ASEAN Four’s middle income trap dilemma: evidence of the middle technology trap

Abstract

In Southeast Asia, Malaysia, Thailand, Indonesia and the Philippines are defined by the World Bank as countries that failed to overcome the "middle income trap". The four Southeast Asian countries (hereinafter referred to as the "ASEAN Four") entered the ranks of middle-income economies in the late 1970s and early 1980s and achieved rapid economic development throughout the 1980s and 1990s. However, since the early 2000s, the competitive advantages of these countries’ labor-intensive industries have started to decline, while the process of industrial transformation and technological improvement has been stagnated due to the lack of innovation resources. With limited R&D input and insufficient indigenous tech innovation, these countries’ manufacturing industry show a trend of "deindustrialization" and the "middle technology trap" phenomenon emerged. As the manufacturing sector failed to generate value-added that promotes economic growth and national income increase, ASEAN Four have so far yet to enter the high-income ranks. Drawing from the cases of ASEAN Four, this paper argues that the "middle technology trap" is a key contributing factor to the “middle income trap,” and countries fallen into the “middle income trap” often experience the "middle technology trap" as a concomitant phenomenon. The paper first introduces the industrialization process of ASEAN Four while analyzes the challenges they faced in industrial structural transformation and technology advancement. It then discusses major reasons that these countries failed to step over both the "middle technology trap" and the “middle income trap”, including limited technology spillovers from FDI, R&D investment shortages and insufficient industrial policies, low-quality education system, deficient intellectual property protection and underdeveloped regional capital markets. The paper concludes with some implications for China and discussion on potential future research on distinctions of the “middle technology trap” phenomenon between upper middle-income and lower middle-income countries.

Introduction

Starting from the 1950s, major East Asian countries embarked on industrialization processes, with export-oriented industries becoming the primary engines of economic growth. The World Bank, in its 1993 publication The East Asian Miracle, described the successful economic development in East Asia over the preceding decades as following the "flying geese pattern,” with Japan as the leading industrialized country that exported its capitals and technologies to developing Asia. Singapore, South Korea, Taiwan, and Hong Kong, known as the "Asian Dragons," were second-tier countries in the flying geese model that successfully sustained long-term economic growth and entered the ranks of high-income countries. Malaysia, Thailand, Indonesia and the Philippines (ASEAN Four, formerly known as the "Asian Tigers") were among the third tier as well as China, while the fourth tier comprised latecomers such as Vietnam, Laos, Cambodia, and Myanmar. However, unlike the “Asian Dragons” that successfully bypassed the high-income threshold, ASEAN Four have been trapped at the middle-income status¹ for over three decades. According to the World Bank², in 2022, Malaysia, Thailand and Indonesia are upper-middle income economies with per capita GNI of US $12,000, $7,230 and $4,680, respectively, while the Philippines is a lower-middle income economy with per capita GNI of US $3,950 (Fig. 1).

Fig. 1

Change in real GDP per capita in ASEAN Four, 1960–2022 (USD). Database: World Bank, https://data.worldbank.org/indicator/NY.GDP.PCAP.CD

Existing studies attribute the emergence of the "middle-income trap"³ to limitations in factor-driven growth, often manifested as rising labor costs, stagnant labor productivity, and low levels of research and development (R&D) expenditure. The “middle-income trap” phenomenon is typically accompanied by a stagnation in the process of industrial structural transformation, with the manufacturing sector failing to transform low value-added segments to high value-added ones. In middle-income countries, foreign trade and foreign direct investment (FDI) are generally regarded as the primary engines of economic development and crucial sources of knowledge and technological diffusion. Manufacturing has been regarded as the source of national prosperity since it offers spillovers from technology learning and drives tech innovation through reinvestments (Rodrik 2007). However, weak industrial foundation in middle-income countries has constrained the manufacturing sector’s capability to effectively absorb foreign knowledge and technologies. Coupled with a lack of adequate policy incentives and supporting mechanisms, these countries fail to induce technological change and indigenous innovation that enhance production efficiency, leading to the entrapment in the "middle-income trap" (Felipe 2012).

It has been pointed out that structural transformation is required to achieve long-term economic development, where resources are efficiently allocated to high value-added sectors with diversified production and enhanced labor productivity (Kanchoochat 2015). Eichengreen, Park and Shin’s research found that countries with high-technology products accounting for a relatively large share of exports and where a relatively large portion of the population has secondary and tertiary education degrees are less likely to experience economic slowdowns. The significance of climbing the technology ladder has been emphasized in order to escape the “middle-income trap” (Eichengreen, Park and Shin 2013). A group of existing literature gives strong weight to State intervention in promoting industrial transformation, while argues that industrial and technology policies require clear yardsticks and compatible macroeconomic measures (Lee 2013).

The "middle technology trap" thus emerges as a significant factor leading to the "middle-income trap" (Zheng 2023). In Zheng’s article, he explains the "middle technology trap" as the scenario that developing countries leverage cost advantages to undertake the transfer of mature industries from developed countries. However, in most cases, multinational corporations consistently retaining core technologies in their home countries while only transferring mature or low-value added technologies to developing countries. In the long term, once the dividends of mature technology transfer are exhausted and local technological catch-up did not take place, economic growth is likely to enter a stage of long-term stagnation (Zheng 2023).

The next section will draw on the industrialization processes of ASEAN Four, which serve as highly relevant cases of developing countries fell behind in technological improvement and structural transformation that being trapped at the middle-income level. Section 3 will address the main reasons leading to stagnated indigenous technological advancement and the paper will conclude with relevant implications for China and other developing countries to avoid the “double traps”.

How ASEAN four fell into the middle technology and income trap

Around the 1960s, ASEAN Four started to implement import substitution industrialization strategies, promoting the development of local labor-intensive industries to reduce dependence on imports of durable consumer goods. While the strategy initiated the development of domestic manufacturing, these countries had relatively low levels of industrialization with some primary industries such as agricultural processing and basic consumer goods production. The secondary sector's share of GDP was small and agriculture remained the backbone of the national economy. As domestic markets gradually saturated, in the 1970s and 1980s, these countries started to adopt an export-oriented industrialization strategy. The outward strategy enabled these countries to leverage advantages in cheap labor and abundant natural resources to attract labor- and capital-intensive industries relocated from developed countries in the region, including Japan, South Korea, and Singapore. Local industrial sectors grew rapidly and gradually expanded from light manufacturing industries like textiles and electronic processing to heavy manufacturing industries such as machinery, steel, and petrochemicals.

During the 1980s and 1990s, multinational corporations from Europe, the United States, and Japan began transferring the production of standardized product components to developing countries. The “Asian Dragon” countries also scaled up their overseas direct investments in Southeast Asia. In this wave of industrial transfers, ASEAN Four seized the opportunity to integrate into global value chains: local manufacturing sectors ascended from assembly processes to the production of components in capital- and technology-intensive industries such as electronics and automobiles. Local manufacturing experienced rapid development that propelled the economy into a phase of takeoff. During this period, latecomer ASEAN countries like Vietnam, Cambodia, Myanmar, and Laos also began participating in the division of labor in the global industrial chain, undertaking primarily labor-intensive production processes (Wang et al. 2020).

