Growth from Technology-Based Industries

Growth from

Technology-Based Industries

Interview with Dennis Ramon Posadas

Growth Revolution: What do we need to establish technology-based industries?

Dennis Posadas: We need to create an ecosystem that’s friendly to small technology entrepreneurs so they can become large businesses. Intel started with eight engineers and now has around 80,000 people. The same thing with Nokia, an old lumber company in Finland that wanted to call its lumbermen in the forest. They had this Nordic mobile radio which became the basis for Nokia’s GSM (global system of mobile communication).

GR: How do we distinguish technology entrepreneurship from other entrepreneurship forms?

DP: We have nothing against regular entrepreneurship. But it’s just like everybody is already into it. What we want is to focus on science and technology ventures like software, hardware, semi-conductors, and other technology-related areas. We’re looking for businesses that rely on intellectual property. The Philippines has a lot of natural resources– mining, oil. These businesses are very capital-intensive, and we’re not rich in capital. But we have human resources. Our people may be poor, but they are intelligent. The trend in the new world economy is you use your human capital to transform its growth for the economy.

GR: Can the Philippines compete globally?

DP: No single country in the world can monopolize all technologies. There is always something that we can specialize in.

GR: What kind of education do we need for this?

DP: America graduates several thousand engineers and scientists annually. We should move away from obsolete programs. We have to evaluate if the curriculum is still appropriate. For example, in Mechanical Engineering, I think they’re still teaching steam engineering. Although there’s still demand for it, it’s not that big. Maybe we should take a look at new areas like microchips design. Let’s say there are about 500 technology companies in the Philippines . Is that a large number? To make a big progress, there should be 10 times more. We need to develop people who are capable of taking higher studies. Let’s develop them because they’re the kind of work that pay more, generate more wealth. We have to drop some programs and concentrate on these areas.

GR: What are critical factors to technological development?

DP: First is education. Next is research and development. The game here is maybe 50 people can design. But we need a critical mass, thousands of these people who can design. Universities have to come out with people with new skills every year. Then another pillar is entrepreneurial culture. We may have brilliant people, but the mindset maybe “I’m gonna work for a big company.” In China and the US , entrepreneurs are the smartest. There they say, “I want to become an entrepreneur because I have superior ideas.” And the environment is supportive. Also part of this culture is risk taking. You will have to do a product that no one else has done before– original intellectual property. There’s risk if no one buys it. But when it clicks, you’re the first mover. We should also have (mentoring by) successful entrepreneurs as role models talking about entrepreneurship. The mentor will teach you where to go for capital and how to be confident to sell your products to Japan, to the US.

GR: How about the role of financing?

DP: A kind of financing is loan typical in banks. The problem is a lot of people in banks are not familiar with business models. They’re only familiar with restaurants, factories. They do not necessarily understand technology businesses. So if someone comes to them proposing a chip design company, a lot of them will not be able to process the loan application. We need to educate these people about the business model of technology. For the first ten years of Microsoft, it was a small company employing not more than 20 to 30 people. But when it started to grow, it needed venture capital. But from zero to a small company, you normally go for an informal capital or you get loan financing. For some banks, it’s enough that you can show them POs (purchase orders) for you to avail of a loan. In the real venture capital, the capitalist puts money in a start-up. At the end of 10 years, he gets back his money because the life of the true venture capital is 10 years. Then the investor pulls out his money at a profit or a loss. One can also raise money through an IPO (initial public offering) or sell the company to other companies.

GR: Businesses normally involve risks. How do we lessen the risks?

DP: First, I have to explain “creative destruction” coined by Joseph Schumpeter. It says “if you want to see really successful companies, you should be willing to see many failures.” It’s like for every one start-up that grows into a Nokia, a Microsoft, or an Intel, there are 99 others which did not make it. From those failures, successful start-ups learn what not to do. For a conservative country like the Philippines , are we prepared to deal with those odds? If we don’t play the game, we will be left behind. If we can encourage incentives for people to invest in speculative start-ups maybe through tax credits, then maybe we will begin to see the emergence of companies that grow where others did not succeed.

