Small business and Asean integration

You’re probably familiar with the 80-20 rule, which says that 80 percent of outcomes can be attributed to (the top) 20 percent of the players. In the Philippine enterprise sector, the interesting numbers are not 80-20 but 68-0.4. That is, 68 percent of our economy’s total output can be attributed just to the largest 0.4 percent of Philippine enterprises, or 3,023 out of a total 777,687 firms counted in 2010. The rest—the 99.6 percent composed of microenterprises (making up 91.6 percent) and small and medium enterprises or SMEs (comprising 8 percent)—account for less than a third (32 percent) of our gross domestic product (GDP).

I recently cited figures from a 2008 study that showed Philippine microenterprises and SMEs contributing a smaller share to GDP than those of our neighbors, with the share reaching up to 57 percent in Indonesia. The same holds for contribution to total jobs: Philippine SMEs account for 61 percent, versus 68 percent in Singapore, 73 percent in Cambodia, 77 percent in Thailand, 81 percent in Laos, and 97 percent in Indonesia. These comparisons show that great scope remains for strengthening the role of SMEs in the Philippine economy, if we could only help them overcome traditional hurdles in access to finance, technology, raw materials and markets.

I have long maintained that widening and strengthening the SME sector is key to overcoming the Philippines’ long-standing lack of inclusive economic growth. The problem is tied to our economy’s persistent struggle with “jobless growth,” clearly reflected in last year’s 7.2-percent GDP growth that came with a meager 0.17-percent growth in jobs. The only way this can change is to have SMEs more prominently propel growth and job creation, not rely primarily on large investments and enterprises especially of the capital-intensive kind. It stands to reason that where workers are in abundance and capital is limited, we must strive to generate employment where it costs less to create a job—and that is in the SME sector. The onset of the Asean Economic Community (AEC) makes the task even more challenging, as SMEs must find proper positioning in a more closely integrated regional economy, with all its peculiar opportunities and challenges.

The foremost and seemingly intractable challenge is in providing financing for our SMEs. Bank financing is estimated to account for only 11 to 21 percent of capital raised by Philippine SMEs, much lower than the 30-percent international benchmark seen in other developing countries like Thailand and India. The SME Policy Index recently developed by the Economic Research Institute for Asean and East Asia rated the Philippines lowest among the original Asean-5 in terms of SMEs’ access to finance. The index considers factors such as collateral and provisioning requirements, credit guarantee schemes, credit bureau/registries, availability of risk capital (including venture capital, private equity funds and “business angels”), and access to the stock market. There is much to learn just by looking at what our neighbors have done on SME finance.

But enabling SMEs to take on the opportunities and challenges of AEC is not a task for government alone. SMEs have to do their homework too. Basic to this is putting their business planning and management and financial record-keeping in order. It’s a common lament that banks do not lend enough to SMEs despite a great abundance of loanable funds in the system. But one can’t fault the banks when small firms that seek their loans are unable to demonstrate a minimum of responsible business and financial management. Targeted capacity-building in these areas for SMEs would be a worthy service that government (especially local governments) and nongovernment organizations (including banks themselves) could provide, as direct contribution to inclusive growth. I’d also like to see organizations of bookkeepers and accountants provide time-bound, free or discounted accounting services to struggling SMEs as a public service, which could after all turn into sustained business relationships later.

More stable SMEs ready to expand their horizons would do well to invest time and effort to study the particular documentary procedures and requirements for taking advantage of trade and investment concessions under the AEC. The Department of Trade and Industry conducts seminars on these all around the country through their Doing Business in Free Trade Areas program, targeting particularly the SMEs. These have already helped boost the level of utilization and availment by Philippine firms of trading privileges under our various free trade agreements, including the AEC.

SMEs also need to be prepared to cluster together, team up and unite, as no single small firm can meet the volume orders that inevitably come from export buyers. A businessman friend once shared with me his experience when he secured a sizable order for his product from overseas; the order was too large for him to fill all by himself. So he invited his known competitors to team up with him to collectively meet the large order. To his utter frustration, no one was willing to do so, all preferring to go it alone. He lost the order, and with it, the opportunity of establishing a foothold in the export market. This seeming propensity for individualism is incompatible with the wealth of export opportunities that the much larger Asean market would present, and is something our SMEs must learn to overcome if they are to reap the benefits of the AEC.

The AEC, after all, was never meant to benefit only the big guys.

* * *

E-mail: [email protected]