The Pax Silica challenge is functional upgrading

President Marcos’ 2026 State of the Nation Address (Sona) placed the proposed Pax Silica Industrial Hub at the center of the country’s industrial ambitions.

The president described it as an artificial intelligence (AI) ecosystem that would create quality jobs, strengthen industrial competitiveness, revitalize the economy and position the Philippines as an advanced manufacturing and logistics hub within the global AI value chain.

Criticisms that focus primarily on environmental risks or fears of bloc fragmentation are, in important respects, counterproductive. As a latecomer in technology and industrial development, the Philippines cannot afford an avoidance-based approach to emerging industries. Environmental concerns can be addressed through regulation and compliance, while geopolitical fragmentation, while real, can be strategically navigated. The key challenge is not fragmentation itself, but whether the Philippines can achieve structural transformation within it.

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Participation is not transformation

For a country that has long struggled to industrialize, this membership to a Global Production Network (GPN) deserves serious consideration. The Philippines cannot remain on the sidelines while global production reorganizes around artificial intelligence, semiconductors, advanced manufacturing and digital technologies. Participating in these industries is no longer optional if we hope to remain competitive.

Yet the success of Pax Silica should not be measured solely by the volume of foreign investment or the number of jobs it creates. The more important question is whether these investments strengthen the country’s productive capabilities or simply integrate the Philippines into another low-value stage of global production.

This distinction is often overlooked.

Industrialization has always involved fragmented production. Countries no longer manufacture entire products from beginning to end. Instead, production is divided into specialized tasks distributed across many countries. Pax Silica seeks initially to position the Philippines within this new geography of production, making it an attractive location for AI-enabled manufacturing, logistics, semiconductor activities and related industries.

Transitional upgrading and its limits

Many late-industrializing economies initially experience what may be called transitional upgrading. They enter technologically sophisticated industries and generate higher incomes through new investments, but much of the work performed locally remains concentrated in standardized production, operations, testing, logistics and support activities. The higher value generated by these industries often reflects the ownership of technology, intellectual property, capital and global production networks rather than the nature of work undertaken domestically.

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This stage is a natural point of entry for countries seeking to industrialize. Japan, South Korea, Taiwan, China, Malaysia and Vietnam all began by integrating into fragmented global production systems before developing their own technological capabilities.

But the danger lies not in engaging with foreign interest. The question is in learning to move to a higher stage of production.

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From investment promotion to capability building

The President’s Sona correctly emphasized the importance of joining the global AI economy. But the speech did not explain how the Philippines intends to move beyond participation toward ownership of productive capabilities. It highlighted AI, advanced manufacturing and quality jobs, but did not categorically indicate that these investments must generate and form domestic technology, stronger local suppliers, research partnerships, engineering capabilities, or innovation ecosystems.

That is the difference between transitional and functional upgrading.

Functional upgrading occurs when domestic firms, workers, universities and research institutions progressively undertake higher-value activities such as engineering, product development, systems integration, software, design, research and innovation. On top of hosting advanced industries, the objective is to shape them.

Fiscal incentives should reward firms not only for locating in the Philippines but also for creating measurable domestic capabilities. Companies benefiting from public incentives should be encouraged to develop local supplier networks, collaborate with universities and technical institutions, strengthen micro, small and medium enterprises, support community enterprises, expand research partnerships and gradually transfer technology to Philippine firms. Investment should leave behind knowledge, not merely infrastructure.

This approach is consistent with the broader aspirations of the Tatak Pinoy strategy. Beyond investment, the ultimate objective is to strengthen Philippine productive capabilities so that local enterprises increasingly create, adapt, commercialize and own the technology rather than simply utilize it.

The real economic question

The debate over Pax Silica has largely been framed around geopolitics. Supporters see it as an opportunity to join strategic supply chains, while critics fear environmental risks, foreign dependence, or entanglement in great-power rivalry. While deserving of careful consideration, these issues should not obscure the more fundamental economic question. This is whether the Philippines develops the domestic capabilities needed to benefit from participation in these GPNs.

Pax Silica should, therefore, be judged not simply by the investments it attracts or the factories it builds, but by the productive capabilities it leaves behind. If it strengthens local enterprises, develops Filipino engineers and innovators, deepens supplier networks, and creates institutions capable of generating new technologies, it can become the foundation of long-term industrial transformation.

If not, the country may once again participate in the industries of the future while leaving ownership of that future to others. ** —CONTRIBUTED** INQ

Leonardo Lanzona Jr. is a professor of economics at the Ateneo de Manila University.