GR Ayala has put up an incubator for technology businesses. What does this do?

DP: The value of the incubator (aside from providing auxiliary business assistance) is providing proximity to the sources of higher learning. When you want to develop it as a place like Silicon Valley, there should also be venture capitalists. The reason why we want to locate everyone in one place is very simple . The more they get to interact with one another because they’re near each other, the more they become socially closer to each other and are able to build trust and to work together. Geographic proximity is of course a multiplier because there’s concentration of brain power. For the local government, it needs to build the infrastructure. One simple example is we need a business hotel. With technology businesses, we deal with a lot of international clients—Koreans, Japanese. Where will you house them? We should make Quezon City more conducive for doing business.

GR: One local government put up a training center for animation artists for Japan, is this one of the things we should go into?

DP: You have to define carefully what is IT and what is IT-enabled. When you have PCs, IT equipment, and telephones, but the job is basically customer service, it’s IT-enabled. What we’re talking about is a focus on intellectual property based on IT businesses.

GR: What countries are now overtaking us in technology?

DP: Vietnam may overtake us if we don’t put our acts together. Taiwan definitely already did. But in the 1970’s, Taiwan and the Philippines were already both making chips, electronic equipment. The main reason why big companies (like Intel) were going to Asia was because it’s cheaper to run a business here. We established export processing zone areas, a union-free industrial estate where companies can locate their factories and employ people. However, we seem not to have outgrown that mentality. We’re increasing our number of export processing zones. But a real science and technology park is different. It has to be near centers of higher learning. Industrial zones have to be near centers of cheap labor. You have to remember that the Silicon Valley developed because in the 1930s, a dean at the Stanford University saw a world where universities work with the local community to help solve their problems. Universities are not Ivory Towers that just do research for the sake of doing research. In the 1970’s, in Taipei, they put all their top engineering, their top research facility in one area, and they built an industrial park that started attracting high-tech companies with the academe and research institutions also in that area. They purposely built it. Since they put it all in one place, normally people will interact because people are going to the same grocery, the same restaurant. Kids are going to the same school. So industry people link with the academe and research people. That’s what we’re are trying to do.

GR: Can start-ups grow by themselves as much as there have been many start-ups in Silicon Valley?

DP: The Silicon Valley model is a celebration of entrepreneurship because there they fund ideas. In the Philippines, we have some limitations and we may not probably do it the same way they are doing it, but we will try to come as close as we can.

GR: In what areas can government help?

DP: There should be massive spending in education. It should be free but quality education, and the standard should be world-class. If you have to force the new economy, government should fund education (which is estimated at P102 billion). If that’s really the cost, then government should find ways to de-prioritize other things. Just think of what happens when China learns to speak English? They’re cheaper. There are more of them. We can no longer claim it’s only we who speak English. Yes we’re able to generate chip designs, but too little. We can’t really say we’ve made science and technology a priority. It should be a national project that considers technopreneurship as a grassroots-driven, engine of growth for the poor.

GR: What can we learn from India, a world leader in IT and biotechnology?

DP: They did something significant. Prime Minister Jawaharlal Nehru’s single biggest legacy is the Indian Institute of Technology (put up after India ’s independence in 1947 aimed to develop a skilled workforce to buttress economic development). It’s like the UP system. But courses are all science and technology. Enrollment is like that of UE (about 15,500 undergraduate and 12,000 graduate students, ed.), but the quality of education matches that of the US . So if you go around the world in high-technology companies, chances are three out of five Ph.Ds in these companies are either Chinese or Indian.

(Dennis Posadas is author of “Rice & Chips: Innovation and Technopreneurship in Asia” and Ayala Foundation Inc. consultant).