Driven by exports and fueled by FDI, the high-speed growth of ASEAN Four had primarily relied on cheap labor and natural resources to develop labor- and resource-intensive industries. Given weak industrial foundations and insufficient utilization of technology spillovers from FDI, these countries failed to develop comprehensive industrial chains. As a result, local industries positioned predominantly at the lower end of the global value chain. However, the global economy underwent consecutive shocks during the 1997 Asian financial crisis and the 2008 international financial crisis, which had a detrimental impact on the export-oriented industries in these countries and disrupted the export-oriented strategy. With contracting international demand and the withdrawal of foreign capitals, the outward-oriented industrial sectors lost their growth impetus and local manufacturers were deprived of tech and financial support. Since the late 1990s, AESEAN Four began experiencing a "deindustrialization" trend that characterized by a deceleration or stagnation in the industrial sector development and particularly manufacturing. The proportion of manufacturing value-added to GDP declined rapidly, leading to the industrial "hollowing out" phenomenon (Table 1) (Wang et al. 2020). Taking Indonesia as an example, in 2001, Indonesia's manufacturing industry contributed nearly 30% to overall economic growth, but that percentage dropped to only 20.5% in 2018, making Indonesia’s “de-industrialization" the most serious among the four countries (Wu and Yao 2019).

Table 1 Changes in value-added by sector as a share of GDP in the four Southeast Asian countries, 2010 and 2020 (%)

Upon reaching middle-income levels, these countries face challenges such as rising labor and production costs, lagging infrastructure, and unfavorable business environment. The advantageous conditions for the growth of export-oriented industries had changed which led to a decline in export competitiveness. In the Global Innovation Index released by the World Intellectual Property Organization (WIPO) in 2022, Malaysia, Thailand, Indonesia, and the Philippines ranked 36th, 43rd, 75th, and 59th, respectively, out of 132 countries. In comparison, South Korea, Singapore, Japan, and China were ranked 6th, 7th, 13th, and 11th, respectively (Dutta et al. 2022). This indicates that ASEAN Four have significant room for improvement in terms of technological innovation and progress. The structural transformation and technological advancement in these four countries did not occur due to limitations in domestic innovation factors and drove these countries into the "middle technology trap." This, in turn, has resulted in insufficient industrial momentum, slow improvement in labor efficiency and output, and persistent inability to overcome the "middle-income trap."

• a. Malaysia

Malaysia started its industrial development relatively early among ASEAN Four. In the late 1950s, during the early years of independence, Malaysia was mainly an agricultural-based economy. To diversify its economy, the government initiated the Import Substitution Industrialization (ISI) strategy. In 1965, the New Industrialization Act was enacted to attract FDI into labor-intensive industries primarily focused on the production of durable consumer goods, such as food processing, sewing machines and detergent production. From 1957 to 1967, Malaysia experienced an average economic growth rate exceeding 6% and significantly reduced dependence on imported daily consumer goods (Wu and Shan 2019).

In late 1960s, as domestic market gradually saturated and public funds shrank, Malaysia started its transition to an Export-Oriented Industrialization (EOI) strategy. Through tax incentives and investment promotion policies, Malaysian government undertook industrial transfers from developed East Asian economies. FDI was directed towards labor-intensive industries focused on processing and manufacturing intermediate goods, driving the development of sectors such as fiber textiles, electronics, shipbuilding, steel, and machinery. In the first half of the 1970s, the EOI strategy greatly stimulated the development of manufacturing and transportation industries, creating a large number of employment opportunities and propelling economic growth. In 1978, Malaysia's per capita GNI reached $1,030, placing it in the category of middle-income countries according to World Bank standards. During this period, effective economic policies, a stable international environment and rising prices of major commodities, such as rubber and tin, provided the Malaysian government with substantial fiscal revenue to support industrial development and purchase advanced technological equipment. However, industrialization also spurred regional development imbalances and environmental degradation (Wu and Shan 2019).

From the 1980s, the Malaysian government launched the second phase of ISI strategy and established state-owned enterprises in heavy industrial sectors such as automotive, methanol, cement, and steel, while encouraging private capitals to enter these industries. In the mid-1980s, affected by economic slowdowns in developed countries and sluggish global demand, Malaysia experienced a period of economic downturn. In response, the government vigorously supported the development of national capital-intensive industries to reduce external dependence. In the late 1980s, amid a new wave of capital and technology-intensive industrial transfers from developed economies, Malaysia actively undertook parts of the global production processes (mostly the assembling part) and experienced fast growth in local electronics industry, which kicked off the development of local automobile industry.

Entering the 1990s, as developing countries globally underwent a wave of market reforms and industrial technology advancement, Malaysia was pressured to transform its industrial structure amid increased global competition. During this period, increasing demand for petroleum products in the Asia–Pacific region led to large FDI inflows in capital-intensive industries such as petrochemicals, metal, and automobiles, fueling rapid growth in these sectors. Malaysia entered the ranks of upper-middle-income countries in the early 1990s. However, its domestic capital and technology-intensive manufacturing industries represented mostly by the assembly lines that relied heavily on imported machineries and struggled to localize key technologies. It overlooked the advancement of intermediate products and production equipment, failing to generate industrial technology spillovers on upstream and downstream sectors and develop extended industrial chains (Wu and Shan 2019).

The 1997 Asian financial crisis led to a sharp decline in Malaysia's currency and stock market. Massive capital outflows, soaring inflation, rising interest rates, shrinking export and sluggish consumption caused significant economic setbacks. The crisis led to large current account deficits and government debt, depriving many large industrial projects from sustainable funding. Due to timely adjustment measures, such as financial market restructuring, lowering interest rates, and policy support for manufacturing and services industries, Malaysia's economy began to recover in 1999. However, after the outbreak of the 2008 financial crisis, global economic stagnation and weak consumption once again blew up Malaysia's highly export-oriented economy and increased its growth volatility and vulnerability. In early 2000s, Malaysia started to promote the services sector with a focus on tourism. Meanwhile, the country’s labor-intensive industries began to lose competitive advantages to latecomer developing countries due to rising labor costs, which further prompted the government to direct FDI into the services sector. In recent years, strong policy incentives have been given to industries such as the digital economy, logistics and e-commerce.

In early 2000s, the government began to prioritize the development of the technology- and knowledge-intensive industry. The Eighth Malaysian Plan in 2001 proposed the strengthening of tech infrastructure and to accelerate the application of technological achievements. Subsequently, the government implemented targeted policies to support industries such as information and communications technology, biotech and agri-tech, as well as increasing funding support for science and research education (Wu and Shan 2019). In post-crisis period, however, developed countries initiated a wave of “re-industrialization” and scaled up investment in strategic emerging industries, such as biopharmaceutical, information communications and renewable energy. The development of relevant industries in Malaysia faced ever more intense global competition and rising risk of falling into the “middle technology trap.”

From the year 2000 onwards, the share of manufacturing value-added in Malaysia's GDP oscillated and declined from its peak, with the tertiary industry surpassing the secondary industry in GDP share in 2007. Its national economy exhibited a trend towards de-industrialization, posing serious challenges to the structural adjustment of the manufacturing industry (Wu and Shan 2019). From 2010 to 2019, Malaysia's average annual real GDP growth rate stayed around 5% (Graph 2) (Wang et al 2020). In 2022, according to UN data, Malaysia's per capita GNI approached nearly $12,000, placing the country in the category of upper-middle-income economies defined by the World Bank, yet it has not entered the ranks of high-income economies (Fig. 2).

Fig. 2

Average annual GDP growth rate and manufacturing value-added as a share of GDP in Malaysia, 1960–2022. Database: The World Bank, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, https://data.worldbank.org/indicator/NV.IND.MANF.ZS

• b. Thailand

The post-World War II period marked the beginning of Thailand's industrialization with the enactment of Industrial Development Promotion Act in 1954. Similar to Malaysia, Thailand adopted an ISI strategy during the early stages of industrialization. However, due to domestic political instabilities, the initial industrialization process in Thailand was limited in scale and scope. The agriculture sector continued to dominate the economy while the manufacturing sector was restricted to durable consumer goods production (Xie 1989).

