Re-industrializing the domestic production base can greatly strengthen economic diversification in the Philippines

26 Jan 2026

This paper builds on the broad argument that economic diversification can drive industrial upgrading and growth in an emerging economy like the Philippines. Freire [2019] suggests that long-run growth may be propelled by diversification within the subset of complex economic activities and sophisticated products. This highlights the potential synergy between diversification, technology-driven industrial upgrading, and productivity growth.

In light of these insights, this current study analyses the various dimensions of economic diversification in the Philippines through key research questions: 1) What are the historical origins of the Philippines’ narrow economic base? 2) What factors drive economic diversification in the country? 3) What role does industrialization play in broader-based diversification? and 4) What benefits does economic diversification bring to the Philippines? We used time series data from 1961 to 2023 to estimate econometric models to answer the questions.

The empirical results suggest that re-industrializing the domestic production base can significantly enhance economic diversification. Strategies that accelerate the growth of local industries, especially to catch up with the dominant services sector, are vital. Effective policies should focus on developing physical and human capital, improving connectivity, and fostering domestic innovation. This push for greater diversification is justified by its potential benefits to output and growth stability, and the diversification and growth of exports.

Based on the results of the empirical analysis, the paper then explores feasible routes towards economic diversification and industrial upgrading in the Philippines using the product space approach. The first route is directed towards leapfrogging to a more sophisticated economic structure in the product space. The second route points to climbing the value ladder within global value chains. The third route leads to the strengthening of the local industrial base that small and medium-sized establishments heavily populate.

The study also outlines policy recommendations fit for each route. Vertical policies focus on targeted interventions within specific sectors. For leapfrogging, this includes technology development, skilled labor attraction, and strategic collaborations; for global value chain (GVC) integration, it involves direct engagement with lead firms and enhancing local suppliers’ bargaining power; and for sustaining the local industrial base, vertical support includes promoting small and medium-sized enterprises, shared services, and innovation. Horizontal policies, on the other hand, are important in addressing economy-wide challenges and laying the pillars of broad-based industrialization. Horizontal policies create a supportive environment across the economy. These policies include enhancing the country’s locational advantages (e.g., infrastructure, ease of doing business, upskilling) to improve the bargaining position of local firms, establishing a cohesive overarching policy strategy, and fostering collaboration among various stakeholders to avoid conflicting interventions.

Authors: Annette Balaoing-Pelkmans (School of Economics, University of the Philippines Diliman) and Adrian Mendoza (School of Economics, University of the Philippines Diliman)

Read the full paper: https://doi.org/10.37907/5ERP4202D

Re-industrializing the domestic production base can greatly strengthen economic diversification in the Philippines

This paper builds on the broad argument that economic diversification can drive industrial upgrading and growth in an emerging economy like the Philippines. Freire [2019] suggests that long-run growth may be propelled by diversification within the subset of complex economic activities and sophisticated products. This highlights the potential synergy between diversification, technology-driven industrial upgrading, and productivity growth.

In light of these insights, this current study analyses the various dimensions of economic diversification in the Philippines through key research questions: 1) What are the historical origins of the Philippines’ narrow economic base? 2) What factors drive economic diversification in the country? 3) What role does industrialization play in broader-based diversification? and 4) What benefits does economic diversification bring to the Philippines? We used time series data from 1961 to 2023 to estimate econometric models to answer the questions.

The empirical results suggest that re-industrializing the domestic production base can significantly enhance economic diversification. Strategies that accelerate the growth of local industries, especially to catch up with the dominant services sector, are vital. Effective policies should focus on developing physical and human capital, improving connectivity, and fostering domestic innovation. This push for greater diversification is justified by its potential benefits to output and growth stability, and the diversification and growth of exports.

Based on the results of the empirical analysis, the paper then explores feasible routes towards economic diversification and industrial upgrading in the Philippines using the product space approach. The first route is directed towards leapfrogging to a more sophisticated economic structure in the product space. The second route points to climbing the value ladder within global value chains. The third route leads to the strengthening of the local industrial base that small and medium-sized establishments heavily populate.

The study also outlines policy recommendations fit for each route. Vertical policies focus on targeted interventions within specific sectors. For leapfrogging, this includes technology development, skilled labor attraction, and strategic collaborations; for global value chain (GVC) integration, it involves direct engagement with lead firms and enhancing local suppliers’ bargaining power; and for sustaining the local industrial base, vertical support includes promoting small and medium-sized enterprises, shared services, and innovation. Horizontal policies, on the other hand, are important in addressing economy-wide challenges and laying the pillars of broad-based industrialization. Horizontal policies create a supportive environment across the economy. These policies include enhancing the country’s locational advantages (e.g., infrastructure, ease of doing business, upskilling) to improve the bargaining position of local firms, establishing a cohesive overarching policy strategy, and fostering collaboration among various stakeholders to avoid conflicting interventions.

Authors: Annette Balaoing-Pelkmans (School of Economics, University of the Philippines Diliman) and Adrian Mendoza (School of Economics, University of the Philippines Diliman)

Read the full paper: https://doi.org/10.37907/5ERP4202D