REVISITING THE SMEs IN THE PHILIPPINES: CHALLENGES AND ISSUES

Edna D. Samar, Ph. D.

The MSMEs have become the backbone of Philippine economy contributing to employment and
generating output for the economy. Threats of an unfavorable global environment create an
atmosphere of high risk and doubt in a borderless economy with high competition as inevitable. With
overall fiscal condition looming because of global financial breakdown, the challenges and issues are
numerous for the MSMEs. Foremost, MSME statistics would be vital to plan out, allocate resources,
and provide capability building, among others. .Also, stakeholders should bind themselves together to
minimize adverse impacts of changing climate and natural hazards, including economic barriers.
Creative solutions and technopreunership are some of the challenges of the time.

INTRODUCTION

Small and medium enterprises (SMEs) have gained increasing recognition in national and
international discussions. In the Philippines, its importance paved the way for the passage to
two major laws that govern the promotion of SMEs: Republic Act (RA) 6977, or the Magna
Carta for Small Enterprises, as amended by RA 8289, and RA 9178, better known as the
Barangay Micro Business Enterprises (BMBEs) Act of 2002.

RA 6977 mandates the government to help SMEs by creating a conducive business

environment; improving access to financing: providing adequate business support;
providing training on entrepreneurship and worker skills; providing linkages between
SMEs and large firms; and strengthening government-private sector partnership in SME
development. RA 9178, on the other hand, encourages the formation and growth of BMBEs,
or those with assets size of less than PHP 3 million, by granting them fiscal and non-fiscal
incentives and other benefits.

The crucial role in the growth of the Philippine economy is discussed by Leano (2006).
Accordingly, the Philippine government has embarked upon a comprehensive and
integrated strategy for the sustainable growth and development of SMEs in the country. The
Philippine strategy encompasses all critical factors - technology, product development,
finance, training, and marketing, among others (Figure 1).

1
 Figure 1. SME Agenda: An Integrated approach (Leano, 2006)

Admittedly from the Bureau of Small and Medium Enterprise Development of the
Department of Trade and Industry, the Philippine government has consistently extended
support to SMEs by creating an enabling environment for them to realize their full potential
in the blueprint for national development.

The importance of micro enterprises in the Philippine economy cannot be understated. The
role of micro enterprises vis-a-vis the SMEs is discussed in this paper to constitute the
MSMEs. This paper presents the MSMEs in the Philippines in the light of the most recent
available data. Also, the paper presents the challenges and issues faced by them on account
of emerging environmental issues.

THE PHILIPPINE MSMEs

Micro, Small and Medium Enterprises Defined

Philippine businesses are categorized by asset size and by number of employees. The micro,
small, and medium enterprises (MSMEs) refers to any business activity/enterprise engaged
in industry, agri-business/services, whether single proprietorship, cooperative, partnership,
or corporation whose total assets, inclusive of those arising from loans but exclusive of the
land on which the particular business entity's office, plant and equipment are situated, must
have value falling under the following categories:

1. By asset size:
Micro: Up to PhP3,000,000 (about US$60,000)
Small: PhP3,000,001 - PhP15,000,000
Medium: PhP15,000,001 - PhP100,000,000
Large: above PhP100,000,000 (>US$2,000,000)

2
 2. By number of employees:
Micro: 1 - 9 employees
Small: 10 -- 99 employees
Medium: 100 -- 199 employees
Large: More than 200 employees

Role of MSMEs

The important economic role of MSMEs is well recognized in the country as embodied in the
following documents:

a. Medium Term Philippine Development Plan (MTPDP) 2004-2010

b. SME Development Plan 2004-2010

In the MTPDP, it is the policy of the state to promote entrepreneurship and SME
development. Specifically, the SME Development Plan presents the integrated efforts to
strengthen and stimulate the SME sector so it can contribute significantly to the country’s
development. The Plan aims to make the SME sector a key factor in the country’s economic
growth by 2010.

On the other hand, the Philippine Business Agenda 21(BA 21): Business Strategies for
Sustainable Development directs the businesses towards the important role of SMES
towards environmental sustainability. The BA 21 is the blue print for the private sector
participation in managing the environment referred as PRIME in this document where 73
industry associations participated in the shaping of BA 21.

