Small is beautiful, but better for it to grow

Published January 8, 2020, 12:00 AM

by Diwa C. Guinigundo


Small businesses, whether micro, small, or medium enterprises (MSMEs), are very strategic in sustaining the growth of the Philippine economy. They account for nearly a hundred percent of all firms in the country and around two-thirds of total jobs. Small firms account for three-fifths of all exporting firms.

Indeed, small firms are critical in achieving high growth, and in creating good jobs. To the extent that they can grow and strengthen beyond their current capacity, small businesses can make a world of difference between an anemic Philippine economy and one that is vibrant, innovative, and promising.

Small is beautiful, but we must help it grow.

No different from little children, small businesses must be nurtured so that they can become more productive members of society.

Three recent, very interesting research pieces by the Philippine Institute for Development Studies highlight the current status of small firms in the Philippines. Discussion centers on how they are linked to global value chains (GVCs), the obstacles to this goal, and the impact of public policy on their innovation efforts towards greater competitiveness.

The first paper, “Facilitating Structural Transformation through Product Space Analysis: The Case of Philippine Exports” by Connie Bayudan-Dacuycuy and Ramonette Serafica, shows that the average sophistication of Philippine exports basket from 1995 through 2014 has barely improved. In fact, the level was lower than the average sophistication content of exports in the global market. The paper also indicates that some of our exports have good potential forward linkages to goods with relatively higher sophistication content which, in turn, have good potential linkages to even more sophisticated products. This is encouraging. The challenge therefore is to faithfully implement the country’s Export Development Plan, intensify human capacity development, and expand our innovation and infrastructure program.

The second paper by Jamil Paolo Francisco, Tristan Canare, and Jean Rebecca Labios explains the obstacles behind the goal towards greater integration with the GVCs. Titled “Obstacles of Philippine SME’s Participation in Global Value Chains,” this research calls for an increase in local export productivity in the light of five key challenges — one, competition in Southeast Asia; two, compliance with international standards and regulatory requirements; three, role of government and institutions; four, adaptation to changes in global market demand and input supply; and  five, internalizing entrepreneurial mindset and skills.

The last paper, “Impact of Government Incentives on MSME Innovation” by Francis Mark Quimba and Maureen Ane Rosellon zeroes in on the role of public policy in promoting export innovation and competitiveness. The authors cite the difficulty in pursuing innovation due to limited resources and capabilities. This being the case, exogenous support is critical and public money plays a very strategic role. Incentives could be in terms of tax deductions or credits—and therefore foregone revenues of government—grants or subsidies and other similar interventions—and therefore actual disbursement of public money.

In the 2015 Survey of Innovation Activities of Enterprises, two findings are prominent. One is that more and more small firms undertake knowledge management, organizational and marketing innovation rather than product or process innovation. And two, provision of public support for innovation activities is found to have a positive effect on organizational and marketing innovation.

This research also shows that larger firms tend to innovate. More successful ones are those doing knowledge management, industrial classification, and locating in export processing zones where incentives are widely available. Most important, it is found that limited access to funds and insufficient technical and technological capabilities can actually hinder innovation and competitiveness.

Two important commentaries are warranted.

One, previous and current administrations have attempted to improve innovation and integration with the GVCs. NEDA has called for intensified promotion of innovation-related activities, and a stronger collaboration across the science and technology ecosystem. The DOST has designed programs for pursuing science for change, accelerated research and development and industrial competitiveness. Other public agencies have also joined in this crusade. Private initiatives have also been supportive.

Public support is truly essential. The literature is replete with evidence of success in UK and the European Community. This is also the case for US manufacturing. China has promoted vertical and horizontal integration. Turkey provides support in financial and advisory services.  Even emerging markets in East Asia are now enjoying years of prosperity because of public policy support of MSMEs .

Two, access to funds is important. Unfortunately, based on the latest report of the BSP for the first nine months of 2019, and in fact, even in past years, banks have been remiss in lending to small businesses.

While we support the BSP and the market’s position that it does not make sense to mandate credit to special groups even to small businesses, the better and more tenable alternative is to promote the conditions conducive to healthy financial intermediation. The use of public money is very justified.

Governor Ben Diokno has offered three options for promoting MSME financing — putting up digital financial infra to mitigate risk and reduce cost like a robust credit information system; innovative approaches to financing including digital payments; and ways to bridge the information gap. These initiatives are future-proof. But they are not enough.

The BSP also initiated the Credit Surety Fund (CSF) in 2008.This has been subsequently institutionalized by Congress through the Credit Surety Fund Cooperative Act of 2015.

The CSF addresses the two most difficult barriers to small businesses’ access to bank credit — lack of collateral and credit history. It leverages on the cooperative framework of small businesses. With their contributions, partner public institutions like the LBP and DBP as well as the local governments pool their funds into a surety fund. This covers the funds lent by participating banks to small businesses without collateral and credit history. Small businesses can borrow ten times their minimum contribution of P100,000. Under this scheme, banks do not have to be risk lovers. The surety fund remains intact so that any cooperative opting out can withdraw its contribution with some interest. This credit framework enables the banks to lend at reasonable cost because the program offers good credit information about their clientele.

The CSF program has an excellent track record. Since its creation in 2008, some 55 CSFs have been established throughout the Philippines. As of the end of December, 2018, 17,424 small businesses have accessed bank loans through this program aggregating P5.647 billion, with very high repayment record.

MSMEs are small and beautiful but they all need to grow.