Starting from the late 1970s, Thailand transitioned its industrialization strategy to EOI (approximately a decade later than Malaysia). The country seized the FDI boom from Japan and East Asia’s Newly Industrialized Economies (NIEs) throughout 1980s and actively integrated into regional industrial chains. In 1981, Thailand’s manufacturing share of GDP surpassed that of agriculture for the first time and maintained a steady upward trend until the early 1990s. The substantial appreciation of the Japanese yen since mid-1980s prompted Japanese companies to flush into Thailand and establish local factories, fueling nearly a decade of prosperity in Thailand's export-oriented economy. During this period, FDI in Thailand concentrated in raw material processing, automobile and home appliance assembling, toys and leather goods production, which fueled rapid development in labor-intensive industries. Consequently, Thailand became a major manufacturing export hub of textiles and automobiles. In the late 1980s, Thailand's automobile production exceeded 2 million units, making it the ninth-largest automobile producing country globally. Expansion of the manufacturing sector created a large number of employment opportunities and improve the national income level (Luo 2021). In 1988, Thailand's per capita GNI exceeded $1,000, marking its transition to a middle-income country. Between 1986 and 1996, Thailand’s per capita GNI soared from $860 to $2,940, experiencing a growth of 241% within a decade (Wang et al. 2020).

However, in July 1997, the Asian financial crisis erupted in Thailand and dealt a massive blow to its economy. Thailand’s per capita GNI rapidly dropped from the 1996 level of $2,940, close to the threshold of upper-middle-income countries, to $2,040 in 1998. Thailand went through severe economic downturn and slow recovery with per capita GNI reached back to pre-crisis levels only until 2004. Since early 2000s, rising labor costs dampened the competitiveness of Thailand's traditional processing and manufacturing industries. Latecomer ASEAN countries like Vietnam and Cambodia have gradually replaced Thailand as the primary recipients of labor-intensive industry transfers from developed economies and NIEs in East Asia. However, due to labor-intensive sector’s easy access to FDI, Thailand insisted on its outdated industrial policies primarily supporting agriculture and labor-/ resource-intensive industries (such as rubber and mining) instead of investing more in capital- and technology-intensive sectors.

Consequently, Thailand has failed to achieve transformation in its industrial structure. Its export structure has long skewed towards agricultural products (rice, rubber, cassava), primary processed goods and textiles, with limited portion of technology-intensive products such as transportation equipment, chemicals and machinery. The automobile industry, Thailand's second-largest export sector, consists of primarily overseas assembly factories of multinational automobile companies, especially Japanese ones, without developing competitive national brands. Thailand's agricultural processing and textile industries have long been relied on imported high-quality raw materials and advanced production equipment, struggling to escape the lower end of global value chains (Luo 2021).

In the field of high-tech industries, Thailand has achieved limited development and faced with the “middle technology trap”. The value-added contribution from medium- to high-tech industries to total manufacturing value-added in Thailand increased only by 2% from 2000 to 2016, rising from 38 to 40%. Despite an average annual economic growth rate of nearly 10% between 1987 and 1995, Thailand’s average annual growth rate of total factor productivity (TFP)⁴ was only around 1.5%. From 2006 to 2015, the average annual growth rate of Thailand's manufacturing sector was 3.0%, with an average TFP growth rate of 0.7% (Intarakumnerd 2017). Comparing the business scope of major Thai conglomerates in 1980 and 2019, most of their businesses were still limited to traditional sectors such as banking, finance, insurance, real estate, agricultural processing, automobiles and retail, with no significant investment in emerging tech industry. In recent years, despite industrial policy adjustments led by the Prayuth administration to advance "Industry 4.0" strategy and construction of the Eastern Economic Corridor, which include enhancing infrastructure connectivity and attracting FDI into strategic emerging industries like new energy vehicles, information technology, smart electronics and biotechnology, successful implementation of these policies have yet to overcome many institutional constraints (Luo 2021).

Historically, Thailand has been the second-largest economy in ASEAN and contributed annually nearly 20% of total ASEAN economic output from 2000–2005. However, due to slow technological progress and industrial innovation, Thailand's economic growth has lagged behind most its neighboring countries in the past decade. Its 2013–2019 average real GDP growth rate was around 3%, which ranked the second-to-last position among ten ASEAN countries. By 2017, Thailand's share of total ASEAN economic output had declined to 16%, while Malaysia and the Philippines were catching up in their share contribution. In recent years, the Thai economy has suffered from a shrinking workforce due to an aging population. With the Thai government implementing a minimum daily wage law, labor costs continue to rise and industries such as textiles, clothing, toys, and footwear are experiencing a further decline in their competitive advantage. In 2022, Thailand's per capita GNI reached $7,230, placing it within the category of upper-middle-income economies according to World Bank standards (Fig. 3). Despite 40 years of industrial development, Thailand has been caught up in the "middle income trap " (Luo 2021).

Fig. 3

Average annual GDP growth rate and manufacturing value added as a share of GDP in Thailand, 1960–2022. Database: The World Bank, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, https://data.worldbank.org/indicator/NV.IND.MANF.ZS

• c. Indonesia

Indonesia had the weakest industrial foundation among the four Southeast Asian countries. Before gaining independence, it was ruled by the Dutch colonial government for over 340 years, serving as a supplier of raw materials for the colonial power. After gaining independence in 1945, Indonesia embarked on a path of government-led industrialization. In the initial phase, industrial policies were characterized by nationalization and import substitution. Through the nationalization of foreign capital, Indonesia rapidly expanded state capital, established state-owned enterprises, and prioritized the development of essential industries that met domestic market demands, such as agricultural product and equipment, daily consumer goods, and textiles. However, in the 1950s, Indonesia faced frequent political upheavals and fiscal challenges, resulting in economic near-collapse in the early 1960s, contributing to widespread poverty among the population (Lin 2011).

In 1965, a military coup marked the beginning of General Suharto's regime that lasted until 1998. Under Suharto's leadership, Indonesia continued to implement the ISI strategy with more liberal economic policies adopted to address domestic economic difficulties. Attracting FDI was considered a crucial policy for economic development, abandoning the previous government's practice of nationalizing foreign capital. The most significant policy in this regard was the Foreign Investment Law enacted in 1967, providing preferential treatment to FDI in infrastructure and labor-intensive industries. As a country rich in petroleum resources, Indonesia prioritized the development of the oil industry as a cornerstone of the national economy. The two oil price increases in the 1970s channeled substantial foreign exchange income to Indonesia. Petroleum revenue provided robust financial support for building a domestic industrial system, leading to rapid economic development in the 1970s (Lin 2011).

However, the early 1980s oil crisis led to a decline in Indonesia's petroleum revenue. Coupled with the drop in international prices for primary products, Indonesia's ISI strategy faced significant challenges and was forced to shift towards an export-oriented model, lagging behind the other three ASEAN countries by 10–15 years. To support export promotion, the Indonesian government initiated financial and trade liberalization reforms, further easing restrictions on foreign investment and beginning the development of non-oil and gas manufacturing. The manufacturing sector began to grow rapidly, with the share of manufacturing value-added in GDP increasing from 16.4% to 26.8% between 1985 and 1997 (Wang et al. 2020). In 1987, the share of manufacturing product exports surpassed agricultural products for the first time; in 1991, the monopoly of oil and gas product exports was altered, resulting in significant improvements in the industrial structure. From the late 1980s to 1996, Indonesia's economy maintained a high annual growth rate of 7–9%. National income increased significantly and reached $1,100 in 1997 as Indonesia gradually entered the ranks of middle-income countries (Lin 2011).