The above documents point to the major role of MSMEs in the country's economic
development through their contributions in the following areas:
a. rural industrialization
b. rural development and decentralization of industries
c. creation of employment opportunities
d. use of indigenous resources
e. earning of foreign exchange (forex) resources
f. creation of backward and forward linkages with existing industries, and
g. entrepreneurial development.

MSMEs are vital in dispersing new industries to the countryside and providing gainful
employment. With the abundance of labor in the Philippines, much is to gain from
entrepreneurial activities particularly those that are labor-intensive. Thus, the MSMEs
generate jobs in the locality of operation that extends to the immediate environs, as the case
may be. Thus, MSMEs bring about a more balanced economic growth and equity in income
distribution.

MSMEs contribute in setting new design trends, developing contemporary products, and
bringing them to the marketplace ahead of the competition. They become channels for
innovation to develop indigenous or appropriate technology, which may be developed into
pioneering technological breakthroughs.

The MSMEs are agents for effective increase of the value added in final goods that are
processed and marketed by large manufacturing firms.

3
MSMEs promote maximization in the use of scarce capital resources and are able to partner
with large firms by supplying locally available raw materials in unprocessed or semi-
processed forms.

Also, MSMEs can act as the seedbed for the development of entrepreneurial skills and
innovation. They contribute in the provision of services to the community. Collectively, they
can make an important contribution to regional development programs.

Economic Contributions

From the 2006 census, the Philippines has a 783,066 establishments spread across the
archipelago. Figure 2 provides the percentage distribution of establishments by size of
establishments. Notably, the micro enterprises made up 92 percent with SME consisting of
about 8 percent while the large enterprises, 0.3 percent only. Although very small in terms of
asset size and employment, the micro-enterprises are too numerous to ignore.

Figure 2. Distribution of establishments by size of

Medium firm, Philippines, 2006
2,839 Large
1% 2,596
0%
Small
57,439
7%

Micro
720,191
92%

The employment generation from all enterprises reached 4,984,883. Of which, MSMEs
generated a total of 3,327,855 jobs representing 67 percent of the total employment
generation (Figure 3). Among them, the micro enterprises had employed 33 percent
comparable to the employment generation of large industries. In particular the SME had an
employment share of 34 percent.

Together with the huge number of micro enterprises throughout the nation, the small and
medium businesses also produced a third of the country’s economic output and accounted
for a fourth of all export revenues in 2006 so that the MSME sector is referred as the
backbone of the economy (Gulle, 2009).

4
 Figure 3. Employment share by size of establishments,
Philippines, 2006

Large Micro
33% 33%

Medium
Small
8%
26%

Sectoral Employment

The distribution of establishments by size of firm and by industry classification is provided

in Table 1. On the other hand, the sectoral contribution of MSMEs to employment generation
is shown in Figure 4. The following are the Philippine Standard Industry Classification
(PSIC) by sector:

A – Agriculture, hunting and forestry

B - Fishery
C – Mining and quarrying
D - Manufacturing
E – Electricity, gas and water
F - Construction
G – Wholesale and retail trade
H – Hotels and restaurants
I – Transport, storage and communications
J – Financial intermediation
K – Real estate, renting and business activities
M – Education
N – Health and social work
O - Other commodity, social and personal service activities

