for themes or issues” (Creswell, 2014: 190).

As this research has sought out to understand the current status of MEPZ, and the perceptions from individuals, a qualitative case study best fits the style of intended research and data collection. Alongside the use of traditional qualitative methods for research such as observation, the collection of secondary data and documents has been built into this inquiry allowing for an increased breadth, complexity, richness and depth (Denzin, 2012). In order to complete this perceptiveness, the use of data triangulation has been used in this design, as this research has studied phenomena from different perceptions and people (Flick, 2014). As triangulation was developed initially as a way to validate and support results obtained through a singular method, this will carry over to the research, alongside the use of the secondary data acquired during the data collection process.

3.7. Qualitative Techniques

Cebu City and Mactan Export Zones I, II and CLIP allowed for the perfect location to conduct research in a case-study approach. The case-study was thus conducted using semi-structured interviews with locator corporations, government representatives and local institutional stakeholders. In addition to this, data was collected through observations, government documents and other locally sourced statistics and legal documents.

3.7.1 Semi-Structured Interviews

To gain a comprehensive understanding of the perceptions of export processing zones by institutional stakeholders as well as multinational corporations, I employed the use of

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semi-structured interviews to allow for the questions and topics of interviewing to match the variance of informants. Semi-structured interviews allow for flexibility in informants, interview location and interviewing environment, this method fit the type of research that was to be conducted within Cebu City (Bryman, 2012). The interview and data collection process took place over eight weeks, from June to August, 2016. As I arrived into the field with no pre-established networks or local supervision, the first week in Cebu City was used to create contacts and engage with potential participants and informants. To accommodate for the various types of government organizations and corporations, interviews were conducted with companies of all sizes and countries of origins, as well as with all available and applicable government organizations. This was done in order to gain the most well-rounded and thorough data. Within the first week in the field, I was able to connect with various government organizations as their information was more readily available online and to the public. I established contacts through email and cold-calls to introduce myself, my research and schedule interviews. Government organizations and stakeholders were surprisingly willing to speak with me and provide information on the success of the Mactan Export Processing Zones and the economic boom that Cebu has recently been a part of.

While the sheer amount of companies within the zones of study is high, gaining access to the best person to speak with was rather difficult due to the lack of public information available, especially as no local field supervisor was used during this research. Before departing for the field, I was able to acquire an antiquated list of MEPZ locators from an online site which also listed firm managers and owners alongside their contact details such as phone number and emails. I utilized this list to arrange my first interviews. Arranging interviews early on was crucial to the success of my research because, due to security reasons within the international zone, it is prohibited to enter in any MEPZ area without the support of a company or PEZA office. This rule made it extremely difficult to enter the zone and speak to potential participants without a scheduled interview. Despite initial difficulty in gaining access to institutional stakeholders and multinational corporations, twenty-one semi-structured interviews were completed; thirteen companies and eight institutional stakeholders. Interviews were conducted on site for companies operating within MEPZ as well as for involved institutional stakeholders with interview times ranging from thirty minutes to over ninety minutes.

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Interviews, which also served as a gateway for other means of data collection, were utilized as my main source of obtaining information on not only perceptions of the zone, but also as a means for observation and secondary data collection. As the desired information I was looking to uncover varied slightly between stakeholders and MNCs, interview questions were altered to fit the goals of data collection. During the course of the interviews, questions were structured mainly around the current status of the zones, perceptions of the zones, their apparent effectiveness and what they provide for the local economy. However, questions were altered depending on whether the interview took place with a local stakeholder or a multinational corporation.

The interviews with multinational corporations consisted of questions regarding employment figures, and attempting to understand how threats of premature deindustrialization have affected their operations. I sought to gain more information on recent changes in production style, alternate production sites, trends in automation, access to labor and the main reasons that keep these companies and production facilities located within MEPZ. Nevertheless, alternate interview questions were comprised of themes and variables represented in the operationalization table above, and later adjusted to fit reoccurring concerns and themes that had been alluded to by key informants such as the rise of special economic zones, the recent presidential inauguration and a tightening grip on the operations of foreign firms in the Philippines.