However, the Asian financial crisis disrupted Indonesia's industrialization process. The GDP growth rate plummeted by 13% the following year, the currency experienced a sharp devaluation, and per capita GNI shrank by nearly half to $560 in 2000. Indonesia sought assistance from the International Monetary Fund (IMF) in the wake of the financial crisis and accepted IMF's economic liberalization reform measures. The reform package included adopting tight fiscal and monetary policies to ensure macroeconomic stability, restructuring the financial sector, and implementing other structural reforms (Lin 2011). After a prolonged six-year adjustment period, although the real economy did not fully recover to pre-crisis levels, the long-term market-oriented reforms enabled Indonesia to successfully withstand the impact of the 2008 global financial crisis.

The significant economic downturn in 1998 led to the fall of the Suharto government, ushering in a challenging period of political transformation in Indonesia. The country gradually transitioned from authoritarian politics to democratic governance, resulting in the 2004 election of the first democratically elected president, Susilo Bambang Yudhoyono. The political situation in Indonesia gradually stabilized under Susilo and the economy entered a new phase of industrialization. Upon taking office, Susilo began to adjust the economic development strategy. He increased efforts to stimulate investment and consumption as drivers of the economy, diversified the overly export-dependent economic structure, and further strengthened the development of the non-trade manufacturing sector to enhance economic resilience against external risks (Lin 2011).

However, the manufacturing recovery plan of the Susilo government failed to substantively drive Indonesia's industrial structural transformation. The share of manufacturing value-added in GDP, after experiencing significant fluctuations from the late 1990s to the early 2000s, began to decline from its historical peak of 31.95% in 2002, reaching only 20% in 2018 and continuing to decline thereafter (see Fig. 4). Capital-intensive industries, represented by petroleum processing, and labor-intensive industries, represented by agricultural products, rubber, and textiles, remain as the primary industrial sectors in Indonesia. The country has limited sectors in technology-intensive industries with low production indices, such as modern pharmaceuticals and microelectronics, indicating a traditional and single manufacturing structure. Despite substantial capital investment in importing advanced production equipment, Indonesia has failed to transition from importing equipment to absorbing technology, resulting in a lack of momentum for industrial transformation (Ji 2017).

Fig. 4

Average annual GDP growth rate and manufacturing value added as a share of GDP in Indonesia, 1961–2022 (Missing data on manufacturing value added as a share of GDP from 1961 to 1982). Database: The World Bank, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, https://data.worldbank.org/indicator/NV.IND.MANF.ZS

Indonesia's industry is still dominated by mid to low-end manufacturing, facing the severe challenge of the "middle-technology trap." According to data from the Indonesian Central Bureau of Statistics (BPS) and the United Nations Industrial Development Organization (UNIDO), from 2011 to 2018, the degree of structural optimization in Indonesia's manufacturing sector was extremely limited, and the outlook for the development of high-end manufacturing industries was pessimistic. In the value-added structure of large and medium-sized manufacturing organizations, the proportion of high-tech-density industries decreased from 37.46% to 36.70%, the proportion of medium-tech-density industries increased from 13.71% to 16%, and the proportion of low-tech-density industries decreased slightly from 48.81% to 47.30% (Wang et al. 2020).

Currently, Indonesia is the largest economy in the ASEAN region, with an average GDP growth rate close to 4.8%, ranking second only to Vietnam and the Philippines. Indonesia has demonstrated significant resilience during the impact of the COVID-19 pandemic. In recent years, President Joko Widodo has proposed a strategic vision for developing the maritime economy, strengthening land-sea-air infrastructure construction, and building a maritime economic power. However, Indonesia's industrial scale, technological level, and financial capabilities, particularly in infrastructure and shipbuilding, are relatively limited. Further industrialization urgently requires the injection of more innovative elements (Ji 2017). In 2022, Indonesia's per capita GNI was $4680, slightly higher than the World Bank's threshold for upper-middle-income status, far from bypassing the "middle-income trap."

• d. The Philippines

The industrialization process in the Philippines has followed a trajectory of initial progress followed by setbacks. Among ASEAN Four, the Philippines initiated its industrialization process the earliest. Before the 1960s, the Philippines' economic strength in East Asia was second only to Japan, surpassing Singapore, South Korea, and other Southeast Asian countries. In 1960, the manufacturing sector accounted for 20% of its GDP (compared to 34% in Japan and 12% in Singapore), earning the Philippines the status of a quasi-advanced industrialized nation. However, due to factors such as constraints from the domestic bureaucratic political system, prolonged political instability, exploitation of industrial wealth by U.S. multinational corporations, and the protection of vested interests by domestic elites, the Philippines' economic development has been overtaken by the Asian NIEs, Malaysia, Thailand, and Indonesia over the past half-century. It has transitioned from being the second industrial nation in East Asia to becoming the largest agricultural country, presenting typical characteristics of "deindustrialization" (Shen 2017).

The Philippines began implementing the ISI strategy in 1950, but its policy orientation differed significantly from the three aforementioned countries under the influence of the United States, with a primary focus on maintaining the interests of U.S. capitals and exporters. Specific measures included restricting the development of local durable consumer goods industries to ensure that U.S. manufacturers could export such goods in large quantities to the Philippines. The encouragement of domestic production of non-durable consumer goods and non-essential items, with restrictions on their imports and the adoption of market protection policies, allowed U.S. capitals to monopolize related production sectors, catering primarily to the needs of the Filipino aristocracy. Meanwhile, there were no restrictions on the import of raw materials and machinery required for the production of non-durable consumer goods. This series of policies resulted in a significant transfer of wealth from the Philippines to the United States, hindering capital accumulation during the country's early-stage industrialization. The conservative bureaucracy and the land-owning elite, in collaboration with U.S. corporations, solidified the traditional industrial structure and protected vested interests, making the transition from ISI to EOI strategy extremely challenging (Shen 2003).

In the late 1960s and early 1970s, the Philippine government introduced a series of initiatives aimed at attracting foreign investment and stimulating exports. These measures included the establishment of export processing zones, currency devaluation, and tariff reforms to develop export-oriented industries. However, the actual benefits were offset by other macroeconomic factors and government interventions. The long-term overvaluation of the peso weakened the competitiveness of Philippine export goods in the international market, dampening the production willingness of export enterprises. Meanwhile, import-substitution industries continued to enjoy protective tariffs several times higher than those for export-oriented industries. The Marcos government's control over foreign exchange and the implementation of import permits further diminished the actual effectiveness of tariff reforms. The beneficiaries of export processing zones and foreign investment incentives were limited to large business groups with close ties to the regime and colluding interest groups. It failed to encourage reinvestment by innovative enterprises, leading to a monopolistic and distorted industrialization pattern that constrained rapid economic development (Velasco 1990).

In contrast to the other three ASEAN countries, which long welcomed and capitalized on the transfer of industries from developed countries, the role of foreign capital in the Philippine industrialization process went through relatively complex changes. The anti-American sentiment of the Philippine national bourgeoisie led to strict restrictions on foreign investment market access and share ratios through the revolutionary constitution passed in 1987. This was unfavorable for the Philippines to integrate into the global supply chain and pursue a more open industrial system. Since independence, the Philippines has followed a U.S.-style political system with the Senate and the House of Representatives controlled by different interest groups, proposals related to monetary and trade/FDI liberalization reforms have struggled to pass through Congress. Consequently, opportunities for the Philippines to undertake the transfer of export-oriented industries from developed countries were missed in the late 1980s.

