Interventions

and HLS clusters are based. This effort should be complemented by the development of advanced logistics and information and communication technology services in these regions, with full implementation of the Customs Modernization and Tariff Act. Also needed is an effort to promote competition and streamline the issuance of permits for digital infrastructure provision. A comprehensive financing strategy should be considered to maximize successful implementation of these projects.

INTERVENTIONS

Fundamental to increasing domestic and foreign investments in GVCs in the three clusters is establishing an enabling environment through the right institutions and infrastructure. Because these two policy instruments can take time to deliver, governments often use speedier policy instruments, such as incentives, to attract investment. By altering a project’s relative costs and associated risks, these targeted policy actions are meant to influence investment decisions in favor of the host country. Fiscal incentives are the most common type of intervention used by low- and middle-income economies (Tavares-Lehmann et al. 2016). They are meant to give firms cost advantages in the form of tax holidays, tax credits, tax deductions, and investment allowances. Countries have also used proactive policies to upgrade their participation in GVCs. This section focuses on how targeted infrastructure and service provision in special economic zones, along with upgrading, could foster participation in the IMT, TMT, and HLS clusters.

Special economic zones

The Philippines is in the process of recalibrating its incentives regime with the Corporate Recovery and Tax Incentives for Enterprise (CREATE) Act. CREATE seeks to cut the corporate income tax and streamline fiscal incentives. The corporate income tax will be lowered from 30 percent to 25 percent for large corporations and to 20 percent for small and medium enterprises. Businesses whose gross sales fall below ₱3 million will pay value added tax of 1 percent instead of 3 percent. CREATE provides incentives to enterprises based on their projects or activities. The Strategic Investments Priorities Plan contains projects or activities that promote long-term growth and sustainable development. Thus, enterprises undergoing projects or activities identified by the Board of Investments are granted incentives. The first Strategic Investments Priorities Plan is scheduled to be released in January 2022. CREATE also grants longer income tax holidays for businesses outside Metro Manila to encourage economic development and create jobs beyond the capital. Other fiscal incentives include exemption from customs duties on imports of capital equipment, raw materials, or spare parts for the registered project or activity; exemption from value added tax on imports; and zero value added tax on local purchases of goods and services used in the registered project or activity.

Setting up special economic zones can foster investment in the IMT, TMT, and HLS clusters. Clearly identifying these sectors in the investment priority plan is a first step to ensuring government commitment to their growth. A long-term view of priorities is appropriate, given the long time frame associated with large capital investments. Incentives can be given to firms based on

the priority zones or activities. For instance, Thailand is promoting automotive parts, smart electronics, aircraft and logistics, and medical services along its Eastern Economic Corridor. Firms receive additional exemptions on their corporate and personal income taxes on top of the standard incentives. The corridor consists of special industry promotion zones, target industry promotion zones, and industrial areas within the corridor. Another example is MSC Malaysia, a high-technology business district and the R&D center for information technology industries in Malaysia.

The three clusters could also benefit from additional incentives. In Malaysia, for example, R&D, automation, and innovation receive additional fiscal incentives, such as income tax exemption, concessionary tax rates, accelerated allowances, and exemption from import duty and sales tax. Such incentives would encourage all firms to invest in automation and innovation, but would especially benefit firms in the three GVC clusters, which are heavily involved in innovation and automation. Other possible activities are the skills development of personnel, managerial training, and investment in human capital in exchange for tax deductions. CREATE states, “upon the recommendation of the Fiscal Incentive Review Board, the President can approve a set of incentives with longer periods of availment, if necessary, to attract highly desirable investment that will bring more employment, higher level of skills training, and greater value added to the economy.”

Securing access to affordable energy within special economic zones to host IMT, TMT, and HLS clusters should also be considered. The high cost of energy is crippling manufacturing in the Philippines. In the 1990s and early 2000s, the government embarked on energy sector reform, which phased out virtually all energy subsidies. But market liberalization has not led to more affordable electricity, and the government’s technology-neutral, least-cost policies have led to the rapid growth of coal-fired power. The development of industrial parks to host some strategic lead firms and domestic suppliers of the three clusters could be an opportunity to promote the development of green energy. Subsidies and other incentives could be used to crowd in private investment in renewable energy and secure affordable access to energy, which would scale up the Philippines’ participation in the IMT, TMT, and HLS clusters. For example, institutional investors could be encouraged to support the united Nations Sustainable Development Goals by creating value in infrastructure, renewable energy, and health care. By raising the bar, the government could help to attract investments in affordable energy and other amenities to specific special economic zones. Full implementation of the country’s Nationally Determined Contributions under the Paris Agreement signed in April 2021, which pushes for investing in renewables and cutting greenhouse gas emissions by 75 percent, will help to secure access to clean energy for the development of the three strategic clusters.

Cluster-specific policies

Interviews with firms in the IMT, TMT, and HLS clusters provide insights into sector- and cluster-specific reforms. As documented in table 4.1, given the commonalities affecting the competitiveness of aerospace, automotive, and electronics, the next steps for the IMT cluster could be to use the GVC reconfiguration policy dialogue initiated by this study as the fulcrum for an IMT Policy 2030. For the TMT cluster, next steps could focus on motivating and enabling existing