Table 3: List of Participating MNCs

Participating Firms # of

Employees

Location Year of Entry

Industry

Company A 200-220 MEPZ I 1993 Medical

Equipment

Company B 6,6778 MEPZ I 1988 Semi-Conductor

Company C 700-800 MEPZ II 1994 Hobby & Toy

Company D 2,000-3000 CLIP 2012 Housewares

Company E 45 MEPZ I 1990 Refining

Company F 230 MEPZ I 1995 Metal Plating

Company G 400 MPEZ I 1987 Jewelry

Company H 70 MEPZ I 1988 Furniture

Company I 450 MEPZ I 1986 Furniture

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7.3.2 Observations

To understand the current status of the zone, I found it vital to my research to view and absorb the economic zones in their entirely. Due to the strict security regarding entry into the zone, I used scheduled interviews as a way to arrive early or stay after the interview to be able to observe the ebb and flow of the inner working of the zones. I entered and left the zones at all different times during the work day to observe a change of shifts for the workers on the various day or night shifts. Primarily, I would enter the zone before early morning interviews to observe the types of employees that would be ending the evening shift or entering for the first shift of the day, as all locators operated on different shifts. I also sought to schedule interviews on Saturdays to be able to observe the difference in output and manufacturing schedules. The aim of this method was to observe the state of the zone in terms of infrastructure, upkeep of the buildings and general look of the area, to gauge if the zones were well maintained or left to expire. Observation was also used to understand the types of labor that these manufacturing companies were using and the management of the zones like traffic and logistics maintenance. In order to complete this observation, I utilized the method of passive participation. Where passive participation “suggests that the research is present at some human scene but not otherwise engaged directly with the people or their activities” (Jorgensen; 2015: 2). Utilizing this technique for observation and participation, I was able to assess the scene of the research in an ethnographically-based way.

3.7.3 Secondary Data

In addition to observations and semi-structured interviews, I relied on the collection of secondary data in the field, specifically to gain diverse and relevant information. Data was provided from informants and consisted primarily of economic data, manufacturing trends and import and export statistics. It encompassed new and recent legislation and bills that had been altered since the inauguration of the newest administration and Rodrigo Duterte. Such data was also given by informants to present an accurate and current picture of the economic benefits the zone brings and statistics relevant to the core mission of this research. Secondary data collection spanned from foreign direct investment in the region to employment statistics and export growth trends.

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3.8 Sampling Strategy

Upon entering the field without various pre-established networks and the difficulty of constructing networks in such a brief amount of time, I used snowball-sampling and purposive sampling to connect to participants for this research. Purposive sampling, has been traditionally best utilized where individuals and cases are presumed to provide the richest knowledge and insight for the research, was used primarily to gain insights from institutional stakeholders (Devers & Frankel, 2000). Snowball-sampling, used to identify participants in local institutions and corporations, can be seen as a technique in which referrals are given by an informant due to their possession of characteristics that are within similar research interests. (Biernacki & Waldorf, 1981). A chain-referral method, used to identify hidden or marginalized groups, was also applied to this case study as there were no pre-established networks before this research has been conducted.

Access to large and established multinational corporations located within the zones proved to be extremely difficult. Relying on government supplied data left me with disconnected phone numbers and email addresses. Through continuous searching online for data surrounding companies located in MEZ I, II and CLIP, I was able to establish interviews with five corporations through this adapted method of purposive sampling. Once I had been able to develop a rapport with these well-connected participants, I was provided contact information and referred to colleagues in other corporations to establish interviews, an employment of snow-ball sampling. Identifying institutional stakeholders and establishing interviews with key participants for this portion of my research proved fruitful mainly through the use of purposive sampling. Through personal, online research, I was able to call and email local institutions that I felt would be the most pertinent to this research.

3.9 Data Analysis

As this research has been anchored in a qualitative method, my data analysis included collected data from structured interviews, observations and field notes. The twenty-one semi-structured interviews were transcribed in the field, to allow for any follow-up questions and to highlight the need for any further questioning of willing participants. The semi-structured transcriptions were then analyzed primarily through the use of selective and open coding. Selective coding was used to identify direct exclamations of themes including the promotion of