On the other hand, the long-term political instability in the Philippines heightened foreign investors' concerns about investment risks, especially after the mid-1980s, as the country experienced frequent street revolutions and armed people's struggles against the government. The impact of political turmoil led to a period of drastic growth fluctuations, with an average growth rate of only 1.69% from 1980 to 1990. As the population growth rate during this decade exceeded 2%, per capita output in the 1980s was actually in a declining trend due to social unrest. Many industrialization policies during this period had been rarely implemented, causing the stagnation of manufacturing development (Huang 2016).

It was only until the early 1990s substantial progress was made in the Philippines' trade and FDI liberalization reforms. Key measures included comprehensive reductions in tariff protection, removal of foreign exchange controls, breaking import monopolies, enactment of new foreign investment laws to relax FDI access, optimize FDI management systems, and the formulation of export development plans. These reforms were both a continuation of the incomplete reforms of the late 1980s and a fulfillment of additional conditions for the IMF's economic structural adjustment loans. Among these measures, the export development plans identified the furniture industry, electronic and mechanical component manufacturing, information and financial services, and agricultural processing as key strategic sectors. These reform measures had a positive impact on attracting foreign investment. From 1988 to 1996, foreign investment inflows increased from $1.08 billion to $3.517 billion, and despite a decline due to the Asian financial crisis, it still reached $1.672 billion in 1998. With the development of export-oriented industries, the annual average growth rate of Philippine exports increased from 8% in the late 1980s to 10.5% in the mid-1990s. The share of exports in electronic products and semiconductors rose from 25% in 1991 to 59% in 1998, and maintained a high growth rate of 33% during the Asian financial crisis, mitigating the crisis’ impact on the Philippine economy (Chen 2000).

However, the development of export-oriented industries in the Philippines faced significant sectoral imbalances. The production of electronic products, benefiting from multinationals' equipment investments and export channels, developed rapidly but was almost a lone performer. In contrast, consumer goods manufacturing sectors such as clothing, shoes, and toys faced export obstacles due to a lack of price advantages, leading to declined production capacity. In reality, the industrial structure of the Philippines saw minimal changes from 1970 to 2000, with the share of agricultural output in GDP remained high at around 20%, and the share of manufacturing in GDP was only 20% in 1998. In terms of industrial tech innovation, the Philippines' performance was less than satisfactory, with total factor productivity (TFP) fluctuating on the edge of negative growth since the late 1970s. According to IMF research statistics, the Philippines' TFP average annual growth rate was -0.4% from 1960 to 1994, with a particularly low rate of -0.9% from 1984 to 1994, ranking at the bottom among ASEAN countries and posing significant challenges to technological advancement (Shen 2017).

Entering the twenty-first century, the Philippines’ economic growth became more stabilized. Despite a significant decline in the real GDP growth rate in 2009 due to the global financial crisis, the Philippine economy began to rebound in 2010 and has since maintained a growth rate of 6% or above (as shown in Fig. 5). However, challenges such as sluggish exports, low savings rates, and low investment rates hinder structural adjustments. The role of foreign trade in driving the economy significantly declined with the proportion of exports to GDP decreased from 48% in 1997 to 28% in 2019. In recent years, the main driver of Philippine economic growth has been domestic consumption, fueled by remittances from overseas labor. Although the information industry and related business outsourcing have rapidly developed due to strong government support, competition from other developing countries has intensified. The structural transformation of the Philippine economy has mainly shifted from agriculture to the services sector, while the contribution of manufacturing to GDP has further declined, exacerbating the risk of "deindustrialization" and an emerging “middle technology trap.” In 2022, the Philippines' per capita GNI was $3,950, categorizing it as a lower-middle-income country according to the World Bank classification (Shen 2017).

Fig. 5

Average annual GDP growth rate and manufacturing value added as a share of GDP in the Philippines, 1961–2022 (Missing data on manufacturing value added as a share of GDP from 1961 to 1999). Database: The World Bank, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, https://data.worldbank.org/indicator/NV.IND.MANF.ZS

ASEAN Four’s middle technology trap: overarching features

The industrial development processes of ASEAN Four have been characterized by predominantly FDI-driven/resource-based labor-intensive and low value-added goods production and exports. Although these four countries achieved successful economic growth in the early stages of industrialization, reliance on foreign technology and capital has led to "path dependence" at later stages, which became an impediment to driving technological innovation and achieving industrial transformation. Several prominent features stand out from overviewing the process of ASEAN Four falling into the "middle technology trap."

• e. Excessive dependence on FDI in labour-intensive sectors with limited technology spillovers.

FDI plays a crucial role in capital formation and technological upgrading across the entire East Asian region. During the economic takeoff phase, ASEAN Four heavily relied on FDI to develop export-oriented, labor-intensive, and capital-intensive industries. According to World Bank statistics, FDI levels in East Asia stayed high during the 1980s and 1990s, averaging around 4% of GDP. Malaysia experienced FDI inflows exceeding 8% of GDP in the early 1990s (as shown in Fig. 6), while Thailand, Indonesia, and the Philippines received FDI inflows accounting for 2–3% of GDP before the Asian financial crisis. The crisis led to a decline in foreign capital levels, causing significant macroeconomic turbulence. In recent years, FDI inflows in ASEAN Four have remained around 2–5% of GDP. However, due to factors such as low labor skills, weak industrial foundations, and insufficient innovation elements, FDI inflows continue to focus predominantly on mid-to-low-end manufacturing that utilizes mature technologies and do not contain cutting-edge tech advancements (Gill and Kharas 2007).

Fig. 6

Change in the value of net inflows of foreign direct investment as a share of GDP in ASEAN Four, 1970–2022 (%). Database: The World Bank, https://data.worldbank.org

Utilizing FDI in local manufacturing development and promoting industrial goods exports has been a shortcut for developing countries to accelerate the process of industrialization. FDI not only brings capital to the host country but also introduces technology and market access, ensuring local integration into regional production networks. The industrialization of emerging economies often took place through learning from the knowledge and technology of developed countries, most effectively through the technological spillover from FDI. When multinational corporations establish overseas production bases, they typically assist local enterprises and labor forces in developing technological capabilities to produce and assemble high-quality components. This process often fosters deep connections between upstream and downstream industries, strengthens business ancillary services, and improves logistics infrastructure (Tsunekawa and Todo 2018).

However, overreliance on foreign capital and technology comes with its costs. As overseas factories for multinational corporations, host countries often have limited exposure to high-end and core technology transfers. Additionally, due to weak local industrial foundations, manufacturing technology improvement is often restricted. For instance, in the early 1990s, Thailand opened its automobile industry to foreign investment, successfully becoming a regional production hub for multinational automotive companies in Southeast Asia. However, Thailand has not yet become a net exporter of automotive components and still relied on advanced production technology. In the final stages of product manufacturing, core patented designs are controlled by multinational corporations. Local enterprises lack the capability for R&D and production of essential components, primarily relying on external purchases or imports. In fact, during the second phase of ISI strategy (between 1980–1985), when policies were introduced to develop local heavy industries, Thailand, Indonesia, and the Philippines lacked the motivation to implement these policies due to easy access to FDI. Only Malaysia, with a relatively strong industrial base, emulated South Korea, implemented incentive policies to promote the development of heavy industries. However, due to limitations in capital size and international market competition, these attempts were not highly successful (Tsunekawa and Todo 2018).

