SMEs in the Philippines: Going beyond survival

Many Philippine SMEs remain too small, only meagerly augment household incomes, and are unable to take advantage of opportunities brought about by ASEAN integration

Mendoza and Melchor

In ASEAN, small and medium-sized enterprises (SMEs) account for more than 90% of all enterprises, employ 50-99% of the domestic workforce and contribute around 32-77% of total domestic output in their respective countries. In the Philippines, the number of SMEs grew by 66% from 492,510 in 1995 to 816,759 in 2011. Similarly, the numbers of those employed by these firms have grown by 45.7% from 2.7 million in 1995 to 3.9 million in 2011. 

These growth figures mask a wide array of challenges faced by these firms, notably with the onset of economic integration in ASEAN. Many Philippine SMEs remain too small, only meagerly augment household incomes, and are unable to take advantage of opportunities brought about by ASEAN integration. 

Overall, SMEs face numerous constraints to further growth and productivity, including credit constraints, cumbersome registration procedures and strict regulatory environments, and other challenges related to an economic playing field that is not level between large and small firms. SMEs, especially start-ups, have lower probabilities of survival than larger firms, leading to high rates of market entry and exit across nearly all economic sectors. 

To go beyond survival and actually compete, SMEs will need to undergo successful business transformation in various dimensions of their operations—spanning enhanced entrepreneurial skill, innovation in process and product development, more successful collaboration across SMEs and with larger firms, and improved crisis resilience among other factors.

At the forthcoming 52nd Annual Philippine Economic Society Conference to be held on Friday, November 14, the AIM Policy Center and the AIM Dr. Stephen Zuellig Center for Asian Business Transformation, in partnership with the Department of Trade and Industry and De La Salle University will feature three recent studies on SMEs, examining some of the factors affecting their performance and growth, such as entrepreneurial skills and backgrounds, competitiveness in the business environment, and crisis resilience to climatic shocks like typhoon Yolanda. 

Streamlining regulations

In “Toward Competitive and Innovative ASEAN SMEs: Philippine SME Policy Index 2012,” Professor Fernando Aldaba of the Ateneo de Manila and Assistant Secretary Rafaelita Aldaba of the DTI examine the Philippine policy environment for SMEs, compared to its ASEAN neighbors. They attribute a weak performance of SMEs to the large number of barriers prevalent in the country’s business climate, notably limited access to finance, technology and skills; the persistence of information gaps; and difficulties with product quality and marketing. In spite of substantial trade and investment liberalization, penetrating the export market and making SMEs internationally competitive remain persistent challenges. 

The Philippines receives mediocre scores – barely average in ASEAN – on the eight policy dimensions measured by the ASEAN SME Policy Index developed by the Economic Research Institute for ASEAN and East Asia (ERIA). This index spans the key aspects of the policy and business environment for SMEs, spanning institutional framework; cheaper and faster start-up and better legislation and regulation for SMEs; access to information and supporting services; access to finance; technology and technology transfer; international market expansion; promotion of entrepreneurial education; and developing stronger, more effective representation for SMEs’ interests.

Hence, simplified and streamlined registration processes as well as broader governmental support for business start-ups could be further enhanced in the Philippines. 

Supporting women entrepreneurs

In “Meeting the Challenge of Corporate Entrepreneurship: The Entrepreneurial Employee Activities among Micro, Small, and Medium Enterprises in the Philippines,”  Dr. Emilina Sarreal of De La Salle University assesses levels of employee engagement by drawing from the results of the 2013 Global Entrepreneurship Monitor (GEM), an international survey which includes the Philippines and measures Entrepreneurial Employee Activity (EEA). In an examination of the extent of corporate entrepreneurship, or entrepreneurial behavior in established mid-sized and large organizations, this study finds evidence of a shortage in the number of employees taking on leadership roles in the entrepreneurial activities of their respective organizations in the country.

And by evaluating EEA rates according to demographic characteristics, it confirms the potential of SMEs to foster women’s empowerment as they consistently show greater involvement in leadership capacity for both new idea development and the implementation of these ideas across both full-time and part-time categories.

Boosting crisis resilience of SMEs

In a case study of the recovery efforts of a handicrafts enterprise in Eastern Samar, in the wake of Super Typhoon Yolanda in 2013, AIM Policy Center researchers find that limited access to government-issued credit, and the numerous procedures and fees required of firms to secure government aid are among the factors that slowed (and in some cases may have prevented) the recovery of enterprises in the typhoon-hit areas. The paper brought to light how aid efforts of international organizations and non-governmental groups in the form of relief goods and cash-for-work programs could be helpful to households; yet these need to be coordinated throughout the crisis response process and into the recovery period. 

Support, when poorly phased-in, could end up competing with enterprises for inputs such as labor (by bidding up wages, and exacerbating labor shortage), inadvertently delaying the recovery process for SMEs. If this persists, then it could result in dependence rather than resilience. 

Stronger crisis resilience could also be bolstered by holistic support mechanisms that do not just focus on helping households (as important as this is). Support to firms could also be provided in a timely manner, to enhance the recovery of investments, jobs and economic activity that is not aid-driven.

Only when firms get back up into operation could entire communities find their income sources restored. Policymakers and donors must keep this crucial element in mind, when phasing-in their interventions so as not to frustrate the recovery of SMEs. –

Ron Mendoza is an Associate Professor of Economics at AIM, and executive director of the AIM Policy Center. Monica Melchor is an economic research associate at AIM Policy Center. For more details on the PES Conference, please visit this site.