5
Table 1. Distribution of Establishments by firm size and by industry, Philippines, 2006

PSIC Size of Establishments

Micro Small Medium Large Total MSME %

A 2,631 1,322 125 121 4,199 4,078 0.5

B 890 499 30 28 1,447 1,419 0.2

C 217 82 5 15 319 304 0.0

D 105,083 10,274 1,004 985 117,346 116,361 14.9

E 558 630 106 104 1,399 1,294 0.2

F 1,352 979 84 73 2,488 2,415 0.3

G 373,721 17,110 384 233 391,448 391,215 50.1

H 90,121 7,677 128 49 97,975 97,926 12.5

I 7,035 2,133 123 114 9,405 9,291 1.2

J 18,679 4,434 90 109 23,312 23,203 3.0

K 40,936 3,985 372 429 45,722 45,293 5.8

M 6,699 4,712 240 206 11,857 11,651 1.5

N 29,996 1,266 98 83 31,443 31,360 4.0

O 42,272 2,336 50 47 44,705 44,658 5.7

TOTAL 720,191 57,439 2,839 2,596 783,065 780,469 100.0

Source of basic data: NSO

Figure 4. Employment by size of firm and by sector, Philippines, 2006

1,400,000

1,200,000
Number of employees

1,000,000
Micro
800,000
Large
600,000
MSME
400,000

200,000

-
6
A B C D E F G H I J K M N O
Industry
Table 2. Average employment generation by sector of By industry sector, MSMEs that
MSME, Philippines, 2006 generated the most number of jobs are the wholesale
and retail trade (G- 1,181,525) followed by
PSIC Size of Establishment MSMEs in manufacturing ( D- 644,927), hotels
ALL MSME Large and restaurants (H- 427,153), real estate,
A 34 15 691 renting and business activities (K-242,122)
B 21 12 498 and education (M-180,265). The substantial
C 47 12 755 contribution to employment by the micro
D 12 6 739 enterprises is noted in the wholesale and
E 60 28 452 retailing sector and in the hotel and restaurant
F 38 18 707 businesses. On the other hand, a substantial
G 3 3 438 contribution by the large enterprises is noted
H 5 4 441 in the manufacturing sector, real state, renting
I 20 10 809
and business activities and in the agriculture,
hunting and forestry.
J 11 7 895
K 11 5 586
The average employment generation by sector
M 23 15 437
of the MSME, relative to the large enterprises
N 4 3 486
and to all industries is shown in Table 2.
O 4 3 563 Because of the numerous numbers of micro
enterprises, their collective contribution to
TOTAL 6 4 638 employment almost equals the large
enterprises.

Source of basic data: NSO

Rural industrialization

Across the archipelago, the distribution of establishments is depicted in Figure 5. By island

group, 68 percent of the MSMEs are located in Luzon, 14 percent in Visayas and 18 percent
in Mindanao. Regardless of the size of the establishment, micro, small, medium and large
enterprises are concentrated in the metropolitan areas and the adjoining environs. In Figure
5, MSMEs representing 25 percent were located in the National Capital Region. Adjoining
the NCR is the Calabarzon (Region IV-A) and Central Luzon (Region III) with 15 and 11
percent of the MSMEs, respectively. The remaining MSMEs representing 18 percent are
spatially distributed in the rest of Luzon Island (northern side and southern part).

MSMEs located in the Visayas regions (Western, Central and Eastern) constituted 15 percent
and Mindanao with its vast natural resources had 18 percent.

Value adding Contribution

The sector that contributes most to value adding activities is the manufacturing sector. This
sector which constitutes 15 percent of MSMEs provides about 19 percent of the MSME
employment generation. The top five (5) sub-industries in the manufacturing sector in terms
of MSME establishments in 2006 are: (1) manufacture of food products and beverages with
55,007 establishments; (2) manufacture of wearing apparel with 15,623; (3) manufacture of
fabricated metal products except machinery and equipment with 12,986; (4) manufacture
and repair of furniture with 7,188; and (5) manufacture of other non-metallic mineral
products with 5,143. These sub-industries accounted for 82% of the total number of MSMEs
in the manufacturing sector.

7
Figure 5. Geographical distribution
of MSMEs by region and island - 50,000 100,000 150,000 200,000
group, Philippines, 2006
CAR
Ilocos Region
Cagayan Valley
Central Luzon
National Capital Region
THE PHILIPPINES Calabarzon
MIMAROPA
Bicol region
Western Visayas
Luzon
Central Visayas
68% Eastern Visayas
Zamboanga Peninzula
Northern Mindanao
Davao Region
NCR SOCCSKSARGEN
25% ARMM
CARAGA

Total MSME

Visayas
14% Source of basic data: NSO

Mindanao
18%

The Institutional Environment to MSMEs Development

The Philippine administration has given outmost policy attention to MSME development
and hopes that through new and better development initiatives, Philippine economy can
move forward despite the threats of an unfavorable global environment.

