Opinion Editorial by Mahirah Mahusin and Hilmy Prilliadi

ERIA Digital Innovation and Sustainable Economy Centre (E-DISC)

Private sector investment in knowledge-based capital (KBC[1]) is a key driver of innovation. In turn, this leads to improvements in total factor productivity (TFP) and economic growth which fosters technological advancements, efficiency improvements, emergence of new businesses, and TFP growth in various contries, including for the US and the EU (Di Ubaldo & Siedschlag, 2021). This global trend towards prioritising KBC investment correlates to the rapid development of Artificial Intelligence (AI) as a catalyst to enhance competitiveness and drive sustainable economic growth across ASEAN.

The AI market in ASEAN is forecasted to achieve significant growth, with projections indicating that the size will escalate to US$10.05 billion by 2024. Following this trajectory, it is anticipated that the market will exhibit a robust annual growth rate of 17.83% from 2024 to 2030, culminating in a substantial market volume of US$26.89 billion by the end of the latter year (Statista, 2023). Young and technology-savvy population makes ASEAN well-positioned not just in utilising AI, but also driving AI-based innovation in transforming the future of the region. A growing number of promising startups are developing and deploying innovative solutions across ASEAN, such as in improving food supply chain infrastructure (Zolo, Seafoody, and eFishery), and improve weather forecasting (Atmo), to name a few, subsequently speeding up progress towards achieving sustainable development goals.

AI integration provides competitive advantages by enhancing productivity and operational efficiency. However, realising AI potential necessitates sharper business cases, robust data ecosystems, concerted talent development, and sometimes incurs high integration costs (Kearney, 2020). AI platforms software is expected to grow substantially in the ASEAN region, increasing from US$174 million in 2022 to US$646 million by 2026. Banking, financial services, and insurance industry leads AI investment, constituting 26.6% of the overall expenditure, followed by manufacturing at 17%. Despite advancements, only 8% of regional organisations view AI as a competitiveness component (Sharma & Giri, 2023). Cloud computing sector is encouraged to invest in AI, yet the state of AI infrastructure in the region still lags behind, with limited access to advanced hardware due to high costs (Isono & Prilliadi, 2023).

Challenges in AI Adoption and Development

Challenges in AI adoption mirror challenges in digital adoption among private sector in general – many firms remain hesitant, highlighting the lack of skills and knowledge, with many struggling to acquire the expertise needed to implement and manage AI systems effectively. As Figure 1 shows, AI adoption by startups in several countries in the region remains in early stages. Consequently, 80% of founders have yet to increase their workforce in response to AI technologies, suggesting that the impact on hiring is still being assessed. Startup founders who utilise AI prioritise them to automate repetitive and administrative tasks across various functions, as illustrated in Figure 2.

source: Monk's Hill Ventures & Glints (2024).

Integrating AI into core business operations is further complicated by a myriad of challenges. Infrastructure deficiencies, uncertain policy and regulatory environment, and addressing data governance and privacy issues all add another layer of complexity for firms to navigate particularly for MSMEs. High barriers for AI adoption can potentially exacerbate the existing digital divide between MSMEs and larger firms, with an added risk of falling behind competitors whohave already adopted AI in their business model and operations.

Key Considerations and Recommendations

Firms looking to adopt and develop AI into their core business operations have several considerations to make. First and foremost, firms should consider whether such move aligns with respective corporate strategy and objectives, ensuring that the AI strategy harmonises with broader business objectives and support expansion. Additionally, attention to commercial strategy is indispensable, such as whether AI implementation is cost-effective and can lead to potential revenue generation in the long run. It is also crucial to develop a strong data strategy, given the heightened risks associated with AI, with responsible AI development and deployment to be addressed throughout the AI life cycle.

The following steps may be considered by private sector for a vibrant AI ecosystem in ASEAN:

• Align AI strategy with business objectives and invest in KBC. Ensuring that AI initiatives are in direct alignment with company’s goals and strategy can contribute to enhanced efficiency and growth. Investing in KBC, including R&D, IP assets, computer software, and skills development fuels AI adoption that fosters innovation and the development of AI solutions tailored to the company's needs. This dual approach ensures that AI not only aligns with current strategic goals but also propels the company towards future readiness and competitive advantage. To mitigate AI adoption costs, opt for scalable solutions.

• Develop a comprehensive and ethical data strategy. Formulate clear guidelines for data management, ensuring quality, accessibility, and governance for effective AI use. Incorporate ethical considerations and regulatory compliance, including data privacy and security, as well as considerations for employee well-being to foster trust and mitigate unintended risks. Utilising the ASEAN Guide on AI Governance and Ethics aids in responsibly navigating AI deployment and governance.
• Improve in-house AI awareness, literacy, and skills training, and collaborate with universities to address AI talent shortages. Investing in AI training and promoting a companywide culture of innovation can maximise AI's potential across all business aspects. University partnerships offer mutual benefits: universities gain real-world applications, while companies access cutting-edge research, skilled talent, and innovative ideas. This collaboration enhances the company's competitive edge and prepares it for AI technology.
• Embrace Cross-Border Hiring for Talent Acquisition. As demand for tech talent rises and cost-saving measures grow, exploring cross-border hiring is prudent. Consider recruiting local business development talent to support regional expansion and deepen market insights. By adopting crossborder hiring practices, companies can build highquality teams and tap into local expertise for effective localisation and market understanding.

The ASEAN Guide on AI Governance and Ethics (ASEAN AI Guide) released on 2 February 2024 serves as a practical resource for organisations seeking to implement AI technologies in commercial contexts within the region. Its objectives include promoting alignment within ASEAN and enhancing the interoperability of AI frameworks across ASEAN. Organisations are encouraged to utilise the guide to evaluate AI-related risks comprehensively and to adopt responsible approaches to the design, development, and deployment of AI technologies. The ASEAN AI Guide set out seven guiding principles which aim to ensure trust in AI, i.e. 1) Transparency and Explainability; 2) Fairness and Equity; 3) Security and Safety; 4) Human-centricity; 5) Privacy and Data governance; 6) Accountability and Integrity; and 7) Robustness and Reliability.

The ASEAN AI Guide offers guidance for organizations to adopt responsible AI practices across sectors. It emphasizes determining the appropriate level of human involvement in AI-augmented decision-making through risk impact assessments to promote trust in AI technologies. Additionally, it advocates for risk-based assessments before data activities to mitigate bias risks and emphasizes stakeholder communication to build trust throughout the AI lifecycle, including disclosing AI usage and supporting employee adaptation to AIaugmented work environments (ASEAN Secretariat, 2024).

Conclusion

In parallel to the trends of AI adoption in private sector, the transformative potential and wide-ranging application of AI and deep-tech is also unlocking new growth opportunities in the region. Recognising this positive development and innovative potential, the ERIA Digital Innovation and Sustainable Economy (E-DISC) is committed to support the growth and competitiveness of ASEAN startups. The One ASEAN Startup Award 2024 organised by ERIA this year aims to provide recognition for ambitious startups including those that are focusing on AI-led innovation, with research grants provided to assist them in developing innovative solutions further. It is hoped that region-wide efforts to support AI innovation and adoptions will foster open innovation not just within ASEAN, but also beyond.

This opinion piece was written by Mahirah Mahusin, Manager for Digital Innovation and Sustainable Economy, and Hilmy Prilliadi, Research Associate, and has been published in ASEAN for Business Bulletin (March 2024). Click here to subscribe to our monthly newsletter.

Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the Economic Research Institute for ASEAN and East Asia.