Small firms and manifold challenges

SMALL FIRMS—spanning micro, small and medium enterprises or MSMEs—comprise more than 99 percent of all firms in the Philippines, and provide 61 percent of the country’s total jobs. They contribute much more to job creation in Indonesia (92 percent), Korea (87), Thailand (84), Taiwan (78), Vietnam (77), China (75), Singapore (70), and Japan (66). Of total economic production, measured by GDP, our small firms account for an estimated 36 percent. This is smaller than in Thailand, Vietnam, Singapore, Indonesia, Korea, United States, China and Japan (whose MSME shares go as high as 59 percent), although larger than in Malaysia, Brunei and Taiwan.

There is great scope for raising the role of small enterprise in the Philippine economy. I have constantly argued that this is the key to making the country’s economic growth benefit the wider masses of Filipinos more directly, rather than rely on growth driven by large firms to “trickle down” to the bottom. Indeed, why should anyone settle for a mere trickle? What we have always needed, but which has remained elusive, is growth that has much broader direct participation in both the sectoral and geographic sense.

As it is, our economy’s growth in recent decades has been largely propelled by services. A scan of the statistics over time readily shows that our consistent growth leaders have been financial services (banking and insurance), real estate and business services, especially business process outsourcing. By no coincidence, our top billionaires derive the bulk of their wealth from these, and less from manufacturing, and hardly from agriculture. All this explains why accelerating economic growth over the past decade has left the poor behind, as poverty incidence actually rose from 24.9 percent in 2003 to 26.5 percent in 2009.

This experience was in complete contradiction to the experience in Asia, where the Asian Development Bank found poverty incidence to have fallen by an average of 2 percent for every 1 percent rise in GDP. Asia has in fact been more successful in translating economic growth into poverty reduction than the rest of the world, where poverty fell by an average of only 1.5 percent for every 1 percent of GDP growth. The Philippine experience has not only been inferior; it is perverse, with poverty moving in the wrong direction! And this is because the economy’s growth has largely excluded the 25 million-plus poor Filipinos that continue to be in our midst to this day.

Everyone agrees that achieving inclusive growth is all about creating more jobs. The World Bank, in its most recent reports and prescriptions for the country, focuses on the need to foster an enabling environment for widespread creation of jobs. The problem is, not enough of these jobs have been forthcoming from large enterprises because various impediments to greater investment persist, not the least of which are the constitutional restrictions on foreign investments. There are also the traditional ones like inferior infrastructure and unstable rules and policies. Smaller enterprises ought to be filling in our jobs gap, especially because the cost of creating a job in the small enterprise sector is much smaller than that in the large enterprise sector. But as the figures cited above show, not enough of those jobs are coming from this direction.

There are several reasons why. Small businesses are typically starved of financing, and this has been more particularly so in the Philippines, where the big banks have traditionally preferred to deal with a few large clients than a large number of small ones. Small firms are also ill-equipped to keep up with improving technology, as in-house research and development, which large firms routinely provide resources for, is out of reach for a small business. I have witnessed how various tax and regulatory measures, including voluminous documentary requirements, have discouraged many a small entrepreneur from pursuing further business growth or, worse, led them to abandon it altogether. Small firms’ access to markets as well as to their inputs is hampered by infrastructure inadequacies, now exemplified daily by traffic congestion and slow Internet speeds.

Small firms’ access to inputs is also hampered by cumbersome trade regulations that make externally sourcing them unattractive, even when such inputs are in limited supplies locally, or much cheaper abroad. The Bureau of Customs released in the past year a comprehensive inventory of all clearances, licenses and permits required by some 50 government agencies before one can import certain products. It turns out that there are more than 7,000 of such regulated products, many of which are subject to multiple clearances that either duplicate or overlap, while some regulations have long outlived their purpose, and are therefore unnecessary.

We will also need our small firms to band together through various forms of clustering, if they are to be better integrated into international trade. Export orders invariably involve large volumes that no single small enterprise can readily meet. But our entrepreneurs need to be helped in shedding the “kanya-kanya” (individualistic) mind-set to tap the opportunities of international trade.

The challenges of small business in this country are manifold and daunting, and it will take nothing less than a well-orchestrated effort to unleash the great potential of MSMEs to participate more in our economy’s growth, and spread benefits therefrom much more widely. Sadly, government efforts on this remain largely fragmented and leaderless—and we will need to fix this. But this will have to be the subject of another article.

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cielito.habito@gmail.com