The comprehensive and integrated strategy for the sustainable growth and development of
SMEs in the country is reflected in the consolidated groupings of the various government
institutions that provide support to MSMEs in terms of five thematic areas: technology/
production, marketing, training, regulation/ incentives and institutional development, as
contained in the 2009 edition of Programs and Services for MSMEs as published by the
Bureau of Micro, Small and Medium Enterprise Development. The number of agencies by
type of assistance is enumerated below (Figure 6).

8
 Figure 6. Institutional support to MSME development

Department of Trade Micro, Small and

and Industry Medium Enterprise
Development
Bureau of Micro,
Council
Small and Medium
Number of agencies Enterprise
by type of assistance Development
to MSME MSME support organizations

Production/
technology - 27 Business Assistance centers
Camber of commerce
Marketing - 9 DTI Regional & provincial offices
Micro
Small Economic zones
Training - 8 Foreign Trade Services Corps
Medium Government Financing Institutions
Regulation/ Enterprises Trade associations
incentives - 14
Institutional
development - 11

The DTI is the key agency of the Philippine Government charged with creating a business
friendly environment conducive to the growth of enterprises and supportive of fair and
robust trade in goods and services, both within and outside the Philippines. The Regional
Operations and Development Group of DTI is the implementing arm that foster
countrywide development through various programs and services in the areas of business
development and consumer welfare. It operates in 16 regions and 79 provinces nationwide
which serves as DTI front liners in providing assistance to investors, exporters, micro, small
and medium-scale entrepreneurs (MSME) businessmen in general and consumers.

Attached to the DTI is the Micro, Small and Medium Enterprise Development (MSMED)
Council, an inter-agency body established in 1991. It is responsible to promotion, growth
and development of MSMEs in the country by facilitating and closely coordinating national
efforts in MSME development. The Bureau of Micro, Small and Medium Enterprise
Development (BMSMED) of the DTI serve as Council Secretariat. Among others, it
recommends all policy matters affecting MSMEs, and formulates a six-year MSMED plan in
consultation with the private sector to be integrated into the Medium Term Philippine
Development Plan.

Programs and Services for MSMEs

The MSMEs programs are: business development and the one town one product (OTOP)
program.

On Business Development Program, the services include:

 Business Information – provides accessible, relevant and timely MSME information
(e.g. cost of doing business, industry profiles, market profiles, MSME profiles,
supplier profiles/ directories, number of business name registration/ repair shop
accreditation/ business license issued)

9
 Tradeline Philippines – It is an online database service that provides product
search listing thousands of manufactured exported Philippine products
complete with product specifications and is a business search allowing users
to contact Philippine exporters, suppliers and local/foreign buyer details and
the products/services they manufacture / provide and export

Exponet - The Bureau of Export and Trade Promotion's (BETP) Export

Assistance Network (EXPONET) helps exporters and prospective exporters’
access information and resolve specific problems related to exporting. It
provides information on export seminar schedules, export organizing, export
procedures and documentation, import facilities for exporters, buyer
linkages, export financing and incentives, product raw material sourcing and
other statistical information. The agency also assists exporters in export-
related problems / trade complaints.

 MSME Development and Promotion – strengthens support to MSME through

operation of SME Centers and support to MSMED Council; conducts information
technology-related seminars for MSMEs.
 Business Name Registration – reduces processing time of business name registration.
For NCR, the processing time is 24 hours. For other areas, processing time for online
application is 3 days and 5 days for those provinces not online.

The One town One product (OTOP) programme enhances and stimulates domestic demand
through SME development on a countrywide basis. The program aims to promote
entrepreneurship and create jobs. The OTOP-Philippines encourages the country’s MSME to
produce and market distinct products or services using indigenous raw materials and
manpower.

Financing programs for MSMEs - To increase the Filipino entrepreneur’s awareness on

sources of funding available from government and private sectors institutions for his
business and encourage him to access these facilities, the BMSMD came out with a
handbook on Financing Programs for MSMEs. The implementation of micro-financing and
SME lending programs by various institutions is recognized as an essential tool in
stimulating entrepreneurial activities.