In terms of indigenous manufacturing innovation, countries like South Korea, Taiwan, and Singapore have more successful cases. In contrast, ASEAN Four have very limited number of indigenous multinational corporations and corporate R&D capabilities are constrained. The Malaysian government, led by Mahathir, attempted a nationalization strategy in the automotive sector by establishing the state-owned Proton. While Proton enjoyed policy advantages in the domestic market with prices 30% cheaper than non-state-owned manufacturers, the protectionist policy hampered Proton's motivation for independent R&D and innovation, resulting in a lack of competitiveness in overseas markets. It was not until Proton acquired more advanced technologies through its joint venture with Mitsubishi Corporation of Japan that its supply chain activities shifted from downstream assembly and sales to upstream component production, while beginning to internationalize its products. In contrast, Taiwan's electronics industry and South Korea's automotive industry aimed for exports and overseas production early in their development, forcing them to compete with multinational corporations from other countries. These industries maintained their leading positions in the fiercely competitive global market through continuous technological advancements (Tsunekawa and Todo 2018).

During the first decade of the twenty-first century, surging global commodity prices prompted foreign investment to shift from manufacturing to primary industries, particularly in Indonesia and Malaysia, deepening the region's economic dependence on commodity exports. In recent years, ASEAN Four saw increasing dependence on imports of raw materials, intermediate products, and production machinery in manufacturing, demonstrating a lack of supply chain resilience and localization. Amid global industrial chain restructuring, local manufacturers, mostly small and medium-sized, lacking initiative and resources, continued to stay at the lower end of the global value chain (Wang et al. 2020).

• f. Failing to prioritize research and innovation at the national strategic level: limited R&D investment and insufficient industrial policies.

ASEAN Four have experienced varying degrees of political upheavals and social unrest in the process of industrialization. Compared with developed economies in East Asia, ASEAN Four have weak government capacity in managing economic development, while high-level elites held on to a conservative development model and fail to reach consensus on promoting industrial innovation in a timely manner. After reaching middle-income levels, ASEAN Four did not sufficiently prioritize research and innovation in their development strategies. They failed to effectively shift economic growth from being primarily driven by resources to being driven by innovation. This has been a crucial factor leading to the stagnation of industrial structural transformation and the manufacturing sector falling into the "middle-technology trap."

R&D expenditure as a percentage of GDP is an important indicator to assess a country’s efforts to promote innovation, with a threshold of 2% often considered as significant (Gill and Kharas 2007). The intensity of R&D investment is substantially influenced by a country’s macroeconomic policies and institutions. In situations of high real interest rates and significant macroeconomic fluctuations, R&D investment tends to decrease. Conversely, having a well-established financial system, strong intellectual property protection, high-quality public research institutions, and effective collaboration between research institutions and the private sector positively impacts R&D investment (Lederman and Maloney 2003).

According to 2015 data (see Table 2), Malaysia's R&D expenditure as a percentage of GDP was 1.30%, Thailand's was 0.63%, the Philippines was 0.14%, and Indonesia was less than 0.1%. These percentages are significantly lower compared to developed economies and NIEs in East Asia. This indicates that these four countries have a long way to go in transitioning toward high-income status. China, with a similar per capita income level to ASEAN Four, presents a stark contrast in terms of R&D expenditure as a percentage of GDP and the number of international patent applications. In 2014, China’s R&D expenditure exceed 2% of its GDP, demonstrating its continuous commitment to increase R&D investment and enhance domestic innovation capabilities (Tsunekawa and Todo 2018).

Table 2 R&D activities in selected countries and economies, 2000 vs. 2015

Similar to R&D investment, ASEAN Four exhibit a substantial gap in the number of patent applications compared to developed economies (see Table 2). According to World Bank statistics, in early 2000s, Taiwan region (China) led in the number of patent applications, generating approximately 30 patents per 100,000 people annually, a performance comparable to Japan and the United States, the best-performing countries among developed economies. Hong Kong, China, South Korea, and Singapore produced 8–10 patents per 100,000 people annually, similar to the performance of developed OECD countries in the mid-1980s but only about half of the current OECD average. In contrast, Malaysia had 0.2–0.3 patents per 100,000 people, resembling South Korea's performance in the mid-1980s. Indonesia, the Philippines, and Thailand had patent numbers ranging from 0.01 to 0.07 per 100,000 people (Gill and Kharas 2007).

On the other hand, Total Factor Productivity (TFP) is a crucial indicator to measure an economy's technological advancement. Studies have estimated the impact of R&D investment on TFP growth: for each percentage point increase in R&D investment, TFP growth could increase by 0.78%. The estimated social return on R&D investment is 78%, encompassing not only the private returns to firms investing in R&D but also the improvement in overall societal efficiency due to R&D spillovers (Gill and Kharas 2007). Table 3 demonstrates that economies like South Korea, Taiwan (China), and Singapore have performed well in terms of TFP growth. In comparison, Malaysia, Thailand, Indonesia, and the Philippines experienced negative TFP growth trends during 1991–2000. Although the annual average growth of TFP improved for ASEAN Four during 2001–2014, it declined again from 2015 to 2021, indicating limited contributions of factors such as innovation and education to economic development.

Table 3 Comparison of total factor productivity in NIEs and middle-Income countries in Asia (average annual growth rate, %)

Low R&D expenditure in developing economies is considered to be significantly related to the weaknesses in their innovation systems that formulate science and technology policies (Mariano and Lederman 2005). For example, for a long time, Thailand's industrial policy did not give sufficient emphasis to the development of indigenous technological capabilities; scientific and technological elements were not incorporated into the formulation of Thailand's broader economic policies. It wasn't until 2016 that the Ministry of Science and Technology in Thailand was recognized of its economic function, allowing it to play a more substantial role in promoting technological development. In the same year, the National Research and Innovation Policy Committee was established, chaired by the Prime Minister of Thailand. The committee aimed to integrate and align science, technology and innovation issues with broader economic policies, and enhance inter-departmental coordination. The committee's members, in addition to the Minister of Science and Technology, included ministers from major economic departments, and its secretariat operated jointly by the committee and the National Office of Science, Technology, and Innovation Policy under the Ministry of Science and Technology. However, some scholars argue that the committee lacks effective mechanisms for execution, supervision, and evaluation, thereby impacting the feasibility and implementation of relevant innovation policies (Intarakumnerd 2017).

Malaysia presents a similar pattern in the evolvement of its innovation system. Since the mid-1990s, Malaysia's industrialization policy began to shift direction and focus on attracting multinationals to set up high-value added segments in Malaysia, such as R&D and product design. The impact of foreign investment projects on industrial structural transformation was included into investment performance indicators, including market access, technology transfer, and human development. Although Malaysia has introduced a large amount of foreign technology in the second phase of its import substitution strategy that focused on the development of heavy industries, it has not successfully developed an effective "independent R&D culture" within the country. It was after the heavy blow of the Asian financial crisis to major industrial projects, in early 2000s, Malaysian government began to reflect on previous industrialization strategy and put forward the vision of building a knowledge-based economy. Science and technology development was elevated to the national strategic level, paying particular attention to the development of information and communication technology (ICT) industry (Shen et al. 2014).

• g. Low-quality education system resulted in a severe shortage of high-skilled talents.