CHALLENGES AND ISSUES ON PHILIPPINE MSMES

MSME statistics

Lagua (undated) provided a critical evaluation of the deficiencies in the present system of
MSME statistics, as follows:

1. Timeliness

Statistics on the census of establishments (done every 5 years) and the annual survey
of establishments are usually released 15-24 months after the year. This makes the
data more or less an imprecise tool for analysis and decision-making.

10
 In the same manner, BSP collects information on the loans lent to MSMEs (in
compliance with the Magna Carta for Small and Medium Enterprise) every quarter.
The data gathered is usually released only after 3 months.

2. Cross compatibility with other countries for cross country comparisons

The major classification used by most countries to define SMEs is through assets and
employment size. However, the size ranges of their classification differ, since
developed countries have large industries than the less developed ones.

Hence, what might be considered as “small” by developed countries will already fall
into the “medium” or “large” category for developing countries like the Philippines.
Thus, cross compatibility with other countries for cross country comparison, is
sometimes inappropriate or could not be used as basis for a policy recommendation.

3. Inadequateness

The scope and coverage of SME statistics are limited to a) the number of
establishments, b) employment contribution, and c) regional distribution. More
important data which will help policy makers and businesses to react quickly in a
competitive environment are usually not available.

4. Coverage

The Philippines has a large section of small business constituting the so-called
underground or informal economy. This refers to the small scale units in the national
economy, which produce and distribute goods and services without the benefit of
official sanction or control.

They don't register, don't keep books and don't pay taxes. They operate beyond the
reach of the law. They have little or no access to organized markets, credit
institutions, educational or training centers or public services. Although efforts are
being made by the government to bring the underground economy to the surface,
the nature of this sector makes it very difficult to gather and process statistics on
them.

Financial risks for startup business

In the United States, two out of 10 startups succeed over five year period (Santos, 2009).
With the global financial slowdown, banks and financial institutions are becoming
extremely careful to give loans to businesses with little or no track record, insufficient
collateral or a murky long-term plan.

The government makes sure that banks make funds available to small business owners even
without collateral (Santos, 2009). Nonetheless, the reality is that the world can be very
indifferent to startup ventures so that preference goes for short term and quick processing
offered by private intermediaries even at relatively higher interests.

11
The challenge is for the government-owned Small Business Corporation to steer away from
being a collateral-based lending agent. It encourages risk-based lending in the country
through the use of risk assessment tools developed by the Asian Development Bank.

Environmental compliance of business operations

While the BA 21 provides the guide for MSME to adopt appropriate waste disposal and a lot
of environmental measures, compliance remains an issue. Improper waste disposal have
caused pollution of water ways and has clogged many small water bodies. The Philippines
is one of the countries known for having degraded water bodies particularly in Luzon,
example of which is the Meycauyan River that releases foul odor.

The plastics and packaging industries have the social responsibilities towards creative
solutions of promoting environment friendly/ organics/ degradable products and
transforming solid waste into useful products.

Creative solutions towards social enterprises remain a challenge to minimize wastes and to
utilize indigenous materials. Building of more sustainable, cost-efficient and catastropic-
resistant structures is a challenge to the architectural and construction enterprises (Francisco,
2009). A serial social entrepreneur helps save environment one structure at a time.

Technopreneurship

More than services, animation biz puts premium on content and clever marketing spells
difference for web-based load service to reach a wider market (Cartalaba, 2009; Santos, 2009;
and Medina, 2009). On line advertising while in the infancy stage is increasingly becoming
popular. Most advertisers still invest most of their money in traditional media but with more
Filipinos going online, the advertising picture is about to change. The use of ICT in selling
and advertising is a challenge to existing and new entrepreneurs.

Business/ Trade Partnerships

The BMSMED had compiled a directory of trade associations in the Philippines. A 141 trade
associations were identified grouped as follows:
1. Agricultural products – 10
2. Automotive parts and accessories – 6
3. Chemical and chemical products – 3
4. Construction – 4
5. Fashion accessories – 9
6. Franchise – 2
7. Fresh and processed food – 25
8. Furniture and furnishings – 9
9. Garments, textiles and similar products – 5
10. Gifts, toys and housewares – 9
11. Hotel and restaurants – 2
12. IT, electronics and electrical products – 13
13. Metal products – 9
14. Non-metal – 2
15. Packaging – 1
16. Paper products – 2
17. Petroleum – 2

12
 18. Pharmaceuticals – 2
19. Resource based – 3
20. Retail – 5
21. Services - 18
22. Others - 12

Partnership or forming into trade associations has a number of advantages for the member
MSME. Resources sharing would bring about cost efficiency for the business. Also,
competition can be minimized. Micro enterprises would benefit more from joining trade
associations.

MSMEs Vulnerability to changing climate and other natural hazards

The Philippine experiences of recent typhoons Ondoy and Peping that struck the country
brought about heavy downpour that resulted to flooding in Metro Manila, Central and
Northern Luzon. These have not spared many MSMEs. The extent of total damages is yet
unofficial on account of extensive damages to lives and properties including businesses.
Certainly many micro enterprises would need rehabilitation. Business insurance plays a
vital role in cushioning negative impacts of changing climate and natural hazards.

Risks and vulnerability mapping for MSMEs might be difficult to undertake considering the
wide coverage of businesses. Nonetheless, grouping them according to resources
requirement, market orientation, target group are among the possibilities.

Changing climate due to sea level rise would affect water-based industries and those located
along the coast. Similarly, agri-based businesses are likely to be affected by typhoon,
drought, land degradation and flooding. Resource-based industries like mining, pottery,
jewelry making are sensitive to earthquake.

Changing lifestyle

With the changing environment come changing fashion and preferences for green products;
fast and convenient services; retail rather than wholesale packages; and intelligent solutions.
The traditional businesses need transformation from conventional processes to ICT-driven
and technology-based processed where competitiveness beyond border is now the
challenge. Rural- based enterprises needs to shape up to changing human patterns.

SUMMARY

The MSMEs have become the backbone of Philippine economy contributing to employment
and generating output for the economy. Threats of an unfavorable global environment
create an atmosphere of high risk and doubt in a borderless economy with high competition
as inevitable. With overall fiscal condition looming because of global financial breakdown,
the challenges and issues are numerous for the MSMEs. Development programs have been
laid out but resources are not readily available because of competing demands for

13
government support. Stakeholders should bind themselves together to minimize adverse
impacts of changing climate and natural hazards, among others. MSME statistics would be
vital to plan out, allocate resources, and provide capability building, among others. Creative
solutions and technopreunership are some of the challenges of the time.

14
REFERENCES

Bureau of Micro, Small and Medium Enterprise Development, Department of Trade and
Industry. Programs and Services for Micro, Small and Medium Enterprises. 2009
edition.

_______. Industry. Financing Programs for Micro, Small and Medium Enterprises. 2009
edition.

_______. Glossary: Terms and Concepts for Micro, Small and Medium Enterprises. 2009
edition.

_______. SME Development Plan 2004-2010

Cartalaba, Jude. Technopreneur: Offer More than Services. In Entrepreneurship, March

2009.

Francisco, Louise. Forward Social Enterprise: Creative Solutions. In Entrepreneurship.

March 2009.

Gulle, Jimbo Owen B. The Philippines’ Fastest Growing Small Companies. In

Entrepreneurship. March 2009.

Lagua, Benel B. undated. SME Characteristics and Statistical Needs in the Philippines.

Leano, Rhodora M. 2006. SMEs in the Philippines. CACCI Journal, Vol. 1, 2006 (Reprinted
from Asia-Pacific Tech Monitor, Sep-Oct 2004 issue, pp. 23-28).

The Philippine Government. Medium Term Philippine Development Plan (MTPDP) 2004-
2010

Philippine Business Agenda 21: Business Strategies for Sustainable Development

Republic Act 9178 otherwise known as the Barangay Micro Business Enterprise (BMBE) Act
of 2002

Republic Act 9501 on May 23 2008 provides for the “Magna Carta for Micro, Small and
Medium Enterprises”

Santos, Rafael. Secure that Loan. In Entrepreneurship, March 2009.

________. 2009. Technopreneur: Ready for the Big League. In Entrepreneurship, March
2009.

15
16