Quality of education is another crucial factor influencing innovation. Higher education can provide the foundational conditions for scientific research and technological application. The overall quality of higher education systems and the education attainment level of the population in ASEAN Four are relatively low, resulting in an extreme shortage of high-skilled talents. Studies have found a significant positive correlation between R&D productivity in science and technology and factors including the average years of education, the quality of academic institutions, the strength of intellectual property protection, and the level of cooperation between research institutions and the private sector. Among these factors, the impact of education duration and intellectual property protection on R&D efficiency is most notable. These factors remain significantly below the average level of OECD economies in middle-income countries (Intarakumnerd 2017).

According to UNESCO statistics (Table 4), from 2017–2021, the average years of education of the population aged 25 and above in ASEAN Four were approximately 3–4 years less than those in developed East Asian economies. Regarding the graduation rate with a first-degree (bachelor's degree) from higher education, Singapore had an undergraduate graduation rate close to 60% and China reached 36%, while the average for the four Southeast Asian countries were below 20%. Taking Indonesia as an example, despite having a large and predominantly young population and low wage levels, Indonesia’s overall education level of the workforce is below the ASEAN regional average (Zhang and Guo 2023). In 2013, only 7% of the employed population in Indonesia had a college degree and above, while most workers possessed only a junior high school education. The lack of professional knowledge and skills among Indonesian workers, coupled with a severe shortage of high-level innovation talents, contribute to Indonesia’s limited indigenous innovation capability.

Table 4 Comparison of education levels in selected countries and economies in East Asia (averaged over 2017–2021)

Analyzing the number of researchers per million population, the indicator averages over 5000 in East Asian developed economies, whereas it averages less than 1000 among ASEAN Four. It reflects a significant gap in the quality of higher education and specialized science and technology education between ASEAN Four and developed nations. The education gap is further reflected in per capita labor productivity (Fig. 7). In 2020, Singapore, Hong Kong, and Taiwan (China) had per capita labor productivity above $100,000, whereas among ASEAN Four, except for Malaysia with per capita labor productivity reaching $60,000, Thailand, Indonesia, and the Philippines all had per capita labor productivity below $40,000.

Fig. 7

Labor output per capita in major Asian economies, 2010 and 2020 (USD). Database: Conference Board Total Economy database

According to earlier World Bank research, among the participation of more than 40 countries and regions in the "2003 Studies of Trends in International Mathematics and Science," the four East Asian NIEs ranked highest in mathematics and science scores. In contrast, among Southeast Asian countries, the Philippines ranked among the bottom five, and Indonesia was close to or among the bottom ten in mathematics and science scores. Similarly, in the assessment of international students’ mathematical capabilities conducted by the OECD in 2003, Hong Kong and Korea ranked in the top five among the samples from more than 40 countries and regions, while Indonesia and Thailand ranked in the bottom five (Gill and Kharas 2007). This series of data illustrates that Southeast Asian countries lag far behind international standards in discipline education closely associated with technological innovation.

Database: UNESCO institute for statistics

Failures to transform national education systems rooted in ASEAN Four’s labor-intensive economic structure, which discourages public investments in high-skilled human resources and benefits from intra-regional flows of low-skilled migrant workers from neighboring countries. Malaysia faces the challenge of a disproportionately high percentage of low-skilled foreign workers in the manufacturing sector, with the majority coming from Indonesia. In the 1990s, Malaysia experienced rapid economic growth and domestic labor shortage. Consequently, a large number of foreign workers were brought in. The percentage of foreign workers in Malaysia was around 2% in 1990, but it rose to 21% by 2004 and exceeded 28% in 2008. With short-term contracts and unstable employment status, these foreign workers are considered to contribute little to the improvement of labor productivity. In 2009, the Malaysian government temporarily froze new work permits for foreign workers when their total number was around 2.3 million. The government issued policies trying to reduce the number of foreign workers to 1.5 million by 2015, however, the result was limited and the number of foreign workers in non-skilled sectors remained high. According to a survey by the International Labour Organization, the proportion of immigrant employment in Malaysia's manufacturing sector was 37% in 2009 and remained at 34% in 2014. Low-skilled labor poses a significant constraint to Malaysia's industrial advancement. For instance, local resource-based private enterprises rely on cheap labors to develop niche products, such as production of medical surgical gloves by rubber firms, but lack the skilled human resources to develop high value-added products (Tsunekawa and Todo 2018).

• h. Lack of corporate innovation incentives and deficient intellectual property protection system.

In addition to universities and research institutions, enterprises are essential vehicles for tech innovation. Effective policy incentives and robust intellectual property protection system can enhance a company's innovation capabilities. However, ASEAN Four lack sound policies to incentivize corporate innovation and local intellectual property protection systems remain underdeveloped.

Economies that have successfully undergone industrial transformation, such as Taiwan (China), have developed strong policy coordination and adaptation capabilities that can provide various policy tools to meet the needs of different industrial sectors, industrial clusters, and even individual enterprises. Comparative research on Thailand and Taiwan (China) in the formulation of corporate innovation incentive policies found that Thailand's incentive measures only applied to the narrowly defined R&D activities, whereas Taiwan expanded the scope of incentive measures to cover various types of activities that have a significant impact on the entire innovation process, including a company's business model, internal and external services and solutions, etc. In addition, Taiwan (China)'s government offers generous support to innovative firms, such as assisting them in attracting foreign talents through preferential policies. Unlike Thailand, Taiwan (China) has successfully attracted Taiwanese talents who studied and worked in developed countries to relocate back to Taiwan. From 2009 to 2014, Taiwan’s high-tech research personnel density increased from 311 people per million population to 5200 people per million population (Tsunekawa and Todo 2018).

Institutional factors such as bureaucratic capacity, legal regulations, government-business relations and trust, fair market competition, and the extent of policy support significantly impact a firm's innovation capabilities. The co-evolution of policy tools with corporate innovation capabilities is a crucial aspect of Taiwan's experience in driving technological innovation. Policymakers in Taiwan were able to develop a solid understanding of the technological barriers face by businesses that corresponding policy tools can be initiated and implemented at different stages of enterprise development. When incentive measures do not work for specific types of firms, adjustments can be made to meet ever-changing business demands. Additionally, it takes a considerable amount of time for a firm to improve its innovative capabilities, highlighting the importance of the scale, duration, and continuity of government support innovation programs (Tsunekawa and Todo 2018).

The level of intellectual property protection is another key factor influencing corporate innovation capabilities. A robust IP protection system can significantly increase a firm's R&D investment and productivity (measured by the number of patents received). Research indicates a positive correlation between a country's IP protection strength and its international trade volume and the degree of foreign investment inflow. There is evidence suggesting that the strength of IP protection is an important consideration for multinationals when choosing overseas production locations in developing countries. If the IP protection system is relatively sound, multinationals are more likely to invest directly in local production and research facilities. Moreover, a robust IP protection system has a positive impact on international technology licensing transfers. The cost of developing and enforcing licensing agreements is sensitive to the quality of IP protection, and an effective system can reduce the costs associated with this process (Fink and Maskus 2005). Table 5 demonstrates that there is a noticeable gap in the strength of IP protection between ASEAN Four and East Asian NIEs as well as developed economies. Similar gaps exist in the quality index of research institutions and the index of industry-university-research cooperation.

Table 5 Selected key variables which affect the innovation system and business environment of economies

• i. Nascent regional capital markets provide limited support for high-risk technological R&D and innovation activities.

Relevant studies indicate that a country’s financial structure significantly influences corporate innovative performance. Typically, the return cycle of R&D activities in the field of science and technology is lengthy with high risks associated, requiring a high level of trust and patience from investors. Many innovations fail, but those that succeed yield high returns and are crucial for achieving technological breakthroughs. Instead of financing through bank loans, companies with strong innovation capabilities are more inclined to finance themselves through the securities market, as banks tend to be overly conservative and may prematurely terminate project loans due to an inability to accurately assess the likelihood of innovation success. In contrast, capital markets bring together various investors who have potentially different views on the likelihood of innovation success, allowing companies to find like-minded investors. Furthermore, equity financing can provide more cash flow than public debt and offer more long-term capitals. In such a scenario, companies have more time and autonomy to demonstrate the capability and value of their innovation. Overall, a diverse financial structure can provide funds for a wider range of innovative forms and support sustainable technological progress (Gill and Kharas 2007).

The financial systems of ASEAN Four still grapple with issues of specialization and diversity, which prevents the system from providing long-term funding support to innovative enterprises in conducting high-risk/high-return research activities. For an extended period, the development of capital markets among ASEAN countries has been extremely uneven (Table 6). Singapore has a mature and developed securities market and is a major international financial center in the world. In contrast, although the capital markets of ASEAN Four continue to develop and grow in sizes, various constraints persist such as market fluctuations in the process of financial opening, ineffective regulatory system, and significant development gaps between government bonds and corporate bonds. Due to limited capital market development, it is difficult for firms in these countries to raise funds through direct financing channels such as stocks, corporate bonds and bills. Instead, most firms still rely on indirect financing through bank loans. In terms of bond market structure, except for Singapore and Malaysia, corporate bond market development in Thailand, Indonesia and the Philippines lags far behind government bond market development, exacerbating the imbalanced corporate financing structure (Shen and Zhang 2020).

Table 6 Securities market developments in ASEAN countries in 2018

Credit risk rating is another significant barrier preventing SMEs from accessing capital markets in ASEAN Four. Securities markets in Indonesia and the Philippines face challenges such as high transaction costs and difficulties in accurately pricing risks due to insufficient information. Investors in these countries generally have low risk tolerance that discourages SMEs from effectively entering capital markets. Most local bond issuers that have high credit ratings are quasi-governmental agencies with explicit or implicit guarantees, possessing the highest domestic credit quality. In contrast, local SMEs, with their small scale, low liquidity in bills, and high transaction costs, have been unfairly discriminated in national credit risk rating systems and remain largely excluded from capital market financing channels (Gill and Kharas 2007).

Conclusion and discussion

From the above discussion, we can conclude with sufficient evidence drawn from the cases of ASEAN Four on the correlation between the "middle technology trap" and the "middle income trap," with the former as a crucial factor leading to the latter. While analyzing various dimensions of the "middle technology trap," several prominent features stood out that found similarities among these four countries, including limited technology spillovers from FDI, lack of national-level R&D support and ineffective industrial policies, severe shortage of high-skilled labor, poor intellectual property protection and lagging regional capital market development. In other words, factors such as high-tech FDI, strong R&D program, targeted industrial policies, cultivation of professional talents, etc. represent critical dimensions supporting the advancement of industrial technologies. Failures in developing and cultivating such industrial and social capitals could lead to technological stagnation. Without productivity improvement enabled by tech innovation, a middle-income country is likely to lose the momentum of continuous upward growth.

Considering the weak industrial foundation in these countries, mainstream international academic and policy communities has urged the government to play up its role in designing targeted industrial development strategy and promoting investment in value-added sectors. The World Bank and the IMF once praised the high-speed export-oriented economic growth of ASEAN Four within the decade since the mid-1980s as successful practices of neoliberal economic theory in Southeast Asia. However, the path-dependent export-oriented strategy failed to boost sustained development in industrial chains and indigenous innovation. In general, governments in these countries have failed to formulate clear and practical sci-tech development strategies and supporting policies during the critical period of industrial transformation, not to mention consistent and effective policy implementation. Meanwhile, market entities in these countries often lack the motivation to perform innovative activities due to institutional weaknesses and constraints. Thus, local firms are usually in a weaker position in competition with multinational companies, making it extremely difficult for them to develop high value-added production capacity.

Although the four ASEAN countries present some similar features in the process of falling into the "middle technology trap" and the "middle income trap," we need to recognize that each one has its own trajectory in industrialization. National development strategy, industrial structure, resource endowment, institutional strength, government capacity, and the competency of national leaders differ from one country to another. Countries being trapped at the upper middle-income level, such as Malaysia, and countries being trapped at the lower middle-income level, such as The Philippines, experienced different reasons for growth stagnation (Tran and Karikomi 2019). The latter remain largely within the stage of factor-accumulation growth, faced with various institutional weaknesses such as excessive bureaucracy, overregulation, and vested interests that preserve unproductive state-owned enterprises and distort efficient resources allocation, which eventually lead to national brain and asset drain. In the case of the former, private dynamism is stronger given relatively less institutional barriers, but economic growth has gradually slowed down in the absent of new technological change. At this stage, active R&D and innovation, technology learning, deregulation, value-added investment promotion become especially crucial, where the “middle-technology trap” phenomenon is more imminent. Although it’s hard to distinguish between institutional factors and insufficient support for innovation in actual policy making, growth driven by “given advantages” will get exhausted after a certain period of time without indigenous skills and knowledge development (Ohno 2020). Future research can conduct further analysis on the distinctions of the “middle-technology trap” phenomenon among upper middle-income and lower middle-income countries in Southeast Asia.

Some parallel can be drawn from ASEAN Four’s lessons for China, as the country is facing with the pressing challenges of both the “middle technology trap” and the "middle income trap” dilemma. Since the 1980s, China has experienced 30 years of rapid economic growth driven by an export-oriented model and is now an upper-middle-income country. Similar to these four countries, China benefited tremendously from FDI in bringing capital, technology, and international markets to develop its manufacturing industry and become the “world’s factory.” With effective technology sharing and learning scheme through foreign joint-ventures and industrial policies encouraging indigenous innovation, China has been able to continue advancing its industrial tech capability and strengthen value-added manufacturing capacity. However, channels of international tech cooperation have been cut down due to intensifying US-China tensions and escalating US export controls on high-tech products against China. In fields of cutting-edge technologies, such as AI and semiconductor, China lags behind significantly in high value-added segments, such as original R&D and industrial design. The risk of falling into the “middle technology trap” becomes ever more imminent for China given a deteriorating external environment. Without technological breakthroughs and structural reforms, China will not be able to climb up global value chains and transform its middle-income status.

Learning from the four Southeast Asian countries, China can double down on its effort to promote indigenous innovation from several dimensions. On the national strategic level, China should fully leverage its institutional advantages and mobilize a nationwide effort to coordinate innovation resources and scale up R&D investment. On talent policies, it’s urgent to implement more favorable incentive mechanisms and open immigration schemes to attract and retain high-skilled researchers and engineers amid intensifying global talent competition. In terms of intellectual property protection, China still sees a large number of cases of patent and trademark infringement. Legal protection and regulatory oversight of IPR needs to be strengthened to incentivize corporate innovation. On the financial side, China's venture capital system is currently in a rapid development stage but still requires improvement. To provide sustainable and diversified financial support for enterprises engaged in long-term, high-risk R&D activities, it is crucial to open up risk financing channels for innovative SMEs. China can draw on the experience of developed countries like Singapore that effectively integrates state-owned venture capital with private venture capital, combining the policy advantages of the former with the market advantages of the latter. Meanwhile, encouraging the inflows of foreign venture capital would inject more financial vitality into sci-tech innovation activities. Overall, the lessons of ASEAN Four deliver critical implications to developing countries on promoting technological change and avoiding the “double